Edgar Filing: PREFERRED APARTMENT COMMUNITIES INC

PAC-10-Q 2Q2014

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 June 30, 2014


¨	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 1150, 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 x Non-accelerated filer ¨ 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 August 6, 2014 was 17,140,022.



	INDEX

			Page No.
PART I - FINANCIAL INFORMATION

Item 1.		Financial Statements

		Consolidated Balance Sheets (unaudited) – as of June 30, 2014 and December 31, 2013	1

		Consolidated Statements of Operations (unaudited) – Three Months and Six Months Ended June 30, 2014 and 2013	2

		Consolidated Statements of Stockholders' Equity (unaudited) – Six Months Ended June 30, 2014 and 2013	3

		Consolidated Statements of Cash Flows (unaudited) – Six Months Ended June 30, 2014 and 2013	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	49

Item 4.		Controls and Procedures	50

PART II - OTHER INFORMATION

Item 1.		Legal Proceedings	50

Item 1A		Risk Factors	50

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3.		Defaults Upon Senior Securities	50

Item 4.		Mine Safety Disclosures	50

Item 5.		Other Information	50

Item 6.		Exhibits	50

SIGNATURES			51

EXHIBIT INDEX			52

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements



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

	June 30, 2014			December 31, 2013
Assets

Real estate
Land	$	36,270,576		$	34,520,000
Building and improvements	151,600,470			147,510,836
Furniture, fixtures, and equipment	22,857,790			22,363,098
Construction in progress	352,463			55,226
Gross real estate	211,081,299			204,449,160
Less: accumulated depreciation	(18,760,757		)	(14,133,421		)
Net real estate	192,320,542			190,315,739
Real estate loans, net of deferred fee income ($16,514,083 and $14,332,658 carried at fair value)	116,323,854			103,433,147
Real estate loans to related parties, net	17,671,052			7,164,768
Total real estate and real estate loans, net	326,315,448			300,913,654

Cash and cash equivalents	9,677,630			9,180,431
Restricted cash	2,875,643			2,064,819
Notes receivable	15,596,387			10,248,178
Note receivable from related party	1,500,000			1,500,000
Revolving lines of credit to related parties	10,551,204			5,358,227
Accrued interest receivable on real estate loans	5,519,192			3,286,660
Acquired intangible assets, net of amortization of $13,886,914 and $12,569,581	344,083			907,883
Deferred loan costs, net of amortization of $995,904 and $963,043	1,617,847			1,719,194
Deferred offering costs	6,668,355			5,255,636
Tenant receivables and other assets	1,919,983			1,202,013

Total assets	$	382,585,772		$	341,636,695

Liabilities and equity

Liabilities
Mortgage notes payable	$	140,816,950		$	140,516,000
Revolving credit facility	37,283,306			29,390,000
Accounts payable and accrued expenses	3,171,512			1,638,401
Accrued interest payable	484,029			443,099
Dividends and partnership distributions payable	3,235,741			2,900,478
Acquired below market lease intangibles, net of amortization of $402,208	430,754			—
Security deposits and other liabilities	735,898			695,998
Total liabilities	186,158,190			175,583,976

Commitments and contingencies (Note 11)

Equity

Stockholders' equity
Series A Redeemable Preferred Stock, $0.01 par value per share; 989,408 shares authorized;
115,391 and 89,408 shares issued; 115,221 and 89,313 shares
outstanding at June 30, 2014 and December 31, 2013, respectively	1,152			893
Common Stock, $0.01 par value per share; 400,066,666 shares authorized; 16,636,359 and
15,294,578 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively	166,363			152,945
Additional paid in capital	203,130,447			177,824,720
Accumulated deficit	(8,230,256		)	(13,391,341		)
Total stockholders' equity	195,067,706			164,587,217
Non-controlling interest	1,359,876			1,465,502
Total equity	196,427,582			166,052,719

Total liabilities and equity	$	382,585,772		$	341,636,695

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



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

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Revenues:
Rental revenues	$	6,044,732		$	5,062,433		$	11,914,023		$	9,362,672
Other property revenues	760,666			586,262			1,405,708			965,052
Interest income on loans and notes receivable	4,492,153			1,992,950			8,785,595			3,288,030
Interest income from related party	767,639			27,063			1,199,946			43,913
Total revenues	12,065,190			7,668,708			23,305,272			13,659,667

Operating expenses:
Property operating and maintenance	960,985			890,498			1,873,534			1,480,075
Property salary and benefits reimbursement to related party	609,104			553,096			1,234,365			1,032,983
Property management fees to related party	268,674			217,719			530,795			405,361
Real estate taxes	730,264			565,798			1,389,313			1,015,577
General and administrative	232,765			175,149			421,604			286,605
Equity compensation to directors and executives	445,924			290,165			890,146			599,086
Depreciation and amortization	3,296,780			4,884,319			5,605,306			8,996,622
Acquisition and pursuit costs	162,364			3,525			350,395			202,136
Acquisition fees to related party	—			121,087			57,268			1,029,487
Management fees to related party	731,521			467,763			1,420,270			851,631
Insurance, professional fees and other expenses	417,939			274,643			811,914			579,052
Total operating expenses	7,856,320			8,443,762			14,584,910			16,478,615

