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Private Placement Memorandum :LQWRQ 5RDG 6RXWK _ 6XLWH _ 5RFKHVWHU 1< _ 3 _ ) CONFIDENTIAL—NOT FOR DISTRIBUTION PRIVATE PLACEMENT MEMORANDUM Royal Oak Realty Trust Inc. Common Stock Royal Oak Realty Trust Inc. acquires, owns and operates commercial net leased real estate as a real estate investment trust, or REIT, for federal income tax purposes. As described in our property selection criteria, we focus on office and industrial net leased properties. We elected REIT status for the year ended December 31, 2014, and intend to continue to operate our business to qualify as a REIT. Through our subsidiary Royal Oak Realty Trust LLC (referred to as the Operating Company), we have acquired, indirectly through single purpose entities, various net leased properties described in this Memorandum. Royal Oak Realty Trust Inc. was formed under the name Buckingham Net Leased Properties Group Inc. but changed its name as of the end of December 2015. We are managed by Cambridge Street Asset Management LLC, an asset manager majority-owned and controlled by our sponsor Daniel Goldstein. Our properties are managed by Cambridge Street Property Management LLC, an affiliated property manager. We are offering shares of our common stock to “accredited investors” in a private placement under the federal and state securities laws. The price per share in this offering was $50.00 initially. On a quarterly basis, our independent directors committee reviews and determines the value of our shares, which we refer to as the “Determined Share Value”. The Determined Share Value has been set at $54.00 as of July 2, 2016. Our minimum investment is 2,000 shares, or $108,000, as of July 2, 2016. Shares purchased through an investment advisor may be purchased at 50% of the minimum investment. In some circumstances, we may reduce the minimum investment for certain investors. At our discretion, depending on our capital requirements, we may defer collecting the full purchase price, and issuing the related shares, with respect to some subscriptions. We may call the deferred subscription amount from time to time, or at one time in full, for six months and the investor will purchase the shares at the Determined Share Value in effect on the date of the subscription. We contribute the proceeds of the offering described in this Memorandum to the Operating Company in exchange for membership interests. The Operating Company uses the proceeds to acquire additional properties meeting the investment criteria we describe in this Memorandum, to reimburse the Asset Manager for certain expenses incurred in this offering, to repay debt from time to time and for general business and operating purposes, including certain fees described in this Memorandum. An investment in our common stock involves significant risks, including a risk of losing your entire investment. We have described the material risks that we have identified under the heading “Risk Factors” in this Memorandum. These risks include, among others, those related to: owning illiquid shares of stock that are not traded in any market and are subject to transfer restrictions; investing in commercial real estate generally; the effect of the economy of the various regions where our properties are located on property valuations; weakness in the economy affecting our tenants’ ability to pay rent and other net charges; our ability to find additional properties meeting our criteria; no minimum level of funds required to be raised in the offering which may limit our ability to acquire additional properties and further diversify the portfolio; our cash flow being insufficient to fund expected distributions; potential funding of distributions from borrowings or proceeds of sales of additional shares of our common stock diluting future investors; and tax risks related to our ability to qualify as a REIT and maintain that qualification. You should carefully consider these risks before deciding to purchase shares of our common stock. THIS OFFERING IS BEING MADE IN RELIANCE UPON THE AVAILABILITY OF EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND APPLICABLE STATE SECURITIES LAWS AND IS MADE SOLELY TO ACCREDITED INVESTORS. TRANSFER OF THE SHARES IS RESTRICTED BY FEDERAL AND STATE SECURITIES LAWS AND BY OUR FORMATIVE DOCUMENTS. THERE IS NO TRADING MARKET FOR THE SHARES AND THERE IS NO EXPECTATION THAT SUCH A MARKET WILL DEVELOP IN THE FORESEEABLE FUTURE. THE SHARES OF COMMON STOCK OFFERED BY THIS MEMORANDUM HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAW. NEITHER THIS OFFERING NOR AN INVESTMENT IN THE SHARES HAVE BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE ATTORNEY GENERAL OF THE STATE OF NEW YORK, ANY OTHER STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING PASSED UPON THE ACCURACY OR ADEQUACY OF THIS MEMORANDUM. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Private Placement Memorandum is January 3, 2017 Website Prospective Investor CONFIDENTIAL Website Copy No. IMPORTANT NOTICES TO INVESTORS THE SHARES OF COMMON STOCK OFFERED HEREBY ARE INTENDED TO BE SOLD ONLY TO ACCREDITED INVESTORS, AS DEFINED IN RULE 501(a) OF REGULATION D, PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES OFFERED HEREBY MAY NOT BE RESOLD OR OTHERWISE DISPOSED OF BY AN INVESTOR UNLESS, IN THE OPINION OF COUNSEL ACCEPTABLE TO US, REGISTRATION UNDER FEDERAL AND APPLICABLE STATE SECURITIES LAW IS NOT REQUIRED OR COMPLIANCE IS MADE WITH THE REGISTRATION REQUIREMENTS OF SUCH LAWS. AN INVESTMENT IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. ONLY INVESTORS WHO CAN BEAR THE ECONOMIC RISK OF AN INVESTMENT OF THIS TYPE FOR AN INDEFINITE PERIOD OF TIME AND THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT SHOULD INVEST IN THE SHARES. SEE “RISK FACTORS.” SPECIAL NOTICE TO FLORIDA RESIDENTS THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE FLORIDA SECURITIES AND INVESTOR PROTECTION ACT (THE “FLORIDA ACT”), AND THEY THEREFORE HAVE THE STATUS OF SECURITIES ACQUIRED IN AN EXEMPT TRANSACTION UNDER SECTION 517.061 OF THE FLORIDA ACT. EACH OFFEREE WHO IS A FLORIDA RESIDENT HAS THE RIGHT TO VOID THE PURCHASE OF THESE SECURITIES WITHIN THREE DAYS AFTER THE FIRST TENDER OF CONSIDERATION IS MADE BY THE PURCHASER TO THE ISSUER OR AN AGENT OF THE ISSUER, OR WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO THE PURCHASER, WHICHEVER OCCURS LATER. THE FOREGOING IS INTENDED TO CONSTITUTE NOTICE REQUIRED BY SECTION 517.061(11)(a)(5) OF THE FLORIDA ACT. ACCORDINGLY, EACH PURCHASER HAS THREE DAYS AFTER THE TENDER OF THE PURCHASE PRICE OF THE SECURITIES TO THE CORPORATION OR TO ANY AGENT OF THE CORPORATION, TO CAUSE A WRITTEN NOTICE OR TELEGRAM TO BE SENT TO THE CORPORATION AT THE ADDRESS PROVIDED IN THE CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM. SUCH LETTER OR TELEGRAM MUST BE SENT AND, IF POSTMARKED, POSTMARKED ON OR PRIOR TO THE AFOREMENTIONED THIRD DAY. IF A PERSON IS SENDING A LETTER, IT IS PRUDENT TO SEND A LETTER BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ASSURE THAT IT IS RECEIVED AND ALSO TO EVIDENCE THE TIME IT WAS MAILED. SHOULD A PERSON MAKE THIS REQUEST ORALLY, HE OR SHE MUST ASK FOR WRITTEN CONFIRMATION THAT HIS OR HER REQUEST HAS BEEN RECEIVED. In making any investment decision with respect to our common stock, you should rely only on the information contained in this Memorandum and information supplemental to this Memorandum which we provide to you in writing. We have not authorized any person to provide you with different or inconsistent information. Our officers, and those of the Asset Manager, Cambridge Street Asset Management LLC, are the only individuals authorized to provide additional information to you about us, this Offering, the common stock, and our business, plans, prospects and results. The information in this Memorandum, and in any written supplemental information we deliver to you, is only accurate as of the date set forth on such information. Neither the delivery of this Memorandum nor any sale made hereunder shall under any circumstances create any implication that there has been no change in our affairs since the date hereof. No offeree will be accepted as a subscriber who does not make the representations set forth in the Subscription Agreement accompanying this Memorandum, including the representation that such offeree is an accredited investor and is acquiring the shares of common stock for investment and not with a view to resale or distribution thereof. Investors also will be required to represent that they are familiar with and understand the terms of this Offering. We reserve the right to reject any subscriptions, for any or no reason, and to withdraw or terminate the Offering at any time. The offeree, by accepting delivery of this Memorandum, agrees to either destroy this Memorandum, or return this Memorandum and any enclosed documents to us, if the offeree does not qualify as an “accredited investor” or meet the other suitability standards, does not desire to purchase any of the shares offered hereby, or submits a subscription which is not accepted for any reason. This Memorandum does not constitute an offer to sell or a solicitation of an offer to buy any of the shares of common stock offered hereby in any state or other jurisdiction in which such an offer or solicitation is not authorized. Except as otherwise indicated, all information contained in this Memorandum is given as of the date of this Memorandum. Prior to the sale of common stock, we are providing each offeree and/or the offeree’s representative the opportunity to ask questions of and receive answers from our officers or those of the Asset Manager, to seek any information believed necessary to verify the accuracy of this Memorandum or required in making a decision concerning the purchase of the shares. We will provide the requested information to the extent that we possess such information or can acquire it without unreasonable effort or expense. Requests and inquiries regarding this Memorandum should be directed to: Royal Oak Realty Trust Inc. 1870 South Winton Road, Suite 10 Rochester, New York 14618 Telephone: (585) 434-1660 Attention: Daniel Goldstein or Mark Allen The discussion of the federal income tax considerations of ownership of the shares is provided for informational purposes only. Investors should consult with their own tax advisors regarding the purchase, ownership, and disposition of any shares. Use of or reliance upon any discussion of federal income tax considerations contained in this Memorandum may be insufficient to itself to serve as a basis for a reasonable-cause defense to the Internal Revenue Service. Any discussion of federal income tax considerations may be adversely affected by subsequent changes in fact or in law. PROSPECTIVE INVESTORS ARE NOT TO CONSTRUE THE CONTENTS OF THIS MEMORANDUM AS LEGAL, BUSINESS OR TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN ADVISORS AS TO THE LEGAL, BUSINESS, TAX, AND RELATED MATTERS CONCERNING THIS INVESTMENT. - ii CONFIDENTIAL INVESTOR SUITABILITY STANDARDS We will only accept subscriptions from prospective investors who tell us that they are accredited investors and we reasonably believe that representation. An investment in shares of our common stock is suitable only for persons who have adequate financial means, desire a relatively long-term investment, and will not need immediate liquidity of their investment. To purchase our common stock, each investor must represent in the Subscription Agreement that the investor has received this Memorandum, is an “accredited investor” as such term is currently defined in Regulation D, based on meeting one of the following criteria: x the investor has a net worth (or joint net worth with a spouse) in excess of $1 million exclusive of the value of the investor’s primary residence (and excluding any indebtedness secured by the primary residence in principal amount up to the residence’s fair market value*); or x the investor has income during the preceding two years in excess of $200,000 per year (or $300,000 jointly with an investor’s spouse) and reasonably expect income at that level in the current year; or x the investor is an entity (a corporation, partnership, trust, or limited liability company), with total assets in excess of $5 million; or x the investor is an entity, all the beneficial owners of which are accredited investors. *Note: Indebtedness secured by the person’s primary residence is not included as a liability unless the mortgage indebtedness exceeds the fair market value of the residence at the time of investment or unless the amount of such indebtedness outstanding at the time of the investment exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence. In each such case, the amount of such excess must be included as a liability. In addition, state securities regulators may impose suitability standards for this type of offering. In most cases, if an investor qualifies as an “accredited investor” the investor will also satisfy the suitability standards imposed by the states. Under state regulations, the definition of “net worth” excludes the value of the investor’s home, furnishings, and automobiles so an investor might be an accredited investor under federal Regulation D but not meet the state suitability standards. Prospective investors residing in jurisdictions outside New York State may be asked to meet certain additional suitability standards. In the case of sales to fiduciary accounts, these suitability standards must be met by the fiduciary account and by the person who directly or indirectly supplied the funds for the purchase of our common stock if such person is the fiduciary or by the beneficiary of the account. PATRIOT Act Representation Each investor will be required to represent that the investor is not, nor is he acting as an agent, representative, intermediary or nominee for, a person identified on the list of blocked persons maintained by the Office of Foreign Asset Control, U.S. Department of Treasury, and has complied with all applicable U.S. laws, regulations, directives and executive orders relating to anti-money laundering, including but not limited to the following laws: (1) the Sharing and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56 (“PATRIOT Act”); and (2) Executive Order 13224 (Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) of September 23, 2001. Each investor will also be required to represent that the source of funds for the investor’s investment were not derived from sources prohibited under the PATRIOT Act. - iii CONFIDENTIAL Table of Contents Page Summary........................................................................................................................................................................1 Risk Factors ...................................................................................................................................................................8 Investment Risks.......................................................................................................................................................8 Real Property Risks ..................................................................................................................................................9 Financing Risks ......................................................................................................................................................12 Federal Income Tax Risks ......................................................................................................................................14 Conflict of Interest and Related Party Transactions ...............................................................................................17 Special Note Regarding Forward-Looking Statements ...............................................................................................19 Estimated Use of Offering Proceeds and Capitalization..............................................................................................20 Estimated Use of Offering Proceeds.......................................................................................................................20 Capitalization..........................................................................................................................................................20 Investment Objectives and Operating Policies ............................................................................................................22 Investment Objectives ............................................................................................................................................22 Property Selection Criteria......................................................................................................................................22 Leverage Policy ......................................................................................................................................................23 Properties, Financing and Leases ................................................................................................................................24 Properties ................................................................................................................................................................24 Financing ................................................................................................................................................................28 Leases .....................................................................................................................................................................31 Management ................................................................................................................................................................34 General....................................................................................................................................................................34 Executive Officers and Directors............................................................................................................................34 Our Board of Directors ...........................................................................................................................................37 Independent Directors Committee ..........................................................................................................................37 Audit Committee ....................................................................................................................................................39 Compensation of Directors .....................................................................................................................................39 Indemnification and Limited Liability of Officers and Directors ...........................................................................39 The Asset Manager .................................................................................................................................................39 The Asset Acquisition Committee ..........................................................................................................................40 The Investor Relations Committee .........................................................................................................................41 The Asset Management Agreement........................................................................................................................41 Management Decisions...........................................................................................................................................43 The Property Manager ............................................................................................................................................43 The Property Management Agreement ...................................................................................................................44 Fees and Other Compensation to Our Managers and Affiliates ..................................................................................46 The Operating Company .............................................................................................................................................48 General....................................................................................................................................................................48 Current Capitalization.............................................................................................................................................48 The Operating Agreement ......................................................................................................................................48 Financial Information .............................................................................................................................................51 Conflicts of Interest .....................................................................................................................................................52 General....................................................................................................................................................................52 Affiliates .................................................................................................................................................................52 Interests in Other Real Estate Investments .............................................................................................................52 Affiliated Asset Manager........................................................................................................................................52 Affiliated Property Manager ...................................................................................................................................53 Independent Directors Committee Oversight .........................................................................................................53 Lack of Separate Representation ............................................................................................................................53 Certain Provisions of Our Charter and By-Laws .........................................................................................................55 General....................................................................................................................................................................55 Common Stock .......................................................................................................................................................55 i Table of Contents (continued) Page Restrictions on Transfer..........................................................................................................................................55 Preferred Stock .......................................................................................................................................................55 Ownership Limit.....................................................................................................................................................55 Suitability Standards and Minimum Purchase Requirements .................................................................................57 Distributions ...........................................................................................................................................................57 Distribution Reinvestment Plan ..............................................................................................................................58 Share Redemption Program ....................................................................................................................................59 Stockholder Reports................................................................................................................................................60 Stockholder Meetings .............................................................................................................................................60 The Offering ................................................................................................................................................................61 General....................................................................................................................................................................61 Closings of the Offering .........................................................................................................................................61 Suitability Criteria ..................................................................................................................................................62 PATRIOT Act Representations ..............................................................................................................................62 Minimum Investment..............................................................................................................................................63 How to Subscribe....................................................................................................................................................63 Federal Income Tax Considerations ............................................................................................................................65 Federal Income Taxation of the Corporation..........................................................................................................65 Requirements for Qualification of REIT ................................................................................................................66 Earnings and Profits................................................................................................................................................72 Failure to Qualify and Statutory Relief...................................................................................................................72 Sale-Leaseback Transactions ..................................................................................................................................72 Taxation of U.S. Stockholders ................................................................................................................................72 Information Reporting Requirements and Backup Withholding Tax .....................................................................74 Tax Aspects of the Operating Company .................................................................................................................75 State and Local Tax ................................................................................................................................................77 Changes in Tax Laws..............................................................................................................................................77 ERISA Considerations.................................................................................................................................................78 General....................................................................................................................................................................78 Plan Assets..............................................................................................................................................................78 ii EXHIBIT A – Most Recent Annual Consolidated Financial Statements of Royal Oak Realty Trust Inc. and Subsidiaries EXHIBIT B – Most Recent Quarterly Consolidated Financial Statements of Royal Oak Realty Trust Inc. and Subsidiaries EXHIBIT C – Most Recent Annual and Quarterly Calculation of Funds From Operations (“FFO”), Adjusted Funds From Operations (“AFFO”) and Modified Adjusted Funds From Operations (“MAFFO”) Per Weighted Average Share/Unit for Royal Oak Realty Trust Inc. and Subsidiaries EXHIBIT D – Supplements: Material Updates and Notifications since the Date on the Cover of this Memorandum EXHIBIT E – Subscription Agreement, Investor Qualification Questionnaire, and Irrevocable Proxy EXHIBIT F – Distribution Reinvestment Plan -iCONFIDENTIAL Summary The following summarizes certain information contained elsewhere in more detail in this Memorandum and highlights the terms of the offering of our common stock made by this Memorandum, which we refer to as the “Offering”. You should read this Memorandum in its entirety, including the various documents included as exhibits, before making any investment decision with respect to our common stock. We refer to Royal Oak Realty Trust Inc. as “we” or “us” or the “REIT” or the “Corporation”. We refer to Royal Oak Realty Trust (Operating Company) LLC, which also does business as Royal Oak Realty Trust LLC, as the “Operating Company”. Sometimes we refer to Mr. Glazer (now deceased) and Mr. Goldstein as the “Initial Sponsors” and Mr. Goldstein alone as the “Sponsor”. Royal Oak Realty Trust Inc. was formed on January 6, 2014 as a Maryland corporation under the name Buckingham Net Leased Properties Group Inc. Our offices are located at 1870 South Winton Road, Suite 10, Rochester, New York, 14618, and our telephone number is (585) 434-1660. We are using the proceeds of this Offering to acquire income-producing, net-leased commercial real estate through our controlling interest in Royal Oak Realty Trust LLC (the “Operating Company”), to reimburse Cambridge Street Asset Management LLC, as asset manager (the “Asset Manager”) (formerly known as Buckingham Properties Asset Management LLC) for certain expenses for our formation and this offering, including any loans made to the Operating Company in connection with acquiring properties, and for general business and operating purposes. The Corporation elected to operate as a real estate investment trust, or “REIT,” for federal and state income tax purposes, beginning with its year ended December 31, 2014. We conduct substantially all of our real estate activities through the Operating Company. Since its formation on May 8, 2013, the Operating Company has acquired the net leased properties discussed in further detail below under “Properties”. At each closing of this Offering, we contribute the proceeds to the Operating Company in exchange for membership interests. The Operating Company then invests those funds in properties directly or by issuing units of membership interest (“Units”) to the sellers. Each Unit is substantially the economic equivalent of a share of common stock. We have entered into an Asset Management Agreement with our Asset Manager, pursuant to which the Asset Manager is responsible for making acquisitions and dispositions that we believe meet our investment criteria. Daniel Goldstein worked beside his partner and co-Initial Sponsor, Laurence Glazer, in acquiring, developing and managing commercial real estate in the Rochester, New York area from 2004 to Mr. Glazer’s death on September 5, 2014. They identified a desire by other real estate investors, and potential investors, in the community to rely on the experience of the Initial Sponsors to create a pool of commercial real estate assets in which accredited investors could invest alongside the Initial Sponsors. They identified commercial net leased properties as appropriate for investment by others in reliance on the Initial Sponsors’ expertise in acquisition and management where most, if not all, of the operating expenses are assumed by a credit-worthy tenant. Mr. Goldstein and his team continue to identify and acquire, on attractive terms, properties which are structurally sound with longterm leases on “net leased” terms where the tenants pay most, or all, of the occupancy costs of their buildings, such as maintenance and repairs, real estate taxes, insurance, and utilities. This pool of properties provides predictable cash flows and diversification of real estate risks. Since entity-level federal income tax is generally eliminated for REITs, more cash flow is available to make the distributions required to maintain REIT status. We believe that, with a combination of favorable portfolio purchases and financing, and reliable long-term tenants, the acquired properties should provide a predictable, favorable, return to the equity investors. The Corporation ........................... Royal Oak Realty Trust Inc., a Maryland corporation. The Corporation elected to be taxed as a real estate investment trust, or REIT, for federal income tax purposes for the year ended December 31, 2014, and intends to operate to continue to qualify for REIT status. The Corporation holds Units of membership interests in the Operating Company. The Initial Sponsors formed the Corporation on January 6, 2014 under the name Buckingham Net Leased Properties Group Inc. The name was changed in December 2015. The Corporation offers shares of its common stock to accredited investors who wish to participate in the ownership of a pool of commercial real estate properties as stockholders of a real estate investment trust. The Corporation has three independent directors, in addition to two nominees of the Asset Manager, on its board of directors. The Operating Company ............. Royal Oak Realty Trust (Operating Company) LLC, a New York limited liability company doing business as Royal Oak Realty Trust. The Operating Company owns the Current Properties through its subsidiaries and expects to acquire additional real property, either directly or through various single purpose entities which it will own. The Operating Company’s name was changed from Buckingham Net Leased Properties Group LLC in December 2015. The Investment Fund ................... The Corporation, the Operating Company and its subsidiaries together constitute the “Investment Fund”. The structure of the Investment Fund (sometimes referred to as an “UPREIT”) allows us to grow through both equity contributions from the sale of our common stock and the tax-deferred contribution of properties in exchange for membership Units of the Operating Company. We are externally managed by the Asset Manager and do not have any direct employees. The Sponsors ................................. Daniel Goldstein and Laurence Glazer (d. September 5, 2014), our Initial Sponsors, formed the Operating Company on May 8, 2013, to acquire certain real estate properties previously owned by the Sponsors as a base pool of properties for forming the Corporation and to provide the opportunity for other investors to acquire interests in an expanding pool of net leased properties. The Current Properties ............... Our current portfolio consists of thirteen properties in six states with a combined gross asset value of approximately $70.7 million and a total annualized base rent of approximately $5.9 million. For detailed information regarding our current properties, including a complete list of our current portfolio and information regarding financing and leases, please see “Properties, Financing and Leases” below. Investment Objectives .................. Our investment objectives are to: x preserve, protect and return the stockholders’ capital contributions; x purchase income-producing properties which will allow us to pay cash distributions to our investors monthly, targeted at 7% annual cash on cash based on the then-current Determined Share Value; x operate the properties effectively and efficiently to maintain and attract tenants and achieve stable cash flow; x provide limited future liquidity to our investors through redemptions; and x realize capital appreciation upon the ultimate sale of the real estate assets we acquire. See “Investment Objectives and Operating Policies”. Distributions payable by REITs, other than long-term capital gains are not entitled to the lower “qualified dividend” tax rates and are generally taxed at the ordinary income rate of the individual stockholder. See “Risk Factors-Federal Income Tax Risks.” Property Selection Criteria.......... We will purchase additional properties upon the recommendation of the Asset Manager. Mr. Goldstein, manager of the Asset Manager, will select and evaluate the properties that we may acquire, subject to the approval of the Asset Acquisition Committee, currently comprised of Mr. Goldstein, Patrick C. Burke and Richard R. LeFrois, as independent advisors. In making its recommendation, the Asset Manager will examine and evaluate several criteria, including: x general office, medical office and industrial properties (warehouse, distribution, manufacturing, etc.) net leased to credit worthy tenants; -2CONFIDENTIAL x existing lease terms with maturities of at least eight years; x base rental rates consistent with comparable market rents; x net leased facilities, where the operating costs are either paid by the tenants directly or paid by the tenants as additional rent; and x strategically sound geographic locations of the leased facilities with diversification in geography, business line, and physical characteristics. Variations from these criteria must be approved by the Independent Directors Committee of our Board of Directors. See “Investment Objectives and Operating Policies – Property Selection Criteria”. Leverage Policy............................. The Investment Fund targets a leverage ratio with total debt not greater than 65% of the approximate market value of its assets. The actual leverage ratio will vary over time but should not exceed 75% without the approval of the Independent Directors Committee. We expect the leverage ratio to decrease as debt is repaid and additional properties acquired. See “Investment Objectives and Operating Policies – Leverage Policy”. The Offering.................................. The Corporation initially offered shares of common stock for $50.00 per share to investors meeting the federal securities laws definition of “accredited investors” and certain additional investor criteria. The Independent Directors Committee of our Board of Directors has determined, in light of a valuation of our properties and stock by an independent valuation firm and other considerations, that the Determined Share Value of each share of our Common Stock currently is $54.00, effective July 2, 2016. Effective July 2, 2016 our minimum investment is 2,000 shares, or $108,000. Shares purchased through an investment advisor may be purchased at 50% of the minimum investment. The Determined Share Value and offering price will be adjusted from time to time by the Independent Directors Committee. The Corporation may accept a subscription for a dollar amount that is more than it will need for property investments at the closing immediately following the date of subscription but hold the issuance of the shares and payment of the price for them for up to six months. The Corporation will issue shares to a Subscriber at the Determined Share Value set forth in the Subscription Agreement for up to six months following the date of the Subscription Agreement. The Corporation will provide notice to a Subscriber with a deferred subscription at least ten days prior to the date payment of the balance of the subscription price is due. The Asset Manager reserves the right to lower the minimum investment in limited circumstances to an amount of not less than $54,000 (or lesser amount approved by our Independent Directors Committee). The common stock is subject to restrictions on transfer. There is no minimum or maximum number of shares that we may issue. Accordingly, our ability to purchase additional properties will be directly related to the number of shares sold in the Offering from time to time. See a description of the intended uses of the proceeds of this Offering under the heading “Estimated Use of Offering Proceeds and Capitalization.” Offering Price; Determined Share Value ................................... The Offering price was fixed at $50.00 per share through December 31, 2014, and is reviewed at least annually by our Independent Directors Committee. The Independent Directors Committee considers the net asset value of the portfolio and, in its discretion, other factors in setting the “Determined Share Value” of our common stock. The Independent Directors Committee has set the Determined Share Value at $54.00 per share effective as of July 2, 2016, until adjusted further on review by the Independent Directors Committee. The Independent Directors Committee may review the Determined Share Value -3CONFIDENTIAL more frequently if there is a significant change in the property portfolio, or material events which may materially affect the value of a particular property, or otherwise affect the value of the common stock. The Asset Manager may, but is not required to, engage consultants, appraisers and other real estate or investment professionals to assist in the Independent Directors Committee’s valuations. Closing of the Offering ................................... The initial closing of the Offering occurred on March 1, 2014 with additional closings as of the first of each month thereafter, as needed, through the date of this Memorandum. We will continue offering the shares of our common stock and conduct subsequent closings periodically until the board of directors of the Corporation decides to conclude the Offering. Sales of shares may be suspended from time to time for various reasons determined by the Asset Manager to be in the best interests of the Corporation. Distributions to Stockholders and Members ................................ Distributions are made when and as declared by our board of directors. We intend, but are not required, to make monthly distributions to investors (both stockholders and members of the Operating Company) equal to a 7% annual return per annum on the then-current Determined Share Value. Our board of directors approved a change in the frequency of the payment of dividends and distributions from quarterly to monthly beginning with distributions, if any, declared for July 2016. Distribution payments are expected to be made within approximately 15 days following the end of each calendar month. To qualify as a REIT, we must distribute 90% of our taxable income to our stockholders. Although we intend that distributions will principally be funded by operating income, we may make distributions from operating cash flow, borrowings, or proceeds of subsequent sales of our common stock. Covenants in our bank debt may limit our distributions. See “Certain Provisions of Our Charter and By-Laws – Distributions.” Management of the Investment Fund ................ The Investment Fund is managed by the Asset Manager pursuant to the Asset Management Agreement. The Asset Manager secures the equity capital and debt financing for the Investment Fund, identifies and arranges for the purchase of additional properties and other matters as described in the Asset Management Agreement. The Corporation has a board of directors, including three independent directors, which oversees the management of the business and affairs of the Corporation by the Asset Manager. The independent directors function as a committee of the board of directors (the “Independent Directors Committee”) to approve any transactions outside our stated investment criteria and certain matters where our managers may have conflicting interests. The Asset Management Agreement provides for the various duties and responsibilities of the Asset Manager and for the fees and other compensation, which will include compensation in the form of our common stock or options or other rights to acquire our common stock. The Operating Company is managed by the Corporation, and indirectly by the Asset Manager. See “Management”. The Asset Manager and Asset Management Agreement .... Cambridge Street Asset Management LLC, a New York limited liability company (formerly known as Buckingham Properties Asset Management LLC). The Asset Manager is majority-owned and controlled by Daniel Goldstein. The Corporation and the Asset Manager have entered into an Asset Management Agreement. The Asset Manager manages the equity capital and debt financing of the Corporation, identifies and arranges for the purchase of additional -4CONFIDENTIAL properties and other matters as described therein. Other services include property management oversight, REIT compliance monitoring, preparation of accounting and tax statements for investors, and related services. The Asset Management Agreement provides for the various duties and responsibilities of the Asset Manager and for the fees and other compensation, which may include compensation in the form of our common stock or options or other rights to acquire our common stock. See “Management – The Asset Manager and The Asset Management Agreement” and “Fees and Other Compensation to Our Managers and Affiliates”. The Property Manager and Property Management Agreements.................................... Our properties have been managed by property managers with significant knowledge and experience in managing commercial, office and similar properties, including Buckingham Properties LLC, a New York limited liability company, principally owned and controlled by the Glazer Estate. As of January 1, 2016, all of our properties are managed by Cambridge Street Property Management LLC, a property manager principally owned by Daniel Goldstein. The Independent Directors Committee approved the form and substance of the standard Property Management Agreement with Cambridge Street Property Management LLC. Some of our properties may be managed, from time to time, by unaffiliated third party property managers when Cambridge Street Property Management LLC is unable to manage them at competitive rates and services. Our properties are owned by the Operating Company indirectly, through various single purpose entities, and are managed under Property Management Agreements between the Operating Company, the entity owning the property and the Property Manager. The services provided by the Property Manager include ongoing management (including preparation of operating and capital budgets for each individual property, quarterly and annual reports, etc.), oversight of compliance with conditions, qualification of tenants, capital improvements and rent collection. Various other duties are undertaken by the Property Manager on behalf of the owner or Operating Company in the Property Management Agreement which also provides for the fees and other compensation to the Property Manager. See “Management–The Property Manager” and “–The Property Management Agreements” and “Fees and Other Compensation to Our Managers and Affiliates”. Fees and Other Compensation to Our Managers and Affiliates... Our Asset Manager and our Property Manager receive compensation for services and reimbursement of costs under the Asset Management Agreement and the Property Management Agreements. See “Fees and Other Compensation to Our Managers and Affiliates”. We believe that our fees are comparable to fees negotiated in arms’ length transactions. Distribution Reinvestment Plan ................................................ We have adopted a Distribution Reinvestment Plan that allows our investors to have dividends and other distributions otherwise distributable to our investors to be invested in additional shares of our common stock. The purchase price for the shares will be 98% of the Determined Share Value. See “Certain Provisions of Our Charter and By-Laws – Distribution Reinvestment Plan.” Restrictions on Transfer of Common Stock.......................... The shares of common stock in the Corporation are offered pursuant to an exemption from the registration requirements of the Securities Act of 1933 and applicable state law and are not transferable except by the laws of descent and distribution, or otherwise in accordance with applicable law. Any transfer of the shares is also subject to the Corporation’s consent, and to the provisions of our -5CONFIDENTIAL Articles of Amendment and Restatement of Articles of Incorporation, as amended (“Charter”) and the By-laws, designed to protect our REIT status. See “Certain Provisions of Our Charter and By-Laws – Restrictions on Transfer.” Risk Factors .................................. An investment in the Corporation is subject to various risks and special considerations. You should consider carefully the risks described below and under “Risk Factors” and elsewhere in this Memorandum before purchasing shares of our common stock in this Offering: x an investment in the Corporation involves various investment risks, including an arbitrarily established initial share price, lack of liquidity, limitations on transfer and restrictions on ownership, compensation to affiliates, and internal valuation of the Current Properties and the portfolio of properties held from time to time; x an investment in the Corporation involves certain real property risks, including failure to identify additional suitable properties, tenant creditworthiness, timing of investment of offering proceeds, limited liquidity of properties, competition for acquisitions, and environmental risks; x an investment in the Corporation involves certain financing risks, including possible lack of access to financing, interest rates fluctuations, and transaction costs; x an investment in the Corporation involves certain tax risks, including failure to qualify for or loss of REIT status, taxation on distributions, pressure placed on cash flow by REIT distribution requirements, restrictions on structure to maintain REIT status, and risk of disqualified income; and x an investment in the Corporation involves certain risks regarding conflicts of interest. Conflicts of Interest ...................... The interests of our Asset Manager and our Property Manager, and their owners, may vary from those of the investors in our shares of common stock in a variety of ways. Those conflicts may result in management favoring their interests over those of other investors. Mr. Goldstein controls and is the majority owner of our Asset Manager. He also controls and owns a majority interest in our Property Manager. Mr. Goldstein is also President and a director of the Corporation and, through the Asset Manager, has the power to nominate himself and a second director to our Board. Each of the Asset Manager and the Property Manager obtain fees related to the size of our portfolio and the rents we derive from our properties which could motivate them to acquire properties and enter into leases that present greater risk than if they were compensated based on other criteria. Mr. Goldstein or other members of our Asset Manager or Property Manager or our directors may acquire properties that do not, initially, meet our investment criteria, and renovate, refinance and lease-up such properties to conform to our criteria and earn fees or profits from those transactions. The Asset Manager may then recommend we acquire these properties. All of the members of the Asset Acquisition Committee and a majority of our Independent Directors Committee must approve any such acquisition. Our officers and directors have other real estate interests and investments which require their time and attention. For a fuller explanation of the potential conflicts, see “Risk Factors” and “Conflicts of Interest”. -6CONFIDENTIAL Royal Oak Realty Trust Inc. Transaction Structure -7CONFIDENTIAL Risk Factors An investment in our common stock involves substantial risks and uncertainties, including the risk that you might lose your entire investment. You should carefully consider all of the information contained in this Memorandum, its exhibits and any supplements and the following risks before making any investment decision regarding our common stock. The following are the risks we believe are material to our business, prospects, ability to invest in properties, make distributions, and operate as a real estate investment trust for federal income tax purposes. The occurrence of one or more of these risks, or other risks which we have not identified, could materially and adversely affect our business and our ability to meet our investment objectives. Investment Risks We have a limited history operating as a pooled investment and a limited number of Properties in our current portfolio making it difficult for investors to evaluate an investment in our Investment Fund. The Corporation was organized on January 6, 2014. The Operating Company was formed on May 8, 2013, and as of the date of this Memorandum holds the properties we describe under the heading “Properties, Financing and Leases” below. We have a limited operating history and may not be able to continue to achieve our investment objectives and, accordingly, an investment in our shares of common stock may entail more risk than the shares of common stock of a real estate investment trust with a more substantial operating history. We expect to invest in additional properties after the date of this Memorandum, from time to time. Our investors will not have the opportunity to evaluate the properties prior to our investment in them. Our failure to invest the proceeds of the Offering from time to time in suitable properties, providing for adequate cash flows to fund our operations and distributions, could have a material adverse effect on our ability to make distributions to our stockholders, and the value of an investment in our shares may decline. The subscription price is based on the Determined Share Value set by our Independent Directors Committee, and not based on an independent trading market or arms’ length determination of value. The initial subscription price for our common stock of $50.00 per share was set by the Sponsors without any independent valuation. The Independent Directors Committee decided that the Determined Share Value of the common stock is $54.00 as of July 2, 2016 (until adjusted further on review by the Independent Directors Committee). In making that determination, the members of the Independent Directors Committee considered a valuation of the Corporation’s common stock as of February 29, 2016 by an independent valuation firm, and such other matters, including the effect of a change in the Determined Share Value on the subscription price, the dividend yield, the reinvestment of distributions and the redemption program, as the Independent Directors considered relevant. The Determined Share Value, which establishes the Offering price, is not directly related either (i) to the amount which could be realized upon liquidation of the Corporation or (ii) to the fair market value of the Current Properties. There is no public trading market for the Shares, and the Corporation does not currently expect one to develop. The transfer of shares is subject to certain restrictions and risks. There is no current public market for our shares and the Corporation does not currently expect that any such public market will develop in the future. The shares are not registered under federal or state securities laws; they cannot be resold unless they are subsequently registered under such laws or unless an exemption from registration is available. REIT rules limit concentration of ownership of the shares which may limit the potential buyers for our shares. Investors must be prepared to bear the economic risk of holding the shares for an indefinite period of time. -8CONFIDENTIAL We have not set a minimum or maximum size for the Offering or identified all of the additional properties we expect to acquire with the net proceeds of the Offering, so you will not be able to evaluate fully our portfolio and tenant mix. We invest the Offering proceeds available for investment, after the payment of fees and expenses, in the acquisition of office and industrial commercial real estate. We have established criteria for acquiring new properties. However, you will be unable to evaluate the transaction terms, location, and financial or operational data concerning the properties before we invest in them. Except for the investments described in this Memorandum or in one or more supplements to this Memorandum, you will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments. You will be relying entirely on the ability of our Asset Manager to identify properties and propose transactions, on the Asset Acquisition Committee and, in certain circumstances, the Independent Directors Committee, to oversee and approve such investments. We may accept an investor’s subscription, but defer calling all or a portion of the subscription amount for up to six months if we do not have an immediate need for new capital at the time of subscription. The investor’s subscription is binding on the subscriber throughout this period, during which the Operating Company may purchase or enter into contracts to purchase one or more properties which may not be described to the investor before the subscription amount is called and the shares issued. Payment of fees to our Asset Manager and our Property Manager will reduce cash available for investment and distribution. Our Asset Manager performs services for us in connection with the offer and sale of our stock and the selection and acquisition of our properties. Our Property Manager provides traditional property management services for our properties. Daniel Goldstein controls and owns a majority interest in our Asset Manager and Property Manager. Both the Asset Manager and the Property Manager are paid transaction and monthly fees for these services, which reduces the amount of cash available for investment in properties and distribution to stockholders and holders of Units of the Operating Company. The fees paid to our Asset Manager and our Property Manager were not determined on an arm’s-length basis. After the date of our initial offering, the Independent Directors Committee has reviewed industry data with respect to the fees paid to our Asset Manager, including data on publicly registered non-traded REITs and other locally controlled private REITs. Although the data supported a conclusion that the Asset Manager’s initial fee structure was competitive with the publically-registered non-traded REITs, the Asset Manager voluntarily agreed to reduce its fees going forward, with the asset management fee stepping down from time to time based on the size of the portfolio as a whole. The fees paid to our Property Manager are consistent with those of other property managers in the region. Although the Independent Directors Committee has approved the fees payable to the Asset Manager and Property Manager, we cannot assure you that a third-party unaffiliated with our Asset Manager or Property Manager would not be willing to provide such services to us at a lower price. The definition of “accredited investor” that we rely on for the suitability of our investors under federal and state law may change, making it more difficult for us to raise capital. As required by the Dodd-Frank Act, the SEC is reviewing the definition of “accredited investor”. That review is ongoing. In testimony before the Committee on Financial Services of the U.S. House of Representatives on November 18, 2015, SEC Chair Mary Jo White stated that the staff of the SEC is still evaluating alternative criteria for the definition proposed by the public and industry participants “giving careful consideration to both the need to facilitate capital formation and the need to protect investors.” We cannot predict when the SEC will announce or act upon changes to the definition of “accredited investor” or speculate as to what those changes may be. If the criteria for individuals to qualify as an “accredited investor” is made significantly more stringent, we may find it more difficult to raise capital. Real Property Risks We may experience difficulty in acquiring attractive properties matching our Property Selection Criteria. We expect to invest in additional properties from time to time after the date of this Memorandum. We have no assurance that we will be successful in identifying and purchasing properties which meet our Property Selection -9CONFIDENTIAL Criteria. See “Investment Objectives and Operating Policies – Property Selection Criteria”. We may not be able to enter into binding agreements with respect to such investments until we have the debt and equity financing assured. We have not set a minimum size for the Offering and sometimes will not know how much equity is available from time to time. Accordingly, we may not be able to commit to acquire a property or arrange its financing until the equity funds are committed. As a result, our investors’ returns may be reduced to the extent we are delayed in our selection and acquisition of real estate properties. If we are unable to raise substantial funds from the sale of our common stock, we will be limited in the investments which we make. We have no minimum in the number of shares of our common stock we may sell in this Offering and are relying on our Sponsor to find investors willing to subscribe for shares of our common stock. If we do not raise a substantial amount in the Offering over time, the number of properties we are able to acquire will be limited, reducing the expected diversification in our portfolio by types, tenants and geographic regions. We are dependent on our tenants for substantially all of our revenue, so our success is materially dependent on the financial stability of our tenants. Each of our Current Properties is occupied by a single tenant (or affiliated tenants) and the success of our investment in those properties is dependent on the financial stability of these tenants in the aggregate. A default of a tenant on its lease payments would cause us to lose the revenue from the property. While we own relatively few properties, our exposure to each tenant is more significant than we expect it to be as we acquire more properties. