Edgar Filing: PREFERRED APARTMENT COMMUNITIES INC

PAC-10-Q_Q3_2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2012


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

For the transition period from to

Commission File No. 001-34995

Preferred Apartment Communities, Inc.

(Exact name of registrant as specified in its charter)



Maryland	27-1712193
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3625 Cumberland Boulevard, Suite 400, Atlanta, GA 30339

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (770) 818-4100

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller reporting company ¨

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

The number of shares outstanding of the registrant’s Common Stock, as of November 7, 2012 was 5,181,280.



	INDEX

			Page No.
PART I - FINANCIAL INFORMATION

Item 1.		Financial Statements

		Consolidated Balance Sheets (unaudited) – as of September 30, 2012 and December 31, 2011	1

		Consolidated Statements of Operations (unaudited) – Three Months and Nine Months Ended September 30, 2012 and 2011	2

		Consolidated Statements of Equity and Accumulated Deficit (unaudited) – Nine Months Ended September 30, 2012 and 2011	3

		Consolidated Statements of Cash Flows (unaudited) – Nine Months Ended September 30, 2012 and 2011	4

		Notes to Consolidated Financial Statements (unaudited)	6

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.		Controls and Procedures	52

PART II - OTHER INFORMATION

Item 1.		Legal Proceedings	52

Item 1A		Risk Factors	52

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.		Defaults Upon Senior Securities	52

Item 4.		Mine Safety Disclosures	52

Item 5.		Other Information	52

Item 6.		Exhibits	52

SIGNATURES			53

EXHIBIT INDEX			54

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.



Preferred Apartment Communities, Inc.
Consolidated Balance Sheets
(Unaudited)

	September 30, 2012			December 31, 2011
Assets

Real estate
Land	$	13,052,000		$	13,052,000
Building and improvements	60,281,597			60,268,867
Furniture, fixtures, and equipment	8,729,062			8,392,446
Construction in progress	3,023			67,877
Gross real estate	82,065,682			81,781,190
Less: accumulated depreciation	(5,495,254		)	(2,698,305		)
Net real estate	76,570,428			79,082,885
Real estate loans	31,190,708			6,000,000
Total real estate and real estate loans, net	107,761,136			85,082,885

Cash and cash equivalents	2,496,308			4,548,020
Restricted cash	691,912			567,346
Notes receivable	930,544			—
Revolving line of credit to related party	345,200			—
Deferred interest receivable on real estate loans	318,296			—
Tenant receivables, net of allowance of $9,439 and $15,924	25,938			23,811
Deferred loan costs, net of amortization of $155,953 and $64,480	784,106			551,660
Deferred offering costs	2,677,192			1,388,421
Other assets	842,180			303,397

Total assets	$	116,872,812		$	92,465,540

Liabilities and equity

Liabilities
Mortgage notes payable	$	55,637,000		$	55,637,000
Accounts payable and accrued expenses	1,057,330			1,158,530
Revolving credit facility	15,000,000			—
Accrued interest payable	216,187			176,084
Dividends payable	787,761			646,916
Security deposits and prepaid rents	287,897			163,663
Other deferred income	299,013			65,446
Total liabilities	73,285,188			57,847,639

Commitments and contingencies (Note 11)

Equity

Stockholder's equity
Series A Redeemable Preferred Stock, $0.01 par value per share; 150,000 shares authorized; 12,178 and 0 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively	122			—
Common Stock, $0.01 par value per share; 400,066,666 shares authorized; 5,179,093 and 5,149,325 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively	51,791			51,493
Additional paid in capital	53,359,638			43,828,030
Accumulated deficit	(9,823,928		)	(9,261,623		)
Total stockholders' equity	43,587,623			34,617,900
Non-controlling interest	1			1
Total equity	43,587,624			34,617,901

Total liabilities and equity	$	116,872,812		$	92,465,540

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



Preferred Apartment Communities, Inc.
Consolidated Statements of Operations
(Unaudited)

	Three months ended						Nine months ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Revenues:
Rental revenues	$	2,309,943		$	2,250,514		$	6,783,328		$	3,942,177
Other property revenues	297,159			258,619			843,379			443,894
Interest income on loans and notes receivable	636,149			124,495			1,112,426			125,828
Total revenues	3,243,251			2,633,628			8,739,133			4,511,899

Operating expenses:
Property operating and maintenance	598,037			579,992			1,790,523			1,016,793
Property management fees	104,320			100,519			304,827			175,572
Real estate taxes	191,262			181,484			558,170			324,630
General and administrative	41,394			51,436			132,496			86,821
Depreciation and amortization	905,988			3,623,732			2,800,404			6,425,841
Acquisition costs	—			18,272			912			1,680,432
Organizational costs	—			—			1,593			94,372
Insurance	45,001			37,748			129,664			66,426
Professional fees	71,246			72,952			241,559			304,702
Other	30,891			36,544			105,679			70,402
Total operating expenses	1,988,139			4,702,679			6,065,827			10,245,991

Operating income (loss)	1,255,112			(2,069,051		)	2,673,306			(5,734,092		)

Management fees	214,684			177,475			583,660			322,741
Insurance	41,377			39,069			124,132			128,247
Interest expense	615,300			537,591			1,688,957			972,233
Equity compensation to directors and executives	315,600			77,519			921,207			157,501
Other (income)	(80,770		)	(1		)	(82,345		)	(262		)
Net income (loss)	148,921			(2,900,704		)	(562,305		)	(7,314,552		)

Less consolidated net income (loss) attributable to
non-controlling interests	—			—			—			—

Net income (loss) attributable to the Company	148,921			(2,900,704		)	(562,305		)	(7,314,552		)

Dividends to preferred stockholders	(163,059		)	—			(242,744		)	—

Earnings attributable to unvested restricted stock	(4,626		)	(3,250		)	(12,302		)	(6,500		)

Net loss attributable to common stockholders	$	(18,764	)	$	(2,903,954	)	$	(817,351	)	$	(7,321,052	)

Net loss per share of Common Stock attributable to
common stockholders, basic and diluted	$	—		$	(0.56	)	$	(0.16	)	$	(2.17	)

Dividends declared on Common Stock	$	729,699		$	646,675		$	2,080,357		$	1,293,162

Weighted average number of shares of Common
Stock outstanding, basic and diluted	5,178,822			5,146,845			5,169,467			3,375,384

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



Preferred Apartment Communities, Inc.
Consolidated Statements of Equity and Accumulated Deficit
For the nine months ended September 30, 2012 and 2011
(Unaudited)

	Series A Redeemable Preferred Stock		Common Stock		Additional Paid in Capital			Accumulated Deficit			Total Stockholders' Equity			Non Controlling Interest		Total Equity

Balance at December 31, 2011	$	—	$	51,493	$	43,828,030		$	(9,261,623	)	$	34,617,900		$	1	$	34,617,901

Equity compensation to directors and executives	—		38		921,169			—			921,207			—		921,207

Issuance of Units	122		—		12,165,498			—			12,165,620			—		12,165,620

Syndication and offering costs	—		—		(1,231,698		)	—			(1,231,698		)	—		(1,231,698		)

Vesting of restricted stock	—		260		(260		)	—			—			—		—

Net loss	—		—		—			(562,305		)	(562,305		)	—		(562,305		)

Dividends to preferred stockholders	—		—		(242,744		)	—			(242,744		)	—		(242,744		)

Dividends to common stockholders	—		—		(2,080,357		)	—			(2,080,357		)	—		(2,080,357		)

Balance at September 30, 2012	$	122	$	51,791	$	53,359,638		$	(9,823,928	)	$	43,587,623		$	1	$	43,587,624


Balance at December 31, 2010	$	—	$	366	$	109,632		$	(766,199	)	$	(656,201	)	$	1	$	(656,200	)

Issuance of warrant to purchase Common Stock	—		—		462,330			—			462,330			—		462,330

Proceeds from sale of Common Stock	—		51,074		51,022,536			—			51,073,610			—		51,073,610

Equity compensation to executives and directors	—		34		157,467			—			157,501			—		157,501

Syndication and offering costs	—		—		(6,043,712		)	—			(6,043,712		)	—		(6,043,712		)

Net loss	—		—		—			(7,314,552		)	(7,314,552		)	—		(7,314,552		)

Dividends to common stockholders	—		—		(1,293,162		)	—			(1,293,162		)	—		(1,293,162		)

Balance at September 30, 2011	$	—	$	51,474	$	44,415,091		$	(8,080,751	)	$	36,385,814		$	1	$	36,385,815

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



Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows
(Unaudited)

	Nine months ended
	September 30, 2012			September 30, 2011
Operating activities:
Net loss attributable to the Company	$	(562,305	)	$	(7,314,552	)
Reconciliation of net loss to net cash provided by (used in) operating activities:
Depreciation expense	2,796,950			1,725,746
Amortization expense	3,454			4,700,095
Deferred fee income amortization	(41,236		)	(4,489		)
Deferred interest income on real estate loans	(318,296		)	—
Deferred loan cost amortization	91,473			42,986
Equity compensation to executives and directors	921,207			157,501
Changes in operating assets and liabilities:
(Increase) in tenant receivables	(2,127		)	(35,680		)
(Increase) in other assets	(338,579		)	(175,621		)
Increase in accounts payable and accrued expenses	291,743			483,797
Increase in accrued interest payable	40,103			153,892
Increase in security deposits	10,079			8,168
Increase (decrease) in prepaid rents	114,155			(8,055		)
Increase in deferred income	16,275			—
Net cash provided by (used in) operating activities	3,022,896			(266,212		)