Operating income (loss)	4,208,870			(775,054		)	8,720,362			(2,818,948		)
Interest expense	1,784,398			1,242,829			3,500,049			2,384,764
Loss on early extinguishment of debt	—			604,337			—			604,337

Net income (loss)	2,424,472			(2,622,220		)	5,220,313			(5,808,049		)
Consolidated net (income) loss attributable
to non-controlling interests	(20,366		)	36,670			(59,228		)	98,156

Net income (loss) attributable to the Company	2,404,106			(2,585,550		)	5,161,085			(5,709,893		)

Dividends declared to preferred stockholders	(1,600,779		)	(745,417		)	(3,021,315		)	(1,795,932		)
Deemed non-cash dividend to holders of Series B
Preferred Stock	—			(7,028,557		)	—			(7,028,557		)
Earnings attributable to unvested restricted stock	(6,274		)	(4,352		)	(10,952		)	(9,144		)

Net income (loss) attributable to common stockholders	$	797,053		$	(10,363,876	)	$	2,128,818		$	(14,543,526	)

Net income (loss) per share of Common Stock, Available
to Common Stockholders, basic and diluted	$	0.05		$	(1.26	)	$	0.13		$	(2.15	)


Dividends per share declared on Common Stock	$	0.16		$	0.15		$	0.32		$	0.295

Weighted average number of shares of Common Stock outstanding:
Basic	16,287,354			8,198,340			15,804,766			6,752,050
Diluted	16,421,351			8,198,340			15,915,384			6,752,050

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



Preferred Apartment Communities, Inc.
Consolidated Statements of Stockholders' Equity
For the six months ended June 30, 2014 and 2013
(Unaudited)

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

Balance at January 1, 2013	$	198		$	52,885	$	59,412,744		$	(9,408,253	)	$	50,057,574		$	1		$	50,057,575
Issuance of Units	393			—		38,455,112			—			38,455,505			—			38,455,505
Syndication and offering costs	—			—		(6,387,968		)	—			(6,387,968		)	—			(6,387,968		)
Equity compensation to executives and directors	—			21		599,065			—			599,086			—			599,086
Vesting of restricted stock	—			330		(330		)	—			—			—			—
Vesting of Class B Units and conversion to Class A Units	—			—		(479,841		)	—			(479,841		)	479,841			—
Current period amortization of Class B OP Units	—			—		(449,289		)	—			(449,289		)	449,289			—
Conversion of Series B Preferred Stock to Common Stock	—			57,143		39,942,857			—			40,000,000			—			40,000,000
Net loss	—			—		—			(5,709,893		)	(5,709,893		)	(98,156		)	(5,808,049		)
Reallocation adjustment to non-controlling interests	—			—		(159,504		)	—			(159,504		)	159,504			—
Distributions to non-controlling interests	—			—		—			—			—			(31,560		)	(31,560		)
Dividends to series A preferred stockholders
($5.00 per share per month)	—			—		(1,105,457		)	—			(1,105,457		)	—			(1,105,457		)
Dividends to series B preferred stockholders
($17.26 per share)	—			—		(690,476		)	—			(690,476		)	—			(690,476		)
Dividends to common stockholders ($0.295 per share)	—			—		(2,431,957		)	—			(2,431,957		)	—			(2,431,957		)
Balance at June 30, 2013	$	591		$	110,379	$	126,704,956		$	(15,118,146	)	$	111,697,780		$	958,919		$	112,656,699

Balance at January 1, 2014	$	893		$	152,945	$	177,824,720		$	(13,391,341	)	$	164,587,217		$	1,465,502		$	166,052,719
Issuance of Units	260			—		25,956,181			—			25,956,441			—			25,956,441
Redemptions of Series A Preferred Stock	(1		)	59		(22,614		)	—			(22,556		)	—			(22,556		)
Issuance of Common Stock	—			12,004		9,799,661			—			9,811,665			—			9,811,665
Syndication and offering costs	—			—		(3,289,788		)	—			(3,289,788		)	—			(3,289,788		)
Equity compensation to executives and directors	—			22		157,325			—			157,347			—			157,347
Vesting of restricted stock	—			293		(293		)	—			—			—			—
Conversion of Class A Units to Common Stock	—			1,040		565,158			—			566,198			(566,198		)	—
Current period amortization of Class B OP Units	—			—		—			—			—			732,798			732,798
Net income	—			—		—			5,161,085			5,161,085			59,228			5,220,313
Reallocation adjustment to non-controlling interests	—			—		273,394			—			273,394			(273,394		)	—
Distributions to non-controlling interests	—			—		—			—			—			(58,060		)	(58,060		)
Dividends to series A preferred stockholders
($5.00 per share per month)	—			—		(3,021,315		)	—			(3,021,315		)	—			(3,021,315		)
Dividends to common stockholders ($0.32 per share)	—			—		(5,111,982		)	—			(5,111,982		)	—			(5,111,982		)
Balance at June 30, 2014	$	1,152		$	166,363	$	203,130,447		$	(8,230,256	)	$	195,067,706		$	1,359,876		$	196,427,582