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. If a lease is terminated, we cannot assure our investors that the property could be leased for the same amount of rent previously received or that we could sell the property without incurring a loss. If a tenant files for bankruptcy, we may be precluded from collecting all sums due to us. If a tenant, or the guarantor of a lease of a tenant, commences, or has commenced against it, any legal or equitable proceeding under any bankruptcy, insolvency, receivership or other debtor’s relief law, we may be unable to collect all sums due to us under that tenant’s lease. Any or all of the lease obligations of our tenants, or any guarantor of our tenants, could be subject to a bankruptcy proceeding which may bar our efforts to collect prebankruptcy debts from these entities or their properties, unless we are able to obtain an enabling order from the bankruptcy court. If our lease were rejected by a tenant in bankruptcy, we would only have a general unsecured claim against the tenant and may not be entitled to any further payments under the lease. A bankruptcy proceeding could hinder or delay our efforts to collect past due balances and ultimately preclude collection of these sums, resulting in a decrease or cessation of rental payments and reducing returns to our investors. Competition with third parties for properties and other investments may result in our paying higher prices for properties which could reduce our profitability and the return on your investment. We compete with many other entities engaged in real estate investment activities, including individuals, corporations, banks, insurance companies, other REITs, real estate limited partnerships, and other entities, many of which have greater resources than we do. Some of these investors may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and increased prices. If competitive pressures cause us to pay higher prices for properties, our ultimate profitability may be reduced and the value of our properties may not appreciate or may decrease significantly below the amount paid for such properties. At the time we elect to dispose of one or more of our properties, we will be in competition with sellers of similar properties to locate suitable purchasers, which may result in us receiving lower proceeds from the disposal or result in us not being able to dispose of the property due to the lack of an acceptable return. This may cause you to experience a lower return on your investment than initially expected or a decrease in the Determined Share Value of our common stock. - 10 CONFIDENTIAL Changes in national, regional or local economic, demographic or real estate market conditions may adversely affect our results of operations and returns to our stockholders. We are subject to risks generally attributable to the ownership of real estate assets, including: changes in national, regional or local economic, demographic or real estate market conditions; changes in supply of or demand for similar properties in an area; increased competition for real estate assets targeted by our investment strategy; bankruptcies, financial difficulties or lease defaults by our tenants; changes in interest rates and availability of financing; and changes in government rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws. Our tenants could be adversely affected by an economic downturn which could jeopardize their ability to pay their rents. A significant economic downturn, whether in the geographic regions where the properties are located, in a particular industry, or generally may adversely affect the ability of our tenants to pay their rents. If a tenant were unable to pay rent on a timely basis, we may need to remove that tenant and re-lease or sell the property at a time when the economic conditions are not favorable and we may suffer a loss on the investment. Changes in supply of, or demand for, similar real properties in a particular area may increase the price of real properties we seek to purchase and decrease the price of real properties when we seek to sell them. The real estate industry is subject to market forces. We are unable to predict certain market changes including changes in supply of, or demand for, similar real properties in a particular area. Any potential purchase of an overpriced asset could decrease our rate of return on these investments and result in lower operating results and overall returns to our stockholders. Real properties are illiquid investments, and we may be unable to adjust our portfolio in response to changes in economic or other conditions or sell a property if or when we decide to do so. Real properties are somewhat illiquid investments. We may be unable to adjust our portfolio in response to changes in economic or other conditions. In addition, the real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. The length of our leases and the credit of our tenants will also affect our ability to sell our properties. We cannot predict whether we will be able to sell any real property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a real property. In addition, we intend to comply with the safe harbor rules relating to the number of properties that can be disposed of in a year, the tax bases and the costs of improvements made to these properties, and other items that enable a REIT to avoid taxation on the sale of assets. Thus, our ability at any time to sell assets may be restricted. In addition, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure you that we will have funds available to correct such defects or to make such improvements. This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on, and the market price of, our common stock. In connection with its acquisition of properties contributed by a seller to the Operating Company, the Operating Company may enter into an agreement with the seller not to sell the property for a certain period or to sell only in a Code Section 1031 exchange. In acquiring a real property, we may agree to restrictions that prohibit the sale of that real property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed, or repaid, on that real property or a requirement that sales occur only in transactions that qualify as exchanges under Section 1031 of the Code. We have one property, 770 Linden Avenue, Rochester, N.Y., which is subject to a five year tax protection agreement (commencing December 2015) restricting our ability to sell the property unless we indemnify the Seller for the tax liability which a sale may cause unless the sale is in connection with a sale of all or substantially all of our properties or as a result of a government exercise of rights of eminent domain. All these - 11 CONFIDENTIAL provisions may restrict our ability to sell a property, which could reduce the amount of cash available for distribution to our stockholders. The inherent risks associated with investing in real estate could adversely affect the Operating Company’s cash flow and ability to make distributions to its members, including the Corporation. The Corporation will be subject to risks inherent in the ownership of property which are beyond its control, such as fluctuations in occupancy rates and operating expenses and variations in rental schedules, which in turn may be adversely affected by general and local economic conditions, the demand for the Property, zoning laws, reduced costs of operating competing properties, shortages or increased costs of fuel or other energy sources, and increasing real property tax rates. Not all of our properties are leased under absolute net lease terms, so it is possible that certain expenditures associated with real estate ownership (principally repair or replacement of structural elements) may decrease our net income. Thus, the cost of operating the Property may exceed the rental income earned thereon. Also, environmental risks such as those relating to hazardous substances and unfavorable environmental legislation are typically associated with real estate investments. Generally, it is impossible or economically infeasible to obtain insurance against losses resulting from such environmental matters. Compliance with governmental laws and regulations is complex and failure to comply may reduce the investment return of the investors. All real property and the operations conducted on real property are subject to federal, state, and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations may impose joint and several liability on the Operating Company and/or the Corporation for the costs to investigate or remediate the property, regardless of fault or whether the acts causing the contamination were legal. The presence of hazardous substances on the property, or the failure to properly remediate these substances, may hinder the Operating Company’s ability to sell or rent the property. Further, the Operating Company’s compliance with new or stricter interpretations of existing laws or regulations may require it to make additional expenditures. If any environmentally hazardous material is determined to exist on a property we own, the investment return of our investors may be adversely affected. The Asset Manager undertakes customary environmental diligence prior to purchasing any property. However, as a current or previous owner of real estate, the Operating Company may be required to remove or remediate hazardous or toxic substances on, under or in such property under various federal, state and local environmental laws, ordinances and regulations. These laws may impose liability whether or not the Operating Company knew of, or was responsible for, the presence of such hazardous or toxic substances. Our use and operation of a property may also be restricted by environmental laws or require certain expenditures. Failure to comply with environmental laws may result in sanctions upon the Operating Company by governmental agencies or the Operating Company’s liability to third parties. The cost of compliance or defense against claims from a contaminated property will likely affect our investors’ return on investment. The insurance covering improvements on the Properties might not be adequate to cover losses incurred. Although the Operating Company maintains, or requires the tenants to maintain, comprehensive insurance coverage on the Properties, some catastrophic losses may be either uninsurable or not economically insurable. If a disaster occurs, the Corporation could suffer a complete loss of capital invested in, and any profits, losses, or tax deferrals expected from, our Properties. If uninsured damages to a Property were to occur and if the Operating Company did not have adequate cash to fund repairs, the Operating Company may be forced to sell the Property at a loss or to borrow capital to fund the repairs. Financing Risks We finance our property acquisitions with mortgage debt and other borrowings, which may increase our business risks. We generally acquire real estate properties with mortgage loans secured by those properties and we will need to finance and refinance our properties from time to time. We have a line of credit which allows us to finance - 12 CONFIDENTIAL a portion of the cash required for an acquisition in advance of our raising the equity required for the property or securing the mortgage financing for that property. In some cases, the mortgage loans may also be guaranteed, in whole or as to certain carve-out matters, by the Corporation and/or the Operating Company. The line of credit is guaranteed by the Corporation, our Asset Manager, our Property Manager and our Sponsor. We may also borrow funds if necessary to satisfy the requirement that we distribute to stockholders at least 90% of our annual REIT taxable income, or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes. Incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in foreclosure actions initiated by lenders and our loss of the property securing the loan that is in default. 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 but would not receive any of the proceeds. The Corporation or the Operating Company may be required to give full or partial guarantees to mortgage lenders. If the Corporation or the Operating Company gives a guaranty, we will be responsible to the lender for satisfaction of the debt or any special liability under a carve-out guaranty if it is not paid by the Operating Company or the applicable subsidiary. If our Sponsor guaranties any of the indebtedness of the Operating Company, he will be paid a fee of up to 0.5% of the principal amount of the loan guaranteed to compensate for the risk of the guaranty. Our Sponsor has been, and may continue to be, required to issue guaranties of certain limited matters under the Operating Company’s loans, such as environmental liabilities, to the extent we are unable to satisfy such liabilities, referred to as “carve-out” guarantees. We will indemnify the Sponsor for any payments he may be required to make under such “carve-out” or other guarantees (see “Risk Factors – Financing Risks”). If any mortgages contain cross-collateralization or cross-default provisions, there is a risk that more than one of our real properties may be affected by a default. If any of our properties are foreclosed upon due to a default, our ability to pay cash distributions to our stockholders will be adversely affected. We have a line of credit and may also obtain other types of financing. The Corporation or Operating Company may borrow money to pay a portion of the equity needed for the purchase of various properties. Under our line of credit, the Operating Company may, if the various conditions are satisfied, borrow up to 90% of the purchase price of a property on a short-term basis (92% if certain transaction costs are included). The advances under the line of credit require repayment in full within 180 days after the acquisition from the proceeds of sales of our common stock and/or mortgage financing of the acquired property. We are required to maintain certain financial ratios and comply with other covenants, and each loan is subject to substantial review and approval requirements for the specific property. If we borrow under the line of credit or other mezzanine financing, there is a risk we will be unable to raise the equity or secure the mortgage financing required to repay the loan on time and the risk that the lender will fail to approve an advance for a property that we wish to buy. Instability in the debt markets may make it more difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make to our stockholders. If mortgage debt is unavailable on reasonable terms as a result of increased interest rates or other factors, there is a risk we may not be able to re-finance our properties when the loans come due, or we may be unable to refinance on favorable terms. If interest rates are higher when we refinance debt, our income could be reduced. We may be unable to refinance debt at appropriate times, which may require us to sell properties on terms that are not advantageous to us, or could result in the foreclosure of such properties. If any of these events occur, our cash flow would be reduced. This, in turn, would reduce cash available for distribution to our stockholders and holders of Units in the Operating Company and may hinder our ability to raise more capital by issuing securities or by borrowing more money. Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders. In connection with obtaining certain financing, a lender could impose restrictions on us that affect our ability to incur additional debt and our distribution and operating policies. Loan documents we enter into may contain customary negative covenants that may limit our ability to further mortgage the property, discontinue - 13 CONFIDENTIAL insurance coverage or impose other limitations. Our line of credit requires us to maintain certain financial ratios and contains other financial covenants and operating covenants and restrictions. Such restrictions or limitations may have an adverse effect on the operations of the Operating Company and the distributions made to our stockholders. Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to our stockholders. To date, we have financed our properties with fixed rate debt and plan to continue to do so. However, we do incur indebtedness under our acquisition line of credit that bears interest at variable rates. We intend to repay advances with proceeds of this offering, but may not be successful in doing so, or in doing so promptly. Accordingly, increases in interest rates would increase the Operating Company’s interest costs, which could have a material adverse effect on its operating cash flow and the ability to pay distributions. 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 properties at times which may not permit realization of the maximum return on such investments. Although the properties will generally be acquired and financed in single purpose entities, the lenders may require recourse against the Operating Company, the Corporation or other responsible persons for certain matters. Mr. Goldstein or his affiliates have been required to guarantee our line of credit and may be required to personally guarantee obligations of our property-owning subsidiaries. If those guarantors are required to pay any amounts to lenders on those guarantees, those guarantors will seek indemnity from the Operating Company and/or the Corporation for such obligations, in effect exposing all of the assets of the Operating Company and/or the Corporation to certain obligations related to the properties. While we expect that most properties will be acquired and financed in separate, single-purposes entities (often referred to as “SPEs” or “SPVs”), borrowings on our line of credit are guaranteed by our Sponsor personally and by the Asset Manager and the Property Manager, as well as the Corporation. In addition, lenders will require certain aspects of the debt to be recourse to the Corporation, the Operating Company or other responsible persons. These recourse obligations may include lender liability for certain environmental matters and, under certain circumstances, repayment of the debt in the event of the insolvency of the owner of the property. The Corporation and the Operating Company have agreed to indemnify the Sponsor and his affiliates for any payments they may be required to make under their personal guaranties for various elements of otherwise non-recourse financing, commonly referred to as “non-recourse carve-outs”. The effect of the lender requirements is to make certain aspects of otherwise non-recourse debt a general obligation of the Operating Company and/or the Corporation. Transaction costs incurred in connection with obtaining debt financing reduce cash available for investment and distribution. Certain transaction costs, including origination fees, debt financing fees, guaranty fees and counsel fees, will be incurred by the Operating Company in obtaining debt financing. These transaction costs increase the risk that the amount available for payment of distributions to our stockholders upon a liquidation of our portfolio would be less than the purchase price of the shares of stock in this Offering. Federal Income Tax Risks Failure to continue to qualify as a REIT could adversely affect our operations and our ability to make distributions. The Corporation elected to be taxed as a REIT for federal income tax purposes for the tax year ended December 31, 2014, and intends to operate to maintain REIT status. Our qualification as a REIT depends on our satisfaction of numerous requirements (some on an annual and quarterly basis) established under highly technical and complex provisions of the Internal Revenue Code for which there are only limited judicial or administrative interpretations and involve the determination of various factual matters and circumstances not entirely within our control. The complexity of these provisions and of the applicable income tax regulations that have been promulgated under the Internal Revenue Code is greater in the case of a REIT that holds its assets through an UPREIT structure, as we do. Moreover, no assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not change the tax laws with respect to qualification as a REIT or the federal income tax consequences of that qualification. - 14 CONFIDENTIAL If we were to fail to qualify as a REIT for any taxable year, we would be subject to federal income tax on our taxable income at corporate rates. In addition, we would generally be disqualified from treatment as a REIT for the four taxable years following the year in which we lose our REIT status. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. In addition, distributions to stockholders would no longer be deductible in computing our taxable income and we would no longer be required to make distributions. To the extent that distributions had been made in anticipation of our qualifying as a REIT, we might be required to borrow funds or liquidate some investments to pay the applicable corporate income tax. In addition, although we intend to operate in a manner intended to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our board of directors to recommend that we revoke our REIT election. To maintain REIT status we must meet annual distribution requirements, which may result in us distributing amounts that would otherwise be used to purchase properties or otherwise support our operations. To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our real estate investment trust taxable income, determined without regard to the deduction for distributions paid and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of: x 85% of our ordinary income, x 95% of our capital gain net income, and x 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds or sell assets to fund these distributions. If we fund distributions through borrowings, then we will have to repay debt using money we could have otherwise used to acquire properties resulting in our ownership of fewer real estate assets. If we sell assets or use offering proceeds to pay distributions, we also will have fewer investments. Fewer investments may impact our ability to generate future cash flows from operations and, therefore, reduce your overall return. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid corporate income taxation on the earnings that we distribute, it is possible that we might not always be able to do so. Our investors who participate in our Distribution Reinvestment Plan may have current tax liability with respect to our distributions, without the corresponding cash distribution which is being reinvested in our common stock. An investor who participates in our Distribution Reinvestment Plan will be deemed to have received, and for income tax purposes will be taxed on, the amount of cash distributions reinvested in shares of our common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless an investor is a taxexempt entity, the investor may have to use funds from other sources to pay the investor’s tax liability on the value of the shares of common stock received. Distributions payable by REITs do not qualify for the reduced tax rates that apply to certain other corporate distributions. In the case of individual taxpayers, long-term capital gains and distributions of qualified dividends are generally taxable at a federal rate of 15%, or 20% for higher income taxpayers. Distributions payable by REITs, other than long-term capital gains, however, generally are taxed at the ordinary rates applicable to the income of the individual recipient, rather than the 20% rate. The more favorable rates applicable to regular corporate distributions could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock. Certain business activities could potentially be subject to the prohibited transaction tax, which could reduce the return on your investment. Our ability to dispose of property during the first few years following acquisition is restricted to a substantial extent as a result of our REIT status. Under applicable provisions of the Internal Revenue Code - 15 CONFIDENTIAL regarding prohibited transactions by REITs, we will be subject to a 100% tax on any gain realized on the sale or other disposition of any property (other than foreclosure property) we own, directly or through any subsidiary entity, including our Operating Company, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by: x conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary other than a taxable REIT subsidiary, will be treated as a prohibited transaction, x structuring certain dispositions of our properties to comply with certain safe harbors available under the Internal Revenue Code for properties held at least four years, or x conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary. However, despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our Operating Company, but excluding our taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business. In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to you. Even if we qualify and maintain our status as a REIT, we may be subject to federal and state income taxes. For example, net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our real estate assets and pay 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. We may also be subject to state and local taxes on our income or property, either directly or at the level of the companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to you. REIT distribution requirements could adversely affect our ability to execute our business plan. 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. 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 make distributions sufficient to enable us to pay out 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 the value of our equity. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits. To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which may delay or hinder our ability to meet our investment objectives and reduce our stockholders’ overall return. To qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and the value of our stockholders’ investment. - 16 CONFIDENTIAL In order to qualify as a REIT, we retain the right to prohibit certain acquisitions and transfers of shares of our common stock which limits our investors’ ability to purchase or sell shares. In general, after our first taxable year, we cannot qualify as a REIT if we have: x x more than 50% of the value of our outstanding common stock owned, directly or indirectly, by five or fewer stockholders during the last half of each taxable year, or fewer than 100 persons owning our outstanding common stock during at least 335 days of a 12month taxable year. In our Charter, we prohibit certain acquisitions and transfers of shares in an attempt to ensure our continued qualification as a REIT. For example, if any person or group of persons acquires, directly or indirectly, beneficial or constructive ownership of more than 9.8% of our outstanding common stock in violation of the ownership limit, those shares are deemed held in a trust for the benefit of a charity. Our prohibition may prevent our existing stockholders from acquiring additional shares, redeeming their shares, or selling their shares to others who may be deemed to, directly or indirectly, beneficially own our common stock. Our board of directors may waive this restriction under certain circumstances. We cannot assure an investor that the 9.8% ownership limit will be effective in permitting the Corporation to retain its REIT status. Recharacterization of sale-leaseback transactions may cause us to lose our REIT status. In certain circumstances, we may purchase real properties and lease them back to the sellers of such properties. While we will use commercially reasonable efforts to structure any such sale-leaseback transaction such that the lease will be characterized as a “true lease” for tax purposes, thereby allowing us to be treated as the owner of the property for U.S. federal income tax purposes, we cannot assure you that the IRS will not challenge such characterization. In the event that any such sale-leaseback transaction is challenged and recharacterized as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the REIT qualification “asset tests” or “income tests” and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated which might also cause us to fail to meet the distribution requirement for a taxable year. Changes in tax laws may adversely affect our ability to operate our business efficiently while maintaining our REIT status or change the taxation of our distributions to our stockholders. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. We cannot predict how changes in the tax laws might affect our stockholders or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification. Federal income tax rates, deductions and other terms are subject to change from time to time as well, including increases in tax rates applicable to our distributions to the extent not a return of capital. Changes to the tax laws, with or without retroactive application, could adversely affect our stockholders or us. Conflict of Interest and Related Party Transactions Our relationship with our Asset Manager and our Property Manager, and their affiliates will subject us to certain conflicts of interest. We will be subject to conflicts of interest arising out of our relationships with our Asset Manager and our Property Manager, and their affiliates. For example, the acquisition fee payable to our Asset Manager may lead to paying more for a property than might be possible if no fees were involved. The initial members of the Operating Company, which included the Initial Sponsors, contributed properties with a tax basis less than their current market value and may not wish to have the Operating Company dispose of those properties, which could trigger a tax gain, even if it would otherwise make business sense to do so. See “Conflicts of Interest” for a more detailed discussion of the conflicts of interest between us and our Asset Manager, our Property Manager, and their affiliates, and the oversight conducted by our Independent Directors Committee. - 17 CONFIDENTIAL Our Asset Manager, our Property Manager, their officers and employees, and our Sponsor face competing demands relating to their time, and this may cause our operating results to suffer. Our Asset Manager, our Property Manager, their officers and employees, and Mr. Goldstein are key personnel, officers, and may be owners of other real estate and have other business interests as well. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. Our officers face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our business strategy and to generate returns to our investors. Mr. Goldstein, our President is manager of our Asset Manager and our Property Manager and owns a majority interest in each of those entities. Mr. Goldstein owes loyalty and certain fiduciary duties to members of these other entities, which may conflict with the duties that he owes to us and our stockholders. His loyalties to these other entities could result in actions or inactions that prefer those entities and potentially could harm the implementation of our business strategy and our investment and leasing opportunities. If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets. There is no separate legal counsel for the Corporation, the Operating Company, and their affiliates, which could result in conflicts of interest. Nixon Peabody LLP acts as legal counsel to the Corporation and the Operating Company in connection with the Offering, and also represented the Initial Sponsors in connection with formation of the Asset Manager and the structuring of the transactions described in this Memorandum. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Nixon Peabody may be precluded from representing any one or all of such parties in the adversarial matter. Nixon Peabody LLP’s representation of the Corporation does not include representation of any prospective investors in connection with their purchase of shares of the Corporation’s common stock, each of whom should rely on their own counsel. Prospective investors are advised to consult with their own legal, tax and financial advisors with respect to any investment in the shares. Partners of Nixon Peabody LLP own less than 2% of the outstanding shares of the Corporation. - 18 CONFIDENTIAL Special Note Regarding Forward-Looking Statements Some of the statements contained in this Memorandum and its Exhibits contain forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Corporation’s control, any of which singly or in combination could cause our business and operations to perform less favorably than we expect. Other than statements of historical facts, the statements in this Memorandum regarding the Investment Fund’s strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. When used in this Memorandum, the words “will,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are also intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Memorandum. We do not undertake any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements made in this Memorandum are reasonable based upon the information that we know at this time, there are numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause us not achieve our plans, intentions or expectations. There are important factors that could cause our actual results to differ materially from our expectations, which may include: x the success of our business and investment strategy; x our ability to elect and maintain our qualification as a REIT for U.S. federal income tax purposes; x adverse economic or real estate developments in the markets where we have properties, and the effect of general market, real estate market, economic and political conditions; x our ability to make additional investments and acquire attractive properties in a timely manner or on acceptable terms; x our ability to raise equity and secure debt financing to allow us to continue to increase our portfolio of properties; x tenant turnover as a result of non-renewals, defaults, or early terminations of leases; x vacancies or our inability to rent our properties on favorable terms or rental rates; x adverse changes in the financial circumstances of our tenants; x our ability to generate sufficient cash flows to make distributions to our stockholders; x the degree and nature of our competition; x changes in credit market conditions, including increases in interest rates, and our ability to obtain financing for our property investments in a timely manner and on terms that are favorable and consistent with what we project when we invest in the property; and x adverse changes in governmental regulations, tax law and rates, and similar matters. For a more detailed discussion of some of the risk factors we have identified, see the section entitled “Risk Factors” above. These cautionary statements qualify all forward-looking statements attributable to the Investment Fund or persons acting on its behalf and you are cautioned not to place undue reliance on forward-looking statements. - 19 CONFIDENTIAL Estimated Use of Offering Proceeds and Capitalization Estimated Use of Offering Proceeds We contribute the proceeds of the Offering described in this Memorandum to the Operating Company in exchange for membership interests. The Operating Company uses the proceeds to select, acquire, and operate real properties meeting the investment criteria and Property Selection Criteria we describe in this Memorandum, to repay debt and for general business and operating purposes of the Corporation and the Operating Company. Included in those business and operating expenses are the costs of formation of the Corporation and the Operating Company and the preparation and updating of the offering documents, including fees paid to third party professionals, such as lawyers and accountants, and various state and federal filing fees. Our ability to purchase additional properties is directly related to the number of shares sold in the Offering from time to time. We do not currently compensate any brokers or others in connection with the sale of our shares. Up to 0.75% of the gross proceeds of the Offering from time to time is used to reimburse the Asset Manager for out-ofpocket costs incurred in connection with the Offering of our common stock and the sale or exchange of membership interests in the Operating Company, including marketing expenses such as potential investor meetings, printing and mailing costs, and, if brokers are engaged to assist in the Offering, broker fees and expenses. Certain fees are paid by the Operating Company to our Asset Manager and our Property Manager for their services. See “Fees and Other Compensation to Our Managers and Affiliates” below. Capitalization The Corporation was formed on January 6, 2014. It is authorized to issue 40,000,000 shares of its common stock, par value $0.001, and up to 100,000 shares of preferred stock. In mid-January 2014, the Corporation issued initial capitalizing shares to the Initial Sponsors for cash. The unaffiliated cash investors in the Operating Company converted their membership interests for shares of the Corporation’s common stock as of February 28, 2014 on a one-for-one basis. The Initial Sponsors converted most of their interests in the Operating Company for shares in the Corporation on the same basis, to the extent consistent with the Corporation’s plan to elect REIT status at the end of 2014. Mr. Glazer’s interests and stock are now owned, directly or indirectly, by the Glazer Estate. In December 2015, the Corporation changed its name from Buckingham Net Leased Properties Group Inc. to Royal Oak Realty Trust Inc. From time to time, as the Corporation issues additional shares of common stock for cash, the Corporation contributes the net proceeds of the sale to the Operating Company in exchange for membership interests. The number of outstanding shares of the Corporation’s common stock and the number of outstanding Units of the Operating Company (which are convertible on a one-for-one basis into shares of common stock) as of the most recent annual and quarterly periods are included on the financial statements provided as Exhibits A and B. The Independent Directors Committee has approved an equity compensation plan which authorizes that Committee to issue equity compensation awards in the form of stock options, restricted stock, stock appreciation rights or restricted stock units to the members of the Independent Directors Committee and the officers of the Corporation and certain others. The awards will be designed to provide additional incentives to build the portfolio of commercial properties of the Corporation and tie the interests of the Independent Directors and other participants to those of other shareholders. While 700,000 shares of common stock are allocated to the Plan, the Independent Directors Committee is only authorized to issue awards with respect to 10% of this amount, or 70,000 shares, until the Corporation has issued 700,000 shares to investors. After that threshold is met, the Independent Directors Committee may issue awards beyond the initial 70,000 shares but the awards are limited to 10% of the number of shares of our common stock outstanding from time to time. Stock options may only be issued under the plan to our directors and officers, and must be issued with an exercise price at fair market value (expected to be the Determined Share Value from time to time). Stock options may be issued only upon payment of the cash exercise price, although payment of any tax withholding obligations may be made by the Corporation withholding a portion of the awarded shares or by surrender of previously owned shares, or in another manner approved by the Independent Directors Committee. On June 26, 2014, the Independent Directors Committee approved, and the Corporation issued, options to purchase 10,000 shares of common stock for $50.00 to each of the Independent Directors and to Messrs. Glazer and Goldstein as officers of the Corporation. The options vest and first become exercisable, subject to certain - 20 CONFIDENTIAL exceptions, 20% on each of January 6, 2015, 2016, 2017, 2018 and 2019, and expire on January 6, 2024 to the extent not exercised. The options will terminate to the extent unvested if a director’s service terminates, except by reason of death or disability. If service is terminated by reason of death or disability, any unvested portion of the options immediately becomes vested and exercisable. Mr. Glazer’s options vested on his death (September 5, 2014) but expired unexercised. In addition, the Independent Directors Committee approved, and the Corporation issued, a performancebased award of 2,000 shares of restricted stock to Daniel Goldstein. The performance targets set by the Independent Directors Committee were met based on the Corporation’s performance and the shares were issued to Mr. Goldstein on January 1, 2015 and vested on January 1, 2016. The Committee may consider making additional restricted stock grants with performance targets to Mr. Goldstein annually. - 21 CONFIDENTIAL Investment Objectives and Operating Policies Investment Objectives Our investment objectives are to: x preserve, protect and return the stockholders’ capital contributions; x purchase income-producing properties which will allow us to pay cash distributions to our stockholders monthly, targeted at 7% annual cash on cash based on the then-current Determined Share Value; x operate the properties effectively and efficiently to maintain and attract tenants and achieve stable cash flow; x provide limited future liquidity to our investors through redemptions; and x realize capital appreciation upon the ultimate sale of the real estate assets we acquire. The Independent Directors Committee of our Board of Directors reviews our Property Selection Criteria and Leverage Policy periodically to determine if they continue to meet our investment objectives. Property Selection Criteria Our Property Selection Criteria was established by our management and is subject to change from time to time in the discretion of the Independent Directors Committee. Variations from our Property Selection Criteria must be approved by the Independent Directors Committee. We will purchase additional properties upon the recommendation of the Asset Manager. Mr. Goldstein, manager of the Asset Manager, selects and evaluates the properties that we may acquire, subject to the approval of the Asset Acquisition Committee of the Asset Manager. The Asset Acquisition Committee is currently comprised of Mr. Goldstein and Patrick C. Burke and Richard R. LeFrois, as independent advisors. In making its recommendation, the Asset Manager examines and evaluates various criteria, including: x general office, medical office and industrial properties (warehouse, distribution, manufacturing, etc.) net leased to credit worthy tenants; x existing lease terms with maturities of at least eight years; x base rental rates consistent with comparable market rents; x net leased facilities, where the operating costs are either paid by the tenants directly or paid by the tenants as additional rent; and x strategically sound geographic locations of the leased facilities with diversification in geography, business line, and physical characteristics. The Asset Manager and the Asset Acquisition Committee also consider a number of other factors, including the proposed purchase price, terms, and conditions; historical financial performance of the property and tenants; potential cash flow and profitability of the property; current market and leasing conditions and demographics of the area in which the property is located; an evaluation of title and the obtaining of satisfactory title insurance; an evaluation of any reasonably ascertainable risks such as environmental contamination; and the current valuation of the property and its potential for appreciation. Any acquisition or disposition of real property or interests in an entity holding real property or the execution of any agreement for or on behalf of the Corporation or the Operating Company relating to such transactions requires: (a) the approval of the Asset Acquisition Committee; (b) in the case of an acquisition from, or - 22 CONFIDENTIAL disposition to, Mr. Goldstein or any of his affiliates, the unanimous approval of the members of the Asset Acquisition Committee of the Asset Manager and approval by a majority of our Independent Directors Committee; (c) if such property is not within the Property Selection Criteria then in effect, the unanimous approval of the members of the Asset Acquisition Committee and approval by a majority of our Independent Directors Committee and (d) if the property, or a group of related properties, has a purchase price of $10,000,000 or more, unanimous approval of the Asset Acquisition Committee and approval of a majority of the Independent Directors Committee. The Asset Manager is required to deliver to the Board, the Asset Acquisition Committee, and the Independent Directors Committee, as applicable, all documents required to properly evaluate the proposed acquisition, disposition or investment. Leverage Policy The Investment Fund targets a leverage ratio with total debt not greater than 65% of the approximate market value of its assets. The actual leverage ratio will vary over time but should not exceed 75% without the approval of the Independent Directors Committee. We expect the leverage ratio to decrease as debt is repaid and additional properties acquired. Our Independent Directors Committee may change our leverage policy from time to time depending on then-current market conditions and other factors impacting our business and growth strategies. The Asset Manager has developed guidelines for its review of financing proposals for the properties to be acquired. In each case, deviations from the guidelines may be required for financing any particular property; it is the goal of the Asset Manager to attain financing with the following characteristics: x long-term financing matched to the lease terms of major tenants; x balloon payments not in excess of the expected fair market value of the property without a tenant in place; x flexible repayment terms to allow opportunistic refinancings; and x non-recourse with limited carve-out guarantees. If the Sponsor or his affiliates provide personal guarantees of our debt, they will be paid a fee equal to 0.5% of the principal amount guaranteed or of the dollar cap on the guaranty. Our Sponsor may also be required to issue guaranties of certain limited matters under the Operating Company’s loans, such as environmental liabilities, to the extent we are unable to satisfy such liabilities, referred to as “carve-out” guarantees. The Operating Company and the Corporation have agreed to indemnify the Sponsor and his affiliates for any payments he may be required to make under such guarantors’ personal guaranties. The effect of the lender requirements is to make certain aspects of otherwise non-recourse debt a general obligation of the Corporation and/or the Operating Company. - 23 CONFIDENTIAL 8.68 4.36 Light Manufacturing Manufacturing Flex / Industrial Office Manufacturing Child Care Center Manufacturing 50 Hanil Drive Tallassee, AL 2101 Cedar Street Fremont, OH 50 Holleder Parkway Rochester, NY 255 Rex Blvd. Auburn Hills, MI 1501 Buchanan Ave Grand Rapids, MI 979 Jackson Road Webster, NY 770 Linden Ave Rochester, NY 4.40 1.88 4.03 5.15 10 4.56 Light Manufacturing 226 Jay Street Rochester, NY 6.44 Flex / Industrial Property Type Office 1350 Scottsville Road Rochester, NY Property 125-205 Bryant Wood South Amherst, NY Parcel Size (Acres) 7.29 73,000 11,300 120,800 68,830 70,125 178,200 111,564 59,670 124,850 Total Rentable Square Feet 41,500 100 100 100 100 100 100 100 100 100 Occupancy % 100 December, 2015 August, 2015 June, 2015 December, 2014 October, 2014 July, 2014 June, 2014 March, 2014 August, 2013 Date of Acquisition May, 2013 - 24 CONFIDENTIAL Arnold Magnetic Technologies Doodle Bugs! Children’s Centers Michigan Wheel Operations Continental Structural Plastics Isaac Heating and Cooling Fremont Plastics Hanil USA Park Capital American Tire Tenant FirstSource Advantage 12 Years 20 Years 20 Years 10 Years 15 Years 15 Years 11 Years 12 Years 10 Years Lease Term at Acquisition 15 years $394,200 $237,300 $392,600 $516,225 $386,000 $400,944 $659,160 $229,730 $692,917 Total Annualized Initial Base Rent $495,925 $4,600,000 $2,700,000 $4,500,000 $6,425,000 $4,450,000 $5,070,000 $7,800,000 $2,220,000 $7,400,000 Appraised Value at Acquisition $6,100,000 $3,400,000 $2,700,000 $4,500,000 $6,425,000 $4,200,000 $5,070,000 $7,400,000 $2,450,000 $7,100,000 Purchase Price $5,250,000 As of December 31, 2016, our portfolio consists of fourteen properties in seven states with a combined gross asset value at acquisition of approximately $80.0 million and a total annualized base rent of approximately $6.7 million. Detailed information regarding our current properties is provided in the following chart: Properties Properties, Financing and Leases $3,000,000 $1,600,000 $2,700,000 $3,750,000 $2,800,000 $2,800,000 $4,500,000 $1,136,913 $5,700,000 Principal Debt Amount at Acquisition $3,935,000 Flex / Office Manufacturing 100 Wisconsin Street, 820 Wisconsin Street, 837 Walworth Street and 850 Walworth Street, Walworth, WI 17.77 7.88 8.94 100% 100% 1,409,454 100% 100 100 Occupancy % 228,494 86,725 92,846 Manufacturing Manufacturing 142,000 8.40 Property Type One Sun Court Peachtree Corners, GA 320 MasonMontgomery Road Mason, OH Property 7300 South Narragansett Ave Bedford Park, IL Total Rentable Square Feet Parcel Size (Acres) December, 2016 August, 2016 February, 2016 January, 2016 Date of Acquisition - 25 CONFIDENTIAL Miniature Precision Components Inc. Atlantix Global Systems Deerfield Manufacturing Archer Wire International Tenant 12 Years 15 Years $6,729,614 $814,275 $733,338 $280,000 $497,000 10 Years 15 Years Total Annualized Initial Base Rent Lease Term at Acquisition $79,965,000 $9,300,000 $9,500,000 $3,450,000 $6,450,000 Appraised Value at Acquisition $76,845,000 $9,300,000 $9,300,000 $3,450,000 $6,300,000 Purchase Price $47,921,913 $4,650,000 $5,500,000 $2,200,000 $4,100,000 Principal Debt Amount at Acquisition Properties and Acquisitions The following describe our Properties and their acquisition. The leases and financing of these properties are described below. See “Financing” and “Leases” below. The property located at 125-205 Bryant Wood South, Amherst, New York, acquired on May 28, 2013, consists of two buildings and is owned by our subsidiary 125-205 Bryant Woods South LLC (“Bryant Woods”). Bryant Woods was initially owned by the Sponsors, who immediately exchanged their membership interests in Bryant Woods for an aggregate of 29,091 membership interests in the Operating Company at $50.00 for each membership interest. The combined 41,500 square foot buildings house a call center for credit card collections. The 7.29 acre property includes 500 parking spaces and is located in a suburban office park campus with a landowners’ association. The contract purchase price of $5,250,000, plus associated transaction costs, was funded by issuance of 29,091 Units (at $50 per Unit) to the Sponsors and assumption of a mortgage loan in the principal amount of $3,935,000. At the closing of the acquisition and loan, Bryant Woods entered into a net lease with the current occupant of the buildings, FirstSource Advantage LLC. The property located at 1350 Scottsville Road, Chili, New York, acquired on August 16, 2013, consists of one building and is owned by our subsidiary 1350 SR LLC (“1350 SR”). 1350 SR was initially owned by Mr. Glazer, who contributed his membership interests in 1350 SR to the Operating Company, in exchange for an aggregate of 28,000 membership interests in the Operating Company at $50.00 for each membership interest. The 124,850-square foot building houses a tire warehouse and distribution facility for American Tire Distributors, Inc. and is situated on a 6.44 acre parcel. The contract purchase price of $7,400,000, plus associated transaction costs, was funded by issuance of 28,000 Units (at $50 per Unit) to Mr. Glazer and assumption of a mortgage loan in the principal amount of $5,700,000. 1350 SR entered into a net lease with the current occupant of the facility, American Tire Distributors. The property located at 226 Jay Street and 511 Smith Street, Rochester, New York, acquired on March 27, 2014, consists of a single building and is owned by our subsidiary 226 Jay St Rochester LLC (“226 Jay Street”). The Operating Company acquired all the outstanding interests in 226 Jay Street from the seller, a non-affiliate, for $2,450,000, plus associated transaction costs, paid in cash and through the assumption of an existing $1,136,913 mortgage note. The 59,670 square foot building includes approximately 7,000 square feet of office space on a 4.56 acre site. The seller, Park Capital LLC, is owned by two individuals who own and operate multiple businesses which lease the facility under one lease agreement. The property located at 50 Hanil Drive, Tallassee, Alabama, acquired on June 5, 2014, consists of a single building and is owned by our subsidiary 50 Hanil Drive AL LLC (“50 Hanil Drive”). 50 Hanil Drive purchased the real property and building from the seller, a non-affiliate for $7,400,000 paid in cash and financed in part by a $4,500,000 mortgage loan. The 111,564 square foot building is situated on a 10.0 acre site. The concrete block and masonry-framed building was built in 2007 and expanded in 2010 and 2012. The tenant, Hanil USA LLC, is a subsidiary of TI Automotive Ltd. and is an automotive supplier that manufactures brake and fuel line bundles for all Hyundai and KIA automobiles manufactured in the United States. The property located at 2101 Cedar Street, Freemont, Ohio, acquired on July 18, 2014, consists of a single building and is owned by our subsidiary 2101 Cedar St OH LLC (“2101 Cedar ”). 2101 Cedar purchased the real property and building from the seller, a non-affiliate, for $5,070,000 paid in cash and financed through a $2,800,000 mortgage note. The 178,200 concrete block and masonry-framed building was constructed in 1969 and is leased to Freemont Plastics Products Inc. and its parent The Plastics Group Inc. Freemont Plastics Products is a plastic blow molding company that manufactures and supplies plastic products for the furniture, recreation, automotive, trucking, appliance, fuel tank, and construction industries. The property located at 50 Holleder Parkway, Rochester, New York, acquired on October 15, 2014, consists of one building and is owned by our subsidiary 50 Holleder Parkway LLC (“50 Holleder”). 50 Holleder was equally owned by 50 Holleder Member LLC (an entity owned by Buckingham Properties LLC insiders) and IH Holdings 3, LLC, who contributed their membership interests in 50 Holleder to the Operating Company, in exchange for an aggregate of 28,000 membership interests in the Operating Company at $50.00 for each - 26 CONFIDENTIAL membership interest. The 70,125-square foot building is the corporate headquarters of Isaac Heating & Air Conditioning, Inc. and is used for fabrication, warehousing and distribution and is situated on a 4.36 acre parcel. The contract purchase price of $4,200,000, plus associated transaction costs, was funded by issuance of 28,000 Units (at $50 per Unit) to 50 Holleder Member LLC and IH Holding 3, LLC, the assumption of a mortgage loan in the principal amount of $2,800,000 and additional cash to cover transaction costs. 50 Holleder entered into a triple net lease with the current occupant of the facility, Isaac Heating & Air Conditioning. The property located at 255 Rex Boulevard, Auburn Hills, Michigan, acquired on December 12, 2014, consists of a single building and is owned by our subsidiary 255 Rex Blvd MI, LLC (“255 Rex Blvd”). 255 Rex Blvd purchased the real property and building from Continental Structural Plastics, Inc. for $6,425,000 paid in cash and financed through a first mortgage, non-recourse note held by Protective Life Insurance Company in the amount of $3,750,000. The 68,830 square foot building is situated on a 5.15 acre site. The concrete block and masonryframed office building and research and development headquarters was built in 1989 with a major renovation being completed in 2013. The entire property is leased to Continental Structural Plastics, Inc. and is guaranteed by Continental Structural Plastics Holdings Corporation, the parent company of Continental Structural Plastics, Inc. Continental Structural Plastics, Inc. is a manufacturer of thermoplastics, fiber composites, and sheet molded compounds for the heavy truck, HVAC and building trade industries. The property located at 1501 Buchanan Avenue, Grand Rapids, MI, acquired on June 29, 2015, consists of a single building and is owned by our subsidiary 1501 Buchanan Ave MI LLC (“1501 Buchanan Ave”). 1501 Buchanan Ave purchased the real property and building from Michigan Wheel Operations, LLC for $4,500,000 paid in cash and financed through a first mortgage, non-recourse note held by Standard Insurance Corporation in the amount of $2,700,000. The 120,800 square foot building is situated on a 4.03 acre site. The concrete block and masonry-framed manufacturing building and headquarters was built in 1945 with multiple renovations completed throughout its history. The entire property is leased to Michigan Wheel Operations, LLC and is guaranteed by Michigan Wheel Holdings, LLC, the parent company of Michigan Wheel Operations, LLC. Michigan Wheel Operations, LLC is a manufacturer of propulsion and marine maneuverability systems for recreational, commercial and governmental marine industries. The property located at 979 Jackson Road, Webster, NY, acquired on August 14, 2015, consists of a single building and is owned by our subsidiary 979 Jackson Rd LLC (“979 Jackson Rd”). 979 Jackson Rd purchased the real property and building from an affiliate of the tenant for $2,700,000. The 11,300 square foot facility is located on a 1.88 acre site. The masonary-framed child care center was built in 2007. The entire property is leased to DB979 Jackson LLC and guaranteed by its parent Doodle Bugs! Holding Company, Inc. A leader in child care centers, Doodle Bugs! has thirteen locations in New York, Pennsylvania and Florida. The property located at 770 Linden Avenue, Rochester, NY, acquired on December 17, 2015, consists of a single building and is owned by our subsidiary 770 Linden Ave NY LLC (“770 Linden Ave”). 770 Linden Ave was owned by Linden Properties LLC, an unrelated company which contributed its membership interests in 770 Linden Ave to the Operating Company in exchange for 50, 727 membership interests in the Operating Company at $53.00 each; and assignment of an outstanding mortgage loan of $711,426. The approximately 73,000 square foot facility is located on a 4.40 acre site. The masonary manufacturing, distribution and headquarters facility was built in 1970. The entire property is leased to Magnetic Technologies Corporation and guaranteed by its parent, AMT Acquisition Corp. Magnetic Technologies Corporation develops, produces and integrates systems of magnetic and nonmagnetic performance materials. The property located at 7300 South Narragansett Avenue, Bedford Park, IL, acquired on January 27, 2016, consists of a single building and is owned by our subsidiary 7300 Bedford IL LLC (“7300 Bedford”). 7300 Bedford purchased the real property and building from an affiliate of the tenant for $6,300,000 paid in cash and financed through a first mortgage, non-recourse note held by Genworth Life Insurance Company in the amount of $4,100,000. The 142,000 square foot building is situated on an 8.40 acre site. The masonry and steel-framed manufacturing and headquarters office building was built in 1989 with a recent office renovation in 2015. The entire property is leased to Archer Wire International Corp. Archer Wire International Corp. forms wire products for their customers that include the leading manufacturers of kitchen appliances, barbecue grills, food service equipment, sporting goods, retailers and various commercial hardware companies. - 27 CONFIDENTIAL The property located at 320 Mason-Montgomery Road, Mason, OH, acquired on February 3, 2016, consists of three buildings and is owned by our subsidiary 320 North Mason Rd OH LLC (“320 Mason”). 