Investing activities:
Investment in real estate loans	(25,190,708		)	(6,000,000		)
Notes receivable issued	(1,580,544		)	—
Notes receivable repaid	650,000			—
Draw on line of credit by related party	(590,233		)	—
Repayments of line of credit by related party	245,032			—
Acquisition fees received on real estate loans	517,057			134,333
Acquisition fees paid on real estate loans	(258,528		)	(60,000		)
Refund of deposit on real estate investment	—			150,000
Acquisition of properties, net	—			(87,449,341		)
Additions to real estate assets - improvements	(290,051		)	(328,848		)
Increase in restricted cash	(124,566		)	(43,773		)
Net cash used in investing activities	(26,622,541		)	(93,597,629		)

Financing activities:
Proceeds from mortgage notes payable	—			55,637,000
Payments for mortgage loan costs	(309,500		)	(616,139		)
Payments on revolving lines of credit	—			(200,000		)
Payments on non-revolving lines of credit	—			(1,240,000		)
Proceeds from non-revolving lines of credit	15,000,000			434,102
Payments on note payable to related parties	—			(465,050		)
Proceeds from sales of common stock, net of offering costs	—			46,117,662
Proceeds from sales of Units, net of offering costs	10,951,202			—
Common Stock dividends declared and paid	(1,997,573		)	(646,487		)
Preferred Stock dividends declared and paid	(184,552		)	—
Payments for deferred offering costs	(1,911,644		)	(133,369		)

Net cash provided by financing activities	21,547,933			98,887,719

Net (decrease) increase in cash and cash equivalents	(2,051,712		)	5,023,878
Cash and cash equivalents, beginning of period	4,548,020			22,275
Cash and cash equivalents, end of period	$	2,496,308		$	5,046,153

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



Preferred Apartment Communities, Inc.
Consolidated Statements of Cash Flows - continued
(Unaudited)

Supplemental cash flow information:
Cash paid for interest	$	1,636,010	$	775,093

Supplemental disclosure of non-cash activities:
Accrued capital expenditures	$	26,967	$	27,982
Dividends payable - common	$	729,699	$	646,675
Dividends payable - preferred	$	58,062	$	—
Accrued deferred offering costs	$	291,329	$	554,496
Reclass of offering costs from deferred asset to equity	$	31,158	$	—
Reclass of deferred offering costs to receivable	$	234,679	$	—

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

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements

September 30, 2012

(unaudited)


1.	Organization

Preferred Apartment Communities, Inc., or the Company, was formed as a Maryland corporation on September 18, 2009, and has elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the "Code") effective with its tax year ended December 31, 2011. The Company was formed primarily to acquire and operate multifamily properties in select targeted markets throughout the United States. As part of its business strategy, the Company may enter into forward purchase contracts or purchase options for to-be-built multifamily communities and may make mezzanine loans, provide deposit arrangements, or provide performance assurances, as may be necessary or appropriate, in connection with the construction of multifamily communities and other properties. As a secondary strategy, the Company also may acquire or originate senior mortgage loans, subordinate loans or mezzanine debt secured by interests in multifamily properties, membership or partnership interests in multifamily properties and other multifamily related assets and invest not more than 10% of its total assets in other real estate related investments, as determined by its Manager (as defined below) as appropriate for the Company. The Company is externally managed and advised by Preferred Apartment Advisors, LLC, or its Manager, a Delaware limited liability company and related party (see Note 6).

On February 22, 2011, the Company effected a change in the designation of its issued and outstanding and authorized but unissued shares of Class A Common Stock, $0.01 par value per share, to shares of common stock, par value $0.01 per share, or Common Stock, and effected a change of each of its issued and outstanding shares of Class B Common Stock, $0.01 par value per share, into one issued and outstanding share of Common Stock, all pursuant to an amendment to the Company's charter. As a result of these actions, NELL Partners, Inc. held 36,666 shares of Common Stock as of February 22, 2011. The consolidated statement of equity and accumulated deficit for the nine-month period ended September 30, 2011 has been retroactively restated to reflect this change.

On February 25, 2011, the Company amended its prior authorization to issue up to $75.0 million in Class A Common Stock in accordance with the change in designation of all shares of Class A Common Stock to shares of Common Stock, as described above, and, as a result, the board of directors of the Company authorized the issuance and sale of up to $75.0 million in Common Stock in an initial public offering.

The Company completed its initial public offering, or IPO, on April 5, 2011. The IPO resulted in the sale of 4.5 million shares of Common Stock at a price per share of $10.00, generating gross proceeds of $45.0 million. The aggregate proceeds to the Company, net of underwriters' discounts and commissions and other offering costs, were approximately $39.8 million. Concurrently with the closing of the IPO, in a separate private placement pursuant to Regulation D under the Securities Act of 1933, as amended, or the Securities Act, the Company sold 500,000 shares of its Common Stock to the Williams Opportunity Fund, LLC, or WOF, at the public offering price of $10.00 per share, for gross proceeds to the Company of $5.0 million. Aggregated estimated offering expenses in connection with the private placement were approximately $297,700. WOF is an affiliate of the Company and its Manager.

On May 4, 2011, in conjunction with the IPO, the Company issued and sold 107,361 shares of Common Stock at $10.00 per share pursuant to the underwriters' exercise of their over-allotment option, for gross proceeds of approximately $1.1 million. After deducting underwriters’ commissions and offering expenses, net proceeds to the Company from the over-allotment option were approximately $1.0 million.

The consolidated financial statements include the accounts of the Company and Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership. The Company controls the Operating Partnership through its sole general partner interest and plans to conduct substantially all of its business through the Operating Partnership.


2.	Summary of Significant Accounting Policies

Basis of Presentation

The unaudited consolidated financial statements include all of the accounts of the Company and the Operating Partnership as of September 30, 2012, presented in accordance with accounting principles generally accepted in the United States of America, or GAAP. All significant intercompany transactions have been eliminated in consolidation. Certain adjustments have been made consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the Company's

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

financial condition and results of operations. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Acquisitions and Impairments of Real Estate Assets

The Company generally records its initial investments in income-producing real estate at fair value at the acquisition date, in accordance with ASC 805-10, Business Combinations. Acquisition costs, which include fees and expenses for due diligence, legal, environmental and consulting services, generally will be expensed as incurred.

The aggregate purchase price of acquired properties is apportioned to the tangible and identifiable intangible assets and liabilities acquired at their estimated fair values. The value of acquired land, buildings and improvements is estimated by formal appraisals, observed comparable sales transactions, and information gathered during pre-acquisition due diligence activities and the valuation approach considers the value of the property as if it were vacant. The values of furniture, fixtures, and equipment are estimated by calculating their replacement cost and reducing that value by factors based upon estimates of their remaining useful lives.

Intangible assets include the values of in-place leases and customer relationships. In-place lease values are estimated by calculating the estimated time to fill a hypothetically empty apartment complex to its stabilization level (estimated to be 92% occupancy) based on historical observed move-in rates for each property. Carrying costs during these hypothetical expected lease-up periods are estimated, considering current market conditions and include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates. The intangible assets are calculated by estimating the net cash flows of the in-place leases to be realized, as compared to the net cash flows that would have occurred had the property been vacant at the time of acquisition and subject to lease-up. The acquired in-place lease values are amortized to operating expense over the average remaining non-cancelable term of the respective in-place leases. The above-market or below-market lease values are recorded as a reduction or increase, respectively, to rental income over the remaining average non-cancelable term of the respective leases. The values of customer relationships are estimated by calculating the product of the avoided hypothetical lost revenue and the average renewal probability and are likewise amortized to operating expense over the average remaining non-cancelable term of the respective in-place leases. Acquired intangible assets generally have no residual value.

The Company evaluates its tangible and identifiable intangible real estate assets for impairment annually or when events such as declines in a property’s operating performance, deteriorating market conditions, or environmental or legal concerns bring recoverability of the carrying value of one or more assets into question. The total undiscounted cash flows of the asset, including proceeds from disposition, are compared to the net book value of the asset. If this test indicates that impairment exists, an impairment loss is recorded in earnings equal to the shortage of the book value versus the discounted net cash flows of the asset.

Loans Held for Investment

The Company records its investments in real estate loans at cost with assessments made for impairment in the event recoverability of the principal amount becomes doubtful. If, upon testing for impairment, the fair value result is lower than the carrying amount of the loan, a valuation allowance is recorded to lower the carrying amount to fair value, with a loss recorded in earnings. Recoveries of valuation allowances are only recognized in the event of maturity or a sale or disposition in an amount above carrying value. See the ‘Revenue Recognition’ section of this note for other loan-related policy disclosures required by ASC 310-10-50-6.