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



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

	Six months ended June 30,
	2014			2013
Operating activities:
Net income (loss)	$	5,220,313		$	(5,808,049	)
Reconciliation of net income (loss) to net cash provided by operating activities:
Depreciation expense	4,631,503			3,683,029
Amortization expense	973,803			5,313,593
Amortization of above and below market leases	(32,940		)	(261,695		)
Deferred fee income amortization	(592,308		)	(145,519		)
Deferred loan cost amortization	264,300			422,395
(Increase) in accrued interest income on real estate loans	(2,232,532		)	(900,048		)
Equity compensation to executives and directors	890,146			599,086
Deferred cable income amortization	(9,138		)	(5,468		)
Loss on asset disposal	2,804			—
Changes in operating assets and liabilities:
Decrease (increase) in tenant receivables and other assets	174,685			(53,426		)
Prepaid interest on operating loans	53,308			—
Increase in accounts payable and accrued expenses	1,205,655			476,796
Increase (decrease) in accrued interest payable	40,930			(88,486		)
(Decrease) in prepaid rents	(58,842		)	(4,547		)
(Decrease) increase in security deposits and other liabilities	(20,486		)	12,090
Increase in deferred income	61,658			—
Net cash provided by operating activities	10,572,859			3,239,751

Investing activities:
Investments in real estate loans	(25,201,346		)	(25,626,531		)
Repayments of real estate loans	2,110,609			—
Notes receivable issued	(6,713,545		)	(7,546,203		)
Notes receivable repaid	1,328,465			956,665
Note receivable issued to and draws on line of credit by related party	(7,337,953		)	(3,597,995		)
Repayments of line of credit by related party	1,912,520			2,390,186
Acquisition fees received on real estate loans	687,378			1,017,440
Acquisition fees paid on real estate loans	(343,689		)	(508,720		)
Acquisition of properties	(5,701,393		)	(33,476,928		)
Additions to real estate assets - improvements	(996,571		)	(642,428		)
Proceeds from asset disposal	4,773			—
(Increase) in restricted cash	(583,994		)	(811,880		)
Net cash used in investing activities	(40,834,746		)	(67,846,394		)

Financing activities:
Proceeds from mortgage notes payable	13,357,000			59,045,000
Payments for mortgage extinguishment	(13,056,050		)	(56,594,389		)
Payments for deposits and other mortgage loan costs	(701,664		)	(1,607,394		)
Proceeds from lines of credit	19,283,306			30,129,147
Payments on lines of credit	(11,390,000		)	(30,793,414		)
Proceeds from sales of Series B Preferred Stock, net of offering costs	—			36,956,575
Proceeds from sales of Units, net of offering costs and redemptions	23,342,536			35,947,555
Proceeds from sales of Common Stock	9,513,500			—
Common Stock dividends paid	(4,905,466		)	(1,543,539		)
Series A Preferred Stock dividends paid	(2,896,958		)	(1,598,854		)
Distributions to non-controlling interests	(53,670		)	(15,513		)
Payments for deferred offering costs	(1,733,448		)	(749,097		)
Net cash provided by financing activities	30,759,086			69,176,077

Net increase in cash and cash equivalents	497,199			4,569,434
Cash and cash equivalents, beginning of period	9,180,431			2,973,509
Cash and cash equivalents, end of period	$	9,677,630		$	7,542,943

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




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

	Six months ended June 30,
	2014		2013
Supplemental cash flow information:
Cash paid for interest	$	3,276,678	$	2,668,558

Supplemental disclosure of non-cash activities:
Accrued capital expenditures	$	199,708	$	200,191
Dividends payable - common	$	2,658,212	$	1,660,034
Dividends payable - preferred	$	556,020	$	276,946
Deemed non-cash dividend to holders of Series B Preferred Stock	$	—	$	7,028,557
Partnership distributions payable to non-controlling interest	$	21,509	$	16,048
Accrued and payable deferred offering costs	$	209,145	$	499,932
Reclass of offering costs from deferred asset to equity	$	295,319	$	189,325
Bridge loans converted to mezzanine loan	$	7,416,864	$	—
Mortgage loans assumed on acquisitions	$	—	$	69,428,389
Mezzanine loan balance applied to purchase of property	$	—	$	6,326,898

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

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements

June 30, 2014

(Unaudited)


1.	Organization and Basis of Presentation

Preferred Apartment Communities, Inc. was formed as a Maryland corporation on September 18, 2009, and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, or the Code, effective with its tax year ended December 31, 2011. Unless the context otherwise requires, references to the "Company", "we", "us", or "our" refer to Preferred Apartment Communities, Inc., together with its consolidated subsidiaries, including Preferred Apartment Communities Operating Partnership, L.P., or the Operating Partnership. 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 development 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 assets in other real estate related investments, as determined by its Manager (as defined below) as appropriate for the Company. See note 16 for details regarding an amendment of the Company's investment strategy. 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).

The Company completed its initial public offering, or IPO, on April 5, 2011. As of June 30, 2014, the Company had 16,636,359 shares of common stock, par value $0.01 per share, or Common Stock, issued and outstanding and owned units in the Operating Partnership which represented a weighted-average ownership percentage of 99.16% for the three-month period ended June 30, 2014. The number of partnership units not owned by the Company totaled 145,011 at June 30, 2014 and represented Class A OP Units of the Operating Partnership, or Class A OP Units. The Class A OP Units are convertible at any time at the option of the holder into the Company's choice of either cash or Common Stock. In the case of cash, the value is determined based upon the trailing 20-day volume weighted average price of the Company's Common Stock.