320 Mason purchased the real property and buildings from Deerfield Manufacturing, Inc. for $3,450,000 paid in cash and financed through a first mortgage, non-recourse note held by S&T Bank in the amount of $2,200,000. The combined 92,846 square foot buildings are situated on a 8.94 acre site. The steel-framed metal manufacturing buildings were built in 1979, 1990, and 2002. The entire property is leased to Deerfield Manufacturing, Inc. D/B/A Ice Industries and is guaranteed by Ice Industries, Inc., the parent company of Deerfield Manufacturing, Inc. Deerfield Manufacturing, Inc. provides stamping, fabrication, machining, welding and assembly production. The company offers metal stamping, such as deep draw, transfer/tandem/progressive, high-volume applications, and specialty and low volume applications. Machining services include welding, assembly, and finishes; product and process engineering, and tool and dies; along with mechanical and hydraulic press equipment. It serves air and specialty tank, alternative energy, appliance, computer and networking, automotive, commercial truck/off-highway, filtration, defense, furniture, healthcare, fire and safety, HVACR manufacturer, and military and government markets. The property located at One Sun Court Peachtree Corners, GA, acquired on August 31, 2016, consists of one building and is owned by our subsidiary One Sun Court GA LLC (“Sun Court”). Sun Court purchased the real property and building from Atlantix Global Systems LLC for $9,300,000 paid in cash and financed through a first mortgage, non-recourse note held by Woodmen of the World Life Insurance Society in the amount of $5,500,000. The 86,275 square foot building is situated on a 7.88 acre site. The concrete and brick building was built in 1996. The entire property is leased to Atlantix Global Systems LLC. Atlantix Global Systems is a one-stop shop for quality new, used and refurbished IT hardware. Atlantix buys, sells, leases, rents, consigns and trades an extensive product line including Cisco, Sun, HP, IBM, Dell, storage equipment (including NetApp and EMC), Nortel and telecom equipment. The properties located at 100 Wisconsin Street, 820 Wisconsin Street, 837 Walworth Street and 850 Walworth Street, Walworth, WI, acquired on December 22, 2016, consist of four buildings and are owned by our subsidiary Walworth WI LLC (“Walworth”). Walworth purchased the real property and buildings from Miniature Precision Components Inc. for $9,300,000 paid in cash and financed through a first mortgage, non-recourse note held by Coastal Federal Credit Union in the amount of $4,650,000. The four buildings total 228,494 square feet and are situated on two sites totaling 17.77 acres. The buildings were constructed in 1984 (renovated in 1993), 1984 (renovated in 1994), 1973 (renovated in 2001) and 2002. The entire property is leased to Miniature Precision Components Inc. Miniature Precision Components Inc. is a Tier 1 supplier that provides thermoplastic components and assemblies to the automotive industry including cooling systems, sealing systems, emission and vacuum control systems, and air induction systems. We will purchase additional properties upon the recommendation of the Asset Manager and in accordance with our Property Selection Criteria, which was established by our management and will be subject to change from time to time in the discretion of the Independent Directors Committee. See “Investment Objectives and Operating Policies – Property Selection Criteria” for additional information. Financing Consistent with our leverage policy, the Corporation, the Operating Company and the individual propertyowning subsidiaries will enter into various financing arrangements. We have and will acquire properties with the proceeds of, or by assumption of existing, mortgage loans. In some cases, the mortgage loans may also be guaranteed, in whole or as to certain carve-out matters, by the Corporation, the Operating Company or by our Sponsors or affiliates of the Asset Manager. We may also borrow funds if necessary to satisfy the requirement that we distribute to stockholders at least 90% of our annual REIT taxable income, or otherwise as is necessary or advisable to assure that we maintain our qualification as a REIT for federal income tax purposes. We may also obtain other types of financing, including short-term loans from the Asset Manager or its affiliates. The Corporation or Operating Company may borrow money on an unsecured basis under a line of credit or, in order to pay a portion of the equity needed for the purchase of various properties, loans secured by a pledge of the Units or interests in the Operating Company or its single-purpose entities which hold title to our properties. - 28 CONFIDENTIAL Mezzanine loans of this type typically will require guarantees of affiliates of the Asset Manager, financial covenants, and substantial review and approval requirements for the specific property. The Operating Company has an unsecured line of credit with Manufacturers and Traders Trust Company (“M&T”) under which the Operating Company may borrow up to a maximum of $10,000,000. Advances under the line of credit agreement bear interest at the one-month London Interbank Offered Rate (“LIBOR”) plus 4.5% over the one-month LIBOR rate. Individual borrowings under the line of credit are limited to 90% of the purchase price for the applicable property or 92% of the purchase price if closing costs are to be included. The line of credit agreement expires at the end of February 2017, unless extended by the Operating Company for one additional year, subject to payment of an annual facility fee of $50,000. An advance fee of 0.1% of each draw on the line of credit is due each time a draw is made. The line of credit agreement also contains certain financial and other covenants that apply to the Operating Company and other customary terms and conditions and events of default. The Corporation, our Sponsor, the Asset Manager and the Property Manager have all provided unconditional guarantees of all borrowings on the line of credit. The Operating Company may periodically draw on the line of credit in connection with property acquisitions approved by M&T. Those draws must be repaid within six months as equity capital becomes available and/or mortgage financing put in place. As the outstanding balance on the line of credit fluctuates regularly, information regarding the current outstanding balance is available upon request. The line of credit requires that the Operating Company meet certain financial covenants on a quarterly basis, including a “tangible net worth” of not less than $13.5 million plus 80% of “net equity proceeds”, a “minimum interest coverage ratio” of 1.83:1, a “fixed charge coverage ratio” equal to or greater than 1/50:1, a “maximum secured leverage ratio of 0.65:1. In addition, as guarantors, the Asset Manager and Property Manager are required to meet liquidity and “tangible net worth” tests quarterly and a net income test annually. The Sponsor is required to maintain a minimum level of liquidity annually. Each of the terms is defined in the credit agreement, dated February 29, 2016, with respect to the line of credit. The events of default which permit M&T to accelerate the repayment of any advance under the line of credit include the following with respect to any of the Operating Company, any of its subsidiaries, or the Guarantors, as applicable: payment defaults related to the line of credit and other obligations, bankruptcy and insolvency, judgments not dismissed or stayed within 45 days, adverse changes in the business of the Operating Company which M&T determines will have a material adverse effect on the ability to repay any advances, and the death of Mr. Goldstein. The financing of our Current Properties is described below. On May 28, 2013, Bryant Woods entered into a $3,935,000 mortgage loan to CMFG Life Insurance Company in connection with the acquisition of 125-205 Bryant Woods South, Amherst, New York. The loan bears interest at 4.5% and is amortized over 20 years with all remaining principal ($1,335,340) due on July 10, 2028. The loan may be prepaid at any time after the first two years, subject to a prepayment penalty. The Sponsors individually issued a carve-out guaranty of certain obligations of Bryant Woods. The Corporation and the Operating Company have agreed to indemnify the Sponsors for any payment they may be obligated to make on their limited guaranty. On August 16, 2013, the Operating Company acquired the membership interests of 1350 SR, which had previously entered into a $5,700,000 mortgage note to Five Star Bank in connection with the acquisition of 1350 Scottsville Road, Rochester, New York. The loan bears interest at 4.7% per annum and is amortized over 20 years with all remaining principal ($3,529,245) due on August 16, 2023. The loan may be prepaid at any time, subject to a prepayment penalty. In addition to the mortgage on the building and property, the Five Star Bank financing is secured by a Replacement Reserve Agreement, pursuant to which the Operating Company is required to deposit $1,155 per month into an account with Five Star Bank as additional security for capital repairs and replacements and for 1350 SR’s obligations to Five Star Bank. The account is capped at $100,000 and, provided that 1350 SR is in compliance with its obligations to Five Star Bank, amounts may be disbursed from the account to reimburse 1350 SR for approved costs associated with repairs, renovations, and replacements to the property and building. On March 27, 2014, the Operating Company indirectly assumed a $1,136,913 mortgage note with M&T Bank in connection with the acquisition of the property at 226 Jay Street and 511 Smith Street in Rochester, New York. In connection with the assumption of the existing mortgage note, M&T Bank, restated the terms of the note to - 29 CONFIDENTIAL increase the amortization to 20 years and retaining the interest rate of 6.11% that was in place at the time of assumption. All remaining principal (estimated to be approximately $1,020,720) and accrued interest will be due on December 1, 2017. The loan may be prepaid at any time, subject to a prepayment penalty. The above-market interest rate on the assumed mortgage note was factored into the rental rate under the lease. If we request, and if the bank approves the credit worthiness of the tenants at the time, the term of the loan may be extended until June 1, 2021 at the bank’s then current rates for similar loans. Prepayment of the loan requires payment of a fee calculated to protect the bank’s yield through initial maturity. The loan is non-recourse and no guarantees were required. On June 5, 2014, 50 Hanil Drive entered into a first mortgage non-recourse note in the amount of $4,500,000 to ServisFirst Bank in connection with the acquisition of the property at 50 Hanil Drive, Tallassee, Alabama. The note bears interest at a fixed rate of 4.5% and is amortized over a 21-year period with all remaining principal (estimated to be approximately $3,572,000) and accrued interest due on October 1, 2020. The loan may be prepaid at any time with no prepayment penalty. The loan is non-recourse but the lender required the Sponsors to provide joint and several personal guarantees for certain non-recourse provisions of the note. The Operating Company and the Corporation have provided indemnification to the Sponsors in regard to the personally guaranteed non-recourse carve-outs. On July 18, 2014, 2101 Cedar entered into a first mortgage non-recourse note in the amount of $2,800,000 to Protective Life Insurance Company in connection with the acquisition of the property at 2101 Cedar Street, Freemont, Ohio. The note bears interest at the fixed rate of 4.5% per annum. After a six-month interest only period, beginning on February 10, 2015, the note is amortized over 24 years with all remaining principal (estimated to be approximately $2,040,000) and accrued interest due on August 10, 2024. The loan may be prepaid at any time, subject to a prepayment penalty. The lender required certain carve-outs from the non-recourse nature of the note to be guaranteed by the Operating Company and the Corporation. On October 15, 2014, the Operating Company acquired the membership interests of 50 Holleder, which had previously entered into a $2,800,000 mortgage note to Genesee Regional Bank in connection with the acquisition of 50 Holleder Parkway, Rochester, New York. The loan bears interest at 4.55% per annum and is amortized over 25 years with all remaining principal ($2,038,025) due on September 10, 2024. The loan may be prepaid at any time, subject to a prepayment penalty. The lender required certain carve-outs from the non-recourse nature of the note to be guaranteed by the Operating Company and the Corporation. On December 12, 2014, 255 Rex Blvd entered into a first mortgage, non-recourse note held by Protective Life Insurance Company in the amount of $3,750,000 in connection with the acquisition of the property at 255 Rex Boulevard, Auburn Hills Michigan. The loan bears interest at a fixed rate of 4.375%, and after an initial six month interest only period, will be amortized over 24 years with all remaining principal ($2,730,049) due on January 1, 2025. The lender required certain carve-outs from the non-recourse nature of the note to be guaranteed by the Operating Company and the Corporation. On June 29, 2015, 1501 Buchanan Blvd entered into a first mortgage, non-recourse note held by Standard Insurance Corporation in the amount of $2,700,000 in connection with the acquisition of the property at 1501 Buchanan Avenue, Grand Rapids, Michigan. The loan bears interest at a fixed rate of 4.2%, and will be amortized over 25 years with all remaining principal ($1,940,839) due on July 1, 2025, unless we elect to accept a new interest rate and extend the term for an additional 10 years. The lender required certain carve-outs from the non-recourse nature of the note to be guaranteed by the Operating Company and the Corporation. On August 14, 2015, 979 Jackson Rd entered into a first mortgage, recourse note held by M&T Bank in the amount of $1,600,000 in connection with the acquisition of the property at 979 Jackson Road, Webster, New York. The mortgage loan bears interest at a fixed rate of 4.57% and is amortized over 25 years with interest only for the first six months, and matures on September 5, 2022. The lender requires certain guarantees of the note by the Operating Company. On December 17, 2015, the Operating Company acquired the outstanding membership interests in 770 Linden Ave which had previously been assigned a $711,426 mortgage note to Sun Life Assurance Company of Canada. The mortgage note to Sun Life was paid in full on December 17, 2015 from the proceeds of a new non- 30 CONFIDENTIAL recourse mortgage note to ESL Federal Credit Union entered into by 770 Linden Ave in the amount of $3,000,000 which bears interest at 4.44% and is amortized over 25 years, with interest only for the first six months and matures on January 8, 2028. On January 27, 2016, 7300 Bedford entered into a first mortgage, non-recourse note held by Genworth Life Insurance Company in the amount of $4,100,000 in connection with the acquisition of the property at 7300 South Narragansett Avenue, Bedford Park, Illinois. The loan bears interest at a fixed rate of 3.85%, and after an initial six month interest only period, will be amortized over 24.5 years with all remaining principal ($3,604,540) due on February 1, 2021. The lender required certain carve-outs from the non-recourse nature of the note to be guaranteed by the Operating Company and the Corporation. On February 3, 2016, 320 Mason entered into a first mortgage, non-recourse note held by S&T Bank in the amount of $2,200,000 in connection with the acquisition of the property at 320 Mason-Montgomery Road, Mason, Ohio. The loan bears interest at a fixed rate of 4.20%, and after an initial six month interest only period, will be amortized over 25 years with all remaining principal ($1,827,601) due on February 8, 2023. On August 31, 2016, Sun Court entered into a first mortgage, non-recourse note held by Woodmen of the World Life Insurance Society in the amount of $5,500,000 in connection with the acquisition of the property at One Sun Court Peachtree Corners, Georgia. The loan bears interest at a fixed rate of 3.90%, and after an initial twelve month interest only period, will be amortized over 24 years with all remaining principal ($4,008,862) due on September 1, 2026. On December 22, 2016, Walworth entered into a first mortgage, non-recourse note held by Coastal Federal Credit Union in the amount of $4,650,000 in connection with the acquisition of the properties at 100 Wisconsin Street, 820 Wisconsin Street, 837 Walworth Street and 850 Walworth Street. The loan bears interest at a fixed rate of 4.375% and will be amortized over 23 years with all remaining principal ($2,798,824) due on January 1, 2029. Leases Bryant Woods entered into a 15-year absolute triple net lease with FirstSource Advantage LLC on May 28, 2013, for the property located at 125-205 Bryant Wood South, Amherst, New York. The monthly base rent of $41,327 ($495,925 annually) increases 1 ½% annually. The lease has two five-year renewal options. The lease is guaranteed by the tenant’s parent company, FirstSource Solutions Ltd., a company traded on the National Stock Exchange of India, and by another U.S. subsidiary of the parent (FirstSource Group USA, Inc.). Pursuant to the Property Management Agreement, Bryant Woods will pay a management fee to the Property Manager of 3% of the base monthly rent. 1350 SR entered into a 10-year net lease with American Tire Distributors Inc., on June 21, 2013, for the property located 1350 Scottsville Road, Rochester, New York. The monthly base rent of $57,743 ($692,917 annually) commenced on August 16, 2013 and increases to $63,465 per month ($761,585 annually) on the fifth anniversary. 1350 SR is responsible for roof and structural repairs. All other costs, expenses, and real property taxes associated with the building and land are the responsibility of American Tire Distributors. The lease has two five-year renewal options. If the renewal options are exercised by American Tire Distributors, the base rent for such renewal terms will be agreed to by the parties in accordance with the terms of the lease. Pursuant to the Property Management Agreement, 1350 SR will pay a management fee to the Property Manager of 3% of the base monthly rent. 226 Jay Street entered into a 12-year absolute net lease with four entities owned by the two individuals who own the seller, Park Capital LLC on March 27, 2014 for the 226 Jay Street and 511 Smith Street, Rochester, New York. The monthly base rent is $19,144 ($229,730 annually) for the first year and an increase of 1% per annum on each anniversary from 2015 to 2023. The last three years of the lease have no increase in the base rent but, if the tenants exercise their five-year renewal option, the rent during the renewal term increases by 1% annually. The individual owners have fully guaranteed the lease through the seventh year and given a limited guaranty for the remaining initial lease term equal to the sum of 18 months’ base rent, landlord’s reasonable attorneys’ fees, and all - 31 CONFIDENTIAL unpaid occupancy costs and taxes payable by the tenants under the lease. Pursuant to the Property Management Agreement, 226 Jay Street will pay a management fee to the Property Manager of 3% of the base monthly rent. 50 Hanil Drive assumed an 11-year triple net lease with Hanil USA LLC on June 5, 2014 for the property located at 50 Hanil Drive, Tallassee, Alabama. The landlord is responsible for only structural repairs. The monthly base rent is $54,930 ($659,160 annually) with rent increases on October 1 of the following years: 2014 to $666,252; 2015 to $673,343; 2016 to $689,692; 2019 to $698,920, and 2022 to $708,724. The lease is scheduled to terminate on September 30, 2025 but Hanil USA has the option to terminate the lease effective October 1, 2020 by providing written notice to the Operating Company on or before October 1, 2019 together with the payment of the termination fee of $1,742,914. TI Automotive Ltd., Hanil USA’s parent company, has fully guaranteed the lease through its term. Pursuant to the Property Management Agreement, 50 Hail Drive will pay a management fee to the Property Manager of 3% of the base monthly rent. 2101 Cedar assumed an 11-year absolute net lease with Freemont Plastics Products Inc. and its parent company, The Plastics Group Inc. on July 18, 2014 for 2101 Cedar Street, Freemont, Ohio. Upon assumption, 2101 Cedar extended the lease with the tenants to a 15-year term. The tenants are responsible for all of the facility operation costs, including property taxes, maintenance, repair and capital replacement costs. The monthly base rent of $33,412 ($400,944 annually) with rent increases on September 1, 2015 to $427,680 annually, and on September 1, 2020 to $463,320. Pursuant to the Property Management Agreement, 2101 Cedar will pay a management fee to the Property Manager of 3% of the base monthly rent. 50 Holleder entered into a 15-year triple net lease with Isaac Heating & Air Conditioning, Inc., on August 1, 2014, for the property located at 50 Holleder Parkway, Rochester, New York. The monthly base rent of $32,166.67 ($386,000 annually) commenced on October 15, 2014 and increases by 1% to $32,488.33 per month ($389,860 annually) on the first anniversary and then by an additional 1% annually thereafter. 50 Holleder is responsible for roof and structural repairs. All other costs, expenses, and real property taxes associated with the building and land are the responsibility of Isaac Heating & Air Conditioning. Pursuant to the Property Management Agreement, 50 Holleder will pay a management fee to the Property Manager of 3% of the base monthly rent. 255 Rex Blvd entered into a 10-year lease with Continental Structural Plastics, Inc. for the property located at 255 Rex Boulevard, Auburn Hills, Michigan. The lease is guaranteed by Continental Structural Plastics Holdings Corporation, the parent company of Continental Structural Plastics, Inc. The monthly base rent is $43,018 ($516,225 annually) with 2% annual increases thereafter. Continental Structural Plastics, Inc. is responsible for all of the facility operating costs associated with the building and land, including real property taxes, maintenance, repair and capital replacement costs. Pursuant to the Property Management Agreement, 255 Rex Blvd will pay a management fee to the Property Manager of 3% of the base monthly rent. 1501 Buchanan Ave entered into a 20-year lease with Michigan Wheel Operations, LLC for the property located at 1501 Buchanan Avenue, Grand Rapids, Michigan. The lease is guaranteed by Michigan Wheel Holdings, LLC, the parent company of Michigan Wheel Operations, LLC. The monthly base rent is $32,716.67 ($392,600 annually) with 2% annual increases for the first five lease years and 1.5% annual increases thereafter. Michigan Wheel Operations, LLC is responsible for all of the facility operating costs associated with the building and land, including real property taxes, maintenance, repair and capital replacement costs. Pursuant to the Property Management Agreement, 1501 Buchanan Ave will pay a management fee to the Property Manager of 3% of the base monthly rent. 979 Jackson Rd entered in to a 20-year lease with DB-979 Jackson LLC for the property located at 979 Jackson Road, Webster, New York. The lease is guaranteed by the parent company, Doodle Bugs! Holding Company, Inc. The monthly base rent is $19,775.00 ($237,300 annually) for the first year and increases 2% annually. The net lease provides for the tenant to pay all costs of operating and maintaining the facility, including real property taxes, insurance, maintenance, repair and capital replacements costs, excluding the replacement of structural elements of the facility, which are the landlord’s responsibility. Pursuant to the Property Management Agreement, 979 Jackson Road will pay a management fee to the Property Manager of 3% of the base monthly rent. - 32 CONFIDENTIAL 770 Linden Ave entered in to a new 12-year lease with Magnetic Technologies Corporation for the property located at 770 Linden Avenue, Rochester, New York. The lease is guaranteed by AMT Acquisition Corp. The monthly base rent is $32,850.00 ($394,200 annually) for the first year and increases 1.5% annually. The net lease provides for the tenant to pay all costs of operating and maintaining the facility, including real property taxes, insurance, maintenance, repair and capital replacement costs, excluding the replacement of structural elements of the facility and roof, which are the landlord’s responsibility. Pursuant to the Property Management Agreement, 770 Linden Ave will pay a management fee to the Property Manager of 3% of the base monthly rent. 7300 Bedford entered into a 10-year lease with Archer Wire International Corp. for the property located at 7300 South Narragansett Avenue, Bedford Park, Illinois. The initial monthly base rent is $41,416.67 ($497,000 annually) with a 1% annual increase in lease years two and three. Archer Wire International Corp. is responsible for all of the facility operating costs associated with the building and land, including real property taxes, maintenance, repair and capital replacement costs. Pursuant to the Property Management Agreement, 7300 Bedford will pay a management fee to the Property Manager of 3% of the base monthly rent. 320 Mason entered into a 15-year lease with Deerfield Manufacturing, Inc. D/B/A Ice Industries for the property located at 320 Mason-Montgomery Road, Mason, OH. The lease is guaranteed by Ice Industries, Inc., the parent company of Deerfield Manufacturing, Inc. The monthly base rent is $23,333.33 ($280,000 annually) with 2% annual increases thereafter. Deerfield Manufacturing, Inc. is responsible for all of the facility operating costs associated with the building and land, including real property taxes, maintenance, repair and capital replacement costs. Pursuant to the Property Management Agreement, 320 Mason will pay a management fee to the Property Manager of 3% of the base monthly rent. Sun Court entered into a 15-year lease with Atlantix Global Systems LLC for the property located at One Sun Court Peachtree Corners, GA. The monthly base rent is $61,111.46 ($733,338 annually) with 2.5% annual increases for the first ten years and then 2.0% annual increases for the remaining five years of the lease term. Atlantix Global Systems LLC is responsible for all of the facility operating costs associated with the building and land, including real property taxes, maintenance, repair and capital replacement costs. Pursuant to the Property Management Agreement, Sun Court will pay a management fee to the Property Manager of 3% of the base monthly rent. Walworth entered into one 12-year lease with Miniature Precision Components Inc. for the properties located at 100 Wisconsin Street, 820 Wisconsin Street, 837 Walworth Street and 850 Walworth Street, Walworth, WI with two ten-year options to extend the term. The monthly base rent is $67,856 ($814,275 annually) with 2.0% annual increases after the third lease year, and then 2.0% annually throughout the renewal options. The lease is an absolute net lease and Miniature Precision Components Inc. is responsible for all of the facility operating costs associated with the building and land, including real property taxes, maintenance, repair and capital replacement costs. Pursuant to the Property Management Agreement, Walworth WI LLC will pay a management fee to the Property Manager of 3% of the base monthly rent. - 33 CONFIDENTIAL Management General The Investment Fund is managed by the Asset Manager pursuant to the Asset Management Agreement, described below under the heading “The Asset Manager and the Asset Management Agreement.” The Asset Manager secures the equity capital and debt financing for the Investment Fund, identifies and arranges for the purchase of additional properties, and other matters as described in the Asset Management Agreement. The Corporation has a board of directors, including independent directors, which will oversee the management of the business and affairs of the Corporation by the Asset Manager. The Independent Directors Committee will approve any transactions outside our stated investment criteria and certain matters where our Sponsors may have conflicting interests. We do not currently have any direct employees. The Asset Management Agreement provides for the various duties and responsibilities of the Asset Manager and for the fees and other compensation, which may include compensation in the form of our common stock or options or other rights to acquire our common stock. The Operating Company is managed by the Corporation and, indirectly, by the Asset Manager. Our management and the management of the Asset Manager and the Property Managers have extensive real estate management, development, ownership, acquisition, and financing experience. We believe that their extensive experience in the real estate industry provides them with a deep knowledge of the business of acquiring, owning, and operating commercial net leased properties. Executive Officers and Directors The following is information regarding our executive officers and directors: Name Position Daniel J. Goldstein President, Chief Executive Officer, Treasurer, Director Bruce E. Bender Vice President Mark T. Allen Vice President Charles R. Knittle Assistant Treasurer, Secretary Thomas F. Bonadio Independent Director Charles E. Lannon Independent Director E. Philip Saunders Independent Director Robert C. Morgan Director Daniel J. Goldstein, CPA, is President, Chief Executive Officer, and Treasurer of the Corporation. He is the Sponsor of the Investment Fund, which he co-founded with his friend and partner Laurence Glazer in 2013. Mr. Goldstein serves as the managing member of the Asset Manager and in this capacity, he is charged with running the day to day operations of the Corporation, including the Operating Company. As manager of the Asset Manager, Mr. Goldstein may nominate two directors to our Board of Directors. Currently, Mr. Goldstein serves as one of the Asset Manager-nominated directors. He also owns a majority interest in and manages the Property Manager. Mr. Goldstein earned a Bachelor’s degree from the University of Michigan, Ann Arbor, before returning to Rochester, New York in 1993 to work as a Certified Public Accountant. He practiced public accounting in Rochester for eleven years, with the last four years at the partner level. In 2004, he became the Chief Financial Officer of Buckingham Properties LLC and, in 2007, was admitted as a partner with Laurence Glazer. In early 2014, Mr. Goldstein transitioned out of his management role at Buckingham Properties LLC to focus his full - 34 CONFIDENTIAL attention on the role of President and chief executive officer of the Corporation and manager of the Asset Manager and the Property Manager. Over the course of Mr. Goldstein’s 20 plus years in accounting and finance, he developed a well-rounded expertise in commercial real estate, particularly in the areas of financial and credit analysis, negotiation, transaction structures and the financing of acquisition and sales. His efforts in these areas, as well as his leadership roles in the companies he has served, have resulted in well-structured, highly profitable portfolio growth. In 2009, Mr. Goldstein was recognized by the Rochester, New York business community as a member of the Rochester Business Journal’s “Forty Under 40,” which recognizes forty young professionals for their professional success and community efforts. He has given generously of his time and resources to many local charities and currently serves on a number of Rochester community non-profit boards. In addition, Mr. Goldstein serves as an executive officer on the Board of Directors of the Jewish Community Center of Greater Rochester where he also serves as chairman of its $15M expansion project. Bruce E. Bender is Vice President of the Corporation. He is also the Vice President of Acquisitions of the Asset Manager and as such is charged with evaluating and acquiring commercial real estate on behalf of the Investment Fund. Mr. Bender holds a minority interest in the Property Manager. Throughout Mr. Bender’s 25-year real estate career, he has obtained a unique blend of experience by being involved in all aspects of real estate transactions including purchasing, selling and leasing. In doing so, Mr. Bender has been the principal representing all sides of the transactions including landlord, tenant, buyer and seller. Prior to joining the Corporation in 2013, Mr. Bender spent the previous fifteen years at Xerox Corporation where he held numerous management positions within its global real estate organization. Throughout this time, he was directly responsible for acquisitions, facility management, and real estate strategy. He helped lead a core team that handled all sale-leaseback projects for Xerox Corporation. As part of the sale-leaseback projects, he managed broker selection, offering memorandum development, financial analysis as well as lease and purchase & sale negotiations. He has been a licensed Real Estate Broker in New York State since 1998 and is a certified Lean Six Sigma Green Belt. Mr. Bender earned an MBA in Finance & Corporate Accounting from The Simon Graduate School of Business at the University of Rochester in Rochester, NY as well as his Bachelor’s degree in Business Administration from the University of South Florida in Tampa, FL. Mark T. Allen is Vice President of the Corporation. He is also the Vice President of Investor Relations for the Asset Manager, Cambridge Street Asset Management LLC. Mr. Allen joined the Asset Manager effective March 1, 2016. Mr. Allen’s responsibilities include providing communication and disclosures to the Royal Oak shareholders, as well as shepherding the shareholder investment experience from the time of initial investment. Mr. Allen holds a minority-interest, subject to vesting, in the Asset Manager. Mr. Allen’s extensive experience in commercial banking provides the Asset Manager with capital markets insight and global relationships that help serve the needs and interests of the Corporation’s shareholders and prospective shareholders. Mr. Allen joined the Asset Manager following a 15-year banking career at JPMorgan Chase Bank. In his most recent role with the bank, Mr. Allen served as the Upstate New York Region Executive for the Commercial Bank and was responsible for the Rochester, Syracuse, Southern Tier (NY) and North Central Pennsylvania corporate client markets. Mr. Allen was responsible for a team of seven bankers who focused on serving the global banking needs of businesses with annual revenues between $20 million and $500 million. In 2012, Mr. Allen was recognized by the Rochester, NY business community as a member of the Rochester Business Journal’s “Forty Under 40” which recognizes forty young professionals for their professional success and community efforts. He is a former board member of CenterState CEO and Big Brothers Big Sisters of Greater Rochester and currently serves on the board of directors of the Rochester Business Charitable Organization, and also serves on the Executive Committee for the American Heart Association’s Heart Ball. - 35 CONFIDENTIAL Mr. Allen has earned a Bachelor of Science degree in Finance from Miami University (OH) and a Master of Business Administration from the Kellogg School of Management at Northwestern University. Charles R. Knittle, CPA, is Assistant Treasurer and Secretary of the Corporation. He is also the Vice President of Finance for the Asset Manager. In this role, Mr. Knittle drives the accounting and financial reporting responsibilities for the growing real estate portfolio of the Investment Fund. These responsibilities include: property performance analysis, oversight of dividend distributions, general ledger maintenance, investor reporting, as well as day-to-day accounting matters and budgeting. Mr. Knittle holds a minority interest, subject to vesting, in the Property Manager. Mr. Knittle holds a Master in Business Administration with a concentration in Accounting, and a Bachelor of Science in Management with a concentration in Corporate Finance and Accounting from St. John Fisher College. He is also a Certified Public Accountant. He is a member of the New York State Society of Certified Public Accountants, the Knights of Columbus, and the American Bowling Congress. While completing his MBA coursework, Mr. Knittle was inducted into Beta Gamma Sigma, an honor society recognizing business excellence. Mr. Knittle began his accounting career in the public accounting sector with Davie Kaplan, CPA, P.C. Just prior to joining the Corporation and the Asset Manager, Mr. Knittle was the Assistant Controller at Ametek Power Instruments. In that role, he assisted in overseeing organizational accounting functions, and all activities related to the budgeting and forecasting of financial data. He also played a fundamental role in the organization’s continuous improvement initiatives through the facilitation of an ERP implementation, as well as establishing and driving various other process improvements. Thomas F. Bonadio, CPA, became an independent director of the Corporation in January 2014 and was appointed as chairman of the Audit Committee of the Board of Directors of the Corporation. He currently serves as the CEO and managing partner of The Bonadio Group, which he founded in 1978. Mr. Bonadio specializes in providing business advice to privately-held companies. He holds a BBA in Accounting from St. John Fisher College, and an honorary Doctor of Law degree. Mr. Bonadio has been a Certified Public Accountant since 1973, and is a member of the American Institute of Certified Public Accountants and the New York State Society of Public Accountants. He has previously served as audit committee chairman for publically traded companies, including Torvec, Inc. and Conceptus, Inc. (NASDAQ). Mr. Bonadio currently serves on multiple private and public boards. In addition to other community activities, Mr. Bonadio has been active in many community organizations and not-for-profits boards. He has also served as a member of the Monroe County Jobs Creation Task Force and the St. John Fisher College Alumni Activities Committee. He is a past Chairman of the Board of Trustees of St. John Fisher College. Mr. Bonadio was inducted into the Rochester Business Hall of Fame in 2010. Charles E. Lannon became an independent director in January 2014 and is the Chairman of the Independent Directors Committee of the Board of Directors. He is also a member of the Royal Oak Audit Committee. Mr. Lannon is an original co-founder of Sovran Self Storage, Inc., a New York Stock Exchange-traded real estate investment trust (REIT) that was rebranded as Life Storage, Inc. in August 2016. He has been a director of Life Storage since 1995. He currently serves as chair of its Governance Committee and a member of its Audit Committee. Mr. Lannon is and has been the President of Strategic Advisors, Inc. (formerly known as Strategic Capital, Inc.), a consulting firm, since 1995. Through Strategic Advisors, Inc., Mr. Lannon has provided consulting and advisory services to many companies seeking capital, transactional and financial guidance. Also, since 1995 he has served as an executive officer and on the board of several non-public companies. Prior to 1995, Mr. Lannon was involved in the self-storage industry for over 10 years. E. Philip Saunders joined the Board as an independent director in June 2014 and serves as a member of the Independent Directors Committee and the Audit Committee. Mr. Saunders is the founder of a number of companies including: Genesee Regional Bank, Truck Stops of America, Griffith Energy, Travel Centers of America and Sugar Creek Corporation. In addition, he is an owner of Essex Property Management, which manages commercial properties. Mr. Saunders also holds significant ownership interests in Valley Fuels, Sugar Creek Farms, Western New York Energy and American Rock Salt. He is Chairman of the Board of Directors of Genesee Regional Bank and Valley Fuels, as well as a member of the Boards of Directors of various businesses, including American Rock Salt, Lewis Tree, Torvec Inc. and Western New York Energy. In addition, Mr. Saunders is - 36 CONFIDENTIAL Chairman of the Board of Directors of Paul Smith’s College and a member of the Boards of Rochester Institute of Technology, NYS Trooper Foundation, and Young Entrepreneurs Academy. Mr. Saunders was inducted in to the Rochester Business Hall of Fame in 2004 and has received an honorary Doctorate of Commercial Science from Paul Smith’s College. Robert C. Morgan serves as one of the Asset Manager-nominated directors and was elected to the Board of Directors of the Corporation on December 18, 2014, to fill the Board seat left vacant by the death of Mr. Glazer. Mr. Morgan is the Managing Member and Chief Executive Officer of Morgan Management LLC and founded Morgan Management, LLC in 1998. Mr. Morgan has more than 36 years of experience as an owner, operator, and developer of investment real estate. Through affiliated companies, Mr. Morgan manages an investment-grade real estate portfolio valued at approximately $2.5 billion. Mr. Morgan’s holdings include over 20,000 units of multifamily apartment communities, as well as an assortment of manufactured housing communities, commercial, retail, self-storage, office, medical office and mixed-use space. Mr. Morgan holds a BS in business management from Rochester Institute of Technology. He currently sits on the Board of Trustees of Nazareth College and of the University of Rochester Medical Center. Mr. Morgan was inducted into the Rochester Business Hall of Fame in 2013. Our Board of Directors The management of the operations, business, and affairs of the Corporation by the Asset Manager is overseen and conducted under the direction of our Board which is ultimately responsible for the management and control of our affairs. Due to the conflicts of interest created by the relationships among the Asset Manager, the Property Manager and our various affiliates, many of the responsibilities of the Board are delegated to the Independent Directors Committee, a committee comprised of directors who: x are not employed by us or any of our affiliates; x are not employed by the entities (or their affiliates) that are responsible for directing or performing our day-to-day business; x do not have any interest in the Asset Manager or the Property Manager; and x with respect to future directors, have been determined by a committee of our independent directors to not have any business or professional relationships with any entity (or its affiliates) that is responsible for directing or performing our day-to-day business, such that independent judgment is likely to be compromised. Our Board is currently composed of five directors. Our Charter requires that, during any time that the Corporation is advised by the Asset Manager: (a) there be an Independent Directors Committee comprised of not fewer than three Independent Directors, and (b) that not fewer than two nominees of the Asset Manager be members of the Board. Under our Charter and By-laws, only the Independent Directors can approve certain matters. Each director serves until the next annual meeting of stockholders or until a successor has been duly elected and qualified; provided, however, that pursuant to the Subscription Agreement and Irrevocable Proxy (the “Subscription Agreement”), our stockholders have granted an irrevocable proxy to our corporate secretary to elect two individuals nominated by the Asset Manager for election to the Board. Currently, the directors elected upon the nomination of the Asset Manager are Mr. Goldstein and Mr. Morgan. Independent Directors Committee In order to reduce or eliminate certain potential conflicts of interest, our Charter provides for an Independent Directors Committee composed of no fewer than three Independent Directors. The Independent Directors Committee is empowered to act on any matter: (a) permitted under Maryland law that is determined by the committee to be of the type in which independent judgment may be compromised if addressed by the Board in its entirety, or (b) otherwise delegated to the Independent Directors Committee pursuant to our Charter or By-laws or the Asset Management Agreement. In making such decisions, the Independent Directors Committee may also retain - 37 CONFIDENTIAL its own legal and financial advisors. Our Independent Directors Committee is composed of Charles Lannon, Thomas Bonadio and Philip Saunders. Mr. Lannon chairs the committee. The Independent Directors Committee reviews our relationship with, and the performance of, the Asset Manager and the Property Manager, and generally approves the terms of any transactions outside our stated investment criteria and certain matters where our Sponsors may have conflicting interests. In addition, the Independent Directors Committee is responsible for the following: x setting the Determined Share Value annually based on the net asset value of our portfolio and such other factors as the Committee may, in its sole discretion, determine, and considering the Determined Share Value more frequently if there is a significant change in the property portfolio, or material events which may materially affect the value of a particular property (changes may include, without limitation, significant property acquisitions or dispositions, property damage, changes in tenants or their credit, or vacancies, etc.); x establishing and determining additional restrictions on our Share Redemption Program and the amount of shares to be redeemed on a quarterly basis; x approving, permitting deviations from, making changes to, and annually reviewing our investment objectives and Property Selection Criteria and our diversification and leverage policies; x approving the Asset Manager’s or Property Manager’s independent pursuit of a real estate investment opportunity that falls within our then current investment objectives and Property Selection Criteria, if the Investment Fund declines the opportunity; x approving (after the unanimous approval of the Asset Acquisition Committee) any acquisition of properties from, or disposition of properties to, any Sponsor or any affiliate of any Sponsor; x approving (after the unanimous approval of the Asset Acquisition Committee) any acquisition of a property which is not within the Property Selection Criteria then in effect; x approving (after the unanimous approval of the members of the Asset Acquisition Committee ) any acquisition of a property, or a group of related properties, which has a purchase price of $10,000,000 or more; x reviewing all conflicts of interest that may arise in connection with our Asset Manager, Property Manager or any of their affiliates; x approving any other interested person transactions; x approving any amendments to our Distribution Reinvestment Plan and Stock Repurchase Program; x waiving the one-year holding period restricting a stockholder’s transfer of his shares in the event of a stockholder’s death or bankruptcy, or other exigent circumstances; x establishing and approving the terms of the Asset Management Agreement and Property Management Agreement; x reviewing the total fees, expenses, assets, revenues, and availability of funds for distributions of the Corporation at least annually or with sufficient frequency to determine that the expenses incurred are reasonable in light of the investment performance of the Corporation and that the assets, revenues, and funds available for distributions are in accordance with our policies and as required to qualify as a REIT under the REIT provisions of the Code; and x in the event of a prohibited transfer of our common stock in violation of our Charter, deciding whether the Corporation should purchase such stock from the trustee appointed pursuant to our Charter. - 38 CONFIDENTIAL Audit Committee The Independent Directors Committee established an audit committee to oversee the engagement of the independent auditors and other functions customarily carved-out by audit committees. Our Audit Committee is chaired by Mr. Bonadio. Messrs. Lannon and Saunders are committee members. Compensation of Directors We compensate our Directors, with the exception of Mr. Goldstein who receives no compensation for his board service, with quarterly cash and stock compensation totaling $30,000 annually per director. The quarterly payments will be made $3,750 in cash and $3,750 in our common stock at the then established Determined Share Value. The chairman of the Independent Directors Committee receives an additional $300 stipend quarterly. Additional equity based compensation may be awarded to all of our Directors if approved by the Independent Directors Committee under the equity compensation plan. The Independent Directors are also reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board or of any Board committee and for their reasonable out-of-pocket expenses, if any, in connection with any meeting, property visit, and/or other service or activity they perform or engage in as directors on behalf of the Corporation. Indemnification and Limited Liability of Officers and Directors To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers of a corporation, no director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. No amendment or repeal of the provisions of our Charter will limit any indemnification rights with respect to matters occurring prior to the date of the amendment or repeal. Our Charter provides that we will indemnify and hold harmless our directors and officers, and the Asset Manager and its affiliates, against any and all losses or liabilities reasonably incurred by such party in connection with or by reason of any act or omission performed or omitted to be performed on our behalf in such capacity. This provision does not reduce the exposure of directors and officers to liability under federal or state securities laws, nor does it limit the stockholders’ ability to obtain injunctive relief or other equitable remedies for a violation of a director’s or an officer’s duties to us, although the equitable remedies may not be an effective remedy in some circumstances. Our Charter provides that a director, officer or the Asset Manager may not be indemnified with respect to: (a) any proceeding charging improper personal benefit to the director or officer, whether or not involving action in the director’s official capacity, in which the director was adjudged to be liable on the basis that personal benefit was improperly received; or (b) any proceeding where the director or officer is found by a court of law to be guilty of a felony directly related to his or her dealings with the Corporation. In any such case, the indemnification or agreement to indemnify is recoverable only out of our net assets and not from the assets of our stockholders. Subject to applicable law, our Charter requires us to advance amounts to a person entitled to indemnification for legal and other expenses and costs incurred as a result of any legal action for which indemnification is being sought only if all of the following conditions are satisfied: (a) the person seeking indemnification provides us with a written affirmation of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification; and (b) the person seeking indemnification undertakes in writing to repay us the advanced funds if the person seeking indemnification is found not to be entitled to indemnification. The general effect to investors of any arrangement under which we agree to insure or indemnify any persons against liability is a potential reduction in distributions resulting from our payment of premiums associated with insurance or indemnification payments in excess of amounts covered by insurance. In addition, indemnification could reduce the legal remedies available to our stockholders and us against the officers and directors. The Asset Manager The Asset Manager, Cambridge Street Asset Management LLC, is a New York Limited Liability Company controlled and majority-owned by Mr. Goldstein. Through the Asset Management Agreement, the Asset Manager - 39 CONFIDENTIAL has been delegated the power and authority to manage the operations of the Corporation and its subsidiaries in accordance with the Property Selection Criteria, investment policies, and subject to the direction of the Board of Directors of the Corporation. The Asset Manager manages the equity capital and debt financing of the Corporation, identifies and arranges for the purchases of additional properties and other matters as described therein. Other services include property management oversight, REIT compliance monitoring, preparation of accounting and tax statements for investors, and related services. The Asset Manager has designated Mr. Goldstein and Robert Morgan as its nominated members of the Board of Directors. In addition to Mr. Goldstein, the other officers of the Asset Manager are Bruce Bender, Vice President of Acquisitions, Charles Knittle, Vice President of Finance, and Mark Allen, Vice President of Investor Relations. (For biographical information on Messrs. Goldstein, Bender, Knittle and Allen, see “Management – Executive Officers and Directors”.) The Asset Acquisition Committee The Asset Manager’s review of commercial real properties for their possible acquisition by the Investment Fund will be conducted by it Asset Acquisition Committee. The members of Asset Acquisition Committee are currently Daniel Goldstein, Patrick C. Burke and Richard R. LeFrois. Biographical information about Mr. Goldstein is set forth under the heading “Management – Executive Officers and Directors.” Patrick C. Burke became the independent member of the Asset Acquisition Committee in January 2014. He is the Managing Principal of the Burke Group, a Rochester, N.Y.-based advisory group founded by Mr. Burke in 1989. The Burke Group specializes in retirement plan consulting and administration, actuarial services and compensation consulting for corporate, non-profit, and public sector clients. Mr. Burke was Rochester Regional President of First Niagara Bank from 2005 to 2011. In addition, he is Chair of Burke Capital Group IV, a local private equity investment partnership. Mr. Burke holds a bachelor’s degree from Cornell University. He is active in community organizations and is Past Chairman of the Board of Lifetime Assistance Corporation, Chairman of the Board of St. Ann’s Home, Chairman of the St. Ann’s Investment Committee and a member of the Board of Trustees of St. Ann’s Home. He also serves on the Cornell University Advisory Board and on the Advisory Council of Cornell’s Entrepreneurship and Personal Enterprise Program. As compensation for his service to the Asset Manager as an independent member of the Asset Acquisition Committee, the Asset Manager pays Mr. Burke $3,000 on a quarterly basis. Mr. Burke has agreed to purchase shares of our common stock with his compensation. Richard R. LeFrois became a member of the Asset Acquisition Committee of the Asset Manager in October 2014. Mr. LeFrois is the President and CEO of Russell P. LeFrois Builder, Inc. and LeFrois Development, LLC. The LeFrois companies were founded in the 1960’s by Russell LeFrois, Richard LeFrois’s father. Richard LeFrois took over leadership of the companies in 1972. Throughout Mr. LeFrois’ fifty plus year commercial real estate career, he has developed and constructed over 10 million square feet of industrial and office space. The LeFrois companies have an impeccable reputation for high quality construction and first class property management services. Russell P. LeFrois Builder is a full service design-build contracting firm that assists clients through all stages of the building process including site selection, program development, design, municipal approval, financing and construction. LeFrois Development owns and manages over 2.5 million square feet of commercial property in Rochester, New York and Lakeland, Florida and continues to develop new projects in both markets. The firm provides development, leasing and property management services for most types of commercial real estate properties, including flex-space, educational facilities, industrial buildings and office parks. Mr. LeFrois is also a member of and an advisor to various construction industry trade groups. As compensation for his service to the Asset Manager as an independent member of the Asset Acquisition Committee, the Asset Manager pays Mr. LeFrois $3,000 on a quarterly basis. Mr. LeFrois has agreed to purchase shares of our common stock with his compensation. - 40 CONFIDENTIAL The Investor Relations Committee The Asset Manager’s responsibility for overseeing all marketing, communications and other services related to the Offering and other offerings of the capital stock of the Corporation is complemented by its Investor Relations Committee. The members of the Investor Relations Committee are currently Daniel Goldstein and Anthony “Tony” Tortorella. Biographical information about Mr. Goldstein is set forth under the heading “Management – Executive Officers and Directors”. Tony Tortorella became the independent member of the Investor Relations Committee in April 2016. Mr. Tortorella is a principal with Cliffordale Capital, LLC, a company he founded in 2004. Cliffordale provides investment capital and strategic guidance to a diversified group of small and mid-sized companies in the techenabled services, manufacturing, alternative energy and real estate industries. Mr. Tortorella also serves as a board advisor to the Cliffordale portfolio companies Forsake, Inc. and Blue Sphere Corporate, Inc. Mr. Tortorella previously enjoyed a 30+ year career in the payroll processing industry. His most recent position was President and CEO of Ovation Payroll, which was acquired by Heartland Payment Systems, Inc. in 2013. From 1987 – 2009, Mr. Tortorella served as an Officer and a Vice President at Paychex, Inc. Mr. Tortorella is a long-time Rochester, NY resident and a 1981 graduate of St. John Fisher College. As compensation for his service to the Asset Manager as an independent member of the Investor Relations Committee, the Asset Manager pays Mr. Tortorella $3,000 on a quarterly basis. Mr. Tortorella has agreed to purchase shares of our common stock with his compensation. The Asset Management Agreement The following summary of the Asset Management Agreement and the descriptions of certain provisions of the Asset Management Agreement set forth elsewhere in this Memorandum are qualified in their entirety by reference to the Asset Management Agreement, a copy of which is available upon request. The Asset Management Agreement details the rights, powers and obligations of the Asset Manager and the services provided to us in managing our day-to-day activities. The summary below is provided to illustrate the material functions the Asset Manager performs, and it is not intended to include a detailed description of all of the services that may be provided to us by the Asset Manager, its affiliates or third parties. Under the Asset Management Agreement, the Asset Manager is required to devote sufficient resources to the Corporation and the Operating Company’s administration and shall, subject to any required Board review or approval: x supervises all that is necessary to perform the management of the day-to-day operations of the Corporation and the Operating Company; x assists the Board and the Asset Acquisition Committee in developing, establishing and monitoring strategies related to the acquisition and disposition of properties held by the Operating Company and setting the Property Selection Criteria; x assist the Board and Investor Relations Committee in developing, establishing and monitoring strategies related to soliciting and qualifying accredited investors; x uses its best efforts to seek out, present and recommend to the Corporation and the Operating Company, whether through its own efforts or those of the Asset Acquisition Committee or the third parties retained by Asset Manager or the Corporation and the Operating Company, suitable investment opportunities that are consistent with our investment objectives and policies and the Property Selection Criteria, as adopted by the Board from time to time; x determines whether to acquire, retain or sell real properties and enter into agreements for or on behalf of the Corporation or the Operating Company, for the purchase or sale of real property or interests in an entity holding real property, and enter into leases with tenants of such property subject to any required review or approval of the Asset Acquisition Committee or Independent Directors Committee; - 41 CONFIDENTIAL x structures and supervises the negotiation of the terms and conditions of the acquisition and financing of potential or existing properties or the disposition thereof, subject to any required review or approval of the Board, Asset Acquisition Committee or Independent Directors Committee; x arranges for financing and refinancing of properties and making any other changes in asset or capital structure of any special purpose entity, subject to any required prior approval of such financing or refinancing by the Board; x monitors compliance with loan covenants, including reports to lenders under the terms of any respective financing; x obtains such other services as may be required in acquiring or disposing of investments, disbursing and collecting the funds of the Investment Fund, paying the debts and fulfilling the obligations of the Investment Fund, and handling, prosecuting and settling any claims of the Investment Fund; x supervises the reinvestment or distribution of the proceeds from the sale of any property; x supervises the maintenance of the books and records of the Corporation and the Operating Company and accounting functions, and prepare, or cause to be prepared, statements and other relevant information for distribution to stockholders or members, as the case may be, of the Corporation and Operating Company; x monitors operations and expenses of the Investment Fund, including the review and approval of operating budgets, capital budgets and leasing plans prepared or presented by the Property Manager (directly or through third-party service providers); x prepares or has prepared by a third party such property and portfolio appraisals and market equity valuations as may be requested by the Board or the Independent Directors Committee or desirable in the sole discretion of the Asset Manager; x from time to time, or as requested by the Board, make reports to the Board as to its performance of the foregoing services; x manages and coordinates distributions to stockholders of the Corporation and members of the Operating Company as declared by the Board; x at the request of the Board, facilitate investor communications and shareholder approvals, including the Corporation’s and Operating Company’s annual meeting; x oversees all marketing, communications and other services related to the Offering and other offerings of the capital stock of the Corporation or membership interests of the Operating Company for investment purposes (e.g., preparation of a private placement memorandum and all ancillary offering documents, soliciting and qualifying potential accredited investors, oversight of closings of sales of the securities, and management and supervision of all third party service providers related to such offerings); x performs any other powers of the Board or the Corporation, in its capacity as manager of the Operating Company, which are set forth in the Charter and the Operating Agreement of the Company (as defined below), as applicable, and which may be delegated to it by the Board from time to time; x secures on behalf of the Corporation and the Operating Company, such third parties necessary to perform its obligations under the Asset Management Agreement; and x take all such other actions and do all things necessary or desirable to carry out the foregoing services. Information regarding the compensation the Asset Manager will be entitled to receive for its services, which compensation will be paid to the Asset Manager by the Operating Company on its own behalf or on behalf of - 42 CONFIDENTIAL the Corporation, is set forth below in “Fees and Other Compensation to Our Managers and Affiliates.” The Asset Manager and its affiliates will also be entitled to receive: (a) distributions from the Corporation and the Operating Company in respect of any shares or Units of member interests that any of them hold, along with the other holders of such shares or interests, and (b) compensation for any additional services requested from time to time by the Corporation or the Operating Company on separate agreed-upon terms, subject to approval by a majority of the Independent Directors as being fair and reasonable to the Corporation and Operating Company. In addition to the compensation paid to the Asset Manager, the Operating Company will pay directly or will reimburse the Asset Manager for certain costs it incurs in connection with the services it provides to the Operating Company, including, without limitation: (i) expenses related to the offering of the Corporation’s common stock and the Operating Company’s Units including printing and mailing costs, marketing activities, including meetings attended by potential investors and, if brokers are engaged, their fees and expenses up to 0.75% of the gross proceeds of the Offering from time to time; (ii) the actual cost of goods and materials used by the Corporation or the Operating Company; (iii) property acquisition expenses related to the identification, evaluation, selection and acquisition of properties, including the costs of insurance premiums, legal services, brokerage and sales commissions, whether or not we acquire such properties; and (iv) expenses related to negotiating and servicing credit facilities and mortgage loans. The Asset Manager, however, will not be reimbursed and will remain responsible for paying any expenses related to: x employee compensation, including salaries, wages, payroll taxes and the cost of employee benefit plans; x rent, telephone, utilities, office furniture, equipment and machinery, computers, supplies and other office expenses; and x administrative overhead costs including those incurred in supervising, monitoring and inspecting any real estate properties or relating to the Asset Manager’s performance of its