Cash and Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Restricted cash includes cash restricted by state law or contractual requirement and, as of September 30, 2012, relates primarily to tax and insurance escrows and resident security deposits.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

Fair Value Measurements

Certain assets and liabilities are required to be carried at fair value, or if they are deemed impaired, to be adjusted to reflect this condition. The Company follows the guidance provided by ASC 820, Fair Value Measurements and Disclosures, in accounting and reporting for real estate assets where appropriate, as well as debt instruments both held for investment and as liabilities. The standard requires disclosure of fair values calculated under each level of inputs within the following hierarchy:

•Level 1 – Quoted prices in active markets for identical assets or liabilities at the measurement date.

•Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or

indirectly.

•Level 3 – Unobservable inputs for the asset or liability.

Deferred Loan Costs

Deferred loan costs are amortized using the straight-line method, which approximates the effective interest method, over the terms of the related indebtedness.

Deferred Offering Costs

Deferred offering costs represent costs incurred by the Company related to current equity offerings, excluding costs specifically identifiable to a closing, such as commissions, dealer-manager fees, and other registration fees. For issuances of equity that occur on one specific date, associated offering costs are reclassified as a reduction of proceeds raised on the date of issue. Our ongoing offering of Units, consisting of one share of Series A Redeemable Preferred Stock, or Preferred Stock, and one warrant, or Warrant, to purchase 20 shares of Common Stock, or Units, generally closes on a monthly basis in variable amounts. Deferred offering costs are reclassified to the stockholders’ equity section of the consolidated balance sheet as a reduction of proceeds raised on a pro-rata basis equal to the ratio of total Units issued to the maximum number of Units that may be issued.

Non-controlling Interest

Non-controlling interest represents the equity interest of the Operating Partnership that is not owned by the Company. Non-controlling interest is adjusted for contributions, distributions and earnings or loss attributable to the non-controlling interest in the consolidated entity in accordance with the Agreement of Limited Partnership of the Operating Partnership, as amended.

Redeemable Preferred Stock

Shares of the Company’s Preferred Stock issued in conjunction with the Company’s Unit offering (further described in note 5) are redeemable at the option of the holder, subject to a declining redemption fee schedule. Redemptions are therefore outside the control of the Company. However, the Company retains the right to fund any redemptions of Preferred Stock in either Common Stock or cash at its option, excluding limited holder death rights which expire two years after the applicable issuance date. Therefore, the Company records Preferred Stock as a component of permanent stockholders’ equity.

Revenue Recognition

Rental revenue is recognized when earned from residents, which is over the terms of rental agreements, typically of 13 months’ duration. Differences from the straight-line method, which recognize the effect of any up-front concessions and other adjustments ratably over the lease term, are not material. The Company evaluates the collectability of amounts due from residents and maintains an allowance for doubtful accounts for estimated losses resulting from the inability of residents to make required payments then due under lease agreements. The balance of amounts due from residents are generally deemed uncollectible 30 days beyond the due date, at which point they are fully reserved.

Interest income on real estate loans and notes receivable is recognized on an accrual basis over the lives of the loans using the effective interest method. Direct loan origination fees and origination or acquisition costs applicable to real estate loans are amortized over the lives of the loans as adjustments to interest income. The accrual of interest on all these instruments is stopped

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

when there is concern as to the ultimate collection of principal or interest, which is generally a delinquency of 30 days in required payments of interest or principal. Any payments received on such non-accrual loans are recorded as interest income when the payments are received. Real estate loan investments are reclassified as accrual-basis once interest and principal payments become current.

Promotional fees received from service providers at the Company’s properties are deferred and recognized on a straight-line basis over the term of the agreement.

The PAC Rewards program, implemented in the first quarter of 2012, allows residents to accumulate reward points on a monthly basis for actions such as resident referrals and making rent payments online. A resident must rent a PAC apartment for at least 14 months before reward points may be redeemed for services or upgrades to a resident’s unit. The Company accrues a liability for the estimated cost of these future point redemptions, net of a 35% breakage fee, which is the Company’s current estimate of rewards points that will not be redeemed. In accordance with Staff Accounting Bulletin 13.A.3c, the Company deems its obligations under PAC Rewards as inconsequential to the delivery of services according to the lease terms. Therefore, the expense related to the PAC Rewards Program is included in property operating and maintenance expense on the consolidated statements of operations.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with guidance provided by ASC 505, Equity-Based Payments to Non-Employees and ASC 718, Stock Compensation. We calculate the fair value of equity compensation instruments at the date of grant based upon estimates of their expected term, the expected volatility of and dividend yield on our Common Stock over this expected term period and the market risk-free rate of return. We will also estimate forfeitures of these instruments and accrue the compensation expense, net of estimated forfeitures, over the vesting period(s). We record the fair value of restricted stock awards based upon the closing stock price on the trading day immediately preceding the date of grant.

Acquisition Costs

The Company expenses property acquisition costs as incurred, which include costs such as due diligence, legal, environmental and consulting.

Capitalization and Depreciation

The Company capitalizes replacements of furniture, fixtures and equipment, as well as carpet, appliances, air conditioning units, certain common area items, and other assets. Significant repair and renovation costs that improve the usefulness or extend the useful life of the properties are also capitalized. These assets are then depreciated on a straight-line basis over their estimated useful lives, as follows:

•Buildings 40 years

•Furniture, fixtures & equipment 5 - 10 years

•Improvements to buildings and land 5 - 10 years

•Acquired customer intangibles average remaining lease term

Operating expenses related to unit turnover costs, such as carpet cleaning, mini-blind replacements, and minor repairs are expensed as incurred.

Income Taxes

The Company has elected to be taxed as a REIT under the Code. To continue to qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company's annual REIT taxable income to its stockholders (which is computed without regard to the dividends paid deduction or net capital gain which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax to the extent it distributes qualifying dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company's net income and net cash available for distribution to stockholders. The Company intends to operate in such a manner as to maintain its election for treatment as a REIT.

Since the Company made its REIT election effective as of January 1, 2011 (See Note 10), it was subject to U.S. federal and state income taxes for the period prior to that date. The provision for income taxes is based on income before taxes reported for financial statement purposes after adjustment for transactions that do not have tax consequences. Deferred tax assets and liabilities are realized according to the estimated future tax consequences attributable to differences between the carrying value of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using the enacted tax rates as of the date of the balance sheet. The effect of a change in tax rates on deferred tax assets and liabilities is reflected in the period that includes the statutory enactment date. A deferred tax asset valuation allowance is recorded when it has been determined that it is more likely than not that deferred tax assets will not be realized. If a valuation allowance is needed, a subsequent change in circumstances in future periods that causes a change in judgment about the realization of the related deferred tax amount could result in the reversal of the deferred tax valuation allowance.

The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position taken or expected to be taken in a tax return that is not based on clear and unambiguous tax law and which is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income or loss available to common stockholders by the weighted average number of shares of Common Stock outstanding for the period. Diluted earnings (loss) per share is computed by dividing earnings or net loss available to common stockholders by the weighted average number of shares of Common Stock outstanding adjusted for the effect of dilutive securities such as share grants or warrants. No adjustment is made for potential Common Stock equivalents that are anti-dilutive during the period.

Recent Adoption of Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The substantive changes in this new guidance require the application of a premium or discount in valuing an instrument that is absent Level 1 inputs, when a market participant would apply such a factor in valuing an instrument. The guidance also enhances disclosure requirements: (i) for fair values of Level 3 assets, the valuation process used for those assets and the sensitivity of those calculations to changes in the amount of unobservable inputs; (ii) a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use when that asset is measured at fair value in the statement of financial position; and (iii) the categorization by level within the fair value hierarchy of items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. This guidance is effective for interim and annual periods beginning after December 15, 2011. Our adoption of this guidance did not have a material effect on our financial position or results of operations.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This new guidance removes the option of presenting elements of other comprehensive income within the statements of changes to stockholders’ equity. Instead, the total of comprehensive income, the components of net income, and the components of other comprehensive income may be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance is effective for interim and annual periods beginning after December 15, 2011, with retrospective application required. Our adoption of this guidance did not have a material effect on our financial position or results of operations.

In December 2011, the FASB issued ASU 2011-10, Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate – a Scope Clarification. This new standard clarifies the guidance concerning deconsolidation of a subsidiary that is

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

in substance real estate upon the event of default of that subsidiary’s nonrecourse debt. Generally, deconsolidation of a subsidiary in this circumstance is not appropriate until the collateral is legally transferred to the lender and the indebtedness is extinguished. This guidance is effective for annual and interim periods beginning after June 15, 2012. Our adoption of this guidance did not have a material effect on our financial position or results of operations.

3. Real Estate Assets

The Company acquired the following three properties which were either partly or wholly owned by parties related to the Company. The acquisition price for each property was based on the appraisals of two independent real estate appraisers and was approved by the Company's conflicts committee.

On April 15, 2011, the Company acquired 100% of the membership interests in Stone Rise Apartments, LLC, a Delaware limited liability company (f/k/a Oxford Rise JV LLC), the fee-simple owner of a 216-unit multifamily community located in suburban Philadelphia, Pennsylvania, or Stone Rise, for a total purchase price of $30.15 million, exclusive of acquisition-related and financing-related transaction costs. The membership interests in Oxford Rise JV LLC were owned by WOF.