The consolidated financial statements include the accounts of the Company and 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.

Basis of Presentation

The unaudited consolidated financial statements include all of the accounts of the Company and the Operating Partnership 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 financial condition and results of operations. The year end condensed balance sheet data was derived from audited financial statements, but does not include all the disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with our audited financial statements and notes thereto included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission, or the SEC, on March 17, 2014.


2.	Summary of Significant Accounting Policies

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. 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

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

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 and liabilities for multifamily communities include the values of in-place leases, customer relationships, and above-market or below-market leases. 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, and which approximate market rates. 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 values of customer relationships are estimated by calculating the product of the avoided hypothetical lost revenue and the average renewal probability and are amortized to operating expense over the average remaining historical period of residency, plus an estimate of the average expected renewal period. The amounts of above-market or below-market lease values are developed by comparing the Company's estimate of the average market rent to the average contract rent of the leases in place at the property acquisition date any amount. This ratio is applied on a lease by lease basis to derive a total asset or liability amount for the property. 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, plus any below market probable renewal options. Acquired intangible assets have no residual value.

The Company evaluates its tangible and identifiable intangible real estate assets for impairment 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 group, including proceeds from disposition, are compared to the net book value of the asset group. If this test indicates that impairment exists, an impairment loss is recorded in earnings equal to the shortage of the book value to the discounted net cash flows of the asset group.

Loans and Notes Held for Investment

The Company carries its investments in real estate loans at amortized 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. The balances of real estate loans presented on the consolidated balance sheets consist of drawn amounts on the loans, net of deferred loan fee revenue. See the "Revenue Recognition" section of this Note for other loan-related policy disclosures required by ASC 310-10-50-6. Certain loans contain contingent exit fees, which are deemed to be embedded derivatives. The Company elects the fair value option for these loans and recognizes in earnings any material changes in fair value.

Deferred Offering Costs

Deferred offering costs represent direct 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 up to a maximum of 900,000 units, consisting of one share of Series A Redeemable Preferred Stock, or Series A Preferred Stock, and one warrant, or Warrant, to purchase 20 shares of Common Stock, or Units, generally closes on a bimonthly basis in variable amounts. Such offering is referred to herein as the Follow-on Offering, pursuant to our registration statement on Form S-3 (registration number 333-183355), as may be amended from time to time. Deferred offering costs related to the Follow-on Offering and Shelf Offering (as defined in note 5) 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 or value of shares issued to the maximum number of Units, or the value of shares, as applicable, that are expected to be issued.

Revenue Recognition

Rental revenue is recognized when earned from residents of the Company's multifamily communities, 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

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

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.

Rental revenue from tenants' operating leases in the Company's retail shopping center is recognized on a straight-line basis over the term of the lease regardless of when payments are due. The Company estimates the collectability of the accounts receivable related to base rents, straight-line rents, expense reimbursements, and other revenue taking into consideration the Company's historical write-off experience, tenant credit-worthiness, current economic trends, and remaining lease terms. Substantially all of the lease agreements with anchor tenants contain "percentage rent" provisions that provide for additional rents that become due upon achievement of specified sales revenue targets as defined in their lease agreements. Substantially all lease agreements contain provisions for reimbursement of the tenants' share of real estate taxes, insurance and common area maintenance costs, or CAM, costs. Recovery of real estate taxes, insurance, and CAM costs are recognized as the respective costs are incurred in accordance with the lease agreements.

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. In the event that a loan or note is refinanced with the proceeds of another loan issued by the Company, any unamortized loan fee revenue from the first loan will be recognized as interest revenue over the term of the new loan. 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 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 assets are reclassified as accrual-basis once interest and principal payments become current. Certain real estate loan assets include limited purchase options and exit fees or additional interest payments that are due the Company at maturity or in the event of a sale of the property or refinancing of the loan by the borrower to a third party. If the Company purchases the subject property, any accrued exit fee will be treated as additional consideration for the acquired project.

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 an apartment from the Company 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.

Discontinued Operations

The Company evaluates all disposal groups for held-for-sale classification and for those disposal groups for which it will have no continuing involvement, nor receipt of cash flows post-disposal, for presentation in the consolidated financial statements according to criteria provided by ASC 360-10-45-9. If the disposal group meets the criteria necessary for held for sale classification, the assets and liabilities to be transferred upon sale or disposal are summarized into single line items entitled property held for sale on the consolidated balance sheets, and the results of operations are reclassified into a single line entitled gain/loss from discontinued operations on the consolidated statements of operations and depreciation expense is no longer recorded. Previous periods are similarly reclassified for comparability. In the event a disposal group no longer meets the criteria necessary for held for sale classification, any reclassification adjustments previously made to the assets, liabilities, and results of operations are reversed and depreciation expense is adjusted to recognize any such expense applicable to periods for which the disposal group was classified as held for sale.

New Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-08 (“ASU 2014-08”), Reporting Discontinued Operations and Disclosures of Disposals of Components of Entity. Under this new guidance, a disposal of a component of an entity or a group of components of an entity shall only be reported in discontinued operations if

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. ASU 2014-08 is to be applied prospectively for annual and interim periods beginning on or after December 31, 2014, with early adoption permitted. Early adoption is not permitted for assets that have previously been reported as held for sale in the consolidated financial statements. Therefore, application of this new guidance was not permitted for the Company’s Trail Creek multifamily community, which was reported as held for sale in the Company’s Annual Report on Form 10-K for the twelve-month period ended December 31, 2013 and in the Company's Quarterly Report on Form 10-Q for the three-month period ended March 31, 2014. The Company does not expect the adoption of this guidance to materially impact its financial position or results of operations.