obligations under the Asset Management Agreement (such as travel, communication and personal costs and expenses associated with such obligations). The Asset Management Agreement has an initial term that continues until February 1, 2024, and will automatically renew for successive five-year periods, unless earlier terminated in accordance with the Asset Management Agreement. We may terminate the Asset Management Agreement at any time for cause as described in the Asset Management Agreement. If there is a change in control of the Asset Manager (as defined in the Asset Management Agreement) which is not approved by the Independent Directors, or if we terminate the Asset Management Agreement at the end of the initial term or any renewal period without cause, we will pay the Asset Manager a termination fee equal to 2 1/2 times the sum of the Asset Management Fee for the preceding twelve consecutive calendar months. In the event of the termination of the Asset Management Agreement, our Asset Manager is required to cooperate with us and take prompt action in accordance with the Asset Management Agreement to assist the Board in making an orderly transition of the advisory function. Management Decisions The Asset Manager controls the basic management decisions of the Corporation, subject to the supervision of the Board and, in certain cases, approval of the Independent Directors Committee. The primary responsibility for the management decisions of the Operating Company, including the selection of investment real estate properties to be recommended to our Board, the supervision of the negotiations for these investments, and the property management and leasing of the properties, will reside directly in the Asset Manager which is owned, directly or indirectly, by the Sponsors. Certain acquisitions of real property or a group of real properties will be submitted to the Independent Directors Committee for approval. The Property Manager Prior to January 1, 2016, our properties were managed by Buckingham Properties LLC, principally owned and controlled by the Glazer Estate. At the recommendation of the Independent Directors Committee after - 43 CONFIDENTIAL Mr. Glazer’s death, Mr. Goldstein formed the Property Manager and transitioned the management of our portfolio of properties from other property managers to the Property Manager. Mr. Goldstein owns a majority of the Property Manager and serves as its manager. The services provided by our Property Manager include ongoing management (including preparation of operating and capital budgets for each individual property, quarterly and annual reports, etc.), oversight of compliance with conditions, qualification of tenants in the event of vacancies, capital improvements and rent collection. Various other duties are undertaken by the Property Manager on behalf of the Operating Company in the Property Management Agreements which also provide for the fees and other compensation to the Property Manager. The Property Management Agreement The following summary of the standard form of Property Management Agreement and the descriptions of certain provisions of the Property Management Agreements set forth elsewhere in this Memorandum are qualified in their entirety by reference to the form of Property Management Agreement, copies of which are available upon request. Each of our properties is subject to a separate Property Management Agreement. The Property Management Agreements detail the rights, powers and obligations of the Property Manager and the services to be provided to us in managing the day-to-day activities of our properties held by the Operating Company. We expect that each of the special purpose entities which the Operating Company forms to acquire properties, which we refer to as the property owner, will enter into a separate Property Management Agreement with the Property Manager. The Property Management Agreements are each in substantially the form summarized herein. We may also enter into Property Management Agreements with other affiliated or unaffiliated property managers from time to time. The summary below is provided to illustrate the material functions that the Property Manager performs, and it is not intended to include a detailed description of all of the services that may be provided to us by the Property Manager, its affiliates or third parties. Under the Property Management Agreement, the Property Manager: x collects the rents from the tenants and deposits them in an operating account of the property owner or, if required by the property owner’s lender, into a deposit account controlled by the lender; x enters into service agreements required to provide tenant services, if any are required of the property owner under the lease; x monitors compliance by the tenants with the terms of the lease; x pays from the operating account principal and interest on outstanding debt, and all other obligations of the property owner attributable to the property; and x pays the applicable management fee to the Property Manager from the operating account. In addition, if requested by the Asset Manager, the Property Manager will assist in leasing properties, securing financing or arranging for the sale of properties. Additional information regarding the compensation the Property Manager will be entitled to receive for its services is set forth below in “Fees and Other Compensation to Our Managers and Affiliates.” Our agreements with the Property Manager have three-year initial terms that typically commence with the acquisition of each subject property. The contracts automatically renew for additional one-year periods, unless either party provides the other with advance written notice of termination in accordance with the Property Management Agreement. We may also terminate any Property Management Agreement at any time for cause as described in the Property Management Agreements. If there is a change in control of the Property Manager (as defined in the Property Management Agreements) which is not approved by the Independent Directors, or if we terminate a Property Management Agreement at the end of the initial term or any renewal period without cause, we will pay the Property Manager a termination fee equal to 1/2 the aggregate management fees paid to that Property Manager during the twelve-month period immediately preceding the date of such termination. It is the duty of our Board to evaluate the performance of our Property Manager. In the event of the termination of any Property Management - 44 CONFIDENTIAL Agreement, the terminated Property Manager is required to cooperate with us and take prompt action in accordance with the Property Management Agreement to assist us making an orderly transition of the property management function. - 45 CONFIDENTIAL Fees and Other Compensation to Our Managers and Affiliates Recipient Asset Manager Asset Manager Asset Manager Asset Manager Asset Manager Asset Manager Asset Manager Asset Manager Sponsor/gu arantor Property Manager Type of Compensation* Reimburse out-of-pocket Offering and marketing expenses of the Corporation, including printing and mailing costs, investor meetings and, if brokers are engaged, their fees and expenses. Annual asset management fee, payable quarterly, for services under the Asset Management Agreement. If approved by the Independent Directors Committee, possible equity incentive compensation. Acquisition fee in connection with the acquisition of properties (no fee was paid with respect to the initial two properties acquired: 125-205 Bryant Wood South and 1350 Scottsville Road). If a broker is representing the Operating Company in the transaction, the Asset Manager’s fees will be reduced to the extent necessary so that the total commissions do not exceed 1%. If acting as agent for leasing any property for us, a fee for leasing any property or portion thereof. In the event any other party is entitled to a leasing fee from us, the Asset Manager’s fees will be reduced to the extent necessary so that Asset Manager’s leasing fee does not cause the total commissions to exceed 6% of the total base rent payments due over the term of the lease for such lease. If paid a fee on the underlying lease, a fee for securing the tenant’s renewal of the lease. In the event any other party is entitled to a leasing fee from us, the Asset Manager’s fees will be reduced to the extent necessary so that Asset Manager’s leasing fee does not cause the total commissions to exceed 3% of the total base rent payments due over the term of the renewal term. If engaged by the Operating Company to secure financing for a property, a fee equal to the difference between 1% of the principal amount of the loan and amounts paid to any loan brokers. Disposition fee in connection with the disposition of properties. Reimbursement of expenses of the Corporation and the Operating Company paid on behalf of those entities by the Asset Manager Fee for providing certain personal guarantees of debt up to the maximum amount guaranteed. Fee for managing the properties. Property Manager Amount Up to 0.75% of the gross proceeds of the Offering from time to time 1.0% of the fair market value of our properties until the portfolio value is $100 million, 0.9% between $100-200 million, 0.8% between $200-300 million, and 0.75% over $300 million. Up to 1% of the total purchase price received for the Property Up to 4% of the total base rent payments due over the first 10 years of the term of the lease, and 2% of the total base rent payments due over the remaining term of the lease Up to 2% of the total base rent payments due over the renewal term of the lease Up to 1% of the principal amount of the loan 1% of the total sale price paid for the Property As reflected in the Asset Management Agreement 0.5% of the principal amount guaranteed 3% of total monthly Base Rent if the value of our portfolio of properties is $100 million or less, 2.75% if the portfolio value is between $100-300 million, and 2.5% if the portfolio value is greater than $300 million. Up to 4% of the total base rent payments due over the first ten years of the term of the lease and up to 2% of base rent on the remaining firm term on existing agreements. Up to 2% of the total base rent payments due over the renewal term of the lease If engaged by the Operating Company as its agent for leasing any property, a fee for leasing any property or portion thereof. In the event any other party is entitled to a leasing fee from us, the Property Manager’s fees will be reduced to the extent necessary so that the Property Manager’s fees do not cause the total commissions to exceed 6% of the total base rent payments due over the term of the lease for such lease. Property If paid a fee on the underlying lease, a fee for securing the tenant’s renewal of Manager the lease. In the event any other party is entitled to a leasing fee from us, the Property Manager’s fees will be reduced to the extent necessary so that the Property Manger’s fees do not cause the total commissions to exceed 3% of the total base rent payments due over the term of the lease for such lease. Property Fees for various property modernization, tenant improvements, repairs and Various percentages of costs as Manager insured loss restoration activities where the Property Manager is engaged to described in the Property oversee and manage such projects. Management Agreement * If approved by the Independent Directors Committee, the Asset Manager may be compensated in shares of common stock in lieu of cash. - 46 CONFIDENTIAL In addition, the Independent Directors Committee has approved an equity compensation plan for administration by the Independent Directors Committee. The plan provides the Independent Directors Committee with the ability to grant to the directors and officers of the Corporation and others, awards of stock options, restricted stock or other equity based compensation. The awards will be designed to provide additional incentives to build the portfolio of commercial properties of the Corporation and tie the interests of the participants to those of other shareholders. The plan is described further under the heading “Estimated Use of Proceeds and Capitalization – Capitalization”. Initially, the Independent Directors Committee is only authorized to issue awards with respect to 70,000 shares until the Corporation has issued 700,000 shares to investors. After that threshold is met, the Independent Directors Committee may issue awards up to 10% of the number of shares of our common stock outstanding from time to time. On June 26, 2014, the Independent Directors Committee approved, and the Corporation issued, options to purchase 10,000 shares of common stock for $50.00 to each of the Independent Directors and to Messrs. Glazer and Goldstein as officers of the Corporation. The options vest and first become exercisable, subject to certain exceptions, 20% on each of January 6, 2015, 2016, 2017, 2018 and 2019, and expire on January 6, 2024 to the extent not exercised. The options will terminate to the extent unvested if a director’s service terminates, except by reason of death or disability. If service is terminated by reason of death or disability, any unvested portion of the options immediately becomes vested and exercisable. Mr. Glazer’s options became fully vested on his death but expired unexercised. The Independent Directors Committee approved, and the Corporation issued, a contingent award of 2,000 shares of restricted stock to Daniel Goldstein. The shares of common stock were issued on January 1, 2015, as a result of the Corporation having met performance targets set by the Independent Directors Committee, and vested on January 1, 2016. The Committee may consider making additional restricted stock grants with performance targets to Mr. Goldstein annually. - 47 CONFIDENTIAL The Operating Company General The Operating Company, Royal Oak Realty Trust (Operating Company) LLC (doing business as Royalty Oak Realty Trust LLC), is a New York limited liability company that was formed on May 8, 2013 under the name Buckingham Net Leased Properties Group LLC. The Operating Company’s Second Amended and Restated Limited Liability Company Agreement provides that the Corporation is the managing member of the Operating Company and that the Corporation will make capital contributions to the Operating Company with the proceeds of the sales of its shares of common stock from time to time in exchange for an equivalent number of interests in the Operating Company. Current Capitalization The Operating Company owns the Current Properties through wholly-owned subsidiaries, and expects to acquire additional real property, either directly or through various single purpose entities. Two of the Current Properties were contributed to the Operating Company by the Initial Sponsors in exchange for membership interests. In addition, prior to the formation of the Corporation in January 2014, various unaffiliated investors had contributed a total of approximately $1,435,000 to the Operating Company in exchange for Units at $50.00 per Unit. On February 28, 2014, these unaffiliated cash investors converted all of their Units into shares of the Corporation’s common stock on a one-for-one basis. The Sponsors also converted a portion of their Units (15,259.5 Units) on the same basis. The number of outstanding shares of the Corporation’s common stock and the number of outstanding Units of the Operating Company (which are convertible on a one-for-one basis into shares of common stock) as of the most recent annual and quarterly periods are included within the financial statements provided as Exhibits A and B. The Operating Company may from time to time acquire property from other investors in exchange for Units in the Operating Company or sell Units in the Operating Company to other investors. Transactions where an investor contributes property meeting our Property Selection Criteria in exchange for interests in the Operating Company may provide the investor with the opportunity to defer certain taxes and result in a more favorable price to the Operating Company. Units in the Operating Company are substantially equivalent to shares of our common stock and are exchangeable for such shares. The Operating Agreement The following summary of the Second Amended and Restated Operating Agreement, as amended (the “Operating Agreement”) and the descriptions of certain provisions of the Operating Agreement set forth elsewhere in this Memorandum are qualified in their entirety by reference to the Operating Agreement, a copy of which is available upon request. Organization The Operating Company is a New York limited liability company. At the initial closing of the Offering, the Corporation was admitted as a member to the Operating Company and, pursuant to the Operating Agreement, the Corporation was admitted as the manager and a member of the Operating Company. The number of Units outstanding, including the number of Units outstanding that are owned by the Corporation, as of the most recent annual and quarterly periods are included within the financial statements provided as Exhibits A and B. The remaining members of the Operating Company acquired their Units as a portion of the price for properties. As manager, the Corporation is empowered to do any and all acts necessary to further the business of the Operating Company and can cause the Operating Company to enter into transactions, subject to certain limited exceptions, including the acquisition, disposition and financing of real estate properties. The other members of the Operating Company do not have a right to exercise control or management power over the business and affairs of the Operating Company, except as may otherwise be expressly provided in the Operating Agreement or required by applicable law. Provided our decisions are made in good faith, the Corporation is under no obligation to consider the separate interests of the non-managing members in deciding whether to cause the Operating Company to take, or - 48 CONFIDENTIAL 4821-2485-6879.12 decline to take, any action. The Corporation has delegated to the Asset Manager substantially all of the operational management duties and authority to implement the policies of the Board. Capital Contributions and Issuance of Membership Units As the Corporation issues shares of its common stock, it will transfer substantially all of the proceeds of the Offering to the Operating Company as a capital contribution. In return, the Operating Agreement will be amended to reflect the additional capital contribution and the Operating Company will issue to the Corporation the number of Units that correlates in value to its capital contribution based on the proceeds raised in connection with the issuance of the shares. Subject to applicable law, the Corporation may authorize the Operating Company to issue preferred or other membership units in different classes and series to parallel in material respects any preferred stock issued by the Corporation. These membership units may provide preferences and other variations in rights and limitations including those related to voting, income and loss allocation, distribution priority, and dissolution and liquidation rights. Generally, no member is personally liable for any obligations of the Operating Company for amounts in excess of the member’s capital contributions. Management As the managing member of the Operating Company, the Corporation generally has exclusive and complete right, power and authority in the management and conduct of the affairs of the Operating Company. The Corporation serves in the capacity of managing member of the Operating Company until it resigns or the Operating Company is dissolved. The Operating Agreement provides for the Operating Company to enter into agreements with the Asset Manager and Property Manager and also authorizes the Corporation to enter into agreements with other services providers on behalf of the Operating Company as required by its business including hiring legal, tax, property and financial advisors. The Corporation has delegated to the Asset Manager most responsibilities for the operations of the Investment Fund. Tax Matters The Corporation is the tax matters partner of the Operating Company with authority to make tax elections under the Code on behalf of the Operating Company. The Corporation, however, may not make or revoke the Operating Company’s “Entity Classification Election” under the Code or any corresponding provision of state tax laws or take any action that will cause the Entity Classification Election of the Company to be changed from an election to be classified as a partnership without the approval of all members. Limitation of Liability and Indemnification To the extent permitted by applicable law, the Operating Agreement provides no member will have personal liability for any debts, obligations or liabilities of the Operating Company or the other members, whether arising in tort, contract or otherwise, solely by reason of being a member of the Operating Company or agent or acting (or omitting to act) in such capacities or participating (as an employee, consultant, contractor or otherwise) in the conduct of the business of the Operating Company. The Operating Company will indemnify the Manager, its affiliates (including the Asset Manager and the Property Manager), each member of the Operating Company, and any manager, officer, shareholder, director, member, employee, representative or agent of the Manager or its affiliates against all claims, damages, and expenses (including attorneys’ fees) arising from the Operating Company’s operations. Indemnification under the Operating Agreement will be provided as long as: (a) the act giving rise to liability was not committed in bad faith or the result of active and deliberate dishonesty, and (b) the potential indemnitee did not knowingly or intentionally personally gain a financial profit or other advantage to which he, she or it was not legally entitled or which was disproportionate to other members. Allocations and Distributions The cash distributions and taxable income or loss of the Operating Company will generally be allocated to the members in accordance with their respective pro rata shares of the Operating Company, which are based on the number of Units held by the member as compared to the aggregate number of Units outstanding. The Operating - 49 CONFIDENTIAL 4821-2485-6879.12 Agreement provides for special allocations of taxable income and loss to certain members to comply with the provisions of Sections 704 of the Code and associated Treasury regulations. The Operating Agreement provides that members may receive distributions of available cash from time to time as the Corporation, acting as manager, may determine. The amount of any distribution will be equal to the corresponding distributions to the holders of the Corporation’s common stock, and will be paid on a pro rata basis in accordance with the ownership of Units as of the record date for such distribution, subject to any class of membership interests which are entitled to a preference on the distribution of available cash. Distribution payments are expected to be made within approximately 15 days following the end of each calendar month and will be paid to members of the Operating Company at the time they are made to holders of shares of the Corporation’s common stock and in corresponding amounts. Conversion Rights and Assignment of Interests On a quarterly basis subject to certain limitations, each member may convert all or a portion of such member’s Units into shares of our common stock. We may also permit conversion upon the occurrence of extraordinary events, in our discretion. Each Unit will be convertible into one share of common stock, subject to adjustment in certain circumstances. Upon such conversion, the number of membership units converted will no longer be deemed outstanding and all rights of the member with respect to the membership units converted will immediately terminate, with the exception of a right to receive any accrued but unpaid distributions with respect to the membership units converted. An initial conversion by some early investors in the Operating Company is expected to occur before March 1, 2014. The common stock is not traded on any market and is subject to substantial restrictions on transfer. Non-managing members may not sell, transfer, pledge or assign a membership Unit without our prior written consent and the granting or denial of such transfer shall be subject to our sole discretion, as managing member. In order to comply with a consent to an assignment, the purported transfer must first comply with certain conditions including those related to the suitability of the assignee. Dissolution The Operating Company shall continue until the first to occur of any of the following: (i) our determination that changes in applicable law may result in a violation of a statute, subject a member to any tax under section 897 of the Code, or cause the Operating Company to be taxed as a corporation; (ii) our determination that the Operating Company cannot carry out or meet its investment program; (iii) our determination that termination is required to comply with a statute, regulation or decree; (iv) our determination that due to a change in the securities laws of the United States that the Operating Company cannot operate as contemplated in the Operating Agreement; (v) our consent, as manager, and the affirmative vote of the members holding at least 75% of the outstanding Units to dissolve the Operating Company; (vi) the passage of 90 days after the sale or other disposition of all or substantially all of the assets of the Operating Company; provided, however, if the consideration for such sale or disposition is payable over time, the 90-day period will not commence until the payment of the final installment of the consideration; or (vii) the date on which the Operating Company has no remaining members; and with respect to (i), (ii), (iii) and (iv) a subsequent decision by the Corporation, as manager, and the affirmative vote of the members holding at least 75% of the outstanding Units to dissolve the Operating Company. Amendments to the Operating Agreement Amendments to the Operating Agreement may be proposed by us, as manager. Generally, the Operating Agreement may be amended with our approval, as manager, and the approval of the members at a meeting or by - 50 CONFIDENTIAL 4821-2485-6879.12 written consent. As manager, the Corporation will have the power to unilaterally make certain amendments to the Operating Agreement without obtaining the consent of the non-managing members as may be required to: (i) reflect the issuance of additional membership units or the admission substitution, termination or withdrawal of members in accordance with the terms of the Operating Agreement; (ii) to reflect a change that is of an inconsequential nature and does not adversely affect the nonmanaging members in any material respect, or to cure any ambiguity or provision of the Operating Agreement that is not consistent with law or other provisions; (iii) satisfy any requirement, condition or guideline of a Federal or state agency or law; or (iv) reflect changes reasonably necessary for the Corporation to maintain its status as a REIT. Term The Operating Company will continue in full force and effect unless dissolved, merged or otherwise terminated in accordance with the terms of the Operating Agreement or as otherwise provided by law. Financial Information The most recent annual consolidated financial statements of Royal Oak Realty Trust Inc. (formerly known as Buckingham Net Leased Properties Group Inc.) and Subsidiaries are set forth as Exhibit A hereto. The most recent quarterly consolidated financial statements of Royal Oak Realty Trust Inc. (formerly known as Buckingham Net Leased Properties Group Inc.) and Subsidiaries are set forth as Exhibit B hereto. The Corporation, together with its consolidated subsidiaries, will provide to shareholders and members annual audited financial statements prepared in accordance with the accounting principles determined by the Independent Directors Committee. Beginning for the fiscal year ended December 31, 2015 and for subsequent years, our financial statements are prepared in accordance with GAAP. Prior to that date, our financial statements were prepared on an Income Tax Basis of Accounting. In addition, unaudited financial statements are prepared on a quarterly basis in accordance with such accounting principles. Shareholders and members will receive required tax information annually. Funds from Operations (“FFO”) is a common financial measure used by REITs. We have attached to this Memorandum the most recent annual and quarterly calculation of FFO, Adjusted Funds From Operations (“AFFO”) and Modified Adjusted Funds From Operations (“MAFFO”) per weighted average share/unit for Royal Oak Realty Trust Inc. and Subsidiaries (see Exhibit C). While our calculation of FFO may be a useful tool for comparing our performance from period to period since it excludes depreciation and amortization, which can vary based on the basis in acquired property and the useful life estimates, and other factors, it should be considered with other operating results in understanding our historical results. Under the guidance for FFO provided by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”), FFO is defined as net income (computed in accordance with accounting principles generally accepted in the United States of America (“GAAP”)) excluding gains or losses from sales of property, impairment write-downs of depreciable real estate, noncontrolling interest, extraordinary items and cumulative effect of change in accounting principle plus depreciation from real property including adjustments for unconsolidated partnerships and joint ventures less dividends from non-convertible preferred shares. - 51 CONFIDENTIAL 4821-2485-6879.12 Conflicts of Interest General We are subject to various conflicts of interest arising out of our relationship with Cambridge Street Asset Management LLC, our Asset Manager, and Cambridge Street Property Management LLC, our Property Manager, including conflicts related to the arrangements pursuant to which the Asset Manager, the Property Manager, and their affiliates will be compensated by us. Our agreements and compensation arrangements with our Asset Manager, Property Manager, and their affiliates were not determined by arm’s-length negotiations, but they were reviewed by our Independent Director Committee and we believe such fees are consistent with industry standards. See the “Management – The Asset Manager and The Asset Management Agreement” and “Management – The Property Manager and The Property Management Agreement” sections of this Memorandum. Some of the conflicts of interest in our transactions with our Asset Manager and our Property Manager, and the limitations on our Asset Manager and our Property Manager adopted to address these conflicts, are described below. Our Asset Manager, our Property Manager, and their affiliates will try to balance our interests with their duties to other real estate investment and community activities. Our Independent Directors will act as a separate committee of the Board and review all situations in which a conflict of interest may arise, and all of our directors have a fiduciary obligation to act on behalf of our stockholders. Affiliates The interests of Mr. Goldstein and his affiliates may vary from those of other investors in our shares of common stock in a variety of ways. Those conflicts may result in one or more of them favoring their interests over those of the investors. Daniel Goldstein is President and a director of the Corporation and has the right, through the Asset Manager, to nominate an additional Director to our Board. Our Asset Manager is majority-owned and controlled by Mr. Goldstein. Our Property Manager is majority-owned and controlled by Mr. Goldstein. Affiliates of Mr. Goldstein or our other directors and members of the Asset Manager’s Asset Acquisition Committee, may acquire properties that do not, initially, meet our Property Investment Criteria, and renovate, refinance and lease-up such properties to conform to our criteria. The Asset Manager may then recommend we acquire these properties. Our Independent Directors Committee must approve any such acquisition. Although property acquisitions must be approved by the Asset Acquisition Committee of the Asset Manager which has two independent members, our Asset Manager may acquire and lease properties which are riskier than may be desirable in order to generate fees. All of our officers and directors have other real estate interests and investments which require their time and attention. Interests in Other Real Estate Investments Our Asset Manager, our Property Manager, our directors, including our Sponsor, and members of the Asset Acquisition Committee, or one of their affiliates may pursue additional real estate investment entities in the future, whether public or private, which can be expected to involve the same investment objectives and policies as we do and which may be involved in the same geographic area. In the event that our Asset Manager, Property Manager, our Sponsor or one of their affiliates wishes to invest in real estate investment opportunities which are within our then current Property Selection Criteria or investment policies, our Asset Manager, our Property Manager or their affiliate must first offer the investment to the Fund and receive approval from our Independent Directors Committee. Affiliated Asset Manager Cambridge Street Asset Management LLC serves as our Asset Manager and performs all asset management functions for the Corporation and the Operating Company pursuant to the Asset Management Agreement. Our agreement with the Asset Manager has an initial term that continues until February 1, 2024, and which will automatically renew for five-year periods, unless earlier terminated in accordance with the terms of the Asset Management Agreement. It is the duty of our Board to evaluate the performance of our Asset Manager. We may also terminate the Asset Management Agreement for cause as described in the Asset Management Agreement. The Asset Manager may also serve as asset manager for entities owned by affiliates of ours, including our directors, officers, and stockholders. - 52 CONFIDENTIAL 4821-2485-6879.12 Our Asset Manager and its affiliates will be paid certain compensation including an annual asset management fee based on the fair market value of our properties and acquisition and disposition fees based on the total purchase or sale price paid for the property, respectively. For a more detailed discussion of the anticipated compensation to be paid to our Asset Manager, see “Management – The Asset Management Agreement.” Subject to oversight by our Board, our Asset Manager will have considerable discretion with respect to all decisions relating to: (i) capital-raising, (ii) the Operating Company’s acquisition and disposition strategies in keeping with our investment objectives and Property Selection Criteria, and (iii) the Operating Company’s financing activities. Therefore, the Asset Manager may have conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact that the Asset Manager could generate higher annual asset management fees, regardless of the quality of the services provided to us, by causing the purchase and sale of properties which might not be in our best interest in order to generate fees. Affiliated Property Manager Our properties are managed and leased by our Property Manager, Cambridge Street Property Management LLC, pursuant to Property Management Agreements in substantially the same form, with three year terms and automatic renewals. Prior to a renewal term, either party may provide the other party with written notice of termination in accordance with the Property Management Agreement. It is the duty of our Board to evaluate the performance of our Property Manager. We may also terminate the Property Manager for cause as described in each Property Management Agreement. Management fees to be paid to our Property Manager include an annual property management fee and, if engaged as agent for leasing any property, leasing and releasing fees. Subject to oversight by our Board and the Asset Manager, our Property Manager has considerable discretion with respect to all decisions relating to the day-to-day management and oversight of our properties, subject to the terms of the leases to our tenants, and, if engaged as agent for leasing any property, leasing and releasing of our properties. Therefore, the Property Manager may have conflicts of interest concerning certain actions taken on our behalf, particularly due to the fact that our Property Manager could generate higher fees regardless of the quality of the services provided to us. The fee structure may provide an incentive to the Property Manager or its employees to acquire properties in locations where the underlying property values are unlikely to increase in order to generate fee income or enter into leases which present greater risk than if they were otherwise compensated. For a more detailed discussion of the fees paid to our Property Manager, see “Management – The Property Management Agreements” and “Fees and Other Compensation to Our Managers and Affiliates”. Independent Directors Committee Oversight Every transaction that we enter into with our Asset Manager and our Property Manager and their affiliates will be subject to an inherent conflict of interest. Our Board may encounter conflicts of interest in enforcing our rights against any affiliate in the event of a default by or disagreement with an affiliate or in invoking powers, rights or options pursuant to any agreement between us and our Asset Manager, our Property Manager or any of their affiliates. In order to reduce or eliminate certain potential conflicts of interest in day-to-day operations, the Independent Directors Committee reviews the transactions and activities of Cambridge Street Asset Management LLC, Cambridge Street Property Management LLC, and their affiliates for any conflicts of interest. Also, the Sponsors, the Asset Manager and the Property Manager must offer to us any real estate investment opportunity they wish to pursue independent of us which falls within our then current Property Selection Criteria and investment policies and, if the Fund elects not to pursue the investment, seek approval to invest from the Independent Directors Committee. Only after the Independent Directors Committee has approved the pursuit of such an independent real estate investment opportunity may the Asset Manager or the Property Manager or their affiliates pursue such an opportunity. Lack of Separate Representation Nixon Peabody LLP acts, and may in the future act, as counsel to us, the Asset Manager, the Property Manager, and their affiliates in connection with this offering or otherwise. There is a possibility that in the future the interests of the various parties may become adverse, and under the Code of Professional Responsibility of the - 53 CONFIDENTIAL 4821-2485-6879.12 legal profession, Nixon Peabody LLP may be precluded from representing any one or all of such parties. In the event that a dispute were to arise between us, the Asset Manager, the Property Manager or any of their affiliates, separate counsel for such matters will be retained as and when appropriate. Nixon Peabody LLP’s representation of the Corporation does not include representation of any prospective investors in connection with their purchase of shares of the Corporation’s common stock, each of whom should rely on their own counsel. Prospective investors are advised to consult with their own legal, tax and financial advisors with respect to any investment in the shares. Partners of Nixon Peabody LLP own less than 2% of the outstanding shares. - 54 CONFIDENTIAL 4821-2485-6879.12 Certain Provisions of Our Charter and By-Laws General Our Charter authorizes the issuance of 40,100,000 shares of capital stock, of which 40,000,000 shares are designated as common stock with a par value of $0.001 per share, and 100,000 shares are designated as preferred stock with a par value of $0.001 per share. In addition, our Board may amend our Charter to increase or decrease the amount of our authorized shares of capital stock. Common Stock The holders of common stock are entitled to one vote per share on all matters voted on by stockholders, including election of our directors. Our Charter does not provide for cumulative voting in the election of our directors. Therefore, the holders of a majority of the outstanding shares of common stock can elect our Independent Directors. Subject to any preferential rights of any outstanding series of preferred stock, the holders of common stock are entitled to such distributions as may be declared from time to time by our Board out of legally available funds and, upon liquidation, are entitled to receive all assets available for distribution to our stockholders. Holders of shares of common stock will not have preemptive rights, which means that our investors will not have an automatic option to purchase any new shares that we issue. Our Board has authorized the issuance of shares of our capital stock without certificates. Information regarding restrictions on the transferability of our shares that, under Maryland law, would otherwise have been required to appear on our share certificates will instead be furnished to our stockholders upon request and without charge. We will maintain a stock ledger that contains the name and address of each stockholder and the number of shares that the stockholder holds. Restrictions on Transfer The shares of common stock in the Corporation are offered pursuant to an exemption from the registration requirements of the Securities Act of 1933 and applicable state law and are not transferable except by the laws of descent and distribution, or otherwise in accordance with applicable law. Any transfer of the shares is also subject to the Corporation’s consent, and to the provisions of our Charter and the By-laws, designed to protect our REIT status, which provisions are described below under the heading “Ownership Limit”. Preferred Stock Our Charter authorizes our Board to designate and issue one or more classes or series of preferred stock without stockholder approval. Our Board may determine the relative rights, preferences and privileges of each class or series of preferred stock so issued, which may be more beneficial than the rights, preferences and privileges attributable to the common stock. The issuance of preferred stock could have the effect of delaying or preventing a change in control. Our Board has no present plans to issue preferred stock, but may do so at any time in the future without stockholder approval. Ownership Limit In order for us to qualify as a REIT, during the last half of each taxable year, not more than 50% of the value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals, as defined in the Code to include certain entities. In addition, the outstanding shares must be owned by 100 or more persons during at least 335 days of a 12-month taxable year or during a proportionate part of a shorter taxable year. Each of the requirements specified in the two preceding sentences apply only after the first taxable year for which we made an election to be taxed as a REIT. We may prohibit certain acquisitions and transfers of shares so as to ensure our continued qualification as a REIT under the Code; however, we cannot assure an investor that this prohibition will be effective. The number of outstanding shares of the Corporation’s common stock and the number of outstanding Units of the Operating Company (which are convertible on a one-for-one basis into shares of common stock) as of - 55 CONFIDENTIAL 4821-2485-6879.12 the most recent annual and quarterly periods are included within the financial statements provided as Exhibits A and B. In order to assist us in preserving our status as a REIT, our Charter contains a limitation on ownership that prohibits any person or group of persons from acquiring, directly or indirectly, beneficial ownership of more than 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of any class or series of our stock unless exempted by our Board. Our Charter provides that any transfer of shares that would violate our share ownership limitations is null and void and the intended transferee will acquire no rights in such shares, unless the transfer is approved by our Board based upon receipt of information that such transfer would not violate the provisions of the Code for qualification as a REIT. In addition, our Charter provides that any attempted transfer of our stock which, if effective, would result in any of the following will be null and void and the intended transferee will acquire no rights in such stock: x our stock being owned by fewer than 100 persons; x our being “closely held” under Section 856(h) of the Code or being a “pension held REIT” under Section 856(h)(3)(D) of the Code; x our beneficially or constructively owning 10% or more of the ownership interests in a tenant of our company’s, our operating company’s or any subsidiary’s real property within the meaning of Section 856(d)(2)(B) of the Code; x our beneficially or constructively owning capital stock to the extent such ownership would cause any of our independent contractors to not be treated as such under Section 856(d)(3) of the Code; or x our otherwise failing to qualify as a REIT. Shares of stock that, if transferred, would cause an individual or entity to be in excess of the 9.8% ownership limit (without an exemption from our board of directors) will be transferred automatically to a trust effective as of the close of business on the day before the reported transfer of such stock. The record holder of the shares of stock that are held in trust will be required to submit such number of shares to us in the name of the trustee of the trust. We will designate a trustee of the share trust that will not be affiliated with us. We will also name one or more charitable organizations as a beneficiary of the share trust. Stock held in trust will remain issued and outstanding stock and will be entitled to the same rights and privileges as all other shares of the same class or series. The trustee will receive all distributions on the stock held in trust and will hold such distributions in trust for the benefit of the beneficiary. Any distribution made prior to our discovery that shares of stock have been transferred to the trust will be repaid by the recipient to the trustee. Any distribution authorized but unpaid will be paid when due to the trustee. The trustee may vote any stock held in trust. Subject to Maryland law, the trustee will have the authority: (a) to rescind as void any vote cast by the proposed transferee prior to our discovery that the shares have been transferred to the trust, and (b) to recast the vote in accordance with the desires of the trustee acting for the benefit of the beneficiary. However, if we have already taken irreversible corporate action, then the trustee will not have the authority to rescind and recast the vote. At our direction, the trustee will transfer the stock held in trust to a person whose ownership will not violate the ownership limit. The transfer shall be made within 20 business days of the trustee receiving notice from us that the stock has been transferred to the trust. During this 20-day period, we will have the option of redeeming such stock. Upon any such transfer or redemption, the interest of the beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale or redemption to the proposed transferee and to the beneficiary as follows. The proposed transferee will receive the lesser of: (a) the price paid by the proposed transferee for the shares or, if the proposed transferee did not give value for the shares in connection with the event causing the shares to be held in the trust (e.g., a gift, devise or other similar transaction), the Determined Share Value of the shares on the day of the event causing the shares to be held in the trust, and (b) the price received by the trustee (net of any commissions and other expenses of sale) from the sale or other disposition of the shares. Any net proceeds in excess of the amount payable to the proposed transferee will be paid to the beneficiary. - 56 CONFIDENTIAL 4821-2485-6879.12 In addition, shares held in the trust will be deemed to have been offered for sale to us, or our designee, at a price per share equal to the lesser of: (a) the price per share in the transaction that resulted in the transfer to the trust (or, in the case of a devise or gift, the Determined Share Value at the time of the devise or gift), and (b) the Determined Share Value on the date we, or our designee, accept the offer. We will have the right to accept the offer until the trustee has sold the shares held in the trust. Upon a sale to us, the interest of the beneficiary in the shares sold will terminate and the trustee will distribute the net proceeds of the sale to the proposed transferee. Any person who acquires stock in violation of the foregoing restrictions or who owns stock that was transferred to any such trust is required to give immediate written notice to us of such event, and any person who transfers or receives stock subject to such limitations is required to give us 15 days’ written notice prior to such transaction. In both cases, such persons shall provide to us such other information as we may request in order to determine the effect, if any, of such transfer on our status as a REIT. In addition, every owner of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder or as may be requested by the Board) of our shares, within 30 days after the end of each taxable year, is required to give us written notice, stating his or her name and address, the number of shares of each class and series of our stock which he or she beneficially owns, and a description of the manner in which the shares are held. Each such owner shall provide us with such additional information as we may request in order to determine the effect, if any, of his or her beneficial ownership on our status as a REIT and to ensure compliance with the ownership limits. In addition, each stockholder shall upon demand be required to provide us with such information as we may request in good faith in order to determine our status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance. The foregoing restrictions will continue to apply until our Board determines it is no longer in our best interest to continue to qualify as a REIT. The ownership limit also does not apply to the underwriter in an Offering of shares or to a person or persons exempted from the ownership limit by our Board based upon appropriate assurances that our qualification as a REIT would not be jeopardized. The foregoing restrictions could delay, defer or prevent a transaction or a change in control that might involve a premium price for our shares or otherwise be in the best interest of our stockholders. Suitability Standards and Minimum Purchase Requirements State law and our Charter require that purchasers of our stock meet standards regarding (a) net worth or income and (b) minimum purchase amounts. These standards are described above at “Suitability Standards” and below at “Plan of Distribution — Minimum Purchase Requirements.” The standards apply not only to purchasers in this Offering, but also to potential purchasers of an investor’s shares. As a result, the requirements regarding suitability and minimum purchase amounts may make it more difficult for an investor to sell the investor’s shares. Distributions Distributions will be made as declared by our Board. We intend, but are not required, to make monthly distributions to investors (both stockholders and members of the Operating Company) equal to a 7% annual return per annum on the then-current Determined Share Value. Distribution payments are expected to be made within approximately 15 days following the end of each calendar month. Distributions will be paid to investors who are stockholders as of the record dates selected by our Board. Those subscribers making an investment (either new or additional) at an end of calendar month closing will begin to accrue dividends in the subsequent month and receive initial distributions approximately 15 days after the subsequent month is complete. If we issue any shares of our common stock on dates other than the end of a calendar month, the holders of such shares will receive a pro rata portion of the distribution, based on the ratio of the number of days in the calendar month remaining after the shares are issued divided by 30. We anticipate receipt of monthly distributions from the Operating Company to fund the distributions to shareholders, although such distribution cannot be guaranteed. We are required to make distributions sufficient to satisfy the requirements for qualification as a REIT for tax purposes. Generally, income distributed as dividends will not be taxable to us under the Code if we distribute at least 90% of our REIT taxable income. Dividends will be declared at the discretion of our Board, but will be - 57 CONFIDENTIAL 4821-2485-6879.12 guided, in substantial part, by a desire to cause us to comply with the REIT requirements. We may borrow money, issue securities or sell assets in order to make dividend distributions. Distribution Reinvestment Plan We have adopted a Distribution Reinvestment Plan that allows our investors to have dividends and other distributions otherwise distributable to our investors to be invested in additional shares of our common stock. The following discussion summarizes the principal terms of this plan. Eligibility All of our stockholders, and members of the Operating Company who may convert their membership Units into our common stock, are eligible to participate in our Distribution Reinvestment Plan except for restrictions imposed by us in order to comply with the securities laws of various jurisdictions. We may elect to deny an investor participation in this plan if the investor resides in a jurisdiction or foreign country where, in our judgment, the burden or expense of compliance with applicable securities laws makes the investor’s participation impracticable or inadvisable. Holders of membership Units in the Operating Company may similarly reinvest their distributions in shares of our common stock. Participants will be required to confirm their status as “accredited investors” periodically. An investor in our common stock or the membership units of the Operating Company may be required to cease participation in our Distribution Reinvestment Plan if the investor no longer meets the suitability standards or cannot make the other investor representations set forth in the then-current Subscription Agreement for shares of our common stock. Participants must agree to notify us promptly when they no longer meet these standards. See the “The Offering — Suitability Standards” and the Subscription Agreement. Election to Participate Assuming an investor is eligible, the investor may elect to participate in our Distribution Reinvestment Plan by completing the appropriate portion of the Subscription Agreement or other approved enrollment form available from time to time from the Asset Manager. An investor’s participation in the plan will begin with the next distribution made after receipt of an investor’s enrollment form. Once enrolled, an investor may generally continue to purchase shares under our Distribution Reinvestment Plan until we have terminated the plan. An investor can choose to have all or a portion of the investor’s distribution reinvested through our Distribution Reinvestment Plan. An investor may also change the percentage of the investor’s dividends that will be reinvested at any time if the investor completes a new enrollment form or other form provided for that purpose. Stock Purchases Shares will be purchased under our Distribution Reinvestment Plan on the monthly distribution payment dates. Fractional shares may be issued as a result of the reinvestment of distributions under the plan. The purchase price per share will be 98% of the Determined Share Value, as determined by our Independent Directors Committee. The Investment Fund will bear the cost of administering the Plan, including compliance with applicable laws. This estimated Determined Share Value may bear little relationship and may exceed what the investor might receive for the investor’s shares if the investor tried to sell them or if we liquidated the portfolio. The Investment Fund and its officers and directors shall not be responsible or liable as to the value of the shares or any change in the value of the shares acquired. The Investment Fund and its officers and directors shall not be liable for any act done in good faith, or any good faith omission to act hereunder. Voting An investor may vote all whole shares acquired through our Distribution Reinvestment Plan at any meeting of stockholders of the Corporation. - 58 CONFIDENTIAL 4821-2485-6879.12 Tax Consequences of Participation If an investor elects to participate in our Distribution Reinvestment Plan and is subject to federal income taxation, the investor will incur a tax liability for distributions allocated to the investor even though the investor has elected not to receive the distributions in cash but rather to have the distributions withheld and reinvested pursuant to the plan. Specifically, the investor will be treated as if the investor has received the distribution from us in cash and then applied such distribution to the purchase of additional shares. See “Federal Income Tax Considerations — Taxation of U.S. Stockholders — Distributions Generally.” We will withhold 28% of the amount of distributions or distributions paid if the investor fails to furnish a valid taxpayer identification number, fail to properly report distributions or fails to certify that the investor is not subject to withholding. Termination of Participation Participation in our Distribution Reinvestment Plan may be terminated by an investor at any time by providing us with written notice. For an investor’s termination to be effective for a particular distribution, we must have received a notice of termination at least 10 business days prior to the last day of the fiscal period to which the distribution relates. Any transfer of an investor’s shares will effect a termination of the participation of those shares in the Distribution Reinvestment Plan. We will terminate an investor’s participation to the extent that a reinvestment of an investor’s dividends in our shares would cause an investor to exceed the ownership limitation contained in our Charter. Amendment or Termination of Plan We may amend or terminate our Distribution Reinvestment Plan or an individual’s participation in the plan for any reason at any time, provided that any amendment that adversely affects the rights or obligations of a participant (as determined in the sole discretion of the Board) will only take effect upon 10 days’ prior written notice to participants. After termination of the Distribution Reinvestment Plan or after termination of an individual’s participation in the Distribution Reinvestment Plan, the Asset Manager will send to each plan participant a check for the amount of any distributions in the participant’s account that have not been invested in shares. Any future distributions with respect to such former participant’s shares made after the effective date of termination will be sent directly to the former participant. Share Redemption Program We have adopted a Share Redemption Program that enables an investor to sell shares of common stock to us in limited circumstances. The Share Redemption Program permits investors to sell shares back to us after December 31, 2014 if the investor has held the shares for over a year (or, if the investor invested through interests in the Operating Company, the combined time period during which an investor has held membership Units of the Operating Company and the underlying converted shares is over a year). Any redemption of shares under the Share Redemption Program shall be subject to compliance with pertinent federal and state securities laws and restrictions applicable to preserve the status of the Corporation as a REIT under the Code. During the term of the Share Redemption Program, the Corporation will redeem shares at the request of holders on a quarterly basis at a price equal to 95% of the Determined Share Value, subject to the program’s restrictions. Notwithstanding the foregoing, if the stockholder has held shares for 5 years or more, the stockholder may redeem such shares at a price equal to 100% of the then in effect Determined Share Value, subject to all other restrictions, conditions and terms of the Share Redemption Program. Any stockholder may also have up to 5% of their outstanding shares redeemed by the Corporation in any calendar year at 100% of the Determined Share Value in effect at the time the shares are offered for redemption. If an individual stockholder is deceased, the deceased stockholder’s estate may redeem shares held in the deceased stockholder’s individual capacity at 100% of the Determined Share Value within one year of the death of the stockholder, subject to all other restrictions, conditions and terms of the Share Redemption Program. There are several restrictions on an investor’s ability to sell shares to us under the Share Redemption Program. An investor generally must hold shares for over a year (or the combined time period during which an investor has held membership Units of the Operating Company and the underlying converted shares is over a year) before selling such shares to us under the Share Redemption Program; however, we may waive the one-year holding - 59 CONFIDENTIAL 4821-2485-6879.12 period in the event of the stockholder’s death or bankruptcy, or other exigent circumstances as approved by the Independent Directors Committee. In addition, we limit the number of shares redeemed pursuant to our Share Redemption Program, unless the Independent Directors Committee determines to redeem additional shares. No redemptions in any quarter may exceed 1% of the shares outstanding at the beginning of the calendar year plus 50% of any additional shares of our common stock issued during the prior calendar quarter under the Distribution Reinvestment Plan. Redemption requests will generally not be honored if the remaining investment by the stockholder will consist of less than one-half of the then effective minimum investment under the Offering (unless all of the stockholder’s shares will be redeemed). Repurchases will only be made with funds legally available under Maryland law for redemption. Also, redemptions may be limited by certain restrictions related to maintaining real estate investment trust qualifications or by the terms of our financing documents. The Code requires that real estate investment trusts: (i) be owned by 