On April 21, 2011, the Company acquired 100% of the membership interests in PAC Summit Crossing, LLC, a Georgia limited liability company (f/k/a Oxford Summit Partners, LLC), the fee-simple owner of a 345-unit multifamily community located in suburban Atlanta, Georgia, or Summit Crossing, for a total purchase price of $33.2 million, exclusive of acquisition-related and financing-related transaction costs. Williams Realty Fund I, LLC, or WRF (see note 6), owned a majority of the membership interests in PAC Summit Crossing, LLC.

On April 29, 2011, the Company, through its wholly owned subsidiary Trail Creek Apartments, LLC, acquired Oxford Trail, a 204-unit multifamily community located in Hampton, Virginia, or Trail Creek, for a total purchase price of $23.5 million, exclusive of acquisition-related and financing-related transaction costs. The Company purchased a fee-simple interest in the property from Oxford Trail JV LLC. WRF owned indirectly an approximately 10% membership interest in Oxford Trail JV LLC.

The Company allocated the purchase prices of the three properties to the acquired assets and liabilities based upon their fair values, as follows:



	Trail Creek			Stone Rise			Summit Crossing			Total
Land	$	2,652,000		$	6,950,000		$	3,450,000		$	13,052,000
Buildings and Improvements	17,257,845			18,637,356			24,112,767			60,007,968
Furniture, fixtures and equipment	1,841,990			2,819,094			3,591,881			8,252,965
Intangibles	1,748,165			1,743,550			2,045,352			5,537,067
Cash	9,301			16,101			486			25,888
Deposits	28,160			61,276			41,525			130,961
Prepaids and reserves	93,967			439,041			154,744			687,752
Accounts payable and accrued expenses	(48,374		)	(81,677		)	(89,321		)	(219,372		)

Net assets acquired	$	23,583,054		$	30,584,741		$	33,307,434		$	87,475,229
Net assets excluding cash	$	23,573,753		$	30,568,640		$	33,306,948		$	87,449,341

The Company recorded depreciation and amortization of tangible and intangible assets as follows:

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)



	Three months ended				Nine months ended
	9/30/2012		9/30/2011		9/30/2012		9/30/2011
Depreciation:
Buildings and improvements	$	412,091	$	406,754	$	1,235,725	$	718,352
Furniture, fixtures, and equipment	492,746		559,474		1,561,225		1,007,394
	904,837		966,228		2,796,950		1,725,746
Amortization:
Acquired intangible assets	—		2,656,352		—		4,698,175
Website development costs	1,151		1,152		3,454		1,920
Total depreciation and amortization	$	905,988	$	3,623,732	$	2,800,404	$	6,425,841

All depreciation and amortization of acquired intangible assets for the nine-month period ended September 30, 2011 commenced with the dates of acquisition of the three properties. The intangible assets recognized in conjunction with the acquisitions of the three properties were amortized in full during 2011.

4. Real Estate Loans, Notes Receivable, and Line of Credit

Madison-Rome

On September 28, 2012, the Company made a land acquisition bridge loan in the amount of $5,360,042 to Madison Retail - Rome LLC, or Madison-Rome, a Delaware limited liability company, to partially finance the construction of a 88,000 square foot retail complex located in Rome, Georgia. At September 30, 2012 , Madison had drawn $4,740,408 of the loan amount.

The Madison-Rome loan matures on September 20, 2015, with no option to extend and pays current monthly interest of 8% per annum. An additional exit fee equal to the difference between the 8% interest paid and a 14% cumulative annual simple interest return will be due and payable to the Company if Madison-Rome refinances the loan with a third party or when the loan balance is repaid.

The Madison-Rome loan is secured by a first priority lien in the land and the project, and by unconditional guaranties of payment and performance by Stephen H. Whisenant and Charles N. Worthen, unaffiliated third parties and principals of the borrower. In connection with the closing of the Madison-Rome loan, the Company received a loan fee of 2% of the aggregate loan amount, or $107,201 and paid an acquisition fee of $53,600 to the Manager out of these funds. The net fees received by the Company will be recognized as an adjustment of yield over the term of the loan using the effective interest method.

City Park

On September 6, 2012, the Company made a mezzanine loan of up to $10,000,000 to Oxford City Park Development LLC, or City Park, a Georgia limited liability company, to partially finance the construction of a 284-unit multifamily community located in Charlotte, North Carolina. At September 30, 2012, City Park had drawn $5,070,511 of the loan amount.

The City Park mezzanine loan matures on September 5, 2017, with no option to extend and pays current monthly interest of 8% per annum. The loan accrues an additional 6% interest which will be due at maturity or if the property is sold to, or refinanced by, a third party. The Company also has an option (but not an obligation) to purchase the property between and including November 1, 2015 and March 31, 2016 for a pre-negotiated purchase price of $30,945,845. If the Company exercises the purchase option and acquires the property, the additional accrued interest will be treated as additional basis in the acquired project.

The mezzanine loan is secured by a pledge of 100% of the membership interests of City Park. Prepayment of the mezzanine loan is permitted in whole, but not in part, without the Company’s consent. The mezzanine loan is subordinate to a senior loan of up to an aggregate amount of approximately $18.6 million that is held by an unrelated third party. W. Daniel Faulk, Jr. and Richard A. Denny have guaranteed the completion of the project in accordance with the plans and specifications. In addition, Messrs. Faulk and Denny have entered into joint and several repayment guaranties of the mezzanine loan. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement.

In connection with the closing of the City Park mezzanine loan, the Company received a loan fee of 2% of the amount drawn on

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

the loan, or $101,430, and paid an acquisition fee of $50,715 to the Manager out of these funds. Additional loan fees will be recorded on subsequent drawn amounts up to the full aggregate amount of the loan. The net fees received by the Company will be recognized as an adjustment of yield over the term of the loan using the effective interest method.

City Vista

On August 31, 2012, the Company made a mezzanine loan of up to $12,153,000 to Oxford City Vista Development LLC, or City Vista, a Georgia limited liability company, to partially finance the construction of a 272-unit multifamily community located in Pittsburgh, Pennsylvania. At September 30, 2012 , City Vista had drawn $5,640,266 of the loan amount.

The City Vista mezzanine loan matures on June 1, 2016, with an option to extend until July 1, 2017 and pays current monthly interest of 8% per annum. The loan accrues an additional 6% interest which will be due at maturity or if the property is sold to, or refinanced by, a third party. The Company also has an option (but not an obligation) to purchase the property between and including February 1, 2016 and May 31, 2016 for a pre-negotiated purchase price of $43,560,271. If the Company exercises the purchase option and acquires the property, the additional accrued interest will be treated as additional basis in the acquired project.

The mezzanine loan is secured by a pledge of 100% of the membership interests of City Vista. Prepayment of the mezzanine loan is permitted in whole, but not in part, without the Company’s consent. The mezzanine loan is subordinate to a senior loan of up to an aggregate amount of approximately $28.4 million that is held by an unrelated third party. W. Daniel Faulk, Jr. and Richard A. Denny have guaranteed the completion of the project in accordance with the plans and specifications. In addition, Messrs. Faulk and Denny have entered into joint and several repayment guaranties of the mezzanine loan. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement.

In connection with the closing of the City Vista mezzanine loan, the Company received a loan fee of 2% of the amount drawn on the loan, or $112,825 and paid an acquisition fee of $56,412 to the Manager out of these funds. Additional loan fees will be recorded on subsequent drawn amounts up to the full aggregate amount of the loan. The net fees received by the Company will be recognized as an adjustment of yield over the term of the loan using the effective interest method.

Crosstown Walk

On August 28, 2012, the Company amended the real estate acquisition bridge loan it made on June 29, 2012 to Iris Crosstown Apartments LLC, or Crosstown Walk, a Florida limited liability company, for Crosstown Walk to acquire a parcel of land located in suburban Tampa, Florida, upon which a multifamily community is to be constructed. The amendment increased the aggregate amount of the loan to $3,693,471. The amount drawn under the loan at September 30, 2012 was $3,636,496, with the balance scheduled to be drawn at a later date. The bridge loan matures on December 31, 2012, with no option to extend and pays current monthly interest of 8% per annum. If Iris sells the property to a third party or if a third party refinances the bridge loan at any time during its term, an additional 6% per annum exit fee will be due and payable to the Company.

The bridge loan is secured by a mortgage, an assignment of project documents and by unconditional guaranties of payment and performance by W. Daniel Faulk, Jr., Richard A. Denny, and J. Michael Morris, unaffiliated third parties and principals of the borrower. In connection with the closing of the bridge loan and the subsequent amendment, the Company received a total loan fee of 2% of the amount drawn on the loan, or $73,540 and paid an acquisition fee of $36,770 to the Manager out of these funds. Additional loan fees will be recorded on subsequent drawn amounts up to the full aggregate amount of the loan. The net fees received by the Company will be recognized as an adjustment of yield over the term of the loan using the effective interest method.

Summit II

On May 7, 2012, the Company made a mezzanine loan in the amount of $6,103,027 to Oxford Summit Apartments II LLC, or Summit II, a Georgia limited liability company, to partially finance the construction of a 140-unit multifamily community located adjacent to the Company’s existing Summit Crossing multifamily community in suburban Atlanta, Georgia.