In May 2014, the FASB issued Accounting Standards Update 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 provides a single comprehensive revenue recognition model for contracts with customers (excluding certain contracts, such as lease contracts) to improve comparability within industries. ASU 2014-09 requires an entity to recognize revenue to reflect the transfer of goods or services to customers at an amount the entity expects to be paid in exchange for those goods and services and provide enhanced disclosures, all to provide more comprehensive guidance for transactions such as service revenue and contract modifications. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2016 and may be applied using either a full retrospective or a modified approach upon adoption. The Company is currently evaluating the impact this standard may have on its financial statements.

3. Real Estate Assets

The Company's real estate assets consisted of six multifamily communities with 1,929 total units at June 30, 2014 and six multifamily communities with 1,789 total units at June 30, 2013. The acquired second phases of our Trail Creek and Summit Crossing communities are managed in combination with the initial phases of these communities, both of which were acquired in April 2011 and are therefore considered single properties. At June 30, 2014, the combined phases of our Trail Creek communities, which was previously classified as held for sale, was reclassified pursuant to action taken by the investment committee of the Company's Manager.

On February 12, 2014, the Company completed the acquisition of a 66,122 square foot retail shopping center in Woodstock, Georgia, or Woodstock Crossing, for $5,701,393, which approximated the fair value of the acquired assets and assumed liabilities.

The Company allocated the purchase price of Woodstock Crossing to the acquired assets and liabilities based upon their fair values, as follows:



Land	$	1,750,576
Buildings and improvements	3,760,654
Escrow fund for improvements	226,830
Tenant improvements	39,447
In-place leases	245,850
Above market leases	30,051
Leasing costs	123,731
Below market leases	(450,310		)
Other liabilities	(25,436		)

Net assets acquired	$	5,701,393

The tenant improvements, in-place leases, above market leases, legal fees and commissions, and below-market leases will continue to be amortized over the remaining non-cancelable lease terms, which range from six months to ten years as of June 30, 2014, with a weighted average remaining lease term of 9.0 years as of June 30, 2014. Since the acquisition date of February 12, 2014, Woodstock Crossing contributed approximately $191,000 and $280,000 of revenue and $68,000 and $105,000 of net income to the Company's consolidated results for the three-month and six-month periods ended June 30, 2014, respectively. See note 6 for details regarding the acquisition fee paid related to this transaction. The Company expensed acquisition costs of approximately $268,000 in conjunction with the Woodstock Crossing acquisition.

On January 23, 2013, the Company completed the acquisition of 100% of the membership interests of the following three entities from Williams Multifamily Acquisition Fund, LP, a Delaware limited partnership, or WMAF, an entity whose properties were also managed by Preferred Residential Management LLC.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)


•	Ashford Park REIT, Inc., the fee-simple owner of a 408-unit multifamily community located in Atlanta, Georgia, or Ashford Park, for a total purchase price of approximately $39.6 million, exclusive of assumed mortgage debt, acquisition-related and financing-related transaction costs. The Company expensed acquisition costs of approximately $455,000 in conjunction with the Ashford Park acquisition.

•

Lake Cameron REIT, Inc., the fee-simple owner of a 328-unit multifamily community located in Raleigh, North Carolina, or Lake Cameron, for a total purchase price of approximately $30.5 million, exclusive of assumed mortgage debt, acquisition-related and financing-related transaction costs. The Company expensed acquisition costs of approximately $358,000 in conjunction with the Lake Cameron acquisition.


•	McNeil Ranch REIT, Inc., the fee-simple owner of a 192-unit multifamily community located in Austin, Texas, or McNeil Ranch, for a total purchase price of approximately $21.0 million, exclusive of assumed mortgage debt, acquisition-related and financing-related transaction costs. The Company expensed acquisition costs of approximately $277,000 in conjunction with the McNeil Ranch acquisition.

Amortization of acquired intangible assets for the six-month period ended June 30, 2013 related to the Ashford Park, McNeil Ranch and Lake Cameron communities commenced on January 23, 2013, the date of acquisition. The intangible assets were amortized over a period ranging from the average remaining lease term, which was approximately six to twelve months, to the average remaining lease term plus the average estimated renewal period.

On December 4, 2013, pursuant to the approval of the investment committee of the Manager, the Company entered into an exclusive marketing agreement with an outside firm to market for sale the combined phases of its Trail Creek multifamily community (Trail I and Trail II). The operating results of the community were classified as held for sale at December 31, 2013 and March 31, 2014. Effective on December 4, 2013, the Company ceased recording depreciation on the combined Trail Creek community. On June 20, 2014, again pursuant to approval of the investment committee of the Manager, the Company removed the Trail Creek community from held for sale classification. As such, Trail Creek is included in the Company's consolidated financial statements for all periods presented.

In the second quarter of 2014, the Company recorded depreciation of approximately $435,000 and amortization expense of intangible assets of approximately $167,000 for the period from December 4, 2013 through March 31, 2014 for the combined Trail Creek multifamily community. The depreciation and amortization charges recorded for the three-month and six-month periods ended June 30, 2014 in the following table include these adjustments.