100 or more persons, and (ii) have no more than 50% of its shares held by five or fewer individuals during the last half of each taxable year. These limitations may prevent us from accommodating all requests made in any quarter. If any shares tendered for redemption cannot be redeemed at the end of any quarter, those shares will be given first priority for redemption in the following quarter, at the applicable percentage of the Determined Share Value then in effect, subject to applicable restrictions. Stockholder Reports We will provide investors with annual financial statements, reported on by our independent auditors, and an IRS Form 1099 and such other information as may be necessary for investors to complete their tax returns. The Corporation will also provide a quarterly report which will include unaudited financial information, a summary of new acquisitions or dispositions, a report on recent new equity contributions and redemptions, and any change in the Determined Share Value. Stockholder Meetings We will hold an annual meeting for our stockholders in accordance with Maryland law. Our second annual meeting was held on May 25, 2016. We expect to hold future annual meetings of stockholders in May of each year. Stockholders will receive notice of the meetings as provided by Maryland law. Matters brought before any annual meeting shall include the election of Directors and any other matters to be properly brought at such forum pursuant to Maryland law. By the terms of the Subscription Agreement, investors have granted an irrevocable proxy, coupled with an interest, to vote their shares of common stock in favor of two nominees of the Asset Manager. A special meeting of the stockholders may be brought in accordance with our Charter and Maryland law. - 60 CONFIDENTIAL 4821-2485-6879.12 The Offering General The shares of common stock are offered and sold in a private placement only to accredited investors (as defined in Rule 501 of Regulation D under the Securities Act), including high net-worth individuals, foundations and endowments desiring access to professionally managed real estate investments and meeting certain other state suitability requirements. Pension funds, individual retirement accounts, and self-directed 401(k) plans may be able to invest if their fiduciaries do not require periodic valuations in addition to those intended to be made by the Independent Directors Committee quarterly; however, the Independent Directors Committee may elect to provide valuations which satisfy the requirement of plan fiduciaries if the Independent Directors Committee determine that such valuations are in the best interests of our stockholders as a whole. The shares of common stock will be issued in book-entry form, without certificates. The shares of common stock of the Corporation being offered at the Determined Share Value as set by our Independent Directors Committee. The initial offering price was arbitrarily determined by us at $50.00 per share. The Independent Directors Committee has determined that as of July 2, 2016, the Determined Share Value and the offering price is $54.00 per share (until adjusted further on review by the Independent Directors Committee). As of July 2, 2016 the minimum investment is 2,000 shares (or $108,000). Shares purchased through an investment advisor may be purchased at 50% of the minimum investment. The Asset Manager reserves the right to lower the minimum investment in limited circumstances to an amount of not less than $54,000 (or lesser amount approved by our Independent Directors Committee). The Determined Share Value is reviewed at least annually by the Independent Directors Committee and adjusted as needed based on the net asset value of the portfolio and such other factors as the Independent Directors Committee may, in its sole discretion, determine. The Asset Manager may, but is not required to, engage consultants, appraisers and other real estate or investment professionals to assist in the Independent Directors Committee’s valuations. The shares of Common Stock are offered by subscription only to residents of those states in which the offer and sale is not prohibited. This Memorandum does not constitute an offer to seller the solicitation of an offer to buy any of our common stock offered hereby in any state or other jurisdiction in which such an offer or solicitation is not authorized. No subscription will be binding upon us until we have accepted such subscription. Except as otherwise required by law, subscriptions may not be withdrawn or canceled by subscribers. We reserve the right to reject or refuse any subscription for any reason. The Offering will be made directly by the officers and affiliates of the Corporation; however, the Asset Manager reserves the right to engage placement, selling or other brokers or representatives to assist in the Offering or selling of shares of common stock in the Corporation. None of the officers or affiliates will receive compensation based on the number of investors or the size of their investments (although the Asset Manager and other affiliates will be entitled to management fees and reimbursement of expenses). Closings of the Offering The initial closing of the Offering was held on March 1, 2014, with additional closings as of the first of each month thereafter, as needed, through the date of this Memorandum. Additional closings are expected, although not required, to be held at the end of each calendar quarter or at other times in the discretion of the Asset Manager. At each closing, the Corporation will accept subscriptions for funding up to an amount which the Asset Manager believes can be prudently invested prior to the next closing. Subscriptions maybe accepted by the Asset Manager subject to funding and issuance of shares at a later date. The Corporation may accept a subscription for a dollar amount that is more than it will need for property investments at the closing immediately following the date of subscription but hold the issuance of the shares and payment of the price for them for up to six months. The Corporation will issue shares to a Subscriber at the Determined Share Value set forth in the Subscription Agreement for up to six months following the date of the Subscription Agreement. The Corporation will provide notice to a Subscriber with a deferred subscription at least ten days prior to the date payment of the balance of the subscription price is due. - 61 CONFIDENTIAL 4821-2485-6879.12 We anticipate accepting subscriptions as received subject to our right to reject or reduce subscriptions. Upon acceptance of a subscription in whole or in part, we will issue the shares. Subscription payments of potential investors whose subscriptions are rejected in whole, and the excess payments of those subscriptions rejected in part will be refunded, without interest or deduction. Default remedies will apply to investors who fail to make timely capital contributions in accordance with their Subscription Agreements on 10 business days’ prior written notice from the Corporation. In each case, the minimum subscription amount, the amount of subscriptions to be accepted, and the order in which subscriptions are accepted may be altered by the Corporation from time to time in its sole discretion. For the Corporation to qualify under the Code for taxation as a “real estate investment trust,” after the first taxable year for which we made an election to be taxed as a REIT, the Corporation must have at least 100 stockholders during 335 days of any taxable year, and no more than 50% of the value of the outstanding capital stock may be owned by five or fewer persons during the last half of a taxable year. To preserve the Corporation’s REIT tax qualification, no investor, directly or indirectly, may own more than 9.8% of the capital stock outstanding, except with the prior approval of the Board subject to restrictions imposed to preserve the Corporation’s REIT status. Accordingly, the Corporation will adjust the procedures for accepting subscriptions, and requests for transfers and redemptions, from time to time as it deems necessary to comply with the REIT rules under the Code. Suitability Criteria An investment in shares of our common stock is suitable only for persons who have adequate financial means, desire a relatively long-term investment and will not need immediate liquidity of their investment. To purchase our common stock an investor must represent in the Subscription Agreement that the investor has received this Memorandum, is an “accredited investor” as such term is currently defined in Regulation D, and: x has a net worth at the time of purchase (or joint net worth with a spouse) in excess of $1 million; or x earned income during the preceding two years in excess of $200,000 per year (or $300,000 jointly with an investor’s spouse) and reasonably expects income at that level in the current year; or x is an entity (a corporation, partnership, trust, limited liability company or entity under Section 501(c)(3) of the Code), with total assets in excess of $5 million; or x is an entity, all the beneficial owners of which are accredited investors. As used above, the term “net worth” means the excess of total assets over total liabilities. In calculating net worth, an investor must exclude the value of the investor’s primary residence as an asset and exclude any indebtedness secured by the primary residence, up to its fair market value. However, the amount of indebtedness secured by the primary residence in excess of the fair market value of the residence should be considered a liability and deducted from an investor’s net worth. In addition, if the amount of indebtedness secured by an investor’s primary residence is increased within 60 days prior to a sale of securities in connection with this Offering other than as a result of purchasing a new principal residence, the amount of the increase should be included as a liability for purposes of calculating an investor’s net worth, even if the total indebtedness on the primary residence remains below its fair market value. Prospective investors residing in jurisdictions outside New York State may be asked to meet certain additional suitability standards. In the case of sales to fiduciary accounts, these suitability standards must be met by the fiduciary account, by the person who directly or indirectly supplied the funds for the purchase of our common stock if such person is the fiduciary or by the beneficiary of the account. If an investor invests the assets of a pension, profit-sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in our common stock, the investor should be satisfied that, among other things: x the investment is consistent with the investor’s fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the Code; - 62 CONFIDENTIAL 4821-2485-6879.12 x the investment is made in accordance with the documents and instruments governing the investor’s plan or Individual Retirement Account (“IRA”), including the plan’s investment policy; x the investment satisfies the prudence and diversification requirements of ERISA; x the investment will not impair the liquidity of the plan or IRA; x the investment will not produce unrelated business taxable income for the plan or IRA; x the investor will be able to value the assets of the plan annually in accordance with ERISA requirements; and x the investor’s investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code. The investor should consult knowledgeable advisors in making the necessary determinations. PATRIOT Act Representations Each investor will be required to represent that the investor is not, nor is he acting as an agent, representative, intermediary or nominee for, a person identified on the list of blocked persons maintained by the Office of Foreign Asset Control, U.S. Department of Treasury, and the investor has complied with all applicable U.S. laws, regulations, directives and executive orders relating to anti-money laundering, including but not limited to the following laws: (1) the Sharing and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56; and (2) Executive Order 13224 (Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) of September 23, 2001. We may seek additional information from prospective investors with respect to these matters and with respect to sources of funds for investment to satisfy our obligations under the PATRIOT Act and other applicable laws. Minimum Investment The shares of common stock of the Corporation are currently being offered at $54.00 per share (until adjusted further on review by the Independent Directors Committee). As of July 2, 2016 the minimum investment is 2,000 shares (or $108,000). Shares purchased through an investment advisor may be purchased at 50% of the minimum investment. The Asset Manager reserves the right to lower the minimum investment in limited circumstances to an amount of not less than $54,000 (or lesser amount approved by our Independent Directors Committee). How to Subscribe Investors who meet the applicable suitability standards and minimum purchase requirements described in the “Suitability Criteria” section of this Memorandum may purchase shares of common stock. Any investor in our common stock must: 1. Carefully read the Memorandum, and any current supplement, as well as any documents described in the Memorandum which you have requested. Consult with your tax, legal and financial advisors. 2. Complete and sign the Subscription Agreement accompanying this Memorandum as Exhibit E, specifying the total purchase price for the shares which you desire to purchase. Be sure to include complete contact and tax information. 3. Complete and sign the “Accredited Investor Status” questionnaire attached to the Subscription Agreement. 4. Complete and sign the “Irrevocable Proxy” attached to the Subscription Agreement. - 63 CONFIDENTIAL 4821-2485-6879.12 5. Complete and sign the Form W-9 included with the Subscription Agreement. 6. Carefully review the Distribution Reinvestment Plan included with the Subscription Agreement. If you elect to participate in the Distribution Reinvestment Plan, complete and sign the Election to Participate form included with the Plan. 7. If you wish, complete the “Transfer on Death Designation Form”. 8. At least 10 days prior to the closing date, the Corporation will notify each investor of the portion of the purchase price it will accept at that closing. Please deliver a check to Royal Oak Realty Trust Inc., 1870 South Winton Road, Suite 10, Rochester, New York 14618, for such amount at least 2 business days prior to the closing date specified in the notice. PLEASE NOTE: Even though the Corporation may not request the full amount of the purchase price of your subscription at the first or any subsequent closing, your obligation to pay the full amount on request is legally binding, unless the Corporation fails to request payment of some portion of the purchase price subscribed for within six months of the first closing date after receipt of your completed Subscription Agreement. By executing the Subscription Agreement, you attest to meeting the suitability standards as provided in the “Suitability Criteria” section of the Memorandum and as stated in the Subscription Agreement and agree to be bound by the terms of the Subscription Agreement. If you will be at another address near the time of the proposed closing, please let the officers of the Corporation know so that you can be reached with notice of the amount of your purchase price to be accepted at that closing and the time and place your check should be delivered. If any information about your “accredited investor” status changes prior to your delivery of any check for the purchase price of shares of common stock, please notify the President of the Corporation in the manner described in the Subscription Agreement. - 64 CONFIDENTIAL 4821-2485-6879.12 Federal Income Tax Considerations The following discussion summarizes certain federal income tax considerations related to us, our investors and our treatment as a REIT. It is not intended as a detailed description of the federal income tax consequences applicable to a particular stockholder in view of such stockholder’s particular circumstances, or certain stockholders subject to special treatment under the federal income tax laws (such as insurance companies, financial institutions, broker-dealers and, except to the extent discussed below, tax-exempt organizations and non-U.S. persons). This summary is based upon the Code, Treasury Regulations, or Regulations, current positions of the Internal Revenue Service, or IRS, contained in Revenue Rulings, Revenue Procedures and other administrative actions and existing judicial decisions in effect as of the date of this Memorandum, and only addresses stockholders who hold common stock as “capital assets” within the meaning of Section 1221 of the Code, or the Code). This discussion does not address state, local or non-U.S. tax considerations. The following information is based on the current Code, current, temporary and proposed Treasury regulations, the legislative history of the Code, current administrative interpretations of the IRS, including its practices and policies as endorsed in private letter rulings, which are not binding on the IRS, and existing court decisions. Future legislation, regulations, administrative interpretations and court decisions could change current law or adversely affect existing interpretations of current law. Any change could apply retroactively. We have not obtained any rulings from the IRS concerning the tax treatment of the matters discussed below. The statements in this discussion could be challenged by the IRS and a court could agree with the IRS. EACH PROSPECTIVE INVESTOR SHOULD CONSULT THE INVESTOR’S PERSONAL TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE AND LOCAL INCOME, NON-U.S. AND OTHER TAX CONSEQUENCES ARISING FROM THE PURCHASE OF THE SHARES. NOTHING IN THIS MEMORANDUM OR ANY OTHER COMMUNICATION FROM US, OUR AFFILIATES, EMPLOYEES OR ANY PROFESSIONAL ASSOCIATED WITH THIS OFFERING SHOULD BE CONSTRUED AS LEGAL OR TAX ADVICE TO A POTENTIAL INVESTOR. A POTENTIAL INVESTOR SHOULD BE AWARE THAT THE IRS MAY NOT AGREE WITH ALL TAX POSITIONS TAKEN BY US AND THAT LEGISLATIVE, ADMINISTRATIVE OR JUDICIAL DECISIONS MAY REDUCE OR ELIMINATE ANTICIPATED TAX BENEFITS. Federal Income Taxation of the Corporation Beginning with our taxable year ended December 31, 2014, we elected to be taxed as a REIT under Sections 856 through 860 of the Code. We believe that beginning with that taxable year we have been organized and have operated in a manner to qualify for taxation as a REIT under the Code, and we intend to continue to operate in such a manner. We can provide no assurance, however, that we have operated or will operate in a manner so as to qualify or remain qualified as a REIT. The sections of the Code relating to qualification and operation as a REIT are highly technical and complex. The following discussion sets forth the material aspects of the Code Sections that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, relevant rules and regulations and administrative and judicial interpretations of Code provisions and regulations. We have not requested a ruling from the IRS with respect to any issues relating to our qualification as a REIT, and cannot provide any assurance that the IRS will not challenge our REIT status. In addition, our qualification as a REIT depends, among other things, upon our meeting the various qualification tests, imposed by the Code discussed below, including asset diversification, distribution levels and diversity of stock ownership each year. REITs are not generally subject to federal income tax on the income they distribute to their stockholders. To the extent that as a REIT we are not subject to income tax on the income we distribute, we will avoid “double taxation” at both the corporate and stockholder level characteristic of ownership of stock in a C-corporation. We will, however, be subject to federal tax in the following circumstances: x Any undistributed REIT taxable income, including undistributed net capital gains, will be taxed at regular corporate rates. - 65 CONFIDENTIAL 4821-2485-6879.12 x Any items of tax preference may be subject to the “alternative minimum tax.” x Any net income from “foreclosure property” (generally property we acquire through foreclosure or after default on a loan secured by the property or a lease of the property) primarily for sale to customers in the ordinary course of business and other non-qualifying income from foreclosure property will be subject to tax at the highest corporate income tax rate. x Any net income from prohibited transactions (which are, in general, certain sales or other dispositions of property, other than foreclosure property, that is held primarily for sale to customers in the ordinary course of business), will be subject to a 100% tax. x If we are able to maintain our qualification as a REIT despite any failure to satisfy either the 75% or 95% gross income test (discussed below), we will be subject to a 100% tax on the net income attributable to the greater of (i) the amount by which we fail the 75% gross income test or (ii) the amount by which we fail the 95% gross income test, in either case multiplied by a fraction intended to reflect our profitability. x If we maintain our qualification as a REIT, despite any failure to satisfy (i) the REIT asset tests (discussed below), then we will have to pay a tax equal to the greater of $50,000 or the highest corporate income tax rate multiplied by the net income generated by the non-qualifying assets during the period of time we failed to satisfy the asset tests, or (ii) REIT requirements other than the gross income tests and the asset tests, we will have to pay $50,000 for each other failure. x Any failure to distribute each year at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, will be subject to a 4% excise tax on the excess of the required distribution over the sum of the amounts actually distributed and retained amounts on which we pay income tax at the corporate level; x Any acquisition of assets from a corporation generally subject to full corporate-level tax in a merger or other transaction in which our initial basis in the assets is determined by reference to the transferor corporation’s basis in the assets, the fair market value of the assets acquired in any such transaction exceeds the aggregate basis of such assets, and we subsequently recognize gain on the disposition of any such asset during the 10-year period beginning on the date on which we acquired the asset, will generally be subject to tax at the highest regular corporate income tax rate on the lesser of the amount of gain that we recognize at the time of the sale or disposition and the amount of gain that we would have recognized if we had sold the asset at the time we acquired the asset, pursuant to guidelines issued by the IRS, or the Built-In Gain Rules. x Any transactions that are not at arm’s length with any “taxable REIT subsidiaries” will be subject to a 100% tax. Requirements for Qualification of REIT In order to qualify as a REIT, we must elect to be treated as a REIT and meet certain requirements related to our organization, income, assets and distributions. Organizational Requirements The Code defines a REIT as a corporation, trust or association that: (1) is managed by one or more trustees or directors; (2) has transferable shares or transferable certificates of beneficial ownership; (3) would be taxable as a domestic corporation but for Sections 856 through 860 of the Code; - 66 CONFIDENTIAL 4821-2485-6879.12 (4) is neither a financial institution nor an insurance company within the meaning of the applicable provisions of the Code; (5) has at least 100 persons as beneficial owners; (6) during the last half of each taxable year, is not closely held, i.e., not more than 50% of the value of its outstanding stock is owned, directly or indirectly, by five or fewer “individuals,” as defined in the Code to include certain entities; (7) files an election or continues such election to be taxed as a REIT on its return for each taxable year; and (8) meets other tests described below, including with respect to the nature of its assets and income and the amount of its distributions. The Code provides that conditions (1) through (4) must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months. Conditions (5) and (6) do not apply for the first taxable year for which we make an election to be taxed as a REIT. For purposes of condition (6), an “individual” generally includes a supplemental unemployment compensation benefit plan, a private foundation or a portion of a trust permanently set aside or used exclusively for charitable purposes, but does not include a qualified pension plan or profit sharing trust. Our Charter currently includes certain restrictions regarding the transfer of our common stock, which are intended to assist us in continuing to satisfy conditions (5) and (6). If we comply with all the requirements for ascertaining the ownership of our outstanding stock in a taxable year and have no reason to know that we have violated condition (6), we will be deemed to have satisfied condition (6) for that taxable year. In addition, a corporation generally may not elect to become a REIT unless its taxable year is the calendar year. We satisfy this requirement. If a REIT owns a corporate subsidiary that is a “qualified REIT subsidiary,” the separate existence of that subsidiary will be disregarded for federal income tax purposes. Generally, a qualified REIT subsidiary is a corporation, other than a taxable REIT subsidiary, all of the capital stock of which is owned by the REIT. All assets, liabilities and items of income, deduction and credit of the qualified REIT subsidiary will be treated as assets, liabilities and items of income, deduction and credit of the REIT itself. Thus, in applying the requirements described herein, any qualified REIT subsidiary that we own will be ignored for federal income tax purposes and all assets, liabilities and items of income, deduction and credit of such subsidiary will be treated as our assets, liabilities and items of income, deduction and credit, although the subsidiary may be subject to state and local income tax in some states. Unincorporated domestic entities that are wholly owned by a REIT, including single-member limited liability companies, are also generally disregarded as separate entities for federal income tax purposes, including for purposes of the REIT income and asset tests. A REIT is also permitted to own up to 100% of the stock of one or more “taxable REIT subsidiaries.” The subsidiary and the REIT must jointly elect to treat the subsidiary as a taxable REIT subsidiary. In addition, if a taxable REIT subsidiary owns, directly or indirectly, securities representing 35% or more of the vote or value of a subsidiary corporation, that subsidiary will automatically be treated as a taxable REIT subsidiary of the parent REIT. A taxable REIT subsidiary is subject to federal, state and local income tax (where applicable), as a regular “C” corporation. Generally, a taxable REIT subsidiary may earn income that would not be qualifying income under the REIT income tests if earned directly by the parent REIT. However, several provisions regarding the arrangements between a REIT and its taxable REIT subsidiary ensure that the taxable REIT subsidiary will be subject to an appropriate level of federal income tax. For example, the Code limits the ability of a taxable REIT subsidiary to deduct interest payments in excess of a certain amount made to its parent REIT. In addition, the Code imposes a 100% tax on transactions between a taxable REIT subsidiary and its parent REIT or the REIT’s tenants that are not conducted on an arm’s-length basis. Moreover, the value of securities of taxable REIT subsidiaries held by the REIT cannot be worth more than 25% of the REIT’s total asset value. We can give an investor no assurance that - 67 CONFIDENTIAL 4821-2485-6879.12 any taxable REIT subsidiaries that we form will not be limited in their ability to deduct interest payments (if any) made to us. We also cannot assure an investor that the IRS would not seek to impose a 100% tax on services performed by our taxable REIT subsidiaries for our tenants, or on a portion of the payments received by us from, or expenses deducted by, our taxable REIT subsidiaries. In the case of a REIT that is a member of a limited liability company, or LLC, the REIT will be deemed to own its proportionate share (based on its capital interest in the LLC and any debt securities issued by such LLC held by the REIT) of the assets of the LLC and will be deemed to be entitled to the income of the LLC attributable to such share. In addition, the character of the assets and gross income of the LLC retain the same character in the hands of the REIT. Thus, our proportionate share of the assets, liabilities and items of income of the Operating Company are treated as our assets, liabilities and items of income for purposes of applying and meeting the various REIT requirements. Income Test Requirements To maintain qualification as a REIT, on an annual basis we must meet the following two gross income requirements: x 75% of our gross income (excluding gross income from prohibited transactions) must be derived directly or indirectly from investments relating to real property, including investments in other REITs or mortgages on real property (including “rents from real property” and, in certain circumstances, interest from such mortgages), and certain temporary investments (as discussed further below) (collectively, “Real Property Investments”); and x 95% of our gross income (excluding gross income from prohibited transactions) must be derived from Real Property Investments and from dividends, interest or gain from the sale or disposition of stock or securities. We may invest proceeds from this Offering in liquid assets such as bank deposits, government securities or certificates of deposit prior to our investment in real properties. Any earnings from these assets qualify as income under the 75% gross income test for one year of our receipt of the proceeds. If we do not subsequently invest the proceeds from this Offering in real properties within this one-year period, we may invest in less liquid investments such as certain mortgage-backed securities or shares in other REITs in order to satisfy the 75% gross income test. To comply with this one-year requirement, we intend to track the receipt and investment of the Offering proceeds. As the IRS has not issued any rulings or regulations governing such tracking, however, we cannot provide any assurance that the IRS will agree with our methodology in this regard. In order to satisfy the gross income requirements any “rents from real property” received must meet the following conditions: x the amount of rent must not be based in whole or in part on the income or profits of any person, but can be based on a fixed percentage of gross receipts or gross sales; x the rent cannot be from a tenant of which we and our affiliates own 10% or more of (i) the total combined voting power of all classes of voting stock, or total value of shares of all classes of stock, if a corporate tenant, or (ii) the interests in total assets or net profits of an entity, if not a corporate tenant; x the rent cannot be attributable to personal property unless it is leased in connection with real property and the rent attributable to such personal property is less than or equal to 15% of the total rent received under the lease based on the respective fair market values; and x the rent cannot be attributable to services furnished or rendered in connection with the rental of real property, unless such services are customarily provided in the geographic area in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. - 68 CONFIDENTIAL 4821-2485-6879.12 For purposes of satisfying the gross income requirements, we may include rent that is attributable to customary services that are not provided to a particular tenant (e.g., furnishing heat and light, the cleaning of public entrances and the collection of trash). Further, the rent should not cease to qualify merely because we perform a de minimis amount of services for a tenant that are not usually and customarily provided, as long as the value of such services (valued at not less than 150% of our direct cost of performing such services) is less than 1% of the total income derived from such property. We cannot, however, include rent attributable to non-de minimis services that are provided primarily for the convenience of a tenant unless such services are provided by an independent contractor or a separate taxable subsidiary. To qualify, any independent contractor providing services must be adequately compensated by us and we cannot derive any income from the independent contractor nor have 35% or more of our ownership, held directly or indirectly, by the independent contractor or its stockholders. We do not anticipate deriving rent attributable to personal property leased in connection with real property that exceeds 15% of the total rent attributable to such lease or receiving rent from related-party tenants. Although we do not directly provide, or indirectly provide through the Operating Company, any services at our properties, we may provide certain services with respect to our properties in the future. We believe that these services will only be of the type that are usually or customarily rendered in connection with the rental of space for occupancy and that are not otherwise rendered to the tenants. Therefore, we believe that the provision of such customary services will not cause rents received with respect to our properties to fail to qualify as “rents from real property.” Noncustomary services and services rendered primarily for the tenants’ convenience will be provided by an independent contractor or a taxable REIT subsidiary to avoid jeopardizing the qualification of rent as “rents from real property.” Except for amounts received with respect to certain investments of cash reserves, we anticipate that substantially all of our gross income will be derived from sources that will allow us to satisfy the income tests described above; however, we can make no assurance in this regard. If we are eligible for relief under the Code, we may still qualify as a REIT despite our failure of any gross income test. Such relief may be available if our failure to meet such gross income test is due to reasonable cause and not willful neglect and we properly disclose the failure to the IRS. We cannot, however, make any assurance that such relief will be available, and even if available, a 100% tax would be imposed on the greater of the amount by which we fail the 75% gross income test or the amount by which we fail the 95% gross income test as multiplied by a fraction intended to reflect our profitability. Asset Test Requirements At the close of each quarter of our taxable year, we must also satisfy the following four tests related to the nature and diversification of our assets: x at least 75% of the value of our total assets must be represented by real estate assets, cash and cash items (including receivables) and government securities; x no more than 25% our total assets can consist of securities (other than those securities includible in the 75% asset test); x no more than 20% of the value of our total assets can be represented by securities of one or more taxable REIT subsidiaries; and x with the exception of stock or securities of REITs, qualified REIT subsidiaries, taxable REIT subsidiaries, equity interests in partnerships and other securities that qualify as “real estate assets” for purposes of the 75% asset test, we may not own: o securities of any one issuer whose value exceeds 5% of the value of our total assets; o more than 10% of any one issuer’s outstanding voting securities; and - 69 CONFIDENTIAL 4821-2485-6879.12 o more than 10% of the value of the outstanding securities of any one issuer. Securities for purposes of the asset tests may include debt securities. The 10% value limitation will not apply, however, to: (i) any security qualifying for the “straight debt exception” discussed below, (ii) any loan to an individual or an estate; (iii) any rental agreement described in Section 467 of the Code, other than with a “related person”; (iv) any obligation to pay qualifying rents from real property; (v) certain securities issued by a State or any political subdivision thereof, the District of Columbia, a foreign government, or any political subdivision thereof, or the Commonwealth of Puerto Rico; (vi) any security issued by a REIT; and (vii) any other arrangement that, as determined by the Secretary of the Treasury of the United States, is excepted from the definition of a security. For purposes of the 10% value test, any debt instrument issued by a partnership (other than straight debt or another excluded security) will not be considered a security issued by the partnership if at least 75% of the partnership’s gross income is derived from sources that would qualify for the 75% REIT gross income test and any debt instrument issued by a partnership (other than straight debt or other excluded security) will not be considered a security issued by the partnership to the extent of the REIT’s interest as a partner in the partnership. There are special look-through rules for determining a REIT’s share of securities held by a partnership in which the REIT holds an interest. The straight debt exception starts with the definition of straight debt in Section 1361 of the Code (as modified) but permits certain contingent payments. The timing of payments of principal or interest may be contingent if such contingency causes specified limited changes to the debt’s effective yield to maturity or the REIT does not hold more than $1 million (by face amount or issue price) of the issuer’s debt instruments and not more than 12 months of unaccrued interest can be required to be prepaid on such debt instruments. In addition, the time or amount of payments may be contingent if such contingency arises only upon default or upon the issuer’s exercise of a prepayment right and such contingencies are consistent with customary commercial practice. The straight debt exception will not apply to any securities issued by a corporation or partnership (such as an LLC for federal tax purposes) if the REIT and any controlled taxable REIT subsidiaries also own securities of such issuer that would not qualify for the straight debt exception and that are worth more than 1% of the issuer’s outstanding securities. If we meet the asset tests at the close of any quarter, we do not lose our status as a REIT for failure to satisfy the asset tests in a subsequent quarter solely due to a change in asset values. If our failure to satisfy the asset tests were to result from an acquisition of securities or other property during a quarter, we can cure the failure by disposing of a sufficient amount of non-qualifying assets within 30 days after the close of that quarter. Even after the 30-day cure period, if we fail the 5% securities limitation or either of the 10% securities limitations, we may avoid disqualification as a REIT by disposing of a sufficient amount of non-qualifying assets, provided the assets causing the violation do not exceed the lesser of 1% of our assets at the end of the relevant quarter or $10,000,000 and such disposition occurs within six months of the last day of the quarter in which violation is first identified. If we were to violate any other asset test due to reasonable cause, we may avoid disqualification after the 30-day cure period by taking certain steps including the disposition of sufficient non-qualifying assets within the six-month period previously described, paying a tax equal to the greater of $50,000 or the highest corporate tax rate multiplied by the net income generated by the non-qualifying assets during the period of time that the assets were held as nonqualifying assets, and filing a schedule with the IRS that describes the non-qualifying assets. We intend to maintain adequate records of the value of our assets to ensure compliance with the asset tests and to take such other actions within 30 days after the close of any quarter as necessary to cure any noncompliance. Annual Distribution Requirements To qualify for taxation as a REIT, we must meet the following annual distribution requirements: x We must distribute to our stockholders an amount (other than capital gain distributions) at least equal to the sum of: (i) 90% of our “REIT taxable income” (computed without regard to the dividends-paid deduction and by excluding our net capital gain) and (ii) 90% of the net income, if any, from foreclosure property in excess of the excise tax on income from foreclosure property, minus the sum of certain items of non-cash income. We are required to pay such distributions in the taxable year to which they relate. Dividends distributed in the subsequent year, however, will be treated as if - 70 CONFIDENTIAL 4821-2485-6879.12 distributed in the prior year for purposes of such prior year’s 90% distribution requirement if one of the following two sets of criteria are satisfied: (a) the dividends were declared in October, November or December, the dividends were payable to stockholders of record on a specified date in such month, and the dividends were actually distributed during January of the subsequent year; or (b) the dividends were declared before we timely filed our federal income tax return for such year, the dividends were distributed in the 12-month period following the close of the prior year and not later than the first regular dividend payment after such declaration, and we elected on our tax return for the prior year to have a specified amount of the subsequent dividend treated as if distributed in the prior year. Even if we satisfy this annual distribution requirement, we will be subject to tax at regular corporate tax rates to the extent that we do not distribute all of our net capital gain or “REIT taxable income” as adjusted. x We must distribute during each calendar year at least the combined sum of 85% of our ordinary income for that year; 95% of our capital gain net income for that year; and any undistributed taxable income from prior periods. In the event that we do not satisfy this distribution requirement, we will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. For these purposes, dividends that are declared in October, November or December of the relevant taxable year, are payable to stockholders of record on a specified date in such month and are actually distributed during January of the subsequent year are treated as distributed in the prior year. x We may not dispose of any asset that is subject to the Built-In Gain Rules during the 10-year period beginning on the date on which we acquired the asset or, if we do, we will be required to distribute at least 90% of the Built-In Gain (after tax), if any, recognized on the disposition of the asset. We intend to make timely distributions sufficient to satisfy the annual distribution requirements and to avoid the 4% excise tax. In this regard, the Operating Company’s operating agreement authorizes its managing member to take such steps as may be necessary to cause the Operating Company to distribute to its members an amount sufficient to permit us to meet these distribution requirements. In order for us to deduct dividends we distribute to our stockholders, such distributions must not be “preferential” within the meaning of Section 562(c) of the Code. Every holder of a particular class of stock must be treated the same as every other holder of shares of such class, and no class of stock may be treated otherwise than in accordance with its dividend rights as a class. We do not intend to make any preferential dividends. We expect that our REIT taxable income will be less than our cash flow due to the allowance of depreciation and other non-cash charges in computing REIT taxable income. Accordingly, we anticipate that we generally will have sufficient cash or liquid assets to enable us to satisfy the 90% distribution requirement. It is possible, however, that we may not have sufficient cash or other liquid assets to meet the 90% distribution requirement or to distribute such greater amount as may be necessary to avoid income and excise tax. In such event, we may find it necessary to borrow funds to pay the required distribution or, if possible, pay taxable stock dividends in order to meet the distribution requirement. In the event that we are subject to an adjustment to our REIT taxable income (as defined in Section 860(d)(2) of the Code) resulting from an adverse determination by either a final court decision, a closing agreement between us and the IRS under Section 7121 of the Code, an agreement as to tax liability between us and an IRS district director or a statement by us attached to an amendment or supplement to our federal income tax return, we may be able to correct any resulting failure to meet the 90% annual distribution requirement by paying “deficiency dividends” to our stockholders that relate to the adjusted year but that are paid in the subsequent year. To qualify as a deficiency dividend, the distribution must be made within 90 days of the adverse determination and we also must satisfy certain other procedural requirements. If the statutory requirements of Section 860 of the Code are satisfied, a deduction is allowed for any deficiency dividend subsequently paid by us to offset an increase in our REIT taxable income resulting from an adverse determination. We, however, will be required to pay statutory interest on the amount of any deduction taken for deficiency dividends to compensate for the deferral of the tax liability. - 71 CONFIDENTIAL 4821-2485-6879.12 Earnings and Profits Although not defined in the Code, “earnings and profits” is a concept used extensively throughout corporate tax law and each corporation maintains an “earnings and profits” account to determine whether a distribution originates from corporate earnings or another source. Distributions generally decrease earnings and profits while income generally increases earnings and profits. If a corporation has positive earnings and profits, distributions generally will be considered to come from corporate earnings. If a corporation has no earnings and profits, distributions generally will be considered a return of capital and then a capital gain. At the close of any taxable year, a REIT cannot have accumulated C corporation earnings and profits and remain qualified as a REIT. Failure to Qualify and Statutory Relief In addition to the statutory relief provisions discussed above, the American Jobs Creation Act of 2004 created additional relief provisions for REITs. If we fail to satisfy one or more of the requirements for qualification as a REIT, other than the income tests and asset tests discussed above, we will not lose our status as a REIT if our failure was due to reasonable cause and not willful neglect and we have paid a penalty of $50,000 for each such failure. If the statutory relief provisions do not apply to our failure to qualify as a REIT, we will be subject to regular corporate tax rates (including any applicable alternative minimum tax) on our taxable income. Distributions to stockholders in any year in which we fail to qualify will not be deductible by us, but we also will not be required to make distributions during those years. If we fail to qualify as a REIT and have positive current or accumulated earnings and profits, our distributions to stockholders will be dividends that are eligible to be taxed to individuals at rates which are currently less than the highest ordinary income tax rates. Subject to certain limitations of the Code, corporate distributees may be eligible for the dividends-received deduction. Unless we are entitled to relief under specific statutory provisions, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be entitled to such statutory relief. Sale-Leaseback Transactions Some of our investments may be in the form of sale-leaseback transactions. In most instances, depending on the economic terms of the transaction, we will be treated for federal income tax purposes as either the owner of the property or the holder of a debt secured by the property. We do not expect to request an opinion of counsel concerning the status of any leases of properties as true leases for federal income tax purposes. The IRS may challenge a specific sale-leaseback transaction that we have treated as a true lease and instead treat it as a financing arrangement or loan for federal income tax purposes. In such event, each such loan would likely be viewed as secured by real property to the extent of the fair market value of the underlying property for purposes of the asset tests and the 75% gross income test. We expect that, for this purpose, the fair market value of the underlying property would be determined without taking into account our lease. If a sale-leaseback transaction were so recharacterized, we might fail to satisfy the asset tests or the income tests and, consequently, lose our REIT status effective with the year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated, which might also cause us to fail to meet the distribution requirement for a taxable year. Taxation of U.S. Stockholders For purposes of this Memorandum, we define a “U.S. Stockholder” to mean a holder of common stock that for federal income tax purposes: x is a citizen or resident of the United States; x is a corporation (including an entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States or any of its political subdivisions; - 72 CONFIDENTIAL 4821-2485-6879.12 x is an estate the income of which is subject to federal income taxation regardless of its source; or x is a trust, provided that a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust. If an entity classified as a partnership for federal income tax purposes holds our stock, the tax treatment of a partner will depend on the status of the partner and on the activities of the partnership. Partners of partnerships holding our stock should consult their tax advisors. Distributions Generally Distributions to U.S. Stockholders, other than capital gain dividends (which are discussed below), will constitute taxable dividends up to the amount of our positive current or accumulated earnings and profits. In general, dividends received from REITs are not eligible to be taxed at the preferential qualified dividend income rates applicable to individuals who receive dividends from taxable C corporations. An exception, however, is when individual stockholders are taxed at such rates on dividends designated by and received from REITs to the extent that the dividends are attributable to: (i) income that the REIT previously retained in a prior year and on which it was subject to corporate level tax, (ii) dividends received by the REIT from taxable corporations (including taxable REIT subsidiaries), or (iii) income from sales of appreciated property subject to the Built-in Gain Rules. Because a REIT is not subject to tax on income distributed to its stockholders, the distributions made to corporate stockholders are not eligible for the dividends-received deduction. To the extent that we make a distribution in excess of our positive current or accumulated earnings and profits, the distribution will be treated first as a tax-free return of capital (reducing the tax basis in the U.S. Stockholder’s shares of our common stock) and then the distribution in excess of the tax basis will be taxable as gain realized from the sale of the common stock. Dividends we declare in October, November or December of any year payable to stockholders of record on a specified date in any such month are treated as both paid by us and received by the stockholders on December 31 of that year, provided that we actually pay the dividends during January of the following calendar year. Capital Gain Distributions Distributions to U.S. Stockholders that we properly designate as capital gain dividends will be treated as long-term capital gains (to the extent they do not exceed our actual net capital gain) for the taxable year without regard to the period for which the U.S. Stockholder has held the stock. However, corporate U.S. Stockholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. Capital gain dividends are not eligible for the dividends-received deduction for corporations. In the case of individuals, long-term capital gains are generally taxable at a federal rate of 15% (20% for higher income individuals, as described below), except that capital gains attributable to the sale of depreciable real property held for more than 12 months are subject to a 25% maximum federal income tax rate to the extent of previously claimed depreciation deductions. The American Taxpayer Relief Act of 2012, signed into law by President Obama on January 2, 2013, among other things, increased the maximum federal rate on long-term capital gains to 20% for certain higher-income individuals (married couples filing joint returns with taxable income in excess of $450,000, heads of households with taxable income in excess of $425,000 and other individuals with taxable income in excess of $400,000). We may elect to retain and pay federal income tax on any net long-term capital gain. In this instance, U.S. Stockholders will include in their income their proportionate share of the undistributed long-term capital gain. The U.S. Stockholders also will be deemed to have paid their proportionate share of tax on such long-term capital gain and, therefore, will receive a credit or refund for the amount of such tax. In addition, the basis of the U.S. Stockholders’ shares will be increased in an amount equal to the excess of the amount of capital gain included in his or her income over the amount of tax he or she is deemed to have paid. Unearned Income Medicare Tax Beginning in 2013, high-income U.S. individuals, estates, and trusts will be subject to an additional 3.8% tax on their net investment income. The Health Care and Education Reconciliation Act of 2010, which amended the Patient Protection and Affordable Care Act, imposes this additional 3.8% tax on net investment income in tax years - 73 CONFIDENTIAL 4821-2485-6879.12 beginning after December 31, 2012. “Net investment income” includes dividends and gains from sales of stock. For individuals, the tax will be 3.8% of the lesser of the individual’s net investment income or the excess of the individual’s modified adjusted gross income over $250,000 in the case of a married individual filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, or $200,000 in the case of a single individual. Certain Dispositions of Shares In general, U.S. Stockholders will realize capital gain or loss on the sale of common stock equal to the difference between (i) the amount of cash and the fair market value of any property received by the U.S. Stockholder on such disposition and (ii) the U.S. Stockholder’s adjusted basis of such common stock. Losses incurred on the sale or exchange of our common stock that a U.S. Stockholder holds for less than six months (after applying certain holding period rules) will be treated as long-term capital loss to the extent of any capital gain dividend the stockholder has received with respect to those shares. The applicable tax rate will depend on the U.S. Stockholder’s holding period in the asset (generally, if the U.S. Stockholder has held the asset for more than one year, it will produce long-term capital gain) and the U.S. Stockholder’s tax bracket. A capital gain tax rate of 25% (which is generally higher than the long-term capital gain tax rates for non-corporate stockholders) would apply to a portion of the capital gain realized by a non-corporate stockholder on the sale of common stock that would correspond to our “unrecaptured Section 1250 gain.” U.S. Stockholders should consult with their own tax advisors with respect to their capital gain tax liability. In general, any loss recognized by a U.S. Stockholder upon the sale or other disposition of common stock that the U.S. Stockholder has held for six months or less, after applying the holding period rules, will be treated as long-term capital loss to the extent of distributions received by the U.S. Stockholder from us that were required to be treated as long-term capital gains. If a U.S. Stockholder has shares of our common stock redeemed by us, such U.S. Stockholder will be treated as if such U.S. Stockholder sold the redeemed shares if all of such U.S. Stockholder’s shares of our common stock are redeemed or if such redemption is not essentially equivalent to a dividend within the meaning of Section 302(b)(1) of the Code or substantially disproportionate within the meaning of Section 302(b)(2) of the Code. If a redemption is not treated as a sale of the redeemed shares, it will be treated as a dividend distribution. U.S. Stockholders should consult with their tax advisors regarding the taxation of any particular redemption of our shares. Passive Activity Loss and Investment Interest Limitations U.S. Stockholders may not treat distributions we make to them or any gain from disposing of our common stock as passive activity income. Therefore, U.S. Stockholders will not be able to apply any “passive losses” against such income. Dividends we pay (to the extent they do not constitute a return of capital) generally will be treated as investment income for purposes of the investment interest limitation. Net capital gain from the disposition of our common stock (or capital gain dividends) generally will be excluded from investment income unless the stockholder elects to have such gain taxed at ordinary income rates. Treatment of Tax-Exempt Stockholders Distributions we make to a tax-exempt employee pension trust or other domestic tax-exempt employee pension trust or other domestic tax exempt stockholder will not constitute unrelated business taxable income (“UBTI”), unless the tax exempt stockholder has borrowed to acquire or carry our shares of common stock. Qualified trusts that hold more than 10% (by value) of the shares of pension-held REITs may be required to treat a certain percentage of such REIT’s distributions as UBTI. We expect that our ownership limitation will prevent us from becoming a pension-held REIT, unless our Board grants qualified trusts waivers from our ownership limitations. Information Reporting Requirements and Backup Withholding Tax U.S. Stockholders - 74 CONFIDENTIAL 4821-2485-6879.12 In general, information reporting requirements will apply to payments of distributions on our common stock and to payments of the proceeds of the sale of our common stock, unless an exception applies. Further, under certain circumstances, U.S. Stockholders may be subject to backup withholding at a rate of 28% on payments made with respect to, or cash proceeds of a sale or exchange of, our common stock. Backup withholding will apply only if: x the payee fails to furnish his or her taxpayer identification number (which, for an individual, would be his or her Social Security Number) to the payor as required; x the IRS notifies the payor that the taxpayer identification number furnished by the payee is incorrect; x the IRS has notified the payee that such payee has failed to properly include reportable interest and dividends in the payee’s return or has failed to file the appropriate return and the IRS has assessed a deficiency with respect to such underreporting; or x the payee has failed to certify to the payor, under penalties of perjury, that the payee is not subject to withholding. In addition, backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. U.S. Stockholders should consult their own tax advisors regarding their qualifications for exemption from backup withholding and the procedure for obtaining such an exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a U.S. Stockholder will be allowed as a credit against the U.S. Stockholder’s federal income tax liability and may entitle the stockholder to a refund, provided that the stockholder furnishes the required information to the IRS. Non-U.S. Stockholders Generally, information reporting will apply to payments of distributions on our common stock and backup withholding at a rate of 28% may apply, unless the payee certifies that he or she is not a U.S. person or otherwise establishes an exemption. The payment of the proceeds from the disposition of our common stock to or through the U.S. office of a U.S. or foreign broker will be subject to information reporting and, possibly, backup withholding, unless the nonU.S. Stockholder certifies as to his or her non-U.S. status or otherwise establishes an exemption and provided that the broker does not have actual knowledge that the stockholder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The proceeds of the disposition of our common stock by a non-U.S. Stockholder to or through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, if the broker is a U.S. person, a controlled foreign corporation for U.S. tax purposes or a foreign person 50% or more of whose gross income from all sources for specified periods is from activities that are effectively connected with a U.S. trade or business, information reporting generally will apply, unless the broker has documentary evidence as to the non-U.S. Stockholder’s foreign status and has no actual knowledge to the contrary. Applicable Treasury regulations provide presumptions regarding the status of stockholders when payments to the stockholders cannot be reliably associated with appropriate documentation provided to the payor. These Treasury regulations require some stockholders to have provided new certifications with respect to payments made after December 31, 2000. Because the application of these Treasury regulations varies depending on the stockholder’s particular circumstances, non-U.S. Stockholders should consult their tax advisors with regard to U.S. information reporting and backup withholding. Tax Aspects of the Operating Company General - 75 CONFIDENTIAL 4821-2485-6879.12 We expect that substantially all of our investments will be held through the Operating Company which was formed as a LLC. In general, a LLC is a “pass-through” entity that is not subject to federal income tax. Rather, members are allocated their proportionate share of the items of income, gain, loss, deduction and credit of a partnership and are potentially subject to tax thereon, without regard to whether the members receive distributions from the LLC. We include in our income our proportionate share of the Operating Company’s income, gain, loss, deduction and credit for purposes of the various REIT income tests and in the computation of our REIT taxable income. In addition, we include our proportionate share of the assets held by the Operating Company in the REIT asset tests. Tax Allocations with Respect to