The Summit II mezzanine loan matures on May 8, 2017, with no option to extend and pays current monthly interest of 8% per annum. The loan accrues an additional 6% interest which will be due at maturity or if the property is sold to, or refinanced by, a third party. Under the terms of a purchase option agreement entered into in connection with the closing of the mezzanine loan, we have an option (but not an obligation) to purchase the property for a period of five months following completion of construction,

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

lease up and stabilization for $19,254,155. If the property is sold to, or refinanced by, a third party before or after the option period, we will be entitled to receive an exit fee equal to the amount required to provide us with a 14% simple interest return on the loan, in addition to loan fees received at closing, which totaled 2% of the loan amount. Since the minimum exit fee, assuming the purchase option is not exercised, is the amount needed to provide a 14% simple interest return, the Company will accrue each period the additional exit fee earned based on the 14% rate assuming the loan was paid off at period end. The accrued exit fee will be recorded as interest income in the consolidated statements of operations. If the Company exercises the purchase option and acquires the property, the additional accrued interest will be treated as additional basis in the acquired project.

The mezzanine loan is secured by a pledge of 100% of the membership interests of Oxford Summit II. Prepayment of the mezzanine loan is permitted in whole, but not in part, without the Company’s consent. The mezzanine loan is subordinate to a senior loan of up to an aggregate amount of $12,384,000 that is held by an unrelated third party. W. Daniel Faulk, Jr. and Richard A. Denny have guaranteed the completion of the project in accordance with the plans and specifications. In addition, Messrs. Faulk and Denny have entered into joint and several repayment guaranties of the mezzanine loan. The repayment guaranties expire at the completion of construction of the property. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement.

In connection with the closing of the Summit II mezzanine loan, the Company received a loan fee of 2% of the loan amount, or $122,061 and paid an acquisition fee of $61,030 to the Manager out of these funds. The net fees received by the Company will be recognized as an adjustment of yield over the term of the loan using the effective interest method.

Trail II

On June 30, 2011, the Company made a mezzanine loan of $6.0 million to Oxford Hampton Partners LLC, or Hampton Partners, a Georgia limited liability company and a related party, to partially finance the construction of a 96-unit multifamily community located adjacent to the Company’s existing Trail Creek multifamily community in Hampton, Virginia, or Trail II. Hampton Partners was required to fully draw down the mezzanine loan on the closing date. Approximately 100% of the membership interest in Hampton Partners is owned by WRF.

The Trail II mezzanine loan matures on June 29, 2016, with no option to extend and pays interest at a fixed rate of 8.0% per annum. Interest will be paid monthly with principal and any accrued but unpaid interest due at maturity. Under the terms of a purchase option agreement entered into in connection with the closing of the mezzanine loan, the Company has an option (but not an obligation) to purchase the property between and including April 1, 2014 and June 30, 2014 for $17,825,600, which is the amount of the aggregate project costs as set forth in the approved construction budget on the closing date. If the property is sold to, or refinanced by, a third party before July 1, 2014, the Company will be entitled to receive an exit fee equal to the amount required to provide it with a 14% cumulative internal rate of return on the loan. If the property is sold to, or refinanced by, a third party on or after July 1, 2014, then the Company will be entitled to receive an exit fee equal to the amount required to provide it with a 12% cumulative internal rate of return on the loan. The calculation of the cumulative internal rate of return will include the loan’s fees received at closing. Since the minimum exit fee, assuming the purchase option is not exercised, is the amount needed to provide a 12% cumulative internal rate of return, the Company will accrue each period the additional exit fee earned based on the 12% rate assuming the loan was paid off at period end as the borrower cannot control whether the option is exercised. The accrued exit fee will be recorded as interest income in the consolidated statements of operations.

If the Company exercises the purchase option and acquires the property, any accrued and unpaid exit fee will be treated as additional basis in the acquired project.

The Trail II mezzanine loan is secured by a pledge of 100% of the membership interests of Hampton Partners. Partial prepayment of the mezzanine loan is not permitted without the Company’s consent. The mezzanine loan is subordinate to a senior loan of up to an aggregate amount of $10 million that is held by an unrelated third party. W. Daniel Faulk, Jr. and Richard A. Denny, both unaffiliated third parties, have guaranteed the completion of the project in accordance with the plans and specifications. This guaranty is subject to the rights held by the senior lender pursuant to a standard intercreditor agreement with the senior lender.

In connection with the closing of the Trail II mezzanine loan, the Company received a loan fee of 2% of the loan amount, or $120,000, and a loan commitment fee of $14,333. The Company paid an acquisition fee of $60,000 to its Manager out of these funds. The net fees received by the Company are recognized as an adjustment of yield over the term of the loan using the effective interest method.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

Notes Receivable

On September 14, 2012, the Company made a loan in the amount of $500,000 to Newport Development, LLC, or Newport, a Georgia limited liability company and unaffiliated third party, in the form of a promissory note. The full amount of the loan was drawn as of September 30, 2012. The loan bears interest at 15% per annum and interest only payments are due on a monthly basis until the maturity date of March 17, 2013. The loan may be prepaid at any time, in whole or in part, without penalty. The amounts payable under the terms of the loan are backed by personal guaranties of repayment issued by Robert F. Krause, Jr., and J. Richard Stephens, Jr., principals of Newport and who are unaffiliated third parties.

On May 21, 2012, the Company made a loan in the amount of $575,000 to Madison Retail, LLC, or Madison Retail, a Georgia limited liability company and unaffiliated third party, in the form of a promissory note. The amount drawn by Madison Retail as of September 30, 2012 was $430,544. The loan bore interest at 15% per annum and interest only payments were due on a monthly basis until the maturity date of September 30, 2012. The loan was paid off at maturity. The amounts payable under the terms of the loan were backed by a personal guaranty of repayment issued by Stephen H. Whisenant, the principal of Madison Retail and an unaffiliated third party.

On March 26, 2012, the Company made a loan in the amount of $650,000 to Oxford Properties, LLC, a Georgia limited liability company, or Oxford, in the form of a promissory note. The loan bore interest at 15% per annum and interest only payments were due beginning May 1, 2012, and continued on a monthly basis until the repayment of the loan, which occurred on September 6, 2012.

Line of Credit

On August 21, 2012, the Company extended a revolving line of credit to its Manager in an aggregate amount of up to $1.0 million, in order to provide liquidity to the Manager in support of its ongoing business operations. The credit line bears interest at 8.0% per annum, with interest payable monthly, and matures on July 31, 2013. The loan is secured by a collateral assignment of the Manager's right to fees under the Management Agreement. At September 30, 2012, the amount drawn on the line of credit by the Manager was $345,200.

The Company recorded interest income and other revenue from these instruments as follows:

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)



	Three months ended				Nine months ended
	9/30/2012		9/30/2011		9/30/2012		9/30/2011
Interest income:
Real estate loans:
Summit II	$	122,061	$	—	$	196,189	$	—
Trail II	120,000		120,000		360,000		120,000
Crosstown Walk	62,335		—		63,567		—
City Park	27,784		—		27,784		—
City Vista	38,838		—		38,838		—
Madison-Rome	3,117		—		3,117		—

Total	374,135		120,000		689,495		120,000

Accrued exit fees	198,449		—		318,296		—
Net loan fee revenue recognized	27,765		4,495		39,194		5,828

Total interest income on real estate loans	600,349		124,495		1,046,985		125,828

Notes receivable:
Newport	3,493		—		3,493		—
Oxford	16,793		—		42,770		—
Madison Retail	13,589		—		17,253		—
PAA line of credit	1,925		—		1,925		—

Total interest income on notes and lines of credit	35,800		—		65,441		—

Total interest income	$	636,149	$	124,495	$	1,112,426	$	125,828

The Company extends loans for purposes such as to partially finance the development of multifamily residential communities, to acquire land in anticipation of developing and constructing multifamily residential communities, and for other real estate or real estate related projects. Certain of these loans include characteristics such as exclusive options to purchase the project at a fixed price within a specific time window following project completion and stabilization, the rights to incremental exit fees over and above the amount of periodic interest paid during the life of the loans, or both. These characteristics can cause the loans to create variable interests to the Company and require further evaluation as to whether the variable interest creates a variable interest entity, or VIE, which would necessitate consolidation of the project. The Company considers the facts and circumstances pertinent to each entity borrowing under the loan, including the relative amount of financing the Company is contributing to the overall project cost, decision making rights or control held by the Company, and rights to expected residual gains or obligations to absorb expected residual losses that could be significant from the project. If the Company is deemed to be the primary beneficiary of a VIE, consolidation treatment would be required.

The Company has evaluated its real estate loans, where appropriate, for accounting treatment as loans versus real estate development projects, as required by ASC 310. For each loan, the majority of the characteristics and the facts and circumstances indicate that loan accounting treatment is appropriate.