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Depreciation:
Buildings and improvements	$	1,416,130	$	959,891	$	2,358,876	$	1,817,926
Furniture, fixtures, and equipment	1,320,962		994,271		2,272,627		1,865,103
	2,737,092		1,954,162		4,631,503		3,683,029
Amortization:
Acquired intangible assets	558,498		2,929,005		971,422		5,311,290
Website development costs	1,190		1,152		2,381		2,303
Total depreciation and amortization	$	3,296,780	$	4,884,319	$	5,605,306	$	8,996,622

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

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

At June 30, 2014, our portfolio of real estate loans consisted of:

Project/Property

Location

Date of loan

Maturity date

Optional extension date

Total loan commitments

Approved senior loan held by unrelated third party

Current / deferred interest % per annum

⁽¹⁾

City Park

Charlotte, NC

9/6/2012

9/5/2017

N/A

10,000,000

18,600,000

8 / 6

City Vista

Pittsburgh, PA

8/31/2012

6/1/2016

7/1/2017

12,153,000

28,400,000

8 / 6

Madison - Rome

Rome, GA⁽²⁾

11/13/2012

9/20/2015

N/A

5,360,042

11,500,000

8 / 6

Lely

Naples, FL

3/28/2013

2/28/2016

2/28/2018

12,713,242

25,000,000

8 / 6

Crosstown Walk

Suburban Tampa, FL ⁽³⁾

4/30/2013

11/1/2016

5/1/2018

10,962,000

25,900,000

8 / 6

Overton

Atlanta, GA

5/8/2013

11/1/2016

5/1/2018

16,600,000

31,700,000

8 / 6

Haven West

Carrollton, GA ^{(4) (6)}

7/15/2013

6/2/2016

6/2/2018

6,940,795

16,195,189

8 / 6

Starkville

Starkville, MS ^{(5) (6)}

6/16/2014

11/30/2015

6/16/17

6,116,384

18,615,081

8.5 / 4.3

Founders' Village

Williamsburg, VA

8/29/2013

8/29/2018

N/A

10,346,000

26,936,000

8 / 6

Encore

Atlanta, GA ⁽⁷⁾

11/18/2013

8/18/2014

N/A

16,026,525

N/A

8 / 2

Manassas

Northern VA ⁽⁸⁾

12/23/2013

7/31/2014

N/A

10,932,000

N/A

8 / 5

Irvine

Irvine, CA ⁽⁹⁾

12/18/2013

9/30/2014

N/A

21,000,000

N/A

8.5 / 4.3

Weems Road

Atlanta, GA ⁽¹⁰⁾

4/14/2014

10/14/2014

N/A

5,700,000

N/A

8.5 / 4.3

Kennesaw

Atlanta, GA ⁽⁶⁾ ⁽¹¹⁾

6/27/2014

6/27/2017

N/A

13,424,995

34,825,000

8.5 / 4.3

158,274,983

⁽¹⁾

All loans are mezzanine loans pertaining to developments of multifamily communities, except as otherwise indicated. The borrowers for each of these projects are as follows: "City Park" - Oxford City Park Development LLC; "City Vista" - Oxford City Vista Development LLC; "Madison - Rome" - Madison Retail - Rome LLC; "Lely" - Lely Apartments LLC; "Crosstown Walk" - Iris Crosstown Partners LLC; "Overton" - Newport Overton Holdings, LLC; "Haven West" - Haven Campus Communities Member, LLC; "Starkville" - Haven Campus Communities - Starkville, LLC; "Founders' Village" - Oxford NTW Apartments LLC; "Encore" - GP - RV Land I, LLC; "Manassas" - Oxford Palisades Apartments LLC; "Irvine" - 360 - Irvine, LLC; "Weems Road" - Weems Road Property Owner, LLC; and "Kennesaw" - Haven Campus Communities - Kennesaw, LLC.

⁽²⁾

Madison-Rome is a mezzanine loan for an 88,351 square foot retail development project. On October 16, 2013, the anchor tenant obtained a certificate of occupancy and took possession of approximately 54,340 square feet of space.

⁽³⁾

Crosstown Walk was a land acquisition bridge loan that was converted to a mezzanine loan in April 2013.

⁽⁴⁾

Planned 568-bed student housing community adjacent to the University of West Georgia campus.

⁽⁵⁾

A planned 152-unit, 536-bed student housing community adjacent to the Mississippi State University campus.

⁽⁶⁾

See note 6 - Related Party Transactions.

⁽⁷⁾

Bridge loan of up to approximately $16.0 million to partially finance the acquisition of land and predevelopment costs for a 340-unit multifamily community in Atlanta, Georgia.

⁽⁸⁾

Bridge loan of up to approximately $10.9 million to partially finance the acquisition of land and predevelopment costs for a 304-unit multifamily community in Northern Virginia. The Company expects to convert this bridge loan to a mezzanine loan by August 21, 2014.

⁽⁹⁾

Bridge loan of up to $21.0 million to partially finance the acquisition of land and predevelopment costs for a 280-unit multifamily community in Irvine, California.

⁽¹⁰⁾

Bridge loan of up to approximately $5.7 million to partially finance the acquisition of land and predevelopment costs for a 310-unit multifamily community in Atlanta, Georgia.