Our Properties When real property is contributed to the Operating Company in exchange for membership interests, the Operating Company will generally take a carryover basis in that property for tax purposes. That carryover basis is equal to the contributing member’s adjusted basis in the property rather than the fair market value of the property at the time of contribution. Pursuant to Section 704(c) of the Code, income, gain, loss and deduction attributable to such contributed property must be allocated in a manner such that the contributing member is charged with or benefits from the unrealized gain or unrealized loss associated with the property at the time of the contribution. The amount of such unrealized gain or unrealized loss generally is equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution (a “Book-Tax Difference”). Such allocations are solely for federal income tax purposes and do not affect the book capital accounts or other economic or legal arrangements among the members. Future contributions to the Operating Company may take the form of appreciated property. Consequently, the Operating Company’s operating agreement requires tax allocations be made in a manner consistent with Section 704(c) of the Code. In general, members who contribute their interests in properties to the Operating Company, or Contributing Members, will be allocated lower amounts of depreciation deductions for tax purposes than such deductions would be if determined on a pro rata basis. In addition, in the event of the disposition of any of the contributed assets that have a Book-Tax Difference, all taxable income attributable to such Book-Tax Difference generally will be allocated to the Contributing Members and we generally will be allocated only our share of capital gains attributable to appreciation, if any, occurring after the closing of the acquisition of such properties. This will tend to eliminate the Book-Tax Difference over the life of the Operating Company. However, the special allocation rules of Section 704(c) of the Code do not always entirely eliminate the Book-Tax Difference on an annual basis or with respect to a specific taxable transaction such as a sale. Thus, the carryover basis of the contributed assets in the hands of the Operating Company may cause us to be allocated lower depreciation and other deductions and cause Contributing Members to be allocated more taxable income. As a result, we could recognize taxable income in excess of distributed amounts, which might adversely affect our ability to comply with the REIT distribution requirements, and Contributing Members may realize income on the distribution of cash because their basis has not been increased sufficiently from income allocations. See “Annual Distribution Requirements.” With respect to any property purchased by the Operating Company, such property initially will have a tax basis equal to its fair market value and Section 704(c) of the Code will not apply. Basis in Operating Company Membership Interest Our adjusted tax basis in our interest in the Operating Company will generally be: x equal to the amount of cash and the basis of any other property that we contribute to the Operating Company; x increased by our allocable share of the Operating Company’s income and our allocable share of indebtedness of the Operating Company; and - 76 CONFIDENTIAL 4821-2485-6879.12 x reduced, but not below zero, by our allocable share of any losses suffered by the Operating Company, the amount of cash distributed to us, and constructive distributions resulting from a reduction in our share of indebtedness of the Operating Company. If the allocation of our distributive share of the Operating Company’s loss exceeds the adjusted tax basis of our membership interest in the Operating Company, the recognition of such excess loss will be deferred until such time and to the extent that we have an adjusted tax basis in our membership interest. To the extent that the Operating Company’s distributions, or any decrease in our share of the indebtedness of the Operating Company (such decreases being considered a cash distribution to the members), exceed our adjusted tax basis, such excess distributions (including such constructive distributions) will constitute taxable income to us. Such taxable income normally will be characterized as a capital gain if the membership interest in the Operating Company has been held for longer than one year, subject to the reduced tax rates described in “Taxation of U.S. Stockholders — Capital Gain Distributions.” Under current law, capital gains and ordinary income of corporations generally are taxed at the same marginal rates. Sale of the Properties Under applicable provisions of the Code regarding prohibited transactions by REITs, we will be subject to a 100% tax on any gain realized on the sale or other disposition of any property (other than foreclosure property) we own, directly or through a subsidiary entity, including the Operating Company, but excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. See “— Requirements for Qualification — Income Tests.” Under existing law, whether property is held as inventory or primarily for sale to customers in the ordinary course of the Operating Company’s trade or business is a question of fact that depends on all the facts and circumstances with respect to the particular transaction and property. We intend to avoid the 100% prohibited transaction tax by: (a) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary, (b) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary other than a taxable REIT subsidiary, will be treated as a prohibited transaction, or (c) structuring certain dispositions of our properties to comply with certain safe harbors available under the Code for properties held at least two years. No assurance, however, can be given that any particular property will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business. State and Local Tax We may be subject to state and local tax in various states and localities. Our stockholders may also be subject to state and local tax in various states and localities. The tax treatment to us and to our stockholders in such jurisdictions may differ from the federal income tax treatment described above. Consequently, before buying our common stock, a potential investor should consult a tax advisor regarding the effect of state and local tax laws on an investment in our common stock. Changes in Tax Laws The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could adversely affect our stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification. - 77 CONFIDENTIAL 4821-2485-6879.12 ERISA Considerations General The following is a summary of some non-tax considerations associated with an investment in our shares by tax-qualified pension, stock bonus or profit-sharing plans, employee benefit plans described in Section 3(3) and subject to Title I of ERISA, annuities described in Section 403(a) or (b) of the Code, an individual retirement account or annuity described in Sections 408 or 408A of the Code, an Archer MSA described in Section 220(d) of the Code, a health savings account described in Section 223(d) of the Code, or a Coverdell education savings account described in Section 530 of the Code, which are referred to as Plans and IRAs, as applicable. This summary is based on provisions of ERISA and the Code, including amendments thereto through the date of this prospectus, and relevant regulations and opinions issued by the Department of Labor, or DOL, and the IRS through the date of this prospectus. We can make no assurance that adverse tax decisions or legislative, regulatory or administrative changes that would significantly modify the statements expressed herein will not occur. Any such changes may or may not apply to transactions entered into prior to the date of their enactment. While each of the ERISA and Code issues discussed below may not apply to all Plans and IRAs, individuals making investment decisions with respect to Plans and IRAs should carefully review the rules and exceptions described below, and determine their applicability to their situation. In general, individuals making investment decisions with respect to Plans and IRAs should, at a minimum, consider: x whether the investment is in accordance with the documents and instruments governing such Plan or IRA; x whether the investment satisfies the prudence and diversification and other fiduciary requirements of ERISA, if applicable; x whether the investment will result in UBTI to the Plan or IRA (see “Federal Income Tax Considerations — Treatment of Tax-Exempt Stockholders”); x whether there is sufficient liquidity for the Plan or IRA, considering the minimum and other distribution requirements under the Code and the liquidity needs of such Plan or IRA, after taking this investment into account; x the need to value the assets of the Plan or IRA annually or more frequently; and x whether the underlying assets of the Company could be considered “plan assets” , which could constitute or give rise to a prohibited transaction or fiduciary breach under ERISA or the Code, if applicable. Additionally, individuals making investment decisions with respect to Plans and IRAs must remember that ERISA requires that the assets of an employee benefit plan must generally be held in trust, and that the trustee, or a duly authorized named fiduciary or investment manager, must have authority and discretion to manage and control the assets of an employee benefit plan. Plan Assets In the event that our properties and other assets were deemed to be assets of a Plan or IRA, referred to herein as “Plan Assets,” our directors would, and employees of our affiliates might be deemed fiduciaries of any Plans or IRAs investing as stockholders. If this were to occur, certain contemplated transactions between us and our directors and employees of our affiliates could be deemed to be “prohibited transactions.” Fiduciaries of a Plan that allow a prohibited transaction to occur may be required to reimburse the Plan for any losses suffered by the Plan as a result of the investment. In addition, each disqualified person (within the meaning of Section 4975 of the Code) involved could be subject to an excise tax equal to 15% of the amount involved in the prohibited transaction for each - 78 CONFIDENTIAL 4821-2485-6879.12 year the transaction continues and, unless the transaction is corrected within statutorily required periods, to an additional tax of 100%. Additionally, ERISA’s fiduciary standards applicable to investments by Plans would extend to our directors and possibly employees of our affiliates as Plan fiduciaries with respect to investments made by us, and the requirement that Plan Assets be held in trust could be deemed to be violated. Further, if our assets are deemed to be Plan Assets, an investment by a Plan or IRA in our shares might be deemed to result in an impermissible commingling of Plan Assets with other property. Under the Pension Protection Act of 2006 (the “PPA”), Section 3(42) of ERISA defines “Plan Assets” in accordance with DOL regulations with certain express exceptions. A DOL regulation, referred to in this discussion as the “Plan Asset Regulation,” as modified by the express exceptions noted in the PPA, provides guidelines as to whether, and under what circumstances, the underlying assets of an entity will be deemed to constitute Plan Assets. Under the Plan Asset Regulation, the assets of an entity in which a Plan or IRA makes an equity investment will generally be deemed to be assets of such Plan or IRA unless the entity satisfies one of the exceptions to this general rule. Generally, the exceptions require that the investment in the entity be one of the following: x in securities issued by an investment company registered under the Investment Company Act; x in “publicly offered securities,” defined generally as interests that are “freely transferable,” “widely held” and registered with the Securities and Exchange Commission; x in an “operating company,” which includes “venture capital operating companies” and “real estate operating companies;” or x in which equity participation by “benefit plan investors” is not significant. The Plan Asset Regulation provides that equity participation in an entity by benefit plan investors is “significant” if at any time 25% or more of the value of any class of equity interests is held by benefit plan investors. As modified by the PPA, a “benefit plan investor” is defined to mean an employee benefit plan subject to Part 4 of Title I of ERISA, any plan to which Section 4975 of the Code applies, and any entity whose underlying assets include plan assets by reason of a plan’s investment in such entity. We intend to restrict ownership of each class of equity interests held by benefit plan investors to an aggregate value of less than 25% and thus qualify for the exception for investments in which equity participation by benefit plan investors is not significant. In order to limit equity participation by benefit plan investors to less than 25%, each investor must disclose to the Company whether or not it is a benefit plan investor or otherwise using plan assets for its investment, and unless otherwise agreed to by the Company, no purchase by or proposed transfer of an interest in the Company will be permitted to the extent that such purchase or proposed transfer would result in benefit plan investors owning 25% or more of the Company. - 79 CONFIDENTIAL 4821-2485-6879.12 EXHIBIT A Most Recent Annual Consolidated Financial Statements of Royal Oak Realty Trust Inc. and Subsidiaries ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2015 AND 2014 TOGETHER WITH INDEPENDENT AUDITORS’ REPORT Rochester, New York INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Stockholders of Royal Oak Realty Trust Inc.: We have audited the accompanying consolidated financial statements of Royal Oak Realty Trust Inc. and subsidiaries (collectively, the “Company”), which comprise the consolidated balance sheets as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with the accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Royal Oak Realty Trust Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Other Matter - Basis of Accounting In our report dated March 12, 2015, we expressed an opinion on the 2014 consolidated financial statements presented in accordance with the basis of accounting the Company used for income tax purposes. During the year ended December 31, 2015, the Company changed its basis of accounting from the income tax basis of accounting to accounting principles generally accepted in the United States of America. The consolidated financial statements for 2014 have been restated to be in conformity with accounting principles generally accepted in the United States of America. April 25, 2016. ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2015 AND 2014 2015 2014 ASSETS INVESTMENT IN RENTAL PROPERTY: Accounted for using the operating method, net of accumulated depreciation Accounted for using the direct financing method $ 37,117,981 7,173,407 44,291,388 $ 34,788,653 34,788,653 4,236,222 32,358 266,824 199,924 2,904,842 1,420,906 9,061,076 2,202,306 18,486 127,499 86,598 3,180,561 842,061 6,457,511 $ 53,352,464 $ 41,246,164 $ $ 23,638,679 1,699,400 157,485 50,741 161,937 209,681 143,162 124,050 1,129,877 27,315,012 OTHER ASSETS: Cash Restricted cash Accrued rental income Prepaid expenses and other assets Intangible lease assets, net Lease acquisition costs, net TOTAL ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Mortgages payable, net of unamortized debt acquisition costs Line of credit, net of unamortized debt acquisition costs Accounts payable and other accrued expenses Accrued interest Due to related parties Distributions/dividends declared Tenant security deposits Tenant real estate tax deposits Intangible lease liabilities, net TOTAL LIABILITIES STOCKHOLDERS’ EQUITY: Royal Oak Realty Trust Inc. Stockholders’ Equity Preferred stock, $.001 par value; 100,000 shares authorized; none issued or outstanding Common stock, $.001 par value; 40,000,000 shares authorized; 288,332 and 207,405 shares issued and outstanding as of December 31, 2015 and 2014, respectively Common stock subscribed Additional paid-in capital Distributions/dividends in excess of accumulated earnings Total Royal Oak Realty Trust Inc. Stockholders’ Equity Noncontrolling interests TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY - - 288 10 15,552,117 (1,700,942) 13,851,473 5,622,697 19,474,170 $ The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. -1- 30,072,308 2,100,000 31,389 72,785 34,159 334,655 120,441 78,608 1,033,949 33,878,294 53,352,464 207 14 11,427,140 (807,014) 10,620,347 3,310,805 13,931,152 $ 41,246,164 ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 REVENUE: Rental income from operating leases Earned income from direct financing leases Rental expenses reimbursable by tenants Interest and other income Total revenue 2015 2014 $ 3,740,445 282,245 220,741 284 4,243,715 $ 2,215,257 282,872 1,497 2,499,626 1,421,790 1,225,773 116,755 535,905 106,000 230,445 220,741 152,735 47,949 4,058,093 872,710 770,958 43,685 252,771 255,450 175,722 282,872 225,841 53,748 2,933,757 EXPENSES: Depreciation and amortization Interest expense - contractual Interest expense - amortization of debt acquisition costs Asset management and property management fees Acquisition fees paid to asset manager Directors fees and related awards Rental expenses reimbursable by tenants Professional fees - general and acquisition-related Other expenses Total expenses NET INCOME (LOSS) INCLUDING NONCONTROLLING INTERESTS LESS - NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS NET INCOME (LOSS) ATTRIBUTABLE TO ROYAL OAK REALTY TRUST INC. 185,622 (434,131) (122,482) 55,856 $ The accompanying notes to consolidated financial statements are an integral part of these statements. -2- 63,140 $ (378,275) - Adjustment of noncontrolling interests Distributions/dividends paid and payable 288 - Adjustment of noncontrolling interests BALANCE, December 31, 2015 - Net income $ - - - 10 10 (14) 14 14 $ $ 15,552,117 239,541 - (245,107) 169,245 - 527,990 3,433,308 - 11,427,140 152,624 - 680,522 138,522 - 8,069,137 - 2,386,335 - - Additional paid-in capital $ $ (1,700,942) - 63,140 - - - - - (957,068) (807,014) - (378,275) - - - - (428,739) - - - Distributions/ dividends in excess of accumulated earnings -3- The accompanying notes to consolidated financial statements are an integral part of these statements. (5) - - Redemption of 5,000 shares of common stock Stock-based compensation - - Issuance of membership units associated with property acquisition 86 - - - - - - - - - - - - $ Common stock subscribed Common stock subscribed Issuance of 85,927 shares of common stock, net 207 - Net loss BALANCE, December 31, 2014 - Stock-based compensation - Issuance of membership units associated with property acquisition Common stock subscribed 163 44 Issuance of 163,535 shares of common stock, net - - - $ $ Distributions/dividends paid and payable Conversion of membership interests into 43,870 shares of common stock Member contributions BALANCE, January 1, 2014 Common stock ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 $ $ - - - - - - - - - - - - - - - - - (4,673,447) 980,536 3,692,911 Members’ capital $ $ 5,622,697 (239,541) 122,482 - - 2,688,573 - - (259,622) 3,310,805 (152,624) (55,856) - - 1,400,000 - (167,783) 2,287,068 - - Noncontrolling interests - 185,622 (245,112) 169,245 2,688,573 528,000 3,433,380 (1,216,690) 13,931,152 - (434,131) 680,536 138,522 1,400,000 8,069,300 (596,522) - 980,536 3,692,911 $ 19,474,170 $ Total ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 2015 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) including noncontrolling interests $ Adjustments to reconcile net income (loss) including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization Stock-based compensation Interest expense - amortization of debt acquisition costs Straight-line rent and financing lease adjustments Increase in prepaid expenses and other assets Increase in accounts payable and other accrued expenses Increase in accrued interest (Decrease) increase in due to related parties (Decrease) increase in tenant security deposits (Decrease) increase in tenant real estate tax deposits Total adjustments Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Additions to investment in rental property accounted for using the direct financing method Additions to investment in rental property accounted for using the operating method Lease acquisition costs paid Increase in restricted cash Net cash used in investing activities 185,622 2014 $ (434,131) 1,342,074 169,245 116,755 (112,732) (113,326) 3,554 22,044 (57,778) (22,721) (45,442) 1,301,673 832,506 138,522 43,685 (77,088) (86,409) 25,335 50,741 38,069 143,162 124,050 1,232,573 1,487,295 798,442 (7,200,000) - (841,077) (670,456) (13,872) (8,725,405) (20,048,543) (597,610) (13,866) (20,660,019) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on mortgages payable Proceeds from issuance of common stock, net Proceeds from common stock subscribed, not yet issued Cash distributions/dividends paid Principal payments on mortgages payable Net borrowings on line of credit Debt acquisition costs paid Redemption of common stock Contributions from members Net cash provided by financing activities 7,300,000 3,119,190 528,000 (777,526) (664,260) 350,000 (338,266) (245,112) 9,272,026 11,050,000 7,981,414 680,536 (348,302) (389,797) 1,750,000 (275,653) 980,536 21,428,734 NET INCREASE IN CASH 2,033,916 1,567,157 CASH, beginning of year 2,202,306 635,149 CASH, end of year $ 4,236,222 The accompanying notes to consolidated financial statements are an integral part of these statements. -4- $ 2,202,306 ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2015 AND 2014 1. BUSINESS DESCRIPTION Royal Oak Realty Trust Inc. (the “Corporation,” together with its consolidated subsidiaries, the “Company”), a Maryland corporation, was formed on January 6, 2014 and elected to be taxed as a real estate investment trust (“REIT”) in 2014. The Company is focused on acquiring commercial net leased real estate. The properties are leased under long-term lease agreements. All properties are leased on a net lease basis, to the extent possible, such that tenants pay most, if not all, of the occupancy costs such as maintenance and repairs, real estate taxes, insurance, and utilities. At December 31, 2015, the Company owns ten commercial stand-alone real estate properties located in four states within the continental United States of America. Royal Oak Realty Trust (Operating Company) LLC (the “Operating Company”) is the entity through which the Corporation conducts substantially all of its business and owns (either directly or through subsidiaries) substantially all of its assets. At December 31, 2015, the Corporation owns 70.5% of the economic interests in the Operating Company and serves as its managing member. The remaining interests are held by members who acquired their interests by contributing property to the Operating Company (see Note 10). Prior to changing their names in December 2015 and January 2016, respectively, Royal Oak Realty Trust Inc. and Royal Oak Realty Trust (Operating Company) LLC were known as Buckingham Net Leased Properties Group Inc. and Buckingham Net Leased Properties Group LLC, respectively. The accompanying consolidated financial statements present the consolidated financial position, results of operations, changes in equity, and cash flows of the Corporation, the Operating Company and its subsidiaries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: All material intercompany balances and transactions have been eliminated in consolidation. Basis of Accounting: The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In prior years, the Company presented its consolidated financial statements on the basis of accounting that the Company uses for income tax purposes, which is a basis of accounting other than GAAP. Adjustments and reclassifications have been made to the 2014 consolidated financial statements to conform to the current year presentation. -5- Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. Significant estimates include, but are not limited to, the allocation of purchase price between investment in rental property and intangible assets and liabilities, the allowance for doubtful accounts, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, and taxable income. Accordingly, actual results may differ from those estimates. Revenue Recognition: Rental property leases are accounted for using either the operating method or the direct financing method. Such methods are described below: Operating method - Revenue is recognized as rents are earned. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Direct financing method - Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases. Accrued Rental Income and Allowance for Doubtful Accounts: Accrued rental income includes the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. Management periodically reviews the sufficiency of the allowance for doubtful accounts, taking into consideration its historical losses and existing economic conditions, and makes adjustments to the allowance as it considers necessary. Accounts are charged off against the allowance for doubtful accounts when management determines that such accounts are uncollectible. Management has determined that no allowance is necessary at December 31, 2015 and 2014. Investment in Rental Property: Rental property accounted for using the operating method is recorded at cost or fair value. Rental property accounted for using the direct financing method is recorded at its net investment (which at the inception of the lease generally represents the cost of the property). When assets are retired or disposed of, the related cost and accumulated depreciation are removed from their respective accounts. The difference between the cost or fair value and accumulated depreciation of assets disposed of, less any amount realized from the disposition, is reflected in the Consolidated Statements of Operations as gain or loss on disposition of rental property. -6- Acquisitions of properties are accounted for utilizing the acquisition method and, accordingly, are recorded at the estimated fair values of the assets acquired and liabilities assumed. Acquisitionrelated costs such as transaction costs and acquisition fees paid under asset management agreements (see Note 7) are expensed as incurred. The results of operations of acquired properties are included in the Consolidated Statements of Operations from the respective date of acquisition. The fair value of rental property acquired is allocated to tangible assets, consisting of land, buildings and improvements, and identifiable intangible assets and liabilities, such as amounts related to in-place leases, acquired above- and below-market leases, and mortgages payable. Estimated fair value determinations are based on management’s judgment, which is based on various factors including market conditions, the industry in which the tenant operates, the characteristics of the real estate and/or real estate appraisals. The Company allocates purchase price to the fair value of the tangible assets of an acquired property determined by valuing the property as if it were vacant. The as-if-vacant value is allocated to land, buildings and improvements based on management’s determination of the relative fair value of the assets. The fair value of in-place leases is based upon the Company’s evaluation of the specific characteristics of the leases. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases, including leasing commissions. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses. Acquired in-place leases as of the date of acquisition are amortized over the remaining lease terms. Acquired above- and below-market lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the lease acquired) of the differences between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair market value lease rates at the time of acquisition for the corresponding in-place leases measured over a period equal to the remaining non-cancelable term of the in-place leases. The capitalized above- and below-market lease values are amortized as adjustments to rental revenue over the remaining non-cancelable terms of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to amortization expense and the unamortized portion of above- or below-market lease value is charged to rental revenue. Management estimates the fair value of assumed mortgages payable based upon indications of thencurrent market pricing for similar types of debt with similar maturities. Depreciation: Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are as follows: Land improvements Buildings and improvements -7- 15 years 15 - 40 years Depreciation expense was $1,070,672 and $671,821 for the years ended December 31, 2015 and 2014, respectively. Long-Lived Assets: Long-lived assets, including investment in rental property, are generally stated at cost or fair value. However, the Company reviews long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate their carrying amounts may not be recoverable. If such events or changes in circumstances are present, a loss is recognized to the extent the carrying value of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. At December 31, 2015 and 2014, there were no such impairments. Restricted Cash: The terms of one of the Company’s mortgages payable requires the Company to deposit certain replacement and other reserves with the lender. Such restricted cash amounted to $32,358 and $18,486 at December 31, 2015 and 2014, respectively. Intangible Assets and Liabilities: Intangible lease assets and liabilities represent the estimated fair value of in-place and above- and below-market leases. These costs are being amortized using the straight-line method over the remaining non-cancelable terms of the respective leases, which range from 10 to 15 years. Lease acquisition costs represent direct leasing costs such as related party asset manager fees, third party professional fees and tenant inducements incurred related to lease transactions. These costs are being amortized using the straight-line method over the terms of the related leases, which range from 10 to 20 years. Debt Acquisition Costs: In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2015-03 Interest - Imputation of Interest. This update requires that debt acquisition costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company has elected early adoption of ASU 2015-03. As a result of the implementation of ASU 2015-03, on a retrospective basis, the Company has reclassified debt acquisition costs previously reported as an other asset on the accompanying Consolidated Balance Sheet as of December 31, 2014. Debt acquisition costs are being amortized to interest expense using the straight-line method, which approximates the effective interest method, over the terms of the related debt, which range from 1 to 25 years. -8- Common Stock Subscribed: The Company offers its common stock on a subscription basis. Common stock subscribed represents funds received for future common stock purchases that have not yet been completed as of the date of the Consolidated Balance Sheets. Noncontrolling Interests: Noncontrolling interests represent the 29.5% and 25.2% interest in the Operating Company at December 31, 2015 and 2014, respectively, which is accounted for as a separate component of Stockholders’ Equity. Members represented by these interests hold membership units, which have the same economic interest as shares of common stock. The Company periodically adjusts the carrying value of noncontrolling interests to reflect its share of the book value of the Operating Company. Such reallocations are recorded to additional paid-in capital as an adjustment of noncontrolling interests in the accompanying Consolidated Statements of Changes in Stockholders’ Equity. Income Taxes: The Corporation has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ended December 31, 2014. The Corporation believes it is organized and operates in such a manner as to qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner so that it will remain qualified as a REIT for federal income tax purposes. To maintain REIT status and not be subject to federal income taxation at the corporate level, the Corporation is generally required to distribute at least 90% of its adjusted taxable income, as defined in the Code, to its stockholders and satisfy certain other organizational and operating requirements. The Company qualified for REIT status for each years ended December 31, 2015 and 2014. Although it may qualify for REIT status for federal income tax purposes, the Corporation is subject to state and local income or franchise taxes in certain states in which some of its properties are located. The Operating Company is a Limited Liability Company and has elected to be treated as a partnership for federal and state income tax purposes. Under this election, the taxable income or loss of the Operating Company is reported on the members’ income tax returns. The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. In making this assessment, the Company must assume that the taxing authority will examine the income tax position and have full knowledge of all relevant information. The second step is to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may or may not accurately forecast actual outcomes. -9- Stock-Based Compensation: The Company recognizes costs related to all stock-based payments, including stock options and restricted stock awards, based upon their fair value on the grant date (see Note 12). Such costs are expensed ratably on a straight-line basis over the requisite service or vesting periods. 3. INVESTMENT IN RENTAL PROPERTY AND LEASE ARRANGEMENTS The Company generally leases its investment rental properties to established tenants. At December 31, 2015, eight of the investment rental property leases have been classified as operating leases and two leases have been classified as direct financing leases. All leases have initial terms of ten to twenty years and provide for minimum rentals. In addition, the leases generally provide for limited fixed increases in rent throughout the lease term. Generally, the tenant is also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and carry property and liability insurance coverage. The leases also typically provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. The following table summarizes the carrying amount of rental property subject to non-cancelable operating leases with tenants at December 31: 2015 $ 2,597,993 3,749,631 32,721,637 39,069,261 (1,951,280) $37,117,981 Land Land improvements Buildings and improvements Less - accumulated depreciation 2014 $ 2,273,393 3,524,181 29,871,687 35,669,261 (880,608) $34,788,653 Estimated future minimum rental receipts required by non-cancelable operating leases with tenants are as follows: Year ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 3,701,349 3,901,118 3,954,903 4,034,369 4,085,044 24,369,356 $44,046,139 - 10 - The following table summarizes the components of net investment in direct financing leases at December 31, 2015: 2015 $ 14,709,324 3,181,475 (10,717,392) $ 7,173,407 Minimum lease payments to be received Estimated unguaranteed residual value Less - unearned revenue Net investment in direct financing leases Estimated future minimum rental receipts required by non-cancelable direct financing leases with tenants are as follows: Year ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 615,633 652,316 661,078 674,300 686,724 11,419,273 $14,709,324 Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future minimum lease payments due during the initial lease terms. 4. INTANGIBLE ASSETS AND LIABILITIES The following is a summary of intangible assets and liabilities and related accumulated amortization at December 31: 2015 2014 $ 190,560 (28,395) $ 162,165 $ 190,561 (12,184) $ 178,377 Acquired in-place leases Less - accumulated amortization $3,205,686 (463,009) $2,742,677 $3,205,686 (203,502) $3,002,184 Intangible lease assets, net $2,904,842 $3,180,561 Acquired below-market leases Less - accumulated amortization Intangible lease liabilities, net $1,200,400 (166,451) $1,033,949 $1,200,400 (70,523) $1,129,877 Lease intangibles: Acquired above-market leases Less - accumulated amortization - 11 - 2015 $1,565,967 (145,061) $1,420,906 Lease acquisition costs Less - accumulated amortization Lease acquisition costs, net 2014 $895,511 (53,450) $842,061 Amortization expense, excluding above-market and below-market leases, amounted to $351,118 and $200,889 for the years ended December 31, 2015 and 2014, respectively. Acquired abovemarket leases amortized to rental revenue amounted to $16,211 and $12,184 for the years ended December 31, 2015 and 2014, respectively. Acquired below-market leases amortized to rental revenue amounted to $95,928 and $52,388 for the years ended December 31, 2015 and 2014, respectively. Estimated future amortization of above- and below-market leases to rental income from operating leases is as follows: Year ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 79,717 79,717 79,717 79,717 79,717 473,199 $871,784 Estimated future amortization of in-place leases and lease acquisition costs is as follows: Year ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 378,093 378,093 378,093 378,093 378,093 2,273,118 $4,163,583 - 12 - 5. LINE OF CREDIT The Operating Company has a line of credit agreement with M&T Bank (“M&T”) which provides for maximum borrowings of $5,000,000. Each advance under the line of credit agreement must be for a minimum of $100,000 and bears interest, which is payable monthly, at the one-month London Interbank Offered Rate (“LIBOR”) plus 3.5%. The line of credit agreement is unsecured, but requires that borrowings not be greater than (i) 90% of the purchase price for the related property or (ii) if closing costs are to be included, 92% of the purchase price for the related property. The line of credit agreement was renewed in December 2015, subject to payment of an annual facility fee of $20,000. An advance fee of 0.1% of each advance on the line of credit is due each time an advance is made. The Operating Company is subject to various financial and non-financial covenants under the line of credit agreement. The Corporation, a related party as described in Note 7, and a sponsor who formed the Operating Company have provided unconditional guarantees of all borrowings on the line of credit agreement. Outstanding borrowings on the line of credit agreement, net of unamortized debt acquisition costs of $0 and $50,600 at December 31, 2015 and 2014, respectively, were $2,100,000 and $1,699,400 at December 31, 2015 and 2014, respectively. The one-month LIBOR was approximately 0.43% at December 31, 2015. Effective February 2016, the line of credit agreement with the Bank was amended. Under the terms of the amended line of credit agreement, maximum borrowings are limited to $10,000,000 with interest payable at the one-month LIBOR plus 4.5%. Advances under the amended line of credit agreement are payable in full no later than 180 days following the date of such advance. The Corporation, two related parties as described in Note 7, and a sponsor who formed the Operating Company have provided unconditional guarantees of all borrowings on the line of credit agreement. In order to obtain this amendment to the line of credit, the Company was required to pay a commitment fee of $50,000. The amended line of credit agreement is renewable annually subject to a review by the Bank and the payment of an annual facility fee of $50,000. The amended line of credit agreement is subject to financial and non-financial covenants (see Note 6). 6. MORTGAGES PAYABLE Mortgages payable consist of the following at December 31: 2015 Mortgage payable to Five Star Bank in monthly installments of $36,689, including interest at 4.7%, with a balloon payment of $3,529,245 due in August 2023. Secured by related rental property and lease rents. Mortgage payable to ServisFirst Bank in monthly installments of $27,635, including interest at 4.5%, with a balloon payment of $3,573,771 due in October 2020. Secured by related rental property and lease rents. - 13 - 2014 $ 5,276,070 $ 5,463,562 4,303,749 4,438,834 2015 2014 Mortgage payable to Protective Life and Annuity Insurance Company (“Protective”) in monthly installments of $21,053, including interest at 4.375%, with a balloon payment of $2,720,132 due in January 2025. Secured by related rental property and lease rents. 3,712,850 3,750,000 Mortgage payable to CMFG Life Insurance Company in monthly installments of $24,895, including interest at 4.5%, with a balloon payment of $1,335,340 due in July 2028. Secured by related rental property and lease rents. 3,613,713 3,746,572 Mortgage payable to ESL Federal Credit Union in monthly installments of interest only through July 2016 followed by monthly installments of $16,683, including interest at 4.44%, with a balloon payment of $2,031,412 due in January 2028. Secured by substantially all assets of the related rental property. 3,000,000 - Mortgage payable to Protective in monthly installments of $15,916, including interest at 4.5%, with a balloon payment of $2,039,652 due in August 2024. Secured by related rental property and lease rents. 2,744,918 2,800,000 Mortgage payable to Genesee Regional Bank (“GRB”) in monthly installments of $15,643, including interest at 4.55%, through November 2021. Thereafter the interest rate will be revised, at the Company’s discretion, to either GRB’s prime rate plus .75% or the then 3-year Federal Home Loan Bank advance rate plus 2.0%, subject to a minimum rate of 4%. A balloon payment of $2,045,910 is due in November 2024. Secured by related rental property and lease rents. 2,734,930 2,794,974 Mortgage payable to Standard Insurance Company (“Standard”) in monthly installments of $14,552, including interest at 4.2%. The interest rate will be adjusted effective July 2025 and July 2035 to Standard’s then prevailing interest rate for loans with similar terms. It is scheduled to mature in July 2040. Secured by related rental property and lease rents. 2,674,311 - - 14 - 2015 Mortgage payable to M&T in monthly installments of interest only through March 2016 followed by monthly installments of $9,019, including interest at 4.57%, with a balloon payment of $1,346,318 due in September 2022. Secured by related rental property and lease rents. 2014 1,600,000 Mortgage payable to M&T in monthly installments of $8,277, including interest at 6.11%, with a balloon payment of $1,020,721 due in December 2017. Secured by related rental property and lease rents. 1,088,370 30,748,911 Debt acquisition costs Less - accumulated amortization Debt acquisition costs, net - 1,119,229 24,113,171 (791,889) 115,286 (676,603) Mortgages payable, net of unamortized debt acquisition costs $30,072,308 (523,623) 49,131 (474,492) $23,638,679 Certain mortgage payable agreements are subject to prepayment premiums and may be terminated by the lender under certain events of default as defined under the related agreements. Under the line of credit agreement and certain mortgages payable, the Company is subject to various covenants, including maintaining a minimum debt service coverage ratio. There are also financial reporting requirements and other covenants as defined in the related agreements. Some of the mortgages payable have non-recourse carve-outs that are guaranteed by the Corporation, Operating Company or sponsors who formed the Operating Company. The Corporation and the Operating Company have indemnified the sponsors for any payments required to be made under any carve-out guaranty. Estimated future principal payments to be made under the above mortgage agreements are as follows: Year ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 851,289 1,958,095 946,243 989,910 4,565,373 21,438,001 $30,748,911 - 15 - Estimated future amortization of debt acquisition costs to interest expense is as follows: Year ending December 31, 2016 2017 2018 2019 2020 Thereafter $ 80,402 79,956 75,057 75,057 64,066 302,065 $676,603 7. RELATED PARTY TRANSACTIONS Asset Management Agreement: The Corporation and the Operating Company have entered into an asset management agreement (the “Asset Management Agreement”) with Cambridge Street Asset Management LLC (“CSAM”, formerly Buckingham Properties Asset Management LLC prior to its name change effective November 2015), a related party which is wholly-owned by the President and Chief Executive Officer of the Corporation. Under the terms of the Asset Management Agreement, CSAM is responsible for, among other things, providing management of the day-to-day operations of the Company, providing suitable investment opportunities to the Company, determining acquisition and disposition strategies of the Company, entering into leases with tenants, managing financing activities, monitoring of compliance with loan covenants, monitoring other operations of the Company, and providing support to the Company’s officers and directors to assist in their governance function and responsibilities. In exchange for services provided under the Asset Management Agreement, CSAM is compensated as follows: (a) Effective August 1, 2015, annual asset management fees payable on a pro-rata basis in advance on the first business day of each calendar quarter, equal to an annual rate of: i. 1.0% if the gross asset value is $100 million or less; ii. 0.9% if the gross asset value is over $100 million and is $200 million or less; iii. 0.8% if the gross asset value is over $200 million and is $300 million or less; or iv. 0.75% if the gross asset value is over $300 million. The “gross asset value” is the sum of the valuations of each of the properties in the Company’s portfolio as determined as of December 31 of the preceding year plus, for each quarter following the acquisition of any property, the gross purchase price set forth in the acquisition contract for each property acquired after such year end. - 16 - Prior to August 1, 2015, the annual asset management fee was equal to 1% of the gross fair market value of the Company’s holdings as determined as of the first day of each quarter. (b) Acquisition fees equal to 1% of the gross purchase price paid for each rental property acquired, including any property contributed to the Operating Company in exchange for membership interests. Prior approval of the acquisition fee is required for rental property contributed by the sponsors who formed the Operating Company. In addition, if CSAM is engaged to secure financing for a rental property, a fee equal to the difference between 1% of the principal amount of the loan and any fees paid to any mortgage brokers; (c) In the event that CSAM acts on behalf of the Operating Company in leasing any properties, a leasing fee equal to (i) 4% of the total gross base rent payments due over the first ten years of the initial term of the lease and 2% of the remainder of the lease term (prior to August 1, 2015, the 4% leasing fee was based on total gross base rent payments due over the entire initial lease term) and (ii) 2% of the total gross base rents of any renewal term. The leasing fee payable to CSAM will be reduced to the extent necessary (including to 0%) if the aggregate of CSAM’s leasing fee and any fee payable to any other third party by the Operating Company or the Corporation with respect to the lease or renewal would be more than 6% of the total gross base rent payments for an initial term or 3% for a renewal term; and (d) A disposition fee equal to 1% of the gross purchase price received upon disposition of a rental property. The initial term of the Asset Management Agreement is effective through February 1, 2024, after which it automatically renews for successive five year periods, unless either party provides written notice of termination in accordance with the Asset Management Agreement. In the event the Company elects to terminate the Asset Management Agreement due to a change in control of CSAM, as defined in the Asset Management Agreement, or at the end of the initial term or any renewal period without cause, the Company will be required to pay CSAM a termination fee of 2 ½ times the aggregate asset management fees paid to CSAM during the twelve-month period immediately preceding the date of such termination. Property Management Agreements: As of December 31, 2015, five of the Operating Company’s ten subsidiaries and CSAM had entered into separate property management agreements (the “Property Management Agreements”) with Cambridge Street Property Management LLC (“CSPM”), a related party that is majority-owned by the President and Chief Executive Officer. It is also partially owned by other officers of the Corporation. Under the terms of the Property Management Agreements, CSPM manages the day-to-day operations of the Company’s rental properties which include, among other things, collection of rent, monitoring of compliance with lease terms, payment of mortgages payable and other obligations, and payment of the management fee. - 17 - In exchange for services provided under the Property Management Agreements, CSPM is compensated as follows: (a) For property management services, the fee is based upon the aggregate value of the Corporation’s investment in rental property, as defined in the Property Management Agreements, as follows: a. 3% of total monthly base rent collected if the value is $100 million or less, b. 2.75% of total monthly base rent collected if the value is greater than $100 million but equal to or less than $300 million, or c. 2.5% of total monthly base rent collected if the value is greater than $300 million. (b) In the event that CSPM is retained to provide leasing services on behalf of the Company, a leasing fee shall be payable for a new lease or lease expansion in an amount up to 4% of the scheduled gross base rental payments to be made under the terms of the new lease or lease expansion during the first ten years of the lease and 2% of the scheduled gross base rental payments to be made thereafter. The leasing fee payable to CSPM will be reduced to the extent necessary (including to 0%) if the aggregate leasing fees payable to additional brokers (including CSAM, if applicable) would be more than 6% of the total scheduled gross base rental payments under the terms of the new lease or lease expansion; (c) In the event that CSPM is retained to provide leasing services on behalf of the Company, a leasing fee shall be payable for lease renewals or extensions in an amount up to 2% of the base rent due over the renewal/extension period. The leasing fee payable to CSPM will be reduced to the extent necessary (including to 0%) if the aggregate leasing fees payable to additional brokers (including CSAM, if applicable) would be more than 3% of the base rent due over the renewal/extension period; (d) In the event that CSPM is retained to provide financing services, a financing fee shall be payable equal to the difference between 1% of the principal amount of the loan and any fees paid to any mortgage brokers (including CSAM, if applicable); (e) In the event that additional services should be deemed required and CSPM is retained to provide those services, various fees for other services provided by CSPM shall be payable, including modernization, tenant improvements, repairs and insured restoration loss activities. In addition, if requested, CSPM may also engage and oversee legal actions related to the rental property pertaining to the collection of rents or enforcement of the related lease. CSPM will charge an hourly fee of $75 plus expenses in addition to any third party expenses associated with these matters. - 18 - The initial term of each of the Property Management Agreements is effective for three years and automatically renews for successive one year periods until terminated by either party upon sixty days written notice prior to the end of the initial term or any renewal period. In the event of a change in control of CSPM, as defined in the Property Management Agreements, or if the Company terminates a Property Management Agreement at the end of any term without cause, the Company will be required to pay CSPM a termination fee of 50% of the aggregate fees paid to CSPM during the twelve-month period immediately preceding the date of such termination. Effective January 1, 2016, all property management agreements (the “Management Agreements”) with Buckingham Properties LLC (“BP”), a related party in which certain stockholders of the Corporation have either a direct or indirect ownership interest, were terminated and new property management agreements were entered into with CSPM. As of December 31, 2015, five of the Operating Company’s ten subsidiaries and CSAM had entered into separate Management Agreements with BP. The terms of the agreements are similar to the Property Management Agreements described above, with the following exceptions: (a) The initial term of each agreement is one year. (b) Compensation for managing the property is up to 3% of total (gross base) rent payments collected each month from the rental properties for property management services; (c) In the event that BP is retained to provide leasing services on behalf of the Company, a leasing fee shall be payable for a new lease or lease expansion in an amount up to 4% of the total scheduled gross base rental payments to be made under the terms of the new lease or lease expansion. The leasing fee payable to BP will be reduced to the extent necessary (including to 0%) if the aggregate leasing fees payable to BP and additional brokers (including CSAM, if applicable) would be more than 6% of the total scheduled (gross base) rental payments under the terms of the new lease or lease expansion; Management fees incurred under the Asset Management Agreement, Property Management Agreements, and Management Agreements totaled $522,506 and $252,771 for the years ended December 31, 2015 and 2014, respectively, of which $1,682 and $8,031 is reported in due to related parties in the accompanying Consolidated Balance Sheets at December 31, 2015 and 2014, respectively. In addition, asset acquisition fees under these agreements totaled $106,000 and $255,450 for the years ended December 31, 2015 and 2014, respectively. Leasing and financing fees paid or payable to CSAM, CSPM and/or BP totaled $680,364 and $662,831 for the years ended December 31, 2015 and 2014, respectively. Leasing fees are reported as lease acquisition costs while financing fees are reported as a reduction of mortgages payable in the accompanying Consolidated Balance Sheets. At December 31, 2015 and 2014, an additional $32,477 and $153,906, respectively, were included in due to related parties in the accompanying Consolidated Balance Sheets for reimbursed expenses and leasing fees due to CSAM, CSPM, and BP. - 19 - During the year ended December 31, 2015, two of the Operating Company’s subsidiaries entered into month-to-month property management agreements with an unrelated third party which were terminated during the year. Management fees incurred under these agreements totaled $13,399 for the year ended December 31, 2015. 8. INCOME TAXES The Corporation qualified for REIT status for both years ending December 31, 2015 and 2014 as distributions/dividends exceeded 90% of taxable income; accordingly, no provision for federal taxes has been provided in the accompanying Consolidated Statements of Operations. The following table reconciles net income (loss) including noncontrolling interests to taxable income for the years ended December 31: Net income (loss) including noncontrolling interests Less: Net (income) loss attributable to noncontrolling interests Net income (loss) attributable to Corporation Straight-line rent adjustments Rent received in advance, net Earned income from direct financing leases adjustment Adjustments for above/below market leases Book-to-tax depreciation and amortization adjustment Stock-based compensation in excess of tax Property acquisition costs Other adjustments Adjusted taxable income (loss)subject to 90% REIT dividend requirement 2015 $185,622 2014 $(434,131) (122,482) 63,140 (231,941) 101,569 26,593 (79,717) (92,052) 9,245 145,694 (15,053) 55,856 (378,275) (134,357) 55,521 (40,204) 121,218 102,522 360,472 (90,184) $(72,522) $(3,287) As of the date the accompanying consolidated financial statements were available to be issued, the Company’s 2015 tax returns have not been filed. The above table represents management’s estimate of adjusted taxable income for the year ended December 31, 2015. The Company is required to file income tax returns with federal and state taxing authorities. The Corporation’s federal and state income tax returns remain subject to examination by the respective taxing authorities for the 2014 and 2015 tax years. The Operating Company’s federal and state income tax returns remain subject to examination by the respective taxing authorities for the 2013 through 2015 tax years. The Company has determined that it has no uncertain tax positions, which includes the tax status of the Company. - 20 - 9. CREDIT RISK CONCENTRATIONS The Company maintained bank balances that, at times, exceeded the federally insured limit during the years ended December 31, 2015 and 2014. The Company has not experienced any losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts. The Company had revenue from five tenants which each represented between 11% and 17% of total revenue for the year ended December 31, 2015. The Company had revenue from three tenants which each represented between 16% and 29% of total revenue for the year ended December 31, 2014. 10. NONCONTROLLING INTERESTS During the years ended December 31, 2015 and 2014, certain entities contributed their properties to the Operating Company. The Operating Company issued 50,728 non-managing membership units valued at $2,688,573 in connection with the contribution of property during the year ended December 31, 2015. The Operating Company issued 28,000 non-managing membership units valued at $1,400,000 in connection with the contribution of property during the year ended December 31, 2014. Noncontrolling interests as reported in the accompanying Consolidated Balance Sheets are held in the form of membership units in the Operating Company. At December 31, 2015, a total of 120,759 non-managing membership units were outstanding, which represent a 29.5% interest in the Operating Company. At December 31, 2014, a total of 70,031 non-managing membership units were outstanding, which represented a 25.2% interest in the Operating Company. Membership units are economically equivalent to the Company’s common stock and, subject to certain restrictions, are convertible into the Company’s common stock at the option of the respective holder on a dollar-for-dollar basis. Holders of the membership units do not have voting rights. 11. DISTRIBUTION REINVESTMENT PLAN The Company has a Distribution Reinvestment Plan (the “Plan”) available to any holder of shares of common stock or membership units that are convertible into shares. In general, the Plan allows participants to purchase common stock from distributions received. Under the Plan, all distributions to be reinvested under the Plan will be used to purchase shares of common stock as of the quarterly distribution date for the applicable distribution. The Corporation offers shares, pursuant to the Plan, at 98% of the Determined Share Value, which is $53 at December 31, 2015. At December 31, 2015 and December 31, 2014, there were 7,025 and 831 shares, respectively, issued and outstanding under the Plan. Distributions/dividends declared at December 31, 2015 as reported in the accompanying Consolidated Balance Sheet include 1,991 shares of common stock totaling $103,388 to be reinvested under the Plan in January 2016. - 21 - 12. STOCK INCENTIVE PLAN The Company has a long-term stock incentive plan (the “Incentive Plan”) under which its Independent Directors have authority to grant stock options, stock appreciation rights, restricted stock awards, restricted stock units or performance share units (collectively, the “Stock Awards”) to employees, officers, directors, and consultants of the Company. Stock options are granted with an exercise price determined by the Company’s Independent Directors, provided that the exercise price per share of common stock shall not be less than the fair value of such share of common stock at the date of grant. The term of the stock options is determined at the time of grant, but generally the stock options vest ratably over a five-year period. In the event of a change in control of the Company, all awards immediately vest and are exercisable or fully earned at the maximum amount, except as otherwise determined by the Independent Directors. The Company may issue a maximum of 700,000 shares under the Plan. However, the Company may not issue more than 70,000 shares under the Plan until the Company has issued at least 700,000 shares of common stock. Once the Corporation has issued a minimum of 700,000 shares of common stock, the shares issued under the Plan may not exceed 10% of the total issued and outstanding shares of the Corporation. Stock Options: Stock-based compensation cost for a stock option is estimated at the grant date based on each option’s fair value as calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected dividend yields, volatility, option lives and interest rates. The Corporation recognizes stock-based compensation cost as an expense ratably on a straight-line basis over the requisite service period. In determining the service period, the Corporation considers service requirements and the vesting period. In June 2014, the Corporation issued 50,000 stock options to the five members of the Corporation’s Board of Directors. The terms of the stock options were determined at the grant date. The stock options vest evenly over an approximate period of five years with 20% of such options vesting each January 6 commencing January 6, 2015. However, the stock options vest immediately in the event the holder of such options dies or becomes disabled. The stock options expire on January 6, 2024. The following key assumptions were used to determine the grant date fair value of the stock options issued during the year ended December 31, 2014: Expected volatility rate Expected dividend yield Risk-free interest rate Expected lives 25.9% 7% 1.64% 5 years The expected volatility rate was based on an analysis of the historical volatility of a similar industry sector index. The expected dividend yield was based on the historical annual dividends. The expected lives for options, with a lifetime of approximately ten years, was based on the vesting period of the options. The risk-free interest rate for the expected life of the options was based on the U.S. Treasury yield curve. - 22 - The following presents stock options granted, exercised, and cancelled during the year ended December 31: 2015 Outstanding - beginning of year Granted Exercised Cancelled Outstanding - end of year Exercisable - end of year 2014 WeightedAverage Exercise Price per Option $50 $50 $50 $50 Number of Options 50,000 (10,000) 40,000 8,000 WeightedAverage Exercise Price per Option $50 $50 $50 Number of Options 50,000 50,000 10,000 The weighted average remaining contractual term for stock options is eight years at December 31, 2015. The Company recognized compensation cost of $42,578 and $69,189 related to stock options during the years ended December 31, 2015 and 2014, respectively. The following is a summary of the status of the Company’s non-vested stock options as of December 31 and changes during the years then ended: 2015 Unvested - beginning of year Granted Vested Forfeited/Terminated Unvested - end of year 2014 WeightedAverage Exercise Price per Option $50 $50 $50 Number of Options 40,000 (8,000) 32,000 Number of Options 50,000 (10,000) 40,000 WeightedAverage Exercise Price per Option $50 $50 $50 At December 31, 2015, there is approximately $128,000 of total unrecognized compensation cost related to unvested stock options that is expected to be recognized over a period of 3 years. Restricted Stock Awards: Stock-based compensation cost for restricted stock is estimated based on the determined share value at the grant date. The Corporation recognizes stock-based compensation cost as an expense ratably on a straight-line basis over the requisite service period. In determining the service period, the Corporation considers service and performance requirements and the vesting period. During each of the years ended December 31, 2015 and 2014, 2,000 shares of restricted stock were granted to the President and Chief Executive Officer of the Corporation. - 23 - The following presents restricted stock granted, vested, and cancelled during the years ended December 31: 2015 Number of Shares Outstanding and unvested beginning of year Granted Vested and issued Cancelled Outstanding and unvested - end of year 2014 Grant Date Fair Value per Share $50 2,000 2,000 (2,000) $50 $50 $50 2,000 Number of Shares 2,000 - Grant Date Fair Value per Share $50 $50 2,000 The Company recognized compensation cost of $66,667 and $33,333 related to restricted stock during the years ended December 31, 2015 and 2014, respectively. Board of Directors Stock Awards: Members of the Company’s Board of Directors, excluding the President and Chief Executive Officer of the Corporation, receive shares of common stock each quarter as partial compensation for serving on the Board of Directors. Stock-based compensation cost for stock issued to board members is estimated at the determined share value at the grant date. The Company recognized compensation cost of $60,000 and $36,000 related to stock issued to board members during the years ended December 31, 2015 and 2014, respectively. 