The Company's real estate loans partially finance the development activities of the borrowers' associated legal entities. Each of these loans create variable interests in each of these entities, and according to the Company's analysis, are deemed to be VIEs. Due to the combined factors of the sufficiency of the borrowers' investment at risk, the existence of payment and performance guaranties provided by the borrowers, as well as the limitations on the fixed-price purchase options on the Trail II, Summit II, City Park and City Vista loans, the Company has concluded that it is not the primary beneficiary of the borrowing entities. It has no decision making authority or power to direct activity, except normal lender rights, which are subordinate to the senior loans on the projects. Therefore, since the Company has concluded it is not the primary beneficiary, it has not consolidated these entities

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

in its consolidated financial statements. The Company's maximum exposure to loss from these loans is their carrying value as of September 30, 2012 of approximately $31.2 million. The maximum aggregate amount of loans to be funded as of September 30, 2012 was approximately $43.3 million.

The Company is subject to a concentration of credit risk that could be considered significant with regard to the Trail II, Summit II, Crosstown Walk, City Park and City Vista real estate loans, as identified specifically by the two named principals of the borrowers, W. Daniel Faulk, Jr. and Richard A. Denny, and as evidenced by repayment guaranties offered in support of these loans. These loans total approximately $26.5 million and in the event of a total failure to perform by the borrowers and guarantors, would subject the Company to a total possible loss of that amount. The Company generally requires secured interests in one or a combination of the membership interests of the borrowing entity, guaranties of loan repayment, and project completion performance guaranties as credit protection with regard to its real estate loans, as is customary in the mezzanine loan industry. The Company has performed assessments of the guaranties with regard to the obligors' ability to perform according to the terms of the guaranties if needed and has concluded that the guaranties reduce the Company's risk and exposure to the above-described credit risk in place as of September 30, 2012.

The borrowers and guarantors behind these real estate loans (excluding the Madison-Rome loan) collectively qualify as a major customer as defined in ASC 280-10-50, as the revenue recorded from this customer exceeded ten percent of the Company's total revenues. The Company recorded revenue from transactions with this major customer for the three-month and nine-month periods ended September 30, 2012 of approximately $611 thousand and $1.1 million, respectively.

5. Redeemable Preferred Stock

On November 18, 2011, the Securities and Exchange Commission declared effective our registration statement on Form S-11 (registration number 333-176604) for our offering of up to a maximum of 150,000 Units, with each Unit consisting of one share of our Preferred Stock and one Warrant to purchase 20 shares of our Common Stock. We refer to such offering as the Primary Series A Offering. Each share of Preferred Stock ranks senior to the Company's Common Stock and carries a cumulative annual 6% dividend of the stated per share value of $1,000, payable monthly as declared by the Company’s board of directors. Dividends begin accruing on the date of issuance. The Preferred Stock is redeemable at the option of the holder beginning two years following the date of issue subject to a 10% redemption fee. After year three the redemption fee decreases to 5%, after year four it decreases to 3%, and after year five there is no redemption fee. Any redeemed shares of Preferred Stock are entitled to any accrued but unpaid dividends at the time of redemption and any redemptions may be in cash or Common Stock, at the Company’s discretion. The Warrant is exercisable by the holder at an exercise price of 120% of the current market price per share of the Common Stock on the date of issuance of such warrant with a minimum exercise price of $9.00 per share. The current market price per share is determined using the volume weighted average closing market price for the 20 trading days prior to the date of issuance of the Warrant. The Warrants are not exercisable until one year following the date of issuance and expire four years following the date of issuance.

On August 16, 2012, we filed a registration statement on Form S-11 (registration number 333-183355) for a follow-on offering of an additional 850,000 Units, bringing the maximum number of Units to be issued to one million. The terms of the follow-on offering and features of the Units are substantially the same as the Primary Series A Offering. The registration statement has not yet been declared effective by the Securities and Exchange Commission.

As of September 30, 2012, offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, totaled approximately $1.2 million. These costs are reflected as a reduction of stockholders' equity at the time of closing. In addition, the costs related to the offering not related to a specific closing transaction totaled approximately $2.7 million. As of September 30, 2012 the Company had issued 12,178 Units and collected net proceeds of approximately $11.0 million from the Primary Series A Offering. The number of Units issued was approximately 1.2% of the maximum number of Units to be issued under the Primary Series A Offering and the follow-on offering. Consequently, the Company cumulatively recognized approximately 1.2% of the approximate $2.7 million deferred to date, or approximately $33 thousand as a reduction of stockholders' equity. The remaining balance of offering costs not yet reflected as a reduction of stockholder's equity, approximately $2.7 million, are reflected in the asset section of the consolidated balance sheet as deferred offering costs. The remainder of current and future deferred offering costs will likewise be recognized as a reduction of stockholders' equity in the proportion of the number of Units issued to the maximum number of Units available to be issued. Offering costs not related to a specific closing transaction are subject to an overall cap of 1.5% of the total gross proceeds raised during the Unit offering.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

6. Related Party Transactions

John A. Williams, the Company's Chief Executive Officer and Chairman of the Board and Leonard A. Silverstein, the Company's President and Chief Operating Officer and a member of the Board, are also executive officers and directors of NELL Partners, Inc., which controls the Manager. Mr. Williams is the Chief Executive Officer and President and Mr. Silverstein is the President and Chief Operating Officer of the Manager.

Mr. Williams, Mr. Silverstein and Michael J. Cronin, the Company's Executive Vice President, Chief Accounting Officer and Treasurer are executive officers of Williams Realty Advisors, LLC, or WRA, which is the manager of the day-to-day operations of WOF. WRA is also the manager of the day-to-day operations of WRF.

The third amended and restated management agreement, or Management Agreement, between the Company and its Manager entitles the Manager to receive compensation for various services it performs related to acquiring assets and managing properties on the Company's behalf:



		Three months ended				Nine months ended
Type of Compensation	Basis of Compensation	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011

Acquisition fees	1% of the gross purchase price of real estate assets acquired or loans advanced	$	168,813	$	—	$	258,528	$	928,500
Asset management fees	Monthly fee equal to one-twelfth of 0.50% of the total book value of assets, as adjusted	148,573		127,292		409,964		235,019
Property management fees	Monthly fee equal to 4% of the monthly gross revenues of the properties managed	104,320		100,519		304,827		175,572
General and administrative expense fees	Monthly fee equal to 2% of the monthly gross revenues of the Company	66,111		50,183		173,696		87,722

		$	487,817	$	277,994	$	1,147,015	$	1,426,813

In addition to property management fees, the Company incurred reimbursable on-site personnel salary and related benefits expenses at the properties as follows:



Three months ended				Nine months ended
September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011

$	247,165	$	255,847	$	738,643	$	435,902

The Company’s Manager utilizes certain personnel of its affiliates to accomplish certain tasks related to raising capital that would typically be performed by third parties, including, but not limited to, legal and marketing functions. As permitted under the Management Agreement, the Manager has requested reimbursement of $43,747 and $120,618 for the three-month and nine-month periods ended September 30, 2012, respectively. These costs are recorded as deferred offering costs until such time as additional closings occur on the Unit offering, at which time they are reclassified on a pro-rata basis as a reduction of offering proceeds within stockholders’ equity.

In addition to the fees described above, the Management Agreement also entitles the Manager to other potential fees, as follows:

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)


•	Disposition fees - Based on the lesser of (A) one-half of the commission that would be reasonable and customary; and (B) 1% of the sale price of the asset


•	Construction, development, and landscaping fees - Customary and competitive market rates in light of the size, type and location of the asset

•

Special limited partnership interest in the Operating Partnership - distributions from the Operating Partnership equal to 15% of any net proceeds from the sale of an asset and prior operations that are remaining after the payment of (i) the capital and expenses allocable to all realized investments (including the sold asset), and (ii) a 7% priority annual return on such capital and expense; provided that all accrued and unpaid dividends on the Preferred Stock have been paid in full

The Company did not incur any of these other potential fees during the three or nine-month periods ended September 30, 2012 or 2011.

7. Dividends

The Company declares and pays monthly cash dividend distributions on its Preferred Stock in the amount of $5.00 per share, prorated for partial months at issuance as necessary. In addition to $718 of accrued dividends applicable to the three-month period

ended March 31, 2012, the Company's dividend activity on its Preferred Stock for the nine-month period ended September 30, 2012 was:



Declaration date	Record date	Payment date	Dividend distributions
4/13/2012	4/30/2012	5/21/2012	$	11,486
5/10/2012	5/31/2012	6/20/2012	25,406
6/22/2012	6/29/2012	7/20/2012	42,793
7/22/2012	7/31/2012	8/20/2012	50,878
8/2/2012	8/31/2012	9/20/2012	54,119
9/18/2012	9/28/2012	10/22/2012	58,062

			$	242,744

On February 2, 2012, the Company declared a quarterly dividend on its Common Stock of $0.13 per share. The dividend totaled $673,181 and was paid on April 16, 2012 to all holders of Common Stock of record as of March 30, 2012.

On May 10, 2012, the Company declared a quarterly dividend on its Common Stock of $0.13 per share. The dividend totaled $677,477 and was paid on July 16, 2012 to all holders of Common Stock of record as of June 29, 2012.

On August 2, 2012, the Company declared a quarterly dividend on its Common Stock of $0.14 per share. The dividend totaled $729,699 and was paid on October 15, 2012 to all holders of Common Stock of record as of September 28, 2012.