⁽¹¹⁾

Mezzanine loan of up to approximately $13.4 million in support of a planned 198-unit,792-bed student housing community adjacent to the campus of Kennesaw State University in Atlanta, Georgia.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

The Company's real estate loans are collateralized by 100% of the membership interests of the underlying project entity, and, where considered necessary, by unconditional joint and several repayment guaranties and performance guaranties by the principal(s) of the borrower. These guaranties generally remain in effect until the receipt of a final certificate of occupancy. All of the guaranties are subject to the rights held by the senior lender pursuant to a standard intercreditor agreement. The Encore, Manassas, Irvine and Weems Road loans are also collateralized by the acquired land. The Haven West and Kennesaw loans are additionally collateralized by an assignment by the developer of security interests in unrelated projects. Prepayment of the mezzanine loans are permitted in whole, but not in part, without the Company's consent.

Management monitors the level of credit quality for each of the Company's mezzanine real estate loans by tracking the timeliness of scheduled interest and principal payments relative to the due dates as specified in the loan documents, as well as draw requests on the loans relative to the project budgets. In addition, management monitors the actual progress of development and construction relative to the construction plan, as well as local, regional and national economic conditions as may bear on our current and target markets. The credit quality of the Company’s borrowers is primarily based on their payment history on an individual loan basis, and as such, the Company does not assign quantitative credit value measures or categories to its real estate loans and notes receivable in credit quality categories.



	As of June 30, 2014									Carrying amount as of
	Amount drawn		Loan Fee received from borrower - 2%		Acquisition fee paid to Manager - 1%		Unamortized deferred loan fee revenue			June 30, 2014		December 31, 2013
Project/Property	Amount drawn		Loan Fee received from borrower - 2%		Acquisition fee paid to Manager - 1%		Unamortized deferred loan fee revenue			June 30, 2014		December 31, 2013

City Park	$	10,000,000	$	200,000	$	100,000	$	(59,621	)	$	9,940,379	$	9,928,017
City Vista	12,153,000		243,040		121,520		(70,814		)	12,082,186		12,063,939
Madison - Rome	5,360,042		107,201		53,600		(25,528		)	5,334,514		5,322,770
Lely	11,959,918		254,265		127,133		(64,550		)	11,895,368		11,402,372
Crosstown Walk	10,455,804		219,240		109,620		(37,567		)	10,418,237		9,997,245
Overton	15,214,206		332,079		166,040		(97,391		)	15,116,815		14,487,178
Haven West	6,691,269		138,816		69,408		(42,584		)	6,648,685		5,582,018
Starkville	2,059,047		34,600		17,300		(42,592		)	2,016,455		1,582,750
Founders' Village	9,866,000		197,320		98,660		(73,329		)	9,792,671		7,572,698
Encore	9,007,044		320,531		160,265		(26,870		)	8,980,174		7,716,421
Manassas	10,932,000		214,140		107,070		—			10,932,000		10,609,849
Irvine	16,559,297		298,634		149,317		(45,214		)	16,514,083		14,332,658
Weems Road	5,344,166		94,356		47,178		(26,740		)	5,317,426		—
Kennesaw	9,065,401		119,500		59,750		(59,488		)	9,005,913		—

	$	134,667,194	$	2,773,722	$	1,386,861	$	(672,288	)	$	133,994,906	$	110,597,915

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

The Company holds options, but not obligations, to purchase certain of the properties which are partially financed by its mezzanine loans, as shown in the table below. The option purchase prices are negotiated at the time of the loan closing.



	Purchase option window		Purchase option price		Total units upon completion
Project/Property	Begin	End	Purchase option price		Total units upon completion

City Park	11/1/2015	3/31/2016	$	30,945,845	284
City Vista	2/1/2016	5/31/2016	$	43,560,271	272
Madison - Rome	N/A	N/A	N/A		N/A
Lely	4/1/2016	8/30/2016	$	43,500,000	308
Crosstown Walk	7/1/2016	12/31/2016	$	39,654,273	342
Overton	7/8/2016	12/8/2016	$	51,500,000	294
Haven West	8/1/2016	1/31/2017	$	26,138,466	160
Starkville	9/1/2016	11/30/2016	⁽¹⁾		152
Founders' Village	2/1/2016	9/15/2016	$	44,266,000	247
Encore	N/A	N/A	N/A		340
Manassas	N/A	N/A	N/A		304
Irvine	N/A	N/A	N/A		280
Weems Road	N/A	N/A	N/A		310
Kennesaw	9/1/2016	11/30/2016	⁽¹⁾		198

					3,491

⁽¹⁾The purchase option price is to be calculated as a discount based on a 50 basis point increase from the market cap rate at the time of exercise of the purchase option.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

At June 30, 2014, our portfolio of notes and line of credit receivable consisted of:

Borrower

Type of instrument

Date of loan

Maturity date

Total loan commitments

Carrying Amount

Interest rate

360 Residential, LLC

Bridge loan

3/20/2013

12/31/2014

2,000,000

440,771

⁽¹⁾

TPKG 13th Street Development, LLC

Land acquisition loan

5/3/2013

8/1/2014

7,200,000

⁽²⁾

Preferred Capital Marketing Services, LLC

Promissory note

1/24/2013

1/23/2015

1,500,000

Riverview Associates, Ltd.