13. COMMITMENT In December 2015, the Company entered into a lease agreement with a tenant which provides for a tenant improvement allowance of up to $700,000 for certain improvements to the property. The work is to be performed by the tenant, subject to the approval of the Company, and must be completed by September 2016. Any unused portion of the tenant improvement allowance will be forfeited by the tenant in September 2016. 14. SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid for interest was $1,203,729 and $720,217 for the years ended December 31, 2015 and 2014, respectively. - 24 - The following are non-cash transactions and have been excluded from the accompanying Consolidated Statements of Cash Flows: x The Company has distributions/dividends payable totaling $334,655 and $209,681 which were declared as payable to members and stockholders at December 31, 2015 and 2014, respectively. x During the years ended December 31, 2015 and 2014, the Company issued common stock totaling $314,190 and $87,122, respectively, under the terms of the Plan with $103,388 and $46,400 of these balances included in distributions/dividends declared, respectively. x During the years ended December 31, 2015 and 2014, the Operating Company issued nonmanaging membership units valued at $2,688,573 and $1,400,000, respectively, in connection with rental property acquisitions. x During the year ended December 31, 2014, the Company assumed mortgages with total balances outstanding of $3,936,913 to finance the acquisition of rental properties. x At December 31, 2014, there were additions to investment in rental property accounted for using the operating method totaling $129,650 included in accounts payable. x At December 31, 2014, there were additions to debt acquisition costs totaling $70,000 included in due to related parties. 15. SUBSEQUENT EVENTS The Company has evaluated subsequent events through April 25, 2016, which is the date the accompanying consolidated financial statements were available to be issued. Distributions/dividends declared of $334,655 as reported in the accompanying Consolidated Balance Sheet at December 31, 2015 were paid to members and stockholders in January 2016. Of this amount, $231,267 was paid in cash while the remaining $103,388 was paid in the form of stock under the terms of the Plan. In December 2015, the Company’s Board of Directors approved a $0.9275 per unit/share distribution/dividend, to be prorated on a daily basis and paid in April 2016, to the common stockholders and members during the three months ending March 31, 2016. In March 2016, the Company’s Board of Directors approved a $0.9275 per unit/share distribution/dividend, to be prorated on a daily basis and paid in July 2016, to the common stockholders and members during the three months ending June 30, 2016. Effective February 2016, the line of credit agreement with the Bank was amended (see Note 5). Subsequent to December 31, 2015, the Company has continued to expand its operations through acquisition of rental properties. At the date these consolidated financial statements were available to be issued, the Company had acquired two additional properties for a combined purchase price of $9,750,000 which were partially funded through mortgages totaling $6,300,000. - 25 - EXHIBIT B Most Recent Quarterly Consolidated Financial Statements of Royal Oak Realty Trust Inc. and Subsidiaries ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 TOGETHER WITH INDEPENDENT ACCOUNTANTS’ COMPILATION REPORT Rochester, New York INDEPENDENT ACCOUNTANTS’ COMPILATION REPORT To the Board of Directors and Stockholders of Royal Oak Realty Trust Inc.: Management is responsible for the accompanying consolidated financial statements of Royal Oak Realty Trust Inc. and subsidiaries, which comprise the consolidated balance sheet as of September 30, 2016 and the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the nine months then ended, and the related notes to the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. We have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. We did not audit or review the consolidated financial statements nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on these consolidated financial statements. The consolidated balance sheet as of December 31, 2015 was audited by us, and we expressed an unmodified opinion on it in our report dated April 25, 2016. We have not performed any auditing procedures on the 2015 consolidated balance sheet since April 25, 2016. November 15, 2016. ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2016 (Unaudited) December 31, 2015 (Audited) ASSETS INVESTMENT IN RENTAL PROPERTY: Accounted for using the operating method, net of accumulated depreciation Accounted for using the direct financing method $ OTHER ASSETS: Cash Restricted cash Accrued rental income Due from related parties Prepaid expenses and other assets Intangible lease assets, net Lease acquisition costs, net 54,640,584 7,146,660 61,787,244 $ 2,146,447 42,767 609,117 16,200 35,973 4,133,590 2,120,343 9,104,437 TOTAL ASSETS 37,117,981 7,173,407 44,291,388 4,236,222 32,358 423,914 199,924 2,904,842 1,420,906 9,218,166 $ 70,891,681 $ 53,509,554 $ 38,165,296 1,950,000 28,292 101,908 203,888 190,642 284,081 28,540 1,330,372 42,283,019 $ 30,072,308 2,100,000 31,389 72,785 34,159 157,090 334,655 120,441 78,608 1,033,949 34,035,384 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES: Mortgages payable, net of unamortized debt acquisition costs Line of credit Accounts payable and other accrued expenses Accrued interest Due to related parties Rents received in advance Distributions/dividends declared Tenant security deposits Tenant real estate tax deposits Intangible lease liabilities, net TOTAL LIABILITIES STOCKHOLDERS’ EQUITY: Royal Oak Realty Trust Inc. Stockholders’ Equity Preferred stock, $.001 par value; 100,000 shares authorized; none issued or outstanding Common stock, $.001 par value; 40,000,000 shares authorized; 484,877 and 288,332 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively Common stock subscribed Additional paid-in capital Distributions/dividends in excess of accumulated earnings Total Royal Oak Realty Trust Inc. Stockholders’ Equity Noncontrolling interests TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY - 485 8 25,372,858 (2,703,695) 22,669,656 5,939,006 28,608,662 $ See independent accountants’ compilation report and accompanying notes to consolidated financial statements. -1- - 70,891,681 288 10 15,552,117 (1,700,942) 13,851,473 5,622,697 19,474,170 $ 53,509,554 ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED) REVENUE: Rental income from operating leases Earned income from direct financing leases Rental expenses reimbursable by tenants Interest and other income Total revenue $ 3,762,767 481,803 286,700 183 4,531,453 EXPENSES: Depreciation and amortization Interest expense - contractual Interest expense - amortization of debt acquisition costs Asset management and property management fees Acquisition fees paid to asset manager Directors fees and related awards Rental expenses reimbursable by tenants Professional fees - general and acquisition-related Other expenses Total expenses 1,494,863 1,259,709 122,394 553,726 190,500 122,833 286,700 219,715 62,673 4,313,113 NET INCOME INCLUDING NONCONTROLLING INTERESTS 218,340 LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (125,211) NET INCOME ATTRIBUTABLE TO ROYAL OAK REALTY TRUST INC. $ See independent accountants’ compilation report and accompanying notes to consolidated financial statements. -2- 93,129 $ $ - - - - - 8 8 (10) 10 Common stock subscribed $ $ 25,372,858 (529,235) - 436,992 (54,670) 76,934 9,890,720 - 15,552,117 Additional paid-in capital $ $ (2,703,695) -3- - 93,129 - - - - (1,095,882) (1,700,942) See independent accountants’ compilation report and accompanying notes to consolidated financial statements. 485 - Adjustment of noncontrolling interests $ - Net income BALANCE, September 30, 2016 - Common stock subscribed (1) - Stock-based compensation Redemption of 1,032 shares of common stock 198 Issuance of 197,577 shares of common stock, net 288 - $ Distributions/dividends paid and payable BALANCE, December 31, 2015 Common stock Distributions/ dividends in excess of accumulated earnings ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED) $ $ 5,939,006 529,235 125,211 - - - - (338,137) 5,622,697 Noncontrolling interests $ 28,608,662 - 218,340 437,000 (54,671) 76,934 9,890,908 (1,434,019) $ 19,474,170 Total ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income including noncontrolling interests $ Adjustments to reconcile net income including noncontrolling interests to net cash provided by operating activities: Depreciation and amortization including intangibles associated with investment in rental property Stock-based compensation Interest expense - amortization of debt acquisition costs Straight-line rent and financing lease adjustments Increase in due from related parties Decrease in prepaid expenses and other assets Decrease in accounts payable and other accrued expenses Increase in accrued interest Decrease in due to related parties Increase in rents received in advance Increase in tenant security deposits Decrease in tenant real estate tax deposits Total adjustments 218,340 1,409,795 76,934 122,394 (158,456) (16,200) 178,747 (3,097) 29,123 (34,159) 46,798 163,640 (50,068) 1,765,451 Net cash provided by operating activities 1,983,791 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to investment in rental property accounted for using the operating method Lease acquisition costs paid Increase in restricted cash Net cash used in investing activities (19,747,941) (816,219) (10,409) (20,574,569) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on mortgages payable Proceeds from issuance of common stock, net Cash distributions/dividends paid Principal payments on mortgages payable - prepayment Principal payments on mortgages payable - scheduled Net repayments on line of credit Debt acquisition costs paid Proceeds from common stock subscribed Redemption of common stock Net cash provided by financing activities 11,800,000 9,307,601 (994,725) (2,900,000) (603,821) (150,000) (340,381) 437,000 (54,671) 16,501,003 NET DECREASE IN CASH (2,089,775) CASH, beginning of period 4,236,222 CASH, end of period $ See independent accountants’ compilation report and accompanying notes to consolidated financial statements. -4- 2,146,447 ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2016 (See Independent Accountants’ Compilation Report - Unaudited) 1. BUSINESS DESCRIPTION Royal Oak Realty Trust Inc. (the “Corporation,” together with its consolidated subsidiaries, the “Company”), a Maryland corporation, was formed on January 6, 2014 and elected to be taxed as a real estate investment trust (“REIT”) in 2014. The Company is focused on acquiring commercial net leased real estate. The properties are leased under long-term lease agreements. All properties are leased on a net lease basis, to the extent possible, such that tenants pay most, if not all, of the occupancy costs such as maintenance and repairs, real estate taxes, insurance, and utilities. At September 30, 2016, the Company owns thirteen commercial stand-alone real estate properties located in six states within the continental United States of America. Royal Oak Realty Trust (Operating Company) LLC (the “Operating Company”) is the entity through which the Corporation conducts substantially all of its business and owns (either directly or through subsidiaries) substantially all of its assets. At September 30, 2016, the Corporation owns 80.1% of the economic interests in the Operating Company and serves as its managing member. The remaining interests are held by members who acquired their interests by contributing property to the Operating Company (see Note 10). Prior to changing their names in December 2015 and January 2016, respectively, Royal Oak Realty Trust Inc. and Royal Oak Realty Trust (Operating Company) LLC were known as Buckingham Net Leased Properties Group Inc. and Buckingham Net Leased Properties Group LLC, respectively. The accompanying consolidated financial statements present the consolidated financial position, results of operations, changes in equity, and cash flows of the Corporation, the Operating Company and its subsidiaries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: All material intercompany balances and transactions have been eliminated in consolidation. Basis of Accounting: The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) applicable to interim financial information. Accordingly, they do not include all of the disclosures that would be required by GAAP to constitute complete financial statements for the Company’s annual reporting period ending December 31. Management has included all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the accompanying consolidated financial statements. -5- Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. Accordingly, the September 30, 2016 consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2015. Use of Estimates: The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include, but are not limited to, the allocation of purchase price between investment in rental property and intangible assets and liabilities, the allowance for doubtful accounts, the depreciable lives of rental property, the amortizable lives of intangible assets and liabilities, and taxable income. Accordingly, actual results may differ from those estimates. Revenue Recognition: Rental property leases are accounted for using either the operating method or the direct financing method. Such methods are described below: Operating method - Revenue is recognized as rents are earned. When scheduled rentals vary during the lease term, income is recognized on a straight-line basis so as to produce a constant periodic rent over the term of the lease. Direct financing method - Unearned income is deferred and amortized into income over the lease terms so as to produce a constant periodic rate of return on the Company’s net investment in the leases. Accrued Rental Income and Allowance for Doubtful Accounts: Accrued rental income includes the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis. Management periodically reviews the sufficiency of the allowance for doubtful accounts, taking into consideration its historical losses and existing economic conditions, and makes adjustments to the allowance as it considers necessary. Accounts are charged off against the allowance for doubtful accounts when management determines that such accounts are uncollectible. Management has determined that no allowance is necessary at September 30, 2016 and December 31, 2015. Investment in Rental Property: Rental property accounted for using the operating method is recorded at cost or, if contributed, fair value. Rental property accounted for using the direct financing method is recorded at its net investment (which at the inception of the lease generally represents the cost of the property). When assets are retired or disposed of, the related cost and accumulated depreciation are removed from their respective accounts. The difference between the cost or fair value and accumulated depreciation of assets disposed of, less any amount realized from the disposition, is reflected in the Consolidated Statement of Income as gain or loss on disposition of rental property. -6- The Company accounts for its acquisitions of investments in rental property, subject to operating leases, in accordance with the authoritative guidance for business combinations. Accordingly, such acquisitions are recorded at the estimated fair values of the assets acquired and liabilities assumed. Acquisition-related costs such as transaction costs and acquisition fees paid under asset management agreements (see Note 7) are expensed as incurred. The results of operations of acquired properties are included in the Consolidated Statement of Income from the respective date of acquisition. The fair value of rental property acquired is allocated to tangible assets, consisting of land, buildings and improvements, and identifiable intangible assets and liabilities, such as amounts related to in-place leases, acquired above- and below-market leases, and mortgages payable. Estimated fair value determinations are based on management’s judgment, which is based on various factors including market conditions, the industry in which the tenant operates, the characteristics of the real estate and/or real estate appraisals. The Company allocates purchase price to the fair value of the tangible assets of an acquired property determined by valuing the property as if it were vacant. The as-if-vacant value is allocated to land, buildings and improvements based on management’s determination of the relative fair value of the assets. The fair value of in-place leases is based upon the Company’s evaluation of the specific characteristics of the leases. Factors considered in these analyses include an estimate of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases, including leasing commissions. The Company also considers information obtained about each property as a result of its pre-acquisition due diligence, marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired. In estimating carrying costs, management also includes real estate taxes, insurance and other operating expenses. Acquired in-place leases as of the date of acquisition are amortized over the remaining lease terms. Acquired above- and below-market lease values are recorded based on the present value (using an interest rate that reflects the risks associated with the lease acquired) of the differences between the contractual amounts to be paid pursuant to the in-place leases and management’s estimate of fair market value lease rates at the time of acquisition for the corresponding in-place leases measured over a period equal to the remaining non-cancelable term of the in-place leases. The capitalized above- and below-market lease values are amortized as adjustments to rental revenue over the remaining non-cancelable terms of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value is charged to amortization expense and the unamortized portion of above- or below-market lease value is charged to rental revenue. Management estimates the fair value of assumed mortgages payable based upon indications of thencurrent market pricing for similar types of debt with similar maturities. -7- Depreciation: Depreciation is provided using the straight-line method over the estimated useful lives of the related assets, which are as follows: Land improvements Buildings and improvements 15 years 15 - 40 years Depreciation expense was $1,125,291 for the nine months ended September 30, 2016. Long-Lived Assets: Long-lived assets, including investment in rental property, are generally stated at cost or fair value. However, the Company reviews long-lived assets to be held and used for possible impairment when events or changes in circumstances indicate their carrying amounts may not be recoverable. If such events or changes in circumstances are present, a loss is recognized to the extent the carrying value of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. At September 30, 2016 and December 31, 2015, there were no such impairments. Restricted Cash: The terms of one of the Company’s mortgages payable requires the Company to deposit certain replacement and other reserves with the lender. Such restricted cash amounted to $42,767 and $32,358 at September 30, 2016 and December 31, 2015, respectively. Intangible Assets and Liabilities: Intangible lease assets and liabilities represent the estimated fair value of in-place and above- and below-market leases. These costs are being amortized using the straight-line method over the remaining non-cancelable terms of the respective leases, which range from 10 to 15 years. Lease acquisition costs represent direct leasing costs such as related party asset manager fees, third party professional fees and tenant inducements incurred related to lease transactions. These costs are being amortized using the straight-line method over the terms of the related leases, which range from 10 to 20 years. Debt Acquisition Costs: Debt acquisition costs are presented in the accompanying Consolidated Balance Sheets as a direct deduction from the debt to which they relate. Debt acquisition costs related to the line of credit commitment fees are presented in other assets in the accompanying Consolidated Balance Sheets. Debt acquisition costs are being amortized to interest expense using the straight-line method, which approximates the effective interest method, over the terms of the related debt, which range from 1 to 25 years. -8- Common Stock Subscribed: The Company offers its common stock on a subscription basis. Common stock subscribed represents funds received for future common stock purchases that have not yet been completed as of the date of the Consolidated Balance Sheets. Noncontrolling Interests: Noncontrolling interests represent the 19.9% and 29.5% interest in the Operating Company at September 30, 2016 and December 31, 2015, respectively, which is accounted for as a separate component of Stockholders’ Equity. Members represented by these interests hold membership units, which have the same economic interest as shares of common stock. The Company periodically adjusts the carrying value of noncontrolling interests to reflect its share of the book value of the Operating Company. Such reallocations are recorded to additional paid-in capital as an adjustment of noncontrolling interests in the accompanying Consolidated Statement of Changes in Stockholders’ Equity. Income Taxes: The Corporation has made an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ended December 31, 2014. The Corporation believes it is organized and operates in such a manner as to qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner so that it will remain qualified as a REIT for federal income tax purposes. To maintain REIT status and not be subject to federal income taxation at the corporate level, the Corporation is generally required to distribute at least 90% of its adjusted taxable income, as defined in the Code, to its stockholders and satisfy certain other organizational and operating requirements. Although it may qualify for REIT status for federal income tax purposes, the Corporation is subject to state and local income or franchise taxes in certain states in which some of its properties are located. The Operating Company is a Limited Liability Company and has elected to be treated as a partnership for federal and state income tax purposes. Under this election, the taxable income or loss of the Operating Company is reported on the members’ income tax returns. The Company recognizes and measures uncertain tax positions using a two-step approach. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained upon examination, including resolution of related appeals or litigation processes, if any. In making this assessment, the Company must assume that the taxing authority will examine the income tax position and have full knowledge of all relevant information. The second step is to measure the tax benefit as the largest amount that is more than fifty percent likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may or may not accurately forecast actual outcomes. -9- Stock-Based Compensation: The Company recognizes costs related to all stock-based payments, including stock options and restricted stock awards, based upon their fair value on the grant date (see Note 12). Such costs are expensed ratably on a straight-line basis over the requisite service or vesting periods. Prior period reclassifications: Certain reclassifications have been made to the December 31, 2015 Consolidated Balance Sheet to conform with the current period presentation. 3. INVESTMENT IN RENTAL PROPERTY AND LEASE ARRANGEMENTS The Company generally leases its investment rental properties to established tenants. At September 30, 2016, eleven of the investment rental property leases have been classified as operating leases and two leases have been classified as direct financing leases. All leases have initial terms of ten to twenty years and provide for minimum rentals. In addition, the leases generally provide for limited fixed increases in rent throughout the lease term. Generally, the tenant is also required to pay all property taxes and assessments, substantially maintain the interior and exterior of the building, and carry property and liability insurance coverage. The leases also typically provide the tenant with one or more multi-year renewal options subject to generally the same terms and conditions as the initial lease. The following table summarizes the carrying amount of rental property subject to non-cancelable operating leases with tenants at: September 30, 2016 $ 4,002,735 5,174,319 48,540,101 57,717,155 (3,076,571) $54,640,584 Land Land improvements Buildings and improvements Less - accumulated depreciation December 31, 2015 $ 2,597,993 3,749,631 32,721,637 39,069,261 (1,951,280) $37,117,981 Estimated future minimum rental receipts required by non-cancelable operating leases with tenants are as follows: Year ending September 30, 2017 2018 2019 2020 2021 Thereafter $ 5,240,292 5,509,718 5,630,205 5,699,350 5,790,067 36,139,782 $64,009,414 - 10 - The following table summarizes the components of net investment in direct financing leases at: September 30, 2016 $ 14,200,774 3,181,475 (10,235,589) $ 7,146,660 Minimum lease payments to be received Estimated unguaranteed residual value Less - unearned revenue Net investment in direct financing leases December 31, 2015 $ 14,709,324 3,181,475 (10,717,392) $ 7,173,407 Estimated future minimum rental receipts required by non-cancelable direct financing leases with tenants are as follows: Year ending September 30, 2017 2018 2019 2020 2021 Thereafter $ 591,362 657,801 670,958 683,846 695,390 10,901,417 $14,200,774 Since lease renewal periods are exercisable at the option of the tenant, the above amounts only include future minimum lease payments due during the initial lease terms. 4. INTANGIBLE ASSETS AND LIABILITIES The following is a summary of intangible assets and liabilities and related accumulated amortization at: September 30, 2016 Lease intangibles: Acquired above-market leases Less - accumulated amortization December 31, 2015 $ 190,561 (40,553) $ 150,008 $ 190,560 (28,395) $ 162,165 Acquired in-place leases Less - accumulated amortization $4,699,380 (715,798) $3,983,582 $3,205,686 (463,009) $2,742,677 Intangible lease assets, net $4,133,590 $2,904,842 Acquired below-market leases Less - accumulated amortization Intangible lease liabilities, net $1,594,048 (263,676) $1,330,372 $1,200,400 (166,451) $1,033,949 - 11 - September 30, 2016 Lease acquisition costs Less - accumulated amortization Lease acquisition costs, net December 31, 2015 $2,382,186 (261,843) $2,120,343 $1,565,967 (145,061) $1,420,906 Amortization expense, excluding above-market and below-market leases, amounted to $369,571 for the nine months ended September 30, 2016. Acquired above-market leases amortized to rental revenue amounted to $12,158 for the nine months ended September 30, 2016. Acquired belowmarket leases amortized to rental revenue amounted to $97,225 for the nine months ended September 30, 2016. Estimated future amortization of above- and below-market leases to rental income from operating leases is as follows: Year ending September 30, 2017 2018 2019 2020 2021 Thereafter $ 115,445 115,445 115,445 115,445 115,445 603,139 $1,180,364 Estimated future amortization of in-place leases and lease acquisition costs is as follows: Year ending September 30, 2017 2018 2019 2020 2021 Thereafter 555,623 555,623 555,623 555,623 555,623 3,325,810 $6,103,925 - 12 - 5. LINE OF CREDIT The Operating Company has a line of credit agreement, amended in February 2016, with M&T Bank (“M&T”) which provides for maximum borrowings of $10,000,000. Each advance under the line of credit agreement must be for a minimum of $100,000 and bears interest, which is payable monthly, at the one-month London Interbank Offered Rate (“LIBOR”) plus 4.5%. The line of credit agreement is unsecured, but requires that borrowings not be greater than (i) 90% of the purchase price for the related property or (ii) if closing costs are to be included, 92% of the purchase price for the related property. Advances under the line of credit agreement are payable in full no later than 180 days following the date of such advance. The Corporation, two related parties as described in Note 7, and a sponsor who formed the Operating Company have provided unconditional guarantees of all borrowings on the line of credit agreement. The Company was required to pay a commitment fee of $50,000 at the time this line of credit was amended. The line of credit agreement is renewable annually subject to a review by the Bank and the payment of an annual facility fee of $50,000. Prior to the amendment in February 2016, the line of credit provided for maximum borrowings of $5,000,000 and bore interest at the one-month LIBOR plus 3.5%. Outstanding borrowings on the line of credit agreement were $1,950,000 and $2,100,000 at September 30, 2016 and December 31, 2015, respectively. The one-month LIBOR was approximately 0.53% at September 30, 2016. The line of credit agreement is subject to financial and non-financial covenants (see Note 6). 6. MORTGAGES PAYABLE Mortgages payable consist of the following at: September 30, 2016 Mortgage payable to Woodmen of the World Life Insurance Society in monthly installments of interest only through September 2017 followed by monthly installments of $29,438, including interest at 3.90%, with a balloon payment of $4,036,300 due in September 2026. Secured by related rental property and lease rents. $5,500,000 Mortgage payable to Five Star Bank in monthly installments of $33,124, including interest at 4.7%, with a balloon payment of $3,654,716 due in August 2023. Secured by related rental property and lease rents. 5,143,920 - 13 - December 31, 2015 $ - 5,276,070 September 30, 2016 December 31, 2015 Mortgage payable to Genworth Life Insurance Company in monthly installments of $21,562, including interest at 3.85%, with a balloon payment of $3,605,115 due in January 2021. Secured by related rental property and lease rents. 4,091,565 - Mortgage payable to Protective Life and Annuity Insurance Company (“Protective”) in monthly installments of $21,053, including interest at 4.375%, with a balloon payment of $2,720,132 due in January 2025. Secured by related rental property and lease rents. 3,644,229 3,712,850 Mortgage payable to CMFG Life Insurance Company in monthly installments of $24,895, including interest at 4.5%, with a balloon payment of $1,335,340 due in July 2028. Secured by related rental property and lease rents. 3,510,078 3,613,713 Mortgage payable to ESL Federal Credit Union in monthly installments of $16,683, including interest at 4.44%, with a balloon payment of $2,031,412 due in January 2028. Secured by substantially all assets of the related rental property. 2,989,555 3,000,000 Mortgage payable to Protective in monthly installments of $15,916, including interest at 4.5%, with a balloon payment of $2,039,652 due in August 2024. Secured by related rental property and lease rents. 2,693,550 2,744,918 Mortgage payable to Genesee Regional Bank (“GRB”) in monthly installments of $15,643, including interest at 4.55%, through November 2021. Thereafter the interest rate will be revised, at the Company’s discretion, to either GRB’s prime rate plus .75% or the then 3-year Federal Home Loan Bank advance rate plus 2.0%, subject to a minimum rate of 4%. A balloon payment of $2,045,910 is due in November 2024. Secured by related rental property and lease rents. 2,688,481 2,734,930 - 14 - September 30, 2016 December 31, 2015 Mortgage payable to Standard Insurance Company (“Standard”) in monthly installments of $14,552, including interest at 4.2%. The interest rate will be adjusted effective July 2025 and July 2035 to Standard’s then prevailing interest rate for loans with similar terms. It is scheduled to mature in July 2040. Secured by related rental property and lease rents. 2,626,924 2,674,311 Mortgage payable to S&T Bank in monthly installments of $11,932, including interest at 4.2%, through February 2023. Thereafter the interest rate will be revised to the published Federal Reserve Board’s 3 year interest rate swap rate plus 2.35%. A balloon payment of $1,628,549 is due in February 2026. Secured by related rental property and lease rents. 2,196,025 Mortgage payable to M&T in monthly installments of $9,019, including interest at 4.57%, with a balloon payment of $1,346,318 due in September 2022. Secured by related rental property and lease rents. 1,583,096 1,600,000 Mortgage payable to ServisFirst Bank in monthly installments of $8,806, including interest at 4.5%, with a balloon payment of $1,154,576 due in October 2020. A prepayment of $2,900,000 was made in August 2016. Secured by related rental property and lease rents. 1,313,682 4,303,749 1,063,985 39,045,090 1,088,370 30,748,911 Mortgage payable to M&T in monthly installments of $8,277, including interest at 6.11%, with a balloon payment of $1,020,721 due in December 2017. Secured by related rental property and lease rents. Debt acquisition costs Less - accumulated amortization Debt acquisition costs, net (1,074,615) 194,821 (879,794) Mortgages payable, net of unamortized debt acquisition costs $38,165,296 - (791,889) 115,286 (676,603) $30,072,308 Certain mortgage payable agreements are subject to prepayment premiums and may be terminated by the lender under certain events of default as defined under the related agreements. - 15 - Under the line of credit agreement and certain mortgages payable, the Company is subject to various covenants, including maintaining a minimum debt service coverage ratio. There are also financial reporting requirements and other covenants as defined in the related agreements. Some of the mortgages payable have non-recourse carve-outs that are guaranteed by the Corporation, Operating Company or sponsors who formed the Operating Company. The Corporation and the Operating Company have indemnified the sponsors for any payments required to be made under any carve-out guaranty. Estimated future principal payments to be made under the above mortgage agreements are as follows: Year ending September 30, 2017 2018 2019 2020 2021 Thereafter $ 931,102 2,104,681 1,125,307 2,324,762 4,716,471 27,842,767 $39,045,090 Estimated future amortization of debt acquisition costs to interest expense is as follows: Year ending September 30, 2017 2018 2019 2020 2021 Thereafter $116,941 112,487 111,597 105,316 79,818 353,635 $879,794 7. RELATED PARTY TRANSACTIONS Asset Management Agreement: The Corporation and the Operating Company have entered into an asset management agreement (the “Asset Management Agreement”) with Cambridge Street Asset Management LLC (“CSAM”), a related party that is majority-owned by the President and Chief Executive Officer. Under the terms of the Asset Management Agreement, CSAM is responsible for, among other things, providing management of the day-to-day operations of the Company, providing suitable investment opportunities to the Company, determining acquisition and disposition strategies of the Company, entering into leases with tenants, managing financing activities, monitoring of compliance with loan covenants, monitoring other operations of the Company, and providing support to the Company’s officers and directors to assist in their governance function and responsibilities. - 16 - In exchange for services provided under the Asset Management Agreement, CSAM is compensated as follows: (a) Annual asset management fees payable on a pro-rata basis in advance on the first business day of each calendar quarter, equal to an annual rate of: i. 1.0% if the gross asset value is $100 million or less; ii. 0.9% if the gross asset value is over $100 million and is $200 million or less; iii. 0.8% if the gross asset value is over $200 million and is $300 million or less; or iv. 0.75% if the gross asset value is over $300 million. The “gross asset value” is the sum of the valuations of each of the properties in the Company’s portfolio as determined as of December 31 of the preceding year plus, for each quarter following the acquisition of any property, the gross purchase price set forth in the acquisition contract for each property acquired after such year end. (b) Acquisition fees equal to 1% of the gross purchase price paid for each rental property acquired, including any property contributed to the Operating Company in exchange for membership interests. Prior approval of the acquisition fee is required for rental property contributed by the sponsors who formed the Operating Company. In addition, if CSAM is engaged to secure financing for a rental property, a fee equal to the difference between 1% of the principal amount of the loan and any fees paid to any mortgage brokers; (c) In the event that CSAM acts on behalf of the Operating Company in leasing any properties, a leasing fee equal to (i) 4% of the total gross base rent payments due over the first ten years of the initial term of the lease and 2% of the remainder of the lease term and (ii) 2% of the total gross base rents of any renewal term. The leasing fee payable to CSAM will be reduced to the extent necessary (including to 0%) if the aggregate of CSAM’s leasing fee and any fee payable to any other third party by the Operating Company or the Corporation with respect to the lease or renewal would be more than 6% of the total gross base rent payments for an initial term or 3% for a renewal term; and (d) A disposition fee equal to 1% of the gross purchase price received upon disposition of a rental property. The initial term of the Asset Management Agreement is effective through February 1, 2024, after which it automatically renews for successive five year periods, unless either party provides written notice of termination in accordance with the Asset Management Agreement. In the event the Company elects to terminate the Asset Management Agreement due to a change in control of CSAM, as defined in the Asset Management Agreement, or at the end of the initial term or any renewal period without cause, the Company will be required to pay CSAM a termination fee of 2 ½ times the aggregate asset management fees paid to CSAM during the twelve-month period immediately preceding the date of such termination. - 17 - Property Management Agreements: As of September 30, 2016, each of the Operating Company’s thirteen subsidiaries and CSAM have entered into separate property management agreements (the “Property Management Agreements”) with Cambridge Street Property Management LLC (“CSPM”), a related party that is majority-owned by the President and Chief Executive Officer. It is also partially owned by other officers of the Corporation. Under the terms of the Property Management Agreements, CSPM manages the day-to-day operations of the Company’s rental properties which include, among other things, collection of rent, monitoring of compliance with lease terms, payment of mortgages payable and other obligations, and payment of the management fee. In exchange for services provided under the Property Management Agreements, CSPM is compensated as follows: (a) For property management services, the fee is based upon the aggregate value of the Corporation’s investment in rental property, as defined in the Property Management Agreements, as follows: a. 3% of total monthly base rent collected if the value is $100 million or less, b. 2.75% of total monthly base rent collected if the value is greater than $100 million but equal to or less than $300 million, or c. 2.5% of total monthly base rent collected if the value is greater than $300 million. (b) In the event that CSPM is retained to provide leasing services on behalf of the Company, a leasing fee shall be payable for a new lease or lease expansion in an amount up to 4% of the scheduled gross base rental payments to be made under the terms of the new lease or lease expansion during the first ten years of the lease and 2% of the scheduled gross base rental payments to be made thereafter. The leasing fee payable to CSPM will be reduced to the extent necessary (including to 0%) if the aggregate leasing fees payable to additional brokers (including CSAM, if applicable) would be more than 6% of the total scheduled gross base rental payments under the terms of the new lease or lease expansion; (c) In the event that CSPM is retained to provide leasing services on behalf of the Company, a leasing fee shall be payable for lease renewals or extensions in an amount up to 2% of the base rent due over the renewal/extension period. The leasing fee payable to CSPM will be reduced to the extent necessary (including to 0%) if the aggregate leasing fees payable to additional brokers (including CSAM, if applicable) would be more than 3% of the base rent due over the renewal/extension period; (d) In the event that CSPM is retained to provide financing services, a financing fee shall be payable equal to the difference between 1% of the principal amount of the loan and any fees paid to any mortgage brokers (including CSAM, if applicable); - 18 - (e) In the event that additional services should be deemed required and CSPM is retained to provide those services, various fees for other services provided by CSPM shall be payable, including modernization, tenant improvements, repairs and insured restoration loss activities. In addition, if requested, CSPM may also engage and oversee legal actions related to the rental property pertaining to the collection of rents or enforcement of the related lease. CSPM will charge an hourly fee of $75 plus expenses in addition to any third party expenses associated with these matters. The initial term of each of the Property Management Agreements is effective for three years and automatically renews for successive one year periods until terminated by either party upon sixty days written notice prior to the end of the initial term or any renewal period. In the event of a change in control of CSPM, as defined in the Property Management Agreements, or if the Company terminates a Property Management Agreement at the end of any term without cause, the Company will be required to pay CSPM a termination fee of 50% of the aggregate fees paid to CSPM during the twelve-month period immediately preceding the date of such termination. Management fees incurred under the Asset Management Agreement and Property Management Agreements totaled $553,726 for the nine months ended September 30, 2016. In addition, asset acquisition fees under these agreements totaled $190,500 for the nine months ended September 30, 2016. Leasing and financing fees paid or payable to CSAM and CSPM totaled $851,456 for the nine months ended September 30, 2016. Leasing fees are reported as lease acquisition costs while financing fees are reported as a reduction of mortgages payable in the accompanying Consolidated Balance Sheets. At September 30, 2016 and December 31, 2015, $16,200 and $0, respectively, were included in due from related parties in the accompanying Consolidated Balance Sheets for management fees and leasing fees due from CSAM and CSPM. At September 30, 2016 and December 31, 2015, $0 and $34,159, respectively, were included in due to related parties in the accompanying Consolidated Balance Sheets for management fees, reimbursed expenses, and leasing fees due to CSAM and CSPM. 8. INCOME TAXES The Company is required to file income tax returns with federal and state taxing authorities. The Corporation’s federal and state income tax returns remain subject to examination by the respective taxing authorities for the 2014 through 2016 tax years. The Operating Company’s federal and state income tax returns remain subject to examination by the respective taxing authorities for the 2013 through 2016 tax years. The Company has determined that it has no uncertain tax positions, which includes the tax status of the Company. - 19 - 9. CREDIT RISK CONCENTRATIONS The Company maintained bank balances that, at times, exceeded the federally insured limit during the nine months ended September 30, 2016. The Company has not experienced any losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts. The Company had revenue from four tenants which each represented between 10% and 13% of total revenue for the nine months ended September 30, 2016. 10. NONCONTROLLING INTERESTS Noncontrolling interests as reported in the accompanying Consolidated Balance Sheets are held in the form of membership units in the Operating Company. At September 30, 2016, a total of 120,776 non-managing membership units were outstanding, which represent a 19.9% interest in the Operating Company. Membership units are economically equivalent to the Company’s common stock and, subject to certain restrictions, are convertible into the Company’s common stock at the option of the respective holder on a dollar-for-dollar basis. Holders of the membership units do not have voting rights. 11. DISTRIBUTION REINVESTMENT PLAN The Company has a Distribution Reinvestment Plan (the “Plan”) available to any holder of shares of common stock or membership units that are convertible into shares. In general, the Plan allows participants to purchase common stock from distributions received. Under the Plan, all distributions to be reinvested under the Plan will be used to purchase shares of common stock as of the quarterly distribution date for the applicable distribution. The Corporation offers shares, pursuant to the Plan, at 98% of the Determined Share Value, which is $54 at September 30, 2016. At September 30, 2016 and December 31, 2015, there were 18,188 and 7,025 shares, respectively, issued and outstanding under the Plan. Distributions/dividends declared at September 30, 2016 as reported in the accompanying Consolidated Balance Sheet include 1,676 shares of common stock totaling $88,673 to be reinvested under the Plan in October 2016. - 20 - 12. STOCK INCENTIVE PLAN The Company has a long-term stock incentive plan (the “Incentive Plan”) under which its Independent Directors have authority to grant stock options, stock appreciation rights, restricted stock awards, restricted stock units or performance share units (collectively, the “Stock Awards”) to employees, officers, directors, and consultants of the Company. Stock options are granted with an exercise price determined by the Company’s Independent Directors, provided that the exercise price per share of common stock shall not be less than the fair value of such share of common stock at the date of grant. The term of the stock options is determined at the time of grant, but generally the stock options vest ratably over a five-year period. In the event of a change in control of the Company, all awards immediately vest and are exercisable or fully earned at the maximum amount, except as otherwise determined by the Independent Directors. The Company may issue a maximum of 700,000 shares under the Plan. However, the Company may not issue more than 70,000 shares under the Plan until the Company has issued at least 700,000 shares of common stock. Once the Corporation has issued a minimum of 700,000 shares of common stock, the shares issued under the Plan may not exceed 10% of the total issued and outstanding shares of the Corporation. Stock Options: Stock-based compensation cost for a stock option is estimated at the grant date based on each option’s fair value as calculated using the Black-Scholes option pricing model, which incorporates various assumptions including expected dividend yields, volatility, option lives and interest rates. The Corporation recognizes stock-based compensation cost as an expense ratably on a straight-line basis over the requisite service period. In determining the service period, the Corporation considers service requirements and the vesting period. At September 30, 2016, there were outstanding options to purchase 40,000 shares under the Incentive Plan, of which 16,000 shares are exercisable. The weighted-average exercise price of all outstanding and exercisable stock options is $50 and the weighted average contractual term is approximately seven years at September 30, 2016. The Company recognized compensation cost of $31,934 related to stock options during the nine months ended September 30, 2016. Restricted Stock Awards: Stock-based compensation cost for restricted stock is estimated based on the determined share value at the grant date. The Corporation recognizes stock-based compensation cost as an expense ratably on a straight-line basis over the requisite service period. In determining the service period, the Corporation considers service and performance requirements and the vesting period. During the nine months ended September 30, 2016, no shares of restricted stock were granted under the Incentive Plan. - 21 - Board of Directors Stock Awards: Members of the Company’s Board of Directors, excluding the President and Chief Executive Officer of the Corporation, receive shares of common stock each quarter as partial compensation for serving on the Board of Directors. Stock-based compensation cost for stock issued to board members is estimated at the determined share value at the grant date. The Company recognized compensation cost of $45,000 related to stock issued to board members during the nine months ended September 30, 2016. 13. COMMITMENT In December 2015, the Company entered into a lease agreement with a tenant which provides for a tenant improvement allowance of up to $700,000 for certain improvements to the property. The work is to be performed by the tenant, subject to the approval of the Company, and must be completed by the end of November 2016. Any unused portion of the tenant improvement allowance will be forfeited by the tenant in December 2016. As of September 30, 2016, $665,439 of the allowance has been used by the tenant and is included in investment in rental property in the accompanying Consolidated Balance Sheet. In August 2016, the Company entered into a lease agreement with a tenant which provides for a tenant improvement allowance of up to $250,000 for certain improvements to the property. The work is to be performed by the tenant, subject to the approval of the Company, and must be completed by the end of February 2018. Any unused portion of the tenant improvement allowance will be forfeited by the tenant. This allowance has not been used by the tenant as of September 30, 2016. 14. SUPPLEMENTAL CASH FLOW DISCLOSURES Cash paid for interest was $1,230,586 for the nine months ended September 30, 2016. The following are non-cash transactions and have been excluded from the accompanying Consolidated Statement of Cash Flows: ! The Company has distributions/dividends payable totaling $190,642 which was declared as payable to members and stockholders at September 30, 2016. ! During the nine months ended September 30, 2016, additions to investment in rental property accounted for using the operating method includes purchase accounting allocation to intangible lease assets and intangible lease liabilities of $1,100,047. ! During the nine months ended September 30, 2016, the Company issued common stock totaling $583,307 under the terms of the Plan. - 22 - 15. SUBSEQUENT EVENTS The Company has evaluated subsequent events through November 15, 2016, which is the date the accompanying consolidated financial statements were available to be issued. Distributions/dividends declared of $190,642 as reported in the accompanying Consolidated Balance Sheet at September 30, 2016 were paid to members and stockholders in October 2016. Of this amount, $101,969 was paid in cash while the remaining $88,673 was paid in the form of stock under the terms of the Plan. In September 2016, the Company’s Board of Directors approved a $0.315 per unit/share distribution/dividend per month for the months of October, November, and December 2016. Such distributions/dividends are to be prorated on a daily basis based on the number of days of ownership on record during each of the months during the quarter ending December 2016. The distribution/dividend amounts for each month of the quarter ending December 2016 are to be paid on or before the forty-fifth day after the first date of ownership on record for each month of the quarter or as promptly as practicable thereafter. - 23 - EXHIBIT C Most Recent Annual and Quarterly Calculation of Funds From Operations (“FFO”), Adjusted Funds From Operations (“AFFO”) and Modified Adjusted Funds From Operations (“MAFFO”) Per Weighted Average Share/Unit for Royal Oak Realty Trust Inc. and Subsidiaries ROYAL OAK REALTY TRUST INC. AND SUBSIDIARIES FUNDS FROM OPERATIONS, ADJUSTED FUNDS FROM OPERATIONS, AND MODIFIED ADJUSTED FUNDS FROM OPERATIONS PER WEIGHTED AVERAGE SHARE/UNIT FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014 2015 2014 Funds From Operations (FFO): Excess (Shortage) of revenue over expenses Depreciation and amortization FFO $ $ $ 185,622 1,421,790 1,607,412 $ $ $ (434,131) 872,710 438,579 Adjusted Funds from Operations (AFFO): Stock Compensation Expense (option vesting) Amortization of Financing Costs U.S. GAAP Straight-Line Rent Adjustment AFFO $ $ $ $ 169,245 116,755 (231,941) 1,661,471 $ $ $ $ 138,522 43,685 (134,357) 486,429 Modified Adjusted Funds from Operations (MAFFO): Acquisition Costs MAFFO $ $ 145,694 1,807,165 $ $ 360,472 846,901 Weighted Average Shares/Units Outstanding FFO Per Unit AFFO per Unit MAFFO per Unit 337,330 $ $ $ 4.77 4.93 5.36 154,479 $ $ $ 2.84 3.15 5.48 As used herin, the Company calculates FFO, as defined by The National Association of Real Estate Investment Trusts (NAREIT), to be equal to net income (computer in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis. AFFO is calculated as FFO, minus U.S. GAAP straight-line rent adjustment, plus stock compensation expense, plus interest expense attributable to the amortization of debt acquisition costs. MAFFO is calculated as AFFO, plus acquisition costs expensed. 52<$/2$.5($/7<75867,1&$1'68%6,',$5,(6 )81'6)52023(5$7,216$'-867(')81'6)52023(5$7,216$1' 02',),('$'-867(')81'6)52023(5$7,216 3(5:(,*+7('$9(5$*(6+$5(81,7 )257+(1,1(0217+6(1'('6(37(0%(5 )XQGVIURP2SHUDWLRQV))2 ([FHVVRIUHYHQXHRYHUH[SHQVHV 'HSUHFLDWLRQDQGDPRUWL]DWLRQ ))2 $GMXVWHG)XQGVIURP2SHUDWLRQV$))2 $PRUWL]DWLRQRIILQDQFLQJFRVWV 'LUHFWILQDQFLQJOHDVHDGMXVWPHQWV $PRUWL]DWLRQRIDERYHEHORZPDUNHWUHQW 86*$$3VWUDLJKWOLQHUHQWDGMXVWPHQW $))2 0RGLILHG$GMXVWHG)XQGVIURP2SHUDWLRQV0$))2 $FTXLVLWLRQFRVWV 6WRFNFRPSHQVDWLRQH[SHQVHRSWLRQYHVWLQJ 0$))2 :HLJKWHGDYHUDJHVKDUHVXQLWVRXWVWDQGLQJ ))23HU8QLW $))2SHU8QLW 0$))2SHU8QLW ))2LVDFRPPRQILQDQFLDOPHDVXUHXVHGE\5(,7V,WLVDQRQ*$$3ILQDQFLDOPHDVXUH ZKLFKSXEOLF5(,7VUHFRQFLOHWR*$$3QHWLQFRPH3XUVXDQWWRWKHXSGDWHGJXLGDQFHIRU ))2SURYLGHGE\WKH%RDUGRI*RYHUQRUVRIWKH1DWLRQDO$VVRFLDWLRQRI5HDO(VWDWH ,QYHVWPHQW7UXVWV³1$5(,7´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upplements: Material Updates and Notifications since the date on the cover of this Memorandum EXHIBIT E Subscription Agreement, Investor Qualification Questionnaire, and Irrevocable Proxy Royal Oak Realty Trust Inc. Instructions for Investing If you wish to purchase shares of the Common Stock of Royal Oak Realty Trust Inc., you should take the following steps: 1. Carefully read the Confidential Private Placement Memorandum and any current supplements and exhibits, as well as any other documents described in the Memorandum which you have requested. Consult with your tax, legal and financial advisors. 2. Complete and sign the attached Subscription Agreement, specifying the total purchase price for the shares which you desire to purchase. Be sure to include your complete contact and tax information. 3. Complete and sign the Accredited Investor Qualification Questionnaire attached as Exhibit A to the Subscription Agreement. 4. Complete and sign the “Irrevocable Proxy” attached as Exhibit B to the Subscription Agreement. 5. Complete and sign the Form W-9 included with the Subscription Agreement. 6. Carefully review the Distribution Reinvestment Plan included with the Subscription Agreement. If you elect to participate in the Distribution Reinvestment Plan, complete and sign the Election to Participate form included with the Plan. 7. Prepare a check payable to the order of Royal Oak Realty Trust Inc. in the amount of your investment. 8. If you wish to designate a transferee under the Maryland Uniform Transfer on Death Statute (Maryland Estates and Trusts Code §16-101 et seq.), please complete the Transfer on Death Designation Form. After you receive notice of the next closing date, at least two business days prior to that closing, please deliver Royal Oak Realty Trust Inc., 1870 Winton Road South, Suite 10, Rochester, New York 14618 the following completed and signed documents: (i) Subscription Agreement, (ii) Accredited Investor Qualification Questionnaire, (iii) Irrevocable Proxy, (iv) Form W-9, (v) if dividend reinvestment is desired, the Election to Participate, (vi) your check, and (vii) if you wish, the Transfer on Death Designation Form. By executing the Subscription Agreement, you attest to meeting the suitability standards as provided in the “Suitability Criteria” section of the Memorandum and as stated in the Subscription Agreement and agree to be bound by the terms of the Subscription Agreement. Please let Dan Goldstein know if you will be traveling or out of town at the end of any calendar quarter when you wish to invest, so that you can be reached with notices. If your circumstances change so that information about your “accredited investor” status changes please let Dan Goldstein know before delivering your check. ROYAL OAK REALTY TRUST INC. INTENDS THAT THE SHARES OF COMMON STOCK OFFERED WILL BE SOLD ONLY TO ACCREDITED INVESTORS. TRANSFER OF THE SHARES IS RESTRICTED BY FEDERAL AND STATE SECURITIES LAWS AND CERTAIN PROVISIONS OF OUR ARTICLES OF INCORPORATION DESIGNED TO PRESERVE OUR QUALIFICATION AS A REIT. THERE IS NO TRADING MARKET FOR THE SHARES AND THERE CAN BE NO ASSURANCE THAT SUCH A MARKET WILL DEVELOP IN THE FORESEEABLE FUTURE. Name of Subscriber: _____________________ Total Amount of Subscription: $____________ Number of shares of Common Stock: _______ Royal Oak Realty Trust Inc. SUBSCRIPTION AGREEMENT Common Stock, par value $.001 THIS SUBSCRIPTION AGREEMENT (this “Agreement”) is between Royal Oak Realty Trust Inc. (the “Corporation”), a Maryland corporation, and the subscriber(s) signing below (the “Subscriber”). RECITALS The Subscriber wishes to purchase from the Corporation, and the Corporation wishes to issue and sell to the Subscriber, shares of common stock of the Corporation, in accordance with and subject to the terms and conditions of this Agreement and the Confidential Private Placement Memorandum, as supplemented from time to time (the memorandum, together with all amendments and supplements, the “Memorandum”) and the provisions of the Articles of Incorporation and By-laws of the Corporation, and the other documents referred to in the Memorandum and available for review by the Subscriber. Certain terms capitalized in this Agreement but not defined are used with the meaning given such terms in the Memorandum. The Subscriber wishes to purchase the number of shares of the common stock of the Corporation, par value $.001 (“Common Stock”) set forth above and on the signature page to this Agreement, and has entered into this Agreement as a condition to the sale and issuance of the Common Stock. The Subscriber acknowledges the voting agreement contained in this Agreement and will enter into the irrevocable proxy attached hereto as Exhibit B to elect two nominees of Cambridge Street Asset Management LLC, the Asset Manager, to the Board of Directors of the Corporation. NOW, THEREFORE, in consideration of payment of the Purchase Price (as defined below) and the issuance of the shares of Common Stock, and the representations, warranties and covenants contained herein, the parties agree as follows: 1. Subscription. The Subscriber irrevocably subscribes to purchase from the Corporation the number of shares of Common Stock represented by the Purchase Price set forth above and on the signature page of this Agreement (the “Shares”) on the terms and conditions described in this Agreement and in the Memorandum and the Corporation’s Articles of Incorporation and Bylaws, copies of which are available upon request. 