8. Equity Compensation

Stock Incentive Plan

On February 25, 2011, the Company’s board of directors adopted, and the Company’s stockholders approved, the Preferred Apartment Communities, Inc. 2011 Stock Incentive Plan, or, as amended, the 2011 Plan, to incentivize, compensate and retain eligible employees, consultants, and non-employee directors. A maximum of 567,500 shares of Common Stock may be issued under the 2011 Plan. Awards may be made in the form of issuances of Common Stock, restricted stock, stock appreciation rights (“SARs”), performance shares, incentive stock options, non-qualified stock options, or other forms. Eligibility for receipt of, amounts, and all terms governing awards pursuant to the 2011 Plan, such as vesting periods and voting and dividend rights on

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

unvested awards, are determined by the Compensation Committee of the Company’s Board of Directors.

Restricted Stock Grants

On April 5, 2011, the Company granted a total of 26,000 shares of restricted Common Stock to its non-employee board members, in payment of their annual retainer fees. The Company records the fair value of restricted stock awards based upon the closing stock price on the trading day immediately preceding the date of grant. The fair value per share was deemed to be $10.00 per share (the IPO offering price) by Board resolution. Compensation cost in the amount of $260,000 was recognized on a straight-line basis over the period ending on the first anniversary of the grant date and all 26,000 shares vested on April 5, 2012. For the nine-month period ended September 30, 2012, stock compensation expense for these grants was $66,867. For the three-month and nine-month periods ended September 30, 2011, stock compensation expense for these grants was $65,534 and $127,507, respectively.

On May 10, 2012, the Company granted a total of 33,046 shares of restricted Common Stock to its non-employee board members, in payment of their annual retainer fees. The per-share fair value was $7.83 and total compensation cost in the amount of $258,750 will be recognized on a straight-line basis over the period ending on the earlier of first anniversary of the grant date or the next annual meeting of the Company's stockholders. For the three-month and nine-month periods ended September 30, 2012, stock compensation expense was $64,480 and $107,813 for these grants, respectively. Unrecognized compensation expense was $150,937 and all 33,046 unvested shares were outstanding at September 30, 2012.

Directors’ Stock Grants

On August 2, 2012, the Company granted 780 shares of Common Stock to its independent board members, in payment of their meeting fees. The per-share fair value of this immediate-vesting award was $7.88, which was the closing price of the Common Stock on the prior business day. The total compensation cost of $6,146 was recorded in full at the grant date.

On February 2, 2012, the Company granted 2,988 shares of Common Stock to its independent board members, in payment of their meeting fees. The per-share fair value of this immediate-vesting award was $6.12, which was the closing price of the Common Stock on the prior business day. The total compensation cost of $18,287 was recorded in full at the grant date.

On August 4, 2011, the Company granted 1,500 shares of Common Stock to its independent board members, in payment of their meeting fees. The per-share fair value of this immediate-vesting award was $7.99, which was the closing price of the Common Stock on the prior business day. The total compensation cost of $11,985 was recorded in full at the grant date.

On May 5, 2011, the Company granted 1,872 shares of Common Stock to its independent board members, in payment of their meeting fees. The per-share fair value of this immediate-vesting award was $9.62, which was the closing price of the Common Stock on the prior business day. The total compensation cost of $18,009 was recorded in full at the grant date.

Class B Units

On December 30, 2011, pursuant to its Third Amended and Restated Agreement of Limited Partnership of the Partnership, the Company granted 107,164 Class B Units, representing ownership interests in the Operating Partnership, to certain of its executive officers as compensation for service in 2011. On January 3, 2012, the Company granted 106,988 Class B Units for service to be rendered during 2012.

The Class B Units become Vested Class B Units at the Initial Valuation Date, which is one year from the date of grant. For each grant, on the Initial Valuation Date, the market capitalization of the number of shares of Common Stock at the date of grant is compared to the market capitalization of the same number of shares of Common Stock at the Initial Valuation Date. If the market capitalization measure results in an increase of at least $650,000, the Vested Class B Units become Earned Class B Units and automatically convert into Class A Units of the Operating Partnership, which are henceforth entitled to distributions from the Operating Partnership and become exchangeable for Common Stock of the Company on a one-to-one basis at the option of the holder. Vested Class B Units may become Earned Class B Units on a pro-rata basis should the result of the market capitalization test be an increase of less than $650,000. Any Vested Class B Units that do not become Earned Class B Units on the Initial Valuation Date are subsequently remeasured on a quarterly basis until such time as all Vested Class B Units become Earned Class

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

B Units or are forfeited due to termination of continuous service as an officer of the Company due to an event other than as a result of a qualified event, which is generally the death or disability of the holder. Continuous service through the final valuation date is required for the Vested Class B Units to qualify to become fully Earned Class B Units.

On August 15, 2012, the Company granted 6,128 Class B Units to its Vice Chairman of the Company's Board of Directors, as additional compensation for acting in an expanded capacity related to board oversight of the Company's capital raising efforts. The vesting conditions, conversion rights and other features are identical to the Class B Unit grants described above, except the market capitalization hurdle is $50,000.

Because of the market condition determining the transition of the Vested Class B Units to Earned Class B Units, a Monte Carlo simulation was utilized to calculate the total fair values, which will be amortized as compensation expense over the one-year periods beginning on the grant dates through the Initial Valuation Dates. For the three-month and nine-month periods ended September 30, 2012, stock compensation expense for these three grants was $244,974 and $722,094, respectively. Unrecognized compensation expense for these awards was $278,302 and all unvested Class B Units were outstanding at September 30, 2012.

The underlying valuation assumptions and results for the Class B Unit awards were:



Grant dates	12/30/2011			1/3/2012			8/15/2012
Stock price	$	5.98		$	6.05		$	8.30
Dividend yield	8.7		%	8.6		%	6.75		%
Expected volatility	35.29		%	35.23		%	31.35		%
Risk-free interest rate	2.73		%	2.83		%	2.72		%

Derived service period (years)	1.0			1.0			1.0

Number of Units granted	107,164			106,988			6,128
Calculated fair value per Unit, assuming:
50% vesting	$	4.49		$	4.50		$	6.69
100% vesting	$	4.46		$	4.47		$	6.68

Total fair value of Units	$	479,559		$	479,841		$	40,996

The expected dividend yield assumptions were derived from the Company’s closing price of its Common Stock on the grant date and its projected future quarterly dividend payments of $0.13 per share for the 2011 and 2012 awards and $0.14 per share for the August 15, 2012 award.

Since the Company has a limited amount of operating history in the public equity market, the expected volatility assumption was derived from the observed historical volatility of the common stock prices of a select group of peer companies within the REIT industry that most closely approximate the Company’s size, capitalization, leverage, line of business and geographic focus markets.

The risk-free rate assumptions were obtained from the Federal Reserve yield table and were calculated as the interpolated rate between the 20 and 30 years year yield percentages on U. S. Treasury securities on the grant dates.

Since the likelihood of attainment of the market condition for each of the Class B Units to become earned is believed to be high and the vesting period is one year, the forfeiture rate assumption for these Class B Units was set to 0%.

Since the Class B Units have no expiration date, a derived service period of one year was utilized, which equals the period of time from the grant date to the initial valuation date.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

Warrant

On March 31, 2011, as partial compensation for services rendered for the IPO, the Company issued to International Assets Advisory, LLC, or IAA, a warrant to purchase up to 150,000 shares of Common Stock. The exercise price is $12.50 per share, which is 125% of the gross IPO price of $10.00 per share. The warrant is currently exercisable and expires on March 31, 2015. The Company calculated the per-share fair value of the warrant using the Black-Scholes method. The underlying valuation assumptions were:

Dividend yield 5.0%

Expected volatility 62.69%

Risk-free interest rate 1.765%

Expected option term (years) 4

The expected dividend yield assumption was derived from the Company’s gross IPO price per share of $10.00 and its then-projected future quarterly dividend payments of $0.125 per share.

The risk-free rate assumption was obtained from the treasury constant maturities nominal yield table obtained from the Federal Reserve, interpolated between the three-year and five-year yield percentages on U. S. Treasury securities on March 31, 2011.

The expected term assumption of 4 years was equal to the contractual term of the instrument. The fair value of the warrant was calculated to be $462,330, or $3.08 per share and, since all service conditions had been met as of the date of issuance, was recorded in full at March 31, 2011 as an increase in the deferred offering costs on the consolidated balance sheet and an increase in additional paid-in capital. Subsequent to the closing of the IPO, these deferred offering costs were removed from the consolidated balance sheet and charged against stockholders’ equity.

The warrant is exercisable, at IAA’s option, in whole or in part, by either payment of the aggregate exercise price for the number of shares exercised, plus applicable transfer taxes, or by a cashless net share settlement. Upon exercise of the warrant, shares of Common Stock will be issued from authorized but unissued Common Stock.

9. Indebtedness

Note Payable

On September 2, 2010, the Company borrowed $465,050 from WOF through the issuance of a promissory note. The note had an interest rate of 4.25% per annum and had a maturity date of April 30, 2011. The proceeds were used to reimburse for organizational, offering, acquisition and due diligence expenses. On April 5, 2011, the Company paid off this note in conjunction with the closing of the IPO and the private placement with WOF. The Company incurred interest on this note of $5,090 for the nine-month period ended September 30, 2011.

Mortgage Notes Payable

The Company partially financed the acquisitions of Stone Rise, Summit Crossing and Trail Creek with non-recourse mortgage notes collateralized only by the associated real estate assets for each community with no cross-collateralization of any of our other properties. Each mortgage requires payments of interest only from the dates of closing through May 1, 2014, then principal and interest are due on a 30-year amortization schedule through May 1, 2018, the date of maturity of each instrument. Interest expense on the mortgages for the three acquired properties was:

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)



		Principal balance			Three months ended				Nine months ended
	Acquisition date	as of September 30, 2012		Interest rate	September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011

				1 month LIBOR +
Stone Rise	4/15/2011	$	19,500,000	2.77%	$	150,036	$	147,962	$	448,126	$	270,309

				Fixed
Summit Crossing	4/21/2011	20,862,000		4.71%	251,109		251,109		747,868		444,900

				1 month LIBOR +
Trail Creek	4/29/2011	15,275,000		2.8%	118,700		117,075		354,521		197,291

Total		$	55,637,000		$	519,845	$	516,146	$	1,550,515	$	912,500

In addition, the Company recorded amortization of deferred loan costs related to these mortgages of $21,492 and $64,479 for the three-month and nine-month periods ended September 30, 2012 and $21,445 and $42,986 for the three-month and nine-month periods ended September 30, 2011, respectively. The interest expense and deferred loan cost amortization for the nine-month period ended September 30, 2011 began with the closing dates of the acquisition of the three multifamily properties and so do not reflect a full period of activity.

Variable monthly interest rates are capped at 7.25% and 6.85% for Stone Rise and Trail Creek, respectively. LIBOR was 0.210% on September 30, 2012. Based upon this current rate, the Company’s estimated future principal payments due on its debt instruments as of September 30, 2012 were:



Period	Future principal payments
Remainder of 2012	$	—
2013	15,000,000
2014	608,635
2015	1,072,884
2016	1,111,367
thereafter	52,844,114

Total	$	70,637,000

Lines of Credit

On October 12, 2010, the Company entered into a $1.0 million unsecured non-revolving line of credit arrangement with WOF, which matured on March 31, 2011. On March 25, 2011, the line of credit was increased to $1.25 million and the maturity date was extended to April 30, 2011. The line was to be used to fund approved expenses incurred by the Company such as organization, offering and property acquisition expenses. The line had an interest rate of 4.25% per annum. For the nine-month period ended September 30, 2011, the Company incurred interest on this line of credit of $10,758. On April 5, 2011, the Company paid off and terminated this line of credit in conjunction with the closing of the IPO and the private placement with WOF.

On October 12, 2010, the Company entered into a $1.0 million unsecured revolving line of credit arrangement with WOF, which matured on March 31, 2011. On March 25, 2011, the line of credit was reduced to $750,000 and the maturity date was extended to April 30, 2011. The line was only to be used to fund certain approved deposits and escrows related to the acquisition of real

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)

estate projects and related financings. The line had an interest rate of 4.25% per annum. For the nine month period ended September 30, 2011, the Company incurred interest on this line of credit of $880. On April 5, 2011, the Company paid off and terminated this line of credit in conjunction with the closing of the IPO and the private placement with WOF.

Credit Facility

On August 31, 2012, the Company and the Operating Partnership entered into a credit agreement with Key Bank National Association, or Key Bank, to obtain a $15.0 million senior secured revolving credit facility, or the Credit Facility. The intended uses of the Credit Facility are to fund investments, capital expenditures, dividends (with consent), working capital and other general corporate purposes on an as needed basis. Amounts drawn under the Credit Facility bear interest at a variable rate of the 1 month LIBOR index plus 500 basis points, or approximately 5.2% per annum at September 30, 2012 as well as a commitment fee on the average daily unused portion of the Credit Facility of 0.50% per annum. Accrued interest and commitment fees are payable monthly and principal amounts owed may be repaid in whole or in part without penalty. The Credit Facility has a maturity date of August 31, 2013.

Borrowings under the Credit Facility are secured by, among other things, pledges of 100% of the ownership of each of the current and future mezzanine loan subsidiaries, and 49% of the ownership of each of the current and future real estate subsidiaries, as well as by joint and several repayment guaranties.

The Credit Facility contains certain affirmative and negative covenants including negative covenants that limit or restrict secured and unsecured indebtedness, mergers and fundamental changes, investments and acquisitions, liens and encumbrances, dividends, transactions with affiliates, burdensome agreements, changes in fiscal year and other matters customarily restricted in such agreements. As of September 30, 2012, the Company was in compliance with all covenants related to the Credit Facility, as follows:



Covenant	Requirement	Result
Senior leverage ratio	Maximum 65%	46%
Net worth	Minimum $38,230,562	$43,587,623
Debt yield	Minimum 7.75%	8.72%
Payout ratio	Maximum 95%	77.7%
Total leverage ratio	Maximum 70%	58.3%
Debt service coverage ratio	Minimum 1.50x	2.77x

At September 30, 2012, the Company and the Operating Partnership had drawn the full $15.0 million available under the Credit Facility to finance the closings of the City Vista and City Park mezzanine loans and the Madison-Rome loan, as well as associated legal expenses and a loan fee and closing costs of $323,918 for the establishment of the Credit Facility, of which $26,993 was amortized for the three-month and nine-month periods ended September 30, 2012. Interest expense for the Credit Facility was $46,970 and the weighted average interest rate was 5.24% for the three-month and nine-month periods ended September 30, 2012 (commencing with the first draw upon the Credit Facility on August 31, 2012).

10. Income Taxes

The Company elected to be taxed as a REIT effective with its tax year beginning January 1, 2011, and therefore, the Company will not be subject to federal and state income taxes after this effective date. For the period preceding this election date, the Company's operations resulted in a tax loss. As of December 31, 2010, the Company had deferred federal and state tax assets totaling approximately $298,100, none of which were based upon tax positions deemed to be uncertain. These deferred tax assets will most likely not be used since the Company elected REIT status, therefore, management has determined that a 100% valuation allowance is appropriate for the period ended September 30, 2012.

11. Commitments and Contingencies

The Company is not currently subject to any known material commitments or contingencies from its business operations, nor any

material known or threatened litigation.

12. Segment Information

The Company evaluates the performance of its business operations and allocates financial and other resources by assessing the financial results and outlook for future performance across two distinct segments: multifamily communities and real estate related financing.

Multifamily Communities - consists of owned residential multifamily communities.

Financing - consists of the Company's portfolio of mezzanine loans, bridge loans, and other instruments deployed by the Company to partially finance the development, construction, and prestabilization carrying costs of new multifamily communities and other real estate and real estate related assets.

The primary financial operating measure utilized internally by the Company's chief operating decision maker, or CODM, is Adjusted Funds from Operations, or AFFO. The Company defines and calculates AFFO as:

Net income/loss, excluding the effects of:


•	impairment charges on and gains/losses from sales of depreciable property;


•	depreciation and amortization charges;


•	acquisition costs;


•	organization costs;


•	non-cash equity compensation to directors and executives;


•	amortization of loan closing costs;


•	REIT establishment costs;


•	net loan origination fees received;


•	non-cash mezzanine loan interest income;


•	cash paid for loan closing costs; and


•	normally recurring capital expenditures

The Company's reported AFFO results are not generally comparable to those reported by other companies. Investors are cautioned that AFFO is a non-GAAP measure which excludes acquisition costs which are generally recorded in the periods in which the properties are acquired (and often preceding periods). The CODM utilizes AFFO to gauge the results of the operating performance of the Company's portfolio of real estate-related assets. As a widely accepted industry financial measure, the Company believes AFFO is useful to investors as a supplemental gauge of its operating performance and is useful in comparing its operating performance with other real estate companies that are not as involved in ongoing acquisition activities. AFFO is a useful supplement to, but not a substitute for, its closest GAAP-compliant measure, which the Company believes to be net income/loss available to common stockholders.

The following table presents the Company's AFFO results by reportable segment. The amounts on the line entitled 'Other' consist of expense attributable to equity compensation awards, asset management fees and general and administrative expense fees incurred at the Operating Partnership level, professional fees, and other miscellaneous costs not allocable to either reportable segment. Assets by reporting segment are not reviewed by, nor reported to, the CODM and are therefore not presented.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

September 30, 2012

(unaudited)



	Three months ended:						Nine months ended:
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Revenues

Multifamily communities	$	2,607,102		$	2,509,133		$	7,626,707		$	4,386,071
Financing	636,149			124,495			1,112,426			125,828
Consolidated revenues	$	3,243,251		$	2,633,628		$	8,739,133		$	4,511,899

Adjusted funds from operations attributable to common stockholders (AFFO):

Multifamily communities	$	1,140,231		$	976,585		$	3,091,436		$	3,351,776
Financing	578,976			119,976			1,013,645			195,642
Other	(901,211		)	(326,088		)	(1,691,461		)	(2,460,645		)
Consolidated AFFO	817,996			770,473			2,413,620			1,086,773

Depreciation of real estate assets	(900,307		)	(961,446		)	(2,782,052		)	(1,715,674		)
Amortization of acquired intangible assets	—			(2,656,351		)	—			(4,698,174		)
Acquisition costs	—			(18,272