2. Acceptance. The Subscriber acknowledges that the subscription represented by this Agreement is not binding on the Corporation until accepted by it. The Corporation reserves the right to reject this subscription for the Shares in whole or part, for any reason, at any time prior to the issuance of the Shares. In the event of the subscription offered in this Agreement is not accepted, as evidenced by the signature of an officer of the Corporation below, on or before the Closing Date (as defined below), this Agreement shall thereafter have no force or effect with respect to that portion of the Shares, unless extended as provided in Section 3(b) below. The Corporation shall promptly return or cause to be returned to the Subscriber any portion of the Purchase Price that relates to the portion of the subscription for Shares not accepted, without interests. The Corporation may accept the subscription represented by this Agreement but purchase some or all of the Shares at a later date, but not later than six months from the date of this Agreement without the express written consent of Subscriber. 3. Closings. The Subscriber understands that closings of the offer and sale of the Shares are scheduled to occur at the end of each month, unless otherwise provided by the Asset Manager. At each closing, upon the acceptance by the Corporation of any subscription for Shares, whether in whole or in part, the Corporation shall issue and sell to Subscriber the number of Shares which may be purchased with the amount of the Purchase Price accepted for that closing. The number of Shares sold and issued to the Subscriber shall then be recorded on the books of the Corporation. The Subscriber acknowledges and agrees as follows. (a) At each closing, the Corporation will accept subscriptions for funding up to an amount which the Asset Manager believes can be prudently invested in properties or used to reduce indebtedness and other general corporate purposes in the following fiscal quarter. (b) If the total subscriptions for shares of common stock of the Corporation exceed the amount described in Section 3(a) for any closing date, subscriptions for that closing date will be accepted in the order received by the Corporation or may be accepted for deferred purchase on notice to the Subscriber. (c) If any portion of Subscriber’s subscription for Shares pursuant to this Agreement is not accepted by the Corporation at any closing, the funds tendered by the Subscript will be returned without interest, provided, however, at the written request of the Subscriber, the Corporation may accept and hold the subscription for a subsequent closing and this Agreement will be a continuing subscription to purchase any remaining Shares at a subsequent closing. The Corporation will give the Subscriber ten (10) days prior notice to pay the Purchase Price for any Shares to be included in a subsequent closing. (d) Any portion of a subscription for Shares pursuant to this Agreement not called for funding and purchase within six months after the first closing date after receipt of all of the documents will be deemed cancelled and the funds tendered in connection with any unaccepted portion of Purchase Price received with respect to the Subscription will be returned without interest, unless the Corporation receives written notice from the Subscriber at least 5 business days prior to the -24813-5207-2236.1 end of the six-month period requesting extension of the subscription and this Agreement and the Corporation accepts that offer. Purchase of Shares. The Subscriber agrees as follows. D The purchase price to be paid to the Corporation for the Shares shall be the “Determined Share Value” as established from time to time by the Independent Directors Committee. The current Determined Share Value and price per share in this offering is $5.00 and will be adjusted from time to time to equal the Determined Share Value (the “Purchase Price”). The Subscriber hereby irrevocably agrees to pay the Purchase Price, based on the number of Shares for which the Subscriber has subscribed as set forth above and on the signature page of this Agreement. E As soon as practicable after receiving this Agreement, the Accredited Investor Status Questionnaire and the Irrevocable Proxy, the Corporation will provide the Subscriber with written notice of whether the Corporation intends to accept all ora portion of the Purchase Price at the upcoming closing. At least two (2) business days prior to the closing, Subscriber shall tender a check payable to the Corporation in an amount equal to the Purchase Price set forth in theCorporation’s notice. F Subscriber’s obligation to pay the all of the Purchase Price subscribed for in this Agreement is a legally binding and enforceable obligation of Subscriber payable upon notice or notices as set forth above from time to time. If Subscriber fails to pay any portion of such Purchase Price, the Corporation may, in its sole discretion, treat Subscriber in default and exercise any or all of the following remedies:(w) not issue the Shares to Subscriber, (x) assess interest on all unpaid portions of the Purchase Price from the earliest date any unpaid portion of the Purchase Price was due at the rate of 2% per month, or such lesser rate as may be the highest rate of interest permitted under applicable law, (y) exercise all available remedies at law or in equity, and (z) on ten (10) days prior notice to Subscriber, repurchase any Shares previously issued to Subscriber at a price per share equal to 90% of the per share Purchase Price paid by Subscriber for such Shares and cancel this Agreement with respect to all remaining Shares. Representations and Warranties of Subscriber. The Subscriber represents and warrants to the Corporation with respect to the purchase of the Shares as follows. D The Subscriber is acquiring the Shares for the Subscriber’s own account, as principal, not as a nominee or agent for another person, for investment purposes only, and not with a view to, or for resale, or distribution thereof in whole or in part. No other person has a direct or indirect beneficial interest in such Shares other than, if the Subscriber is an entity, as shareholders, members, partners or other equity owners of Subscriber. Further, the Subscriber does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person, or to any third person, to with respect to -3- 4813-5207-2236.1 any of the Shares for which the Subscriber is subscribing. The funds invested by Subscriber are from personal resources secured in compliance with any and all applicable provisions of the Patriot Act, including the Bank Secrecy Act, and all other applicable laws. If Subscriber is an entity, it has no obligation or current intention to distribute the Shares to the equity owners of Subscriber. (b) The Subscriber has full power and authority to enter into this Agreement, the execution and delivery of this Agreement has been duly authorized by all applicable entity action, if applicable, and this Agreement constitutes a valid and legally binding obligation of the Subscriber. If Subscriber is an entity, Subscriber will provide evidence to the Corporation of its due formation and authorization of the investment described in this Subscription Agreement. (c) The Subscriber acknowledges that the offering and sale of the Shares is intended to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and applicable state securities laws by virtue of Section 4(2) of the Securities Act and the provisions of Regulation D promulgated thereunder (“Regulation D”) and makes the following representations and warranties to the Corporation, the Asset Manager, and their respective officers, directors, managers, employees and representatives. (d) (i) The Subscriber agrees that each of the Corporation, the Asset Manager, and their respective officers, directors, managers, employees and representatives may and is relying on the representations made by the Subscriber in this Agreement. (ii) The Subscriber has the financial ability to bear the economic risk of loss of the Subscriber’s investment in the Shares, has adequate means for providing the Subscriber’s current needs and personal contingencies, and has no need for liquidity with respect to the Subscriber’s investment in the Shares of the Corporation. (iii) The Subscriber (or, if the Subscriber is an entity, the person making the investment decision on behalf of such entity) has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment in the Shares. (iv) If the Subscriber is an entity, the Subscriber also represents it has not been organized for the purpose of acquiring the Shares and, upon the request of the Corporation, will provide the Corporation with such information as may be required by the Corporation to reasonably determine that the entity was formed for other purposes. The Subscriber is an “accredited investor,” as that term is defined in Rule 501 of Regulation D and one or more of the categories set forth in Exhibit A hereto correctly and in all respects describes the Investor, and the Investor has so -44813-5207-2236.1 indicated by checking the applicable box or boxes corresponding to the applicable category or categories on Exhibit A. (e) The Subscriber acknowledges and agrees as follows. (i) The Subscriber (or the Subscriber’s legal or financial representative) has been furnished with the Memorandum and has carefully read the Memorandum including any exhibits thereto and understands and has evaluated the risks set forth under “Risk Factors” and the other considerations described in the Memorandum, and has relied solely on the information contained in the Memorandum and that provided as indicated in subsections (ii) and (iii) below. (ii) The Subscriber (or the Subscriber’s legal or financial representative) has been given the opportunity for a reasonable time prior to the date of this Agreement to ask questions of, and receive answers from, designated officers of the Corporation and the Asset Manager, concerning the terms and conditions of the offering of the Shares and other matters pertaining to this investment, and has been given the opportunity for a reasonable time prior to the date hereof to obtain such additional information necessary to verify the accuracy of the information contained in the Memorandum or that which was otherwise provided in order to evaluate the merits and risks of purchasing the Shares to the extent the Corporation possesses such information or can acquire it without unreasonable effort or expense. (iii) The Subscriber (or the Subscriber’s legal or financial representative) has been given the opportunity to receive and review the Articles of Incorporation and By-Laws of the Corporation, the Second Amended and Restated Operating Agreement as amended of Royal Oak Realty Trust (Operating Company) LLC (doing business as Royal Oak Realty Trust LLC) (the “Operating Company”), the Asset Management Agreement between the Corporation and the Operating Company and Cambridge Street Asset Management LLC as the Asset Manager, the Property Management Agreement between the Corporation and the Operating Company and Cambridge Street Property Management LLC as the Property Manager; and the Distribution Reinvestment Plan. (iv) The Subscriber (or the Subscriber’s legal or financial representative) has not relied upon any oral representation or oral information in connection with the offering of the Shares which is not contained in the Memorandum or the documents described above. (v) The Subscriber (or the Subscriber’s legal or financial representative) has determined that a purchase of the Shares is a suitable investment for the Subscriber and that as of the date hereof the Subscriber could bear a complete loss of such investment. -54813-5207-2236.1 (f) The Subscriber acknowledges and agrees that the Shares are subject to substantial restrictions on transfer both under the securities laws and to comply with REIT requirements. The Subscriber acknowledges and agrees that there is no trading market for the Shares, nor is one expected to develop. Accordingly, the Subscriber agrees as follows. (i) The Subscriber will not sell or otherwise transfer the Shares without registration under the Securities Act and applicable state securities laws or an exemption therefrom, and fully understands and agrees that the Subscriber must bear the economic risk of the Subscriber’s purchase for an indefinite period because, among other reasons the Shares have not been registered under the Securities Act or under the securities laws of any state and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless they are subsequently registered under the Securities Act and under the applicable securities laws of such states or an exemption from such registration is available and in compliance with the other transfer restrictions described in this Agreement and the Memorandum. (ii) The Subscriber is aware that the Shares, when issued, will be “restricted securities” as such term is defined in Rule 144 under the Securities Act of 1933 unless all of the conditions of Rule 144 are met. The Corporation is under no obligation: to register the Shares on the Subscriber’s behalf, or to assist Subscriber in complying with any exemption from registration under the Securities Act or applicable state securities laws, or to make public the information which may be required for a sale under Rule 144. (iii) The Subscriber understands that to qualify after its first year of election of REIT status, the Corporation cannot have (x) more than 50% of the value of its outstanding common stock owned, directly or indirectly, by five or fewer stockholders during the last half of each taxable year, (y) fewer than 100 persons owning its outstanding common stock during at least 335 days of a 12-month taxable year, or (z) any person or group of persons that acquires, directly or indirectly, beneficial ownership of more than 9.8% of its outstanding common stock, and as such the Corporation may prohibit a transfer of Shares to obtain or maintain its qualification as a REIT. (g) Any information which the Subscriber has furnished to the Corporation with respect to the Subscriber’s financial position and business experience is correct and complete as of the date of this Agreement and if there should be any material change in such information the Subscriber will immediately furnish such revised or corrected information to the Corporation; (h) The Subscriber understands and agrees to the restrictions and the limitations on voting pursuant to this Agreement and the Irrevocable Proxy. The Subscriber consents to the placing of the legends on any notice of ownership of uncertificated Shares or, if issued, share certificates representing the Shares, reflecting such -6- 4813-5207-2236.1 restrictions and limitations, and to the issuance of stop-transfer orders to any transfer agent of the Corporation’s securities, with respect to any Shares that may be registered in the name of the Subscriber or beneficially owned by the Subscriber. 6. (i) The Subscriber understands that an investment in the Shares is a speculative investment which involves a degree of risk of loss of the Subscriber’s entire investment. (j) The Subscriber’s overall commitment to investments which are not readily marketable is not disproportionate to the Subscriber’s net worth, and an investment in the Shares will not cause such overall commitment to become excessive. (k) The Subscriber acknowledges that no Shares were offered or sold to it by means of any form of general solicitation or general advertising. (l) The Subscriber consents to the management of the Corporation’s business by Cambridge Street Asset Management LLC or its successor, as Asset Manager, as provided in the Corporation’s Articles of Incorporation and the Asset Management Agreement, and by Cambridge Street Property Management LLC or its successor, as Property Manager, as provided in the Property Management Agreement, subject to the review by the board of directors of the Corporation. The Subscriber understands the affiliations among certain members of the Corporation’s board of directors, the Asset Manager and the Property Manager and the conflicts of interest resulting therefrom, including the possibility that such persons may invest in parallel or competing investments with the Corporation, subject to such limitations as are described in the Memorandum or approved by the Independent Directors. (m) The Subscriber understands that the voting agreement and irrevocable proxy contained in this Agreement grants to an officer of the Corporation the exclusive power to vote the Subscriber’s Shares in favor of the election to the Board of two nominees of the Asset Manager, but does not affect the ability of the Subscriber to vote the Shares with respect to the election of Independent Directors. (n) The Subscriber agrees that foregoing representations, warranties and agreements shall survive the closing or closings of the purchase and sale of the Shares pursuant to this Agreement. Voting Agreement and Irrevocable Proxy. (a) Upon acceptance of this subscription of Shares of the Corporation, the Subscriber hereby agrees to vote all shares of Common Stock now and hereafter owned by Subscriber, directly or indirectly, to: (i) elect two individuals designated by the Asset Manager to the Board, and (ii) continue to vote in favor of the election for such designees for so long as Subscriber owns such Shares, and acknowledges -7- 4813-5207-2236.1 and agrees that any successor owner of the Shares shall be required to agree and vote such shares as provided herein. (b) In order to insure voting in accordance with this Agreement, the Subscriber agrees to execute an irrevocable proxy simultaneously with the execution of this Agreement in the form of Exhibit B attached hereto granting to the corporate secretary, or in the event there is no corporate secretary, the chief financial officer, of the Corporation the right to vote, or to execute and deliver stockholder written consents, in respect of all shares of Common Stock owned by Subscriber. Both Corporation and Subscriber understand and agree such irrevocable proxy relates solely to voting for the election of directors of the Corporation in accordance with this Agreement and does not constitute the grant of any rights to said proxy to vote as to any other matters or for any other purpose. (c) The Subscriber agrees that if any capital stock or other securities (other than any shares or securities of another corporation issued pursuant to a plan of merger) are issued on, or in exchange for, any of the Shares held by Subscriber by reason of any stock dividend, stock split, reinvestment plan, consolidation of shares, reclassification, or consolidation involving the Corporation, such shares or securities shall be deemed to be Shares owned by Subscriber for purposes of this Agreement. 7. Indemnification. Subscriber agrees to indemnify and hold harmless the Corporation from and against any and all losses arising out of or resulting from: (a) any breach by Subscriber of any representation or warranty made by Subscriber in this Agreement; and (b) the failure by Subscriber to perform any covenant, agreement or obligation set forth in this Agreement, including, without limitation, the failure to pay any portion of the Purchase Price within the time set forth in Section 4. 8. Miscellaneous. (a) Confidentiality. Subscriber agrees that it is in the best interest of the Corporation, and Subscriber agrees to keep confidential and not disclose to any person any information that Subscriber may obtain from the Corporation pursuant to financial statements, reports and other materials submitted by the Corporation to Subscriber pursuant to this Agreement or otherwise, all of which the Corporation and the Asset Manager deem confidential, proprietary or secret, except as may be required by applicable law or regulatory authority, or until such information becomes known to the public; provided, however, Subscriber may disclose (i) such information to their respective affiliates, attorneys, consultants and other professionals to the extent necessary to obtain their services in connection with Subscriber’s investment in the Corporation, so long as such affiliates, consultants or professionals agree to be bound by the provisions of this Section 8(a), and (ii) the U.S. federal income tax treatment (as defined in Treasury Regulation § 1.6011-4) and U.S. federal income tax structure (as defined in Treasury Regulation § 1.6011-4) of the transactions contemplated by this Agreement and -84813-5207-2236.1 all materials of any kind (including opinions or other tax analyses) that are or have been provided to Subscriber relating to such tax treatment or tax structure. (b) Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York, without regard to principles of choice of law other than the provisions of General Obligations Law Sections 5-1401 and 5-1402, except to the extent that the General Corporate Law of Maryland is mandatorily applicable to the Shares. The Subscriber hereby consents to the jurisdiction of the courts of the State of New York and Federal courts located in Monroe County, New York, with respect to any matter related to this Agreement or any investment in the Shares and will not object to the laying of venue in Monroe County, New York. (c) Entire Agreement; Amendment. The parties have not made any representations or warranties with respect to the subject matter hereof not set forth herein. This Agreement, the Articles of Incorporation, and Bylaws of the Corporation, together with the Asset Management Agreement and Property Management Agreement and any other agreements or instruments described in the Memorandum, each as amended from time to time, constitute the entire agreement between the parties with respect to the subject matter hereof. All understandings and agreements heretofore had between the parties with respect to the subject matter hereof are merged in this Agreement and such documents and agreements. This Agreement may not be changed, modified, extended, terminated or discharged orally, but only by an agreement in writing that is signed by all of the parties to this Agreement. (d) Notices. Any notice, report, consent or other communication required or permitted to be given hereunder shall be in writing, and shall be given by delivering such notice in person, by registered or certified United States mail, postage prepaid and return receipt requested, or by recognized overnight delivery service and shall be given when received at the following addresses of the parties hereto: The Corporation : Royal Oak Realty Trust Inc. 1870 Winton Road South, Suite 10 Rochester, New York 14618 Attention: Daniel Goldstein Subscriber The address set forth on the signature page of this Agreement. Any party may at any time change its address by notice given to the other party in the manner set forth above. -94813-5207-2236.1 (e) No Waivers. Neither the failure nor any delay on the party of a party to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise or waiver of any right, remedy, power or privilege preclude any other or further exercise of the same or of any other right, remedy, power or privilege. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. (f) No Third Party Beneficiaries. Nothing in this Agreement, express or implied, is intended or will be construed to give any person other than the parties hereto, or their respective administrators, successors or permitted assigns, any legal or equitable right, remedy or claim under or in respect of any provision contained herein. (g) Severability. If any provision of this Agreement, or the application thereof to any person or any circumstance, is invalid or unenforceable: (i) a suitable and equitable provision shall be substituted therefor in order to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid or unenforceable provision, and (ii) the remainder of this Agreement and the application of such provision to other persons, entities or circumstances shall not be affected by such invalidity or unenforceability. (h) Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. (i) Assignability. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof will be assignable by the Subscriber. (j) Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, permitted assigns, heirs, executors and administrators of the parties hereto. (k) Waiver of Jury Trial. The parties to this Agreement each hereby waives, to the fullest extent permitted by law, any right to trial by jury of any claim, demand, action, or cause of action: (i) arising under this Agreement, or (ii) in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or the offer and sale of the Shares pursuant to this Agreement and the Memorandum, whether now existing or hereafter arising, and whether in contract, tort, equity, or otherwise. The parties to this Agreement each hereby agrees and consents that any such claim, demand, action, or cause of action will be decided by court trial without a jury and that the parties to this Agreement may file a counterpart or a copy of this Agreement with any court as written evidence of the consent of the parties hereto to the waiver of their right to trial by jury. - 10 - 4813-5207-2236.1 (l) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one instrument. (m) Survival of Warranties. The representations, warranties, covenants and agreements of the Corporation and Subscriber contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and shall in no way be affected by any investigation made by Subscriber or the Corporation. (n) Further Action. The parties agree to execute any and all such other and further instruments and documents, and to take any and all such further actions reasonably required to effectuate this Agreement and the intent and purposes hereof. [Signature page follows] - 11 4813-5207-2236.1 IN WITNESS WHEREOF, and intending to be legally bound, the Subscriber has executed this Agreement on the date first written below to be effective immediately, subject to acceptance by Royal Oak Realty Trust Inc. Name of Subscriber(s): By: Subscriber Signature Title (if applicable) By: Co-Subscriber Signature Please indicate type of joint tenancy or other interest: TEN COM - as tenants in common I TEN ENT Initial - as tenants by the entireties (not available in NY for securities) Initial JT TEN as joint tenants with right of survivorship (and not as Initial tenants in common) If you desire to designate a beneficiary or beneficiaries under the Maryland Uniform Transfer on Death Statute (Maryland Estates and Trusts Code §16-101 et seq.) you must initial here and complete the “Transfer on Death Designation Form”. I I Date: ____________________, 20 ___ Initial _______ SUBSCRIPTION TERMS Purchase Price of shares of common stock, par value $.001, subscribed for: $ (Note: The Purchase Price will be applied to purchase the Shares subscribed at a per share price equal to the Determined Share Value in effect on the date of this Subscription Agreement.) The Subscriber acknowledges and agrees that the Corporation may accept the entire amount of the Subscriber’s subscription up to the aggregate Purchase Price set forth above but only issue and sell the Shares to Subscriber from time to time. In such event, the Corporation will give Subscriber 10 days’ prior notice of its intention to issue all or a portion of the Shares upon receipt of the Purchase Price, at the Determined Share Value on the date the Subscription Agreement is accepted. If the Subscriber fails to pay the Purchase Price for such Shares on the date set forth in the Corporation’s notice, Shares will not be issued and Subscriber will be liable to the Corporation as described in this Agreement. Typed or printed address of Subscriber: Preferred address for receiving notices (Complete only if different from prior column): Social Security or Federal Tax Identification No.: Type of Entity (if applicable): Telephone # of Subscriber: Email address of Subscriber: _____ Please initial if you wish to receive notices only by email at the above address. [Form of acceptance by Royal Oak Realty Trust Inc. follows] 4813-5207-2236.1 For Royal Oak Realty Trust Inc. Subscriber’s subscription for shares of Royal Oak Realty Trust Inc. Common Stock is hereby accepted for an initial Purchase Price of $ for _________ Shares closing on ____________________, 20___. The Corporation will give Subscriber 10 days’ prior written notice from the Corporation of the number of Shares and aggregate Purchase Price due at any Closing if fewer than all of the Shares subscribed for will be issued at the next closing. ROYAL OAK REALTY TRUST INC. By: Name: Title: Date of Initial Acceptance: 4813-5207-2236.1 [Page intentionally left blank] 4813-5207-2236.1 Exhibit A ROYAL OAK REALTY TRUST INC. ACCREDITED INVESTOR STATUS QUESTIONNAIRE The Subscriber hereby represents and warrants, as an integral part of the attached Subscription Agreement, that he, she or it is correctly and in all respects described by the category or categories set forth directly next to which the Subscriber has marked below: Name of Subscriber(s): _________________________________ [MARK BELOW THE CATEGORY OR CATEGORIES THAT DESCRIBE YOU] Ƒ The Subscriber is a natural person whose net worth, either individually or jointly with such person’s spouse, at the time of his or her purchase, exceeds $1,000,000. Note: As used above, the term “net worth” means the excess of total assets over total liabilities. In calculating net worth, the Subscriber must exclude the value of the Subscriber’s primary residence as an asset and exclude any indebtedness secured by the primary residence, up to its fair market value. However, the amount of indebtedness secured by the primary residence in excess of the fair market value of the residence should be considered a liability and deducted from the Subscriber’s net worth. In addition, if the amount of indebtedness secured by the Subscriber’s primary residence is increased within 60 days prior to Subscriber’s purchase of securities in connection with this Offering other than as a result of purchasing a new principal residence, the amount of the increase should be included as a liability for purposes of calculating an Subscriber’s net worth, even if the total indebtedness on the primary residence remains below its fair market value. Ƒ The Subscriber is a natural person who had individual income in excess of $200,000, or joint income with that person’s spouse in excess of $300,000, in each of the last two years and reasonably expects to reach the same income level in the current year. Ƒ The Subscriber is a corporation, partnership or other organization described in Section 501(c)(3) of the Internal Revenue Code, or Massachusetts or similar business trust, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000. Ƒ The Subscriber is an entity which falls within one of the following categories of “accredited investors” set forth in Rule 501(a) of Regulation D under the Securities Act (please mark applicable description): ƑD A bank as defined in Section 3(a)(2) of the Securities Act, or any savings and loan association or other institution as defined in Section 3(a)(5)(A) of the Securities Act whether acting in its individual or a fiduciary capacity. ƑE A broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934. ƑF An insurance company as defined in Section 2(13) of the Securities Act. ƑG An investment company registered under the 1940 Act or as a business development company as defined in Section 2(a)(48) of that Act. ƑH A Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958. ƑI Any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such a plan has total assets in excess of $5,000,000. ƑJ Any private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940. ƑK An employee benefit plan within the meaning of Title I of ERISA, if the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company or registered investment adviser acting as a plan fiduciary as defined in Section 3(21) of ERISA. ƑL An employee benefit plan within the meaning of Title I of ERISA with total assets in excess of $5,000,000, whether or not the investment decision regarding this investment was made by a bank, savings and loan association, insurance company or registered investment adviser acting as plan fiduciary. ƑM A self-directed employee benefit plan within the meaning of Title I of ERISA, if investment decisions are made solely by persons that are accredited Subscribers as defined in Rule 501 of Regulation D under the Securities Act. ƑN A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purpose is directed by a sophisticated person as described in Rule 506(b)(2)(ii) of Regulation D under the Securities Act. Ƒ The Subscriber is an entity in which all of the equity owners are accredited investors and described in one or more of the categories set forth in paragraphs 1 through 4 above and has provided evidence of the accredited investor status of each such equity owner with its subscription. Ƒ The Subscriber is a grantor trust (a “Trust”) and (a) the Trust is a revocable trust treated as a grantor trust under Section 676 of the Internal Revenue Code and all income, gain and loss of the Trust is treated as income, gain and loss of the grantor and reported by the grantor on his or her individual income tax return, and (b) the grantor of the Trust is (i) a natural person whose net worth, either individually or jointly with such person’s spouse, at the time of his or her purchase, exceeds $1,000,000, and/or (ii) a natural person who had an individual income in excess of $200,000, or joint income with that person’s spouse in excess of $300,000, in each of the last two years and reasonably expects to reach the same income level in the current year. Ƒ The Subscriber is a person who/which is not a “United States Person” as described in Rule 902 of Regulation S under the Securities Act and the Subscriber does not fall within any of the categories set out at items 1 through 5 above. Please provide a brief description of the non-U.S. Person: Signature of each Subscriber _______________________________ Print Subscriber(s) Name 4813-5207-2236.1 _____________ Date Exhibit B IRREVOCABLE PROXY The undersigned hereby grants to the corporate secretary and the chief financial officer, each acting alone, of Royal Oak Realty Trust Inc. (the “Corporation”), an irrevocable proxy pursuant to the provisions of Section 2-507 of the Maryland General Corporation Law to vote, or to execute and deliver written consents or otherwise act with respect to, all shares of common stock (the “Shares”) of the Corporation now owned or hereafter acquired by the undersigned as fully, to the same extent and with the same effect as the undersigned might or could do under any applicable laws or regulations governing the rights and powers of stockholders of a Maryland corporation in connection with the election of directors of the Corporation as provided in that certain Subscription Agreement and Irrevocable Proxy (the “Agreement”) by and between the undersigned and the Corporation, in favor of the election of the nominees of the Asset Manager (Cambridge Street Asset Management LLC or its successors) to the Board of Directors of Royal Oak Realty Trust Inc., as provided in the voting agreement set forth in the Agreement. The undersigned hereby affirms that this proxy is given as a condition of said agreement as such is coupled with an interest and is irrevocable. The undersigned agrees and acknowledges that this proxy shall be valid and binding on the undersigned and any successors and assigns of the Shares and shall continue in full force and effect as set forth in the Agreement. THIS PROXY SHALL REMAIN IN FULL FORCE AND EFFECT AND BE ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE OR ASSIGNEE OF THE SHARES, AND IN THE EVENT OF THE DEATH OR INCAPACITY OF SUBSCRIBER. ___________ Signature of Subscriber Date ___________ Signature of Co-Subscriber ________________________________ Print Subscriber(s) Name(s) 4813-5207-2236.1 Date ROYAL OAK REALTY TRUST INC. 1870 Winton Road South, Suite 10 Rochester, NY 14618 Telephone: (585) 287-5856 Attention: Daniel J. Goldstein, President TRANSFER ON DEATH DESIGNATION FORM 1 Maryland Uniform Transfer-on-Death (TOD) Security Registration Act Maryland Estates and Trusts Code §16-101 et seq. Upon receipt of a properly completed and executed copy of this form, Royal Oak Realty Trust Inc. (the “Company”) will register your shares (or re-register outstanding shares) of common stock in the Company (the “Shares”) in your name to be transferred on death (“TOD”) to the Beneficiary or Beneficiaries you name below. x Only shares of Company common stock registered to individuals, joint tenants with right of survivorship or tenants by the entirety may designate a TOD Beneficiary or Beneficiaries. x Completing this form will transfer the Shares to your Beneficiary on your death. x This form preempts any terms in your will concerning the shares in question. x The Company will re-register Shares in the name of your Beneficiary upon presentation of appropriate evidence of your death. x The Company has adopted a policy to follow the TOD rules of the Securities Transfer Association, as modified from time to time by the Company in connection with TOD transfers (the “TOD Rules”). [See below] x This Agreement shall be governed by Rules and construed in accordance with the laws of the State of Maryland. x Upon receipt of this form, properly completed, the Company will register or re-register your Shares as follows: Shareholder TOD Beneficiary under Uniform Transfer on Death (TOD) Registration Act Subject to TOD Rules 1. SHAREHOLDER INFORMATION ƑIndividual ƑJoint Tenants with Rights of Survivorship ƑTenants by the Entirety A. _____________________________________________________________________________________ Shareholder’s First Name Middle Initial Last Name _____________________________________________________________________________________ Shareholder’s Social Security Number Shareholder’s Date of Birth _____________________________________________________________________________________ Shareholder’s Address _____________________________________________________________________________________ City State Zip Phone Number Additional shareholder, if any B. _____________________________________________________________________________________ Shareholder’s First Name Middle Initial Last Name _____________________________________________________________________________________ Shareholder’s Social Security Number Shareholder’s Date of Birth _____________________________________________________________________________________ Shareholder’s Address _____________________________________________________________________________________ City 1 State Zip Phone Number Royal Oak Realty Trust Inc. provides this form for your convenience. Designating a Beneficiary on this Transfer on Death Form has significant legal consequences upon your death. You should consult your attorney in connection with this and any other estate planning issues. 2. BENEFICIARY Please note: Unless otherwise indicated, the Company will assume equal Beneficiary distribution if more than one Beneficiary is designated. The sum of all Beneficiaries must equal 100% of the Shares set forth below and the sum of all Contingent Beneficiaries must equal 100%. The Beneficiary Designation is: ƑAn Original TOD ƑA Beneficiary Change to an Existing TOD A. _____________________________________________________________________________________ Beneficiary’s First Name Middle Initial Last Name _____________________________________________________________________________________ Beneficiary’s Social Security Number Beneficiary’s Date of Birth _____________________________________________________________________________________ % of Shares Relationship _____________________________________________________________________________________ Beneficiary’s Address _____________________________________________________________________________________ City State Zip Phone Number B. _____________________________________________________________________________________ Beneficiary’s First Name Middle Initial Last Name _____________________________________________________________________________________ Beneficiary’s Social Security Number Beneficiary’s Date of Birth _____________________________________________________________________________________ % of Shares Relationship _____________________________________________________________________________________ Beneficiary’s Address _____________________________________________________________________________________ City State Zip Phone Number 3. SPOUSAL CONSENT Any resident of a community property state who designated Beneficiaries other than a spouse must obtain the spouse’s consent. If there is more than one Shareholder, each Shareholder’s spouse must sign. I voluntarily and irrevocably consent to (i) the naming of another person as Primary Beneficiary of this account or (ii) the naming of myself as Primary Beneficiary and others as Contingent Beneficiaries of this account. I give any interest in these assets to the Shareholder, to the extent necessary to accomplish the Beneficiary designation made above. _____________________________________________________________________________________ Signature Printed Name Date _____________________________________________________________________________________ Signature Printed Name Date 4. SHARES SUBJECT TO THIS TOD BENEFICIARY DESIGNATION I hereby designate TOD to the Beneficiary(ies) named in this Designation Form with respect to: ________ Please initial All of my Shares of the Company owned by me/us including Shares acquired through the Dividend Reinvestment Plan. ________ ______ Shares of the Company owned by me/us. Please initial ________ Please initial _______% of all Shares owned by me/us including my Shares acquired through the Dividend Reinvestment Plan Please remove TOD Beneficiary designations from ______ Shares owned by me. ________ Please initial 5. SHAREHOLDER SIGNATURE I have read and understand the attached Rules for TOD Registration and hereby instruct the Company to register my Shares, in transfer on death form, for the benefit of the Beneficiary(ies) designated above or remove the designation of a Beneficiary as stated above. I direct the Company to transfer these Shares and any shares into which these have been exchanged, in accordance with this direction and the Rules as they may be amended, modified or supplemented from time to time. I agree that this TOD Designation shall be governed by and construed in accordance with the laws of Maryland regarding nonprobate transfers. The Company reserves the right, at any time without prior notice, to suspend, limit, modify or terminate TOD Registrations. _____________________________________________________________________________________ Signature Printed Name Date _____________________________________________________________________________________ Signature State of New York County of ________ Printed Name Date ) ) ss.: ) On the __ day of ______ in the year _____ before me, the undersigned, personally appeared ___________________________ personally known to me or proved to me on the basis of satisfactory evidence to the the individual(s) whose name(s) is (are) subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their capacity(ies), and that by his/her/their signature(s) on the instrument, the individual(s), or the person upon behalf of which the individual(s) acted, executed the instrument. _________________________ Notary Public TOD LIMITATIONS & MODIFICATIONS The Company’s TOD registrations are governed by its TOD Rules, as altered, modified or supplemented by the Company from time to time. The phrase “Subject to TOD Rules” in a TOD Registration shall incorporate the “STA TOD Rules” of the Securities Transfer Association, subject to any modifications adopted by the Company from time to time, including the following: A. You may change or revoke your Beneficiary designation at any time by: (i) submitting a new notarized Transfer on Death Designation Form, or (ii) providing the Company with a notarized letter of instruction detailing the same information included on this form. A notarized letter of instruction must be submitted to the Company to revoke the designation of Beneficiary. B. A Beneficiary must be designated by name. Designations of lineal descendants or lineal descendants per stirpes will not be accepted. Multiple beneficiaries may be designated. If no percentage interest is designated, the Company will treat all Beneficiaries as holding equal interests as tenants in common. C. If one joint Shareholder has died, the surviving joint Shareholder must provide the Company with evidence of the death of the deceased joint Shareholder (certified death certificate) and inheritance tax waivers and/or affidavits of domicile of the deceased joint Shareholder, if applicable. The surviving joint Shareholder may re-register the Shares into sole ownership and can change or delete the Beneficiary(ies). C. Upon notification of the death of all Shareholders and receipt of the required documentation as outlined in the Rules, the Shares will be transferred to the Beneficiary(ies) named in this form. If more than one Beneficiary is designated, the Shares will be registered as tenants in common upon the death of the Shareholder(s). D. If there is no proof of the Beneficiary’s death and the Beneficiary is not located within six months of the Shareholders’ death, the Company may transfer the Shares to the estate of the deceased Shareholder. The Company shall have no obligation to attempt to locate the missing Beneficiary(ies). E. The Company shall not have any duty to: (i) verify information in a request for registration of a Shareholder’s TOD direction; (ii) give notice to any person of the date, manner and persons to whom a transfer will be made under the Shareholder’s TOD direction; (iii) attempt to locate Beneficiaries; (iv) determine any fact or law that would cause the Shareholder’s TOD direction to be revoked in part or in whole or that would change the distribution provided in the Shareholder’s TOD direction; (v) respond to inquiries from anyone other than the Shareholder during the Shareholder’s lifetime; or (vi) mail any notices with respect to these Rules to an address other than the address of record. In addition to these modifications, please note the following Securities Transfer Association TOD restrictions: x A TOD Registration may not be changed or revoked by will, codicil, or telephone conversation. x A custodian under the Uniform Gifts to Minors Act (UGMA) may not be designated as a Beneficiary because the UGMA applies only to gifts made during the lifetime of the donor. A custodian under the Uniform Transfer to Minors Act (UTMA) may be designated as a Beneficiary. x The name(s) of the Beneficiary(ies) and the legend “Subject to STA TOD Rules” must appear in the Share registration at all times. EXHIBIT F Distribution Reinvestment Plan 4821-2485-6879.12 Royal Oak Realty Trust Inc. DISTRIBUTION REINVESTMENT PLAN Royal Oak Realty Trust Inc., a Maryland corporation (the “Corporation”) and Royal Oak Realty Trust (Operating Company) LLC (doing business as Royal Oak Realty Trust LLC, the “Operating Company”) have adopted this Distribution Reinvestment Plan (the “Plan”), to be administered by Cambridge Street Asset Management LLC or its successor as Plan Administrator of the Plan (the “Plan Administrator”) as agent for participants in the Plan (“Participants”), on the terms and conditions set forth below. As of June 30, 2015, we have appointed American Stock Transfer and Trust Company LLC as our Transfer Agent and Plan Administrator. 1. Election to Participate. Any holder of shares of common stock of the Corporation, par value $.001 per share (the “Shares”) or membership units of the Operating Company that are convertible into Shares (“Membership Units”) (Shares and Membership Units are collectively, “Securities”) may become a Participant by making a written election to participate by written notice to the Plan Administrator and providing the Plan Administrator with a completed and executed Election to Participate, provided, however, that no Person may participate in the Plan unless such Person is an “Accredited Investor” (as defined below). Any stockholder or member who has not previously elected to participate in the Plan, may so elect at any time by completing and executing an Election to Participate form obtained from the Plan Administrator or any other appropriate documentation as may be acceptable to the Plan Administrator which shall include representations that the proposed Participant is an “Accredited Investor” (as defined below). Participants in the Plan may choose to have the full amount of their cash distributions (other than “Excluded Distributions” as defined below) or any lesser percentage thereof with respect to the Securities owned by them reinvested pursuant to the Plan. A Participant may change the percentage of the Participant’s Securities subject to participation in the Plan at any time by executing a new Election to Participate form obtained from the Plan Administrator or any other appropriate documentation for that purpose as may be acceptable to the Plan Administrator. Under the Emergency Economic Stabilization Act, passed by Congress in 2008, you must reinvest at least 10% of your dividend distribution each dividend period. 2. Distribution Reinvestment. The Plan Administrator will receive all cash distributions other than Excluded Distributions paid by the Corporation or the Operating Partnership with respect to participating Securities of Participants (collectively, the “Distributions”). Participation will commence with the next Distribution payable after receipt of the Participant’s election pursuant to Paragraph 1 hereof, provided it is received at least ten (10) business days prior to the last day of the period to which such Distribution relates. Subject to the preceding sentence, regardless of the date of such election, a holder of Securities will become a Participant in the Plan effective on the first day of the period following such election, and the election will apply to all Distributions attributable to such period and to all periods thereafter. As used in this Plan, the term “Excluded Distributions” shall mean those cash or other distributions designated as Excluded Distributions by the Board. 3. General Terms of Plan Investments. (a) 4816-2799-7727.5 All Distributions to be reinvested under the Plan will be used to purchase shares of Common Stock as of the monthly distribution date for the applicable Distribution. The Corporation intends to offer Shares pursuant to the Plan at 98% of the Determined Share Value (as such term is defined in the Corporation’s Articles of Incorporation), regardless of the price per Security paid by the Participant for the Securities in respect of which the Distributions are paid. (b) Organizational, offering or marketing expenses will not be paid or reimbursed to Cambridge Street Asset Management LLC, as the Asset Manager, for Shares purchased pursuant to the Plan. (c) For each Participant, the Plan Administrator will maintain an account which shall reflect for each period in which Distributions are paid (a “Distribution Period”) the Distributions received by the Plan Administrator on behalf of such Participant. A Participant’s account shall be reduced as purchases of Shares are made on behalf of such Participant on the monthly distribution payment date. (d) Distributions shall be invested in Shares by the Plan Administrator promptly following the payment date with respect to such Distributions to the extent Shares are available for purchase under the Plan. If sufficient Shares are not available, any such funds that have not been invested in Shares within 30 days after receipt by the Plan Administrator and, in any event, by the end of the fiscal quarter in which they are received, will be distributed to Participants. Any interest earned on such accounts will be paid to the Corporation and will become property of the Corporation. (e) Participants may acquire fractional Shares, computed to three decimal places, so that 100% of the Distributions will be used to acquire Shares. The ownership of the Shares shall be reflected on the books of the Corporation or its transfer agent. 4. Absence of Liability. Neither the Corporation nor the Plan Administrator shall have any responsibility or liability as to the value of the Shares or any change in the value of the Shares acquired for the Participant’s account. Neither the Corporation nor the Plan Administrator shall be liable for any act done in good faith, or for any good faith omission to act hereunder. 5. Suitability. Each Participant shall notify the Plan Administrator in the event that, at any time while participating in the Plan, there is a material change in the Participant’s financial condition or an inaccuracy of any representation relating to the suitability of the Participant as an investor and qualification of the Participant as an “Accredited Investor” as such term is defined in Rule 501(a) of Regulation D, promulgated under the Securities Act of 1933, as amended (an “Accredited Investor”) made by Participant in connection with the Participant’s purchase of the Securities. A material change shall include any anticipated or actual decrease in net worth or annual gross income or any other change in circumstances that would cause the Participant to fail to meet the suitability standards as an investor and qualification as an Accredited Investor previously represented. 6. Reports to Participants. Promptly after each dividend reinvestment, the Plan Administrator will mail to each Participant a statement of account describing, as to such 2 4816-2799-7727.5 Participant, the Distributions received, the number of Shares purchased and the per Share purchase price for such Shares pursuant to the Plan for the year to date. 7. Taxes. Taxable Participants may incur a tax liability for Distributions even though they have elected not to receive their Distributions in cash but rather to have their Distributions reinvested in Shares under the Plan. If a Participant fails to furnish a valid taxpayer identification number, fails to properly report distributions or fails to certify that the Participant is not subject to withholding, the Plan Administrator will withhold 28% of the amount of Distributions paid with respect to such Participant’s Securities. 8. Termination. (a) A Participant may terminate or modify participation in the Plan at any time by written notice to the Plan Administrator. To be effective for any Distribution, such notice must be received by the Plan Administrator at least ten (10) business days prior to the last day of the Distribution Period to which it relates. (b) A Participant’s transfer of Securities will terminate participation in the Plan with respect to such transferred Securities as of the first day of the Distribution Period in which such transfer is effective, unless the transferee of such Securities in connection with such transfer demonstrates to the Plan Administrator that such transferee meets the requirements for participation hereunder and affirmatively elects participation by delivering an executed authorization form or other instrument required by the Plan Administrator. 9. State Regulatory Restrictions. The Plan Administrator is authorized to deny participation in the Plan to residents of any state or foreign jurisdiction that imposes restrictions on participation in the Plan that conflict with the general terms and provisions of this Plan, or where, in the Plan Administrator’s sole discretion, the burden or expense of compliance with the applicable securities laws of such state or foreign jurisdiction would make the stockholder’s or member’s participation in the Plan impracticable or inadvisable. 10. Amendment or Termination by Corporation. (a) The terms and conditions of this Plan may be amended by the Corporation at any time, including but not limited to an amendment to the Plan to substitute a new Plan Administrator to act as agent for the Participants, by mailing an appropriate notice at least ten (10) days prior to the effective date thereof to each Participant. (b) The Corporation may terminate the Plan by providing ten (10) days’ prior written notice to all Participants. (c) The Plan Administrator may terminate a Participant’s individual participation in the Plan, at any time by providing ten (10) days’ prior written notice to a Participant, if the Participant’s participation in the Plan 3 4816-2799-7727.5 may: (i) adversely affect the status of the Corporation as a real estate investment trust pursuant to Section 856 of the Internal Revenue Code, (ii) result in a Participant who is not an Accredited Investor, (iii) violate or create adverse consequences under any law, rule, regulation or statement of policy of any governmental body or agency having jurisdiction over the Corporation and its securities including, without limitation, the Employee Retirement Income Security Act of 1974 or Internal Revenue Code, (iv) with regard to Shares, be prohibited by the Corporation’s Articles of Incorporation or Bylaws, or (v) with regards to Membership Units, be prohibited by Royal Oak Realty Trust LLC’s Articles of Organization or Amended and Restated Operating Agreement. (d) After termination of the Plan or termination of a Participant’s participation in the Plan, the Plan Administrator will send to each Participant a check for the amount of any Distributions in the Participation’s account that have not been invested in Shares. Any future Distributions with respect to such former Participant’s Securities made after the effective date of the termination of the Participant’s participation will be sent directly to the former Participant. 11. Authorization. Any determination, decision, or action of the Board in connection with the construction, interpretation, administration, or application of the Plan shall be final, conclusive, and binding upon all Participants, unless otherwise determined by the Board. 12. Governing Law. This Plan and the Participants’ election to participate in the Plan shall be governed by the laws of the State of New York, unless otherwise, and only to the extent, required to be governed by the Maryland General Corporate Law, as amended. 13. Notice. Any notice or other communication required or permitted to be given by any provision of this Plan shall be in writing to the following address: Cambridge Street Asset Management LLC 1870 South Winton Road Suite 10 Rochester, NY 14618 Attention: Shareholder Services or such other address provided by the Plan Administrator or Corporation by written notice to all Participants. Notices to a Participant may be given by letter addressed to the Participant at the Participant’s last address of record with the Plan Administrator. Each Participant shall notify the Plan Administrator promptly in writing of any changes of address. Effective as of February 1, 2014 Name changes effective as of December, 2015 4 4816-2799-7727.5 Royal Oak Realty Trust Inc. DISTRIBUTION REINVESTMENT PLAN ELECTION TO PARTICIPATE The Distribution Reinvestment Plan (the “Plan”) of Royal Oak Realty Trust Inc. (the “Corporation”) provides the opportunity for our stockholders and holders of units in Royal Oak Realty Trust LLC (the “Operating Company”) to reinvest distributions we make with respect to the Corporation’s common stock or the membership units in the Operating Company. In order to become a participant in the Plan, please sign this Election of Participation below and return it to our asset manager, Cambridge Street Asset Management LLC, at the following address: Cambridge Street Asset Management LLC 1870 South Winton Road, Suite 10 Rochester, NY 14618 For this Election to Participate to apply to any distribution, it must be received no later than 10 business days before the last day of the applicable calendar quarter. If this Election is received after that date, you will receive a cash distribution for such quarter and your enrollment will be processed for any distribution declared with respect to the following quarter. Once you have enrolled in the Plan, your enrollment will continue for all subsequent distributions until we receive written notice from you withdrawing from the Plan. Royal Oak Realty Trust Inc. has appointed American Stock Transfer and Trust Company LLC as our Transfer Agent and Plan Administrator (“Plan Administrator”) to administer Royal Oak Realty Trust Inc. Dividend Reinvestment Plan. By signing below, you: x elect to participate in the Plan, until such time as you provide the Administrator with written notice of your desire to no longer participate; x appoint the Plan Administrator as your agent under the terms of the Plan; x represent to the Corporation that you are an “accredited investor,” as that term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended; x agree to notify the Secretary of the Corporation of any material change to the information you have previously represented to the Corporation regarding your financial position and business experience; and x affirm that the Form W-9: Request for Taxpayer Identification Number and Certification provided by you to the Corporation remains correct and complete. Under the Emergency Economic Stabilization Act, passed by Congress in 2008, you must reinvest at least 10% of your dividend distribution each dividend period. If no other designation is made below, all (100%) of the Shares or Membership Units registered in your name will participate in the Distribution Reinvestment Plan. If you wish to have fewer than all of the Shares or Units registered in your name participate in the Plan, please designate below: Number of your Shares or Membership Units as to which any distribution is to be reinvested pursuant to the Plan: _____ OR Percentage of your Shares or Membership Units as to which any distribution is to be reinvested pursuant to the Plan: _____% The undersigned (if shares or units are jointly owned, all holders must sign), intending to be legally bound, directs the Plan Administrator to reinvest distributions as set forth in the foregoing request. Date: __________________________ _____________________________________ (Print or Type Name) By: ______________________________ Title (if applicable):_____________________ Date: __________________________ _____________________________________ (Print or Type Name) By: ______________________________ Title (if applicable):_____________________ Contact telephone number: _______________ 4847-6638-5695.3 :LQWRQ 5RDG 6RXWK ,6XLWH , 5RFKHVWHU 1< ,3 ,)