Promissory note

12/17/2012

12/16/2014

1,300,000

⁽³⁾

Pecunia Management, LLC

Subordinated loan

11/16/2013

11/15/2014

200,000

Oxford Contracting LLC

Promissory note

8/27/2013

4/30/2017

1,500,000

1,475,000

⁽⁴⁾

Preferred Apartment Advisors, LLC

Revolving credit line

8/21/2012

12/31/2015

9,500,000

8,920,869

⁽⁵⁾

23,200,000

21,036,640

⁽¹⁾ Amendment of the bridge loan which was originated on March 20, 2013. The amounts payable under the terms of the loan, which include an additional 6% deferred interest, are collateralized by guaranties of payment and performance by the principals of the borrower.

⁽²⁾Note pays current interest at 8% per annum, plus an additional interest amount necessary to provide the Company with a 14% cumulative simple rate of return through August 31, 2013, scaling upward to 20% per annum on January 1, 2014 and thereafter. The loan was amended on March 17, 2014 to extend the maturity date to August 1, 2014. The borrower paid deferred interest of $351,491 and repaid principal of $164,743 at the date of amendment. The note is collateralized by a pledge of 100% of the membership interests of the project as well as by a first mortgage on the property. See Note 16.

⁽³⁾The amounts payable under the terms of the loan are collateralized by an assignment of project documents and guaranties of payment and performance by the principal of the borrower.

⁽⁴⁾ The amounts payable under the terms of the loan are collateralized by a personal guaranty of repayment by the principals of the borrower.

⁽⁵⁾ The amounts payable under the credit line are collateralized by an assignment of the Manager's rights to fees due under the third amended and restated management agreement, or Management Agreement, between the Company and the Manager. On February 10, 2014, this instrument was amended to increase the commitment amount and extend the maturity date as shown.

Also, the Company originated revolving lines of credit during the second quarter of 2014, as follows:



Borrower	Origination date	Total loan commitments		Interest rate		Maturity date	Carrying amount at June 30, 2014

Haven Campus Communities, LLC	6/11/2014	$	4,000,000	12	%	6/30/2016	$	1,630,335
Oxford Capital Partners, LLC	6/27/2014	4,200,000		12	%	6/30/2016	3,234,958
Newport Development Partners, LLC	6/17/2014	3,000,000		12	%	6/30/2016	1,745,658

		$	11,200,000				$	6,610,951

The Haven and Newport instruments are collateralized in full by guaranties of repayment issued by the principals of the borrowers, which are not affiliates of the Company. The Oxford line of credit is collateralized by guaranties of repayment issued by the principals of the borrowers, which are not affiliates of the Company, up to the lesser of 25% of the outstanding principal balance or $1,000,000. Haven Campus Communities, LLC is a related party, as described in note 6.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

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



	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Real estate loans:
Current interest payments	$	2,628,833	$	975,905	$	4,928,126	$	1,708,085
Additional accrued interest	1,697,017		678,848		3,211,178		1,121,837
Deferred loan fee revenue	272,399		88,383		580,856		115,694
Total real estate loan revenue	4,598,249		1,743,136		8,720,160		2,945,616
Interest income on notes and lines of credit	661,543		276,877		1,265,381		386,327
Interest income on loans and notes receivable	$	5,259,792	$	2,020,013	$	9,985,541	$	3,331,943

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, guarantees provided by third parties, 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 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 City Park, City Vista, Overton, Crosstown Walk, Lely, Haven West, Founders' Village, and Kennesaw 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 in its consolidated financial statements. The Company's maximum exposure to loss from these loans is their drawn amount as of June 30, 2014 of approximately $85.4 million. The maximum aggregate amount of loans to be funded as of June 30, 2014 was approximately $93.1 million.

The Company is subject to a concentration of credit risk that could be considered significant with regard to the Crosstown Walk, City Park, City Vista, Founders' Village and Manassas real estate loans, the promissory note to Oxford Contracting, LLC, and the revolving line of credit to Oxford Capital Partners, LLC, 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. The drawn amount of these loans total approximately $58.1 million (with a total commitment amount of $60.1 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 or the entity holding the project, 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 June 30, 2014.

The borrowers and guarantors behind the Crosstown Walk, City Park, City Vista, Founders' Village and Manassas real estate loans, the promissory note to Oxford Contracting, LLC, and the revolving line of credit to Oxford Capital Partners, LLC 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 within its financing segment of approximately $1.9 million and $1.3 million for the three-month periods ended June 30, 2014 and 2013, respectively.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

5. Redeemable Preferred Stock and Equity Offerings

The Company's Follow-on Offering is being offered by the dealer manager on a "reasonable best efforts" basis. Each share of Preferred Stock ranks senior to 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. On June 26, 2014, the Company amended the redemption schedule of the Preferred Stock to allow redemptions at the option of the holder from the date of issuance of the Preferred Stock through the first year subject to a 13% redemption fee. After year one, the redemption fee decreases to 10%, after year three it 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.

As of June 30, 2014, offering costs specifically identifiable to Unit offering closing transactions, such as commissions, dealer manager fees, and other registration fees, totaled approximately $10.8 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 $6.9 million. As of June 30, 2014, the Company had issued 115,391 Units and collected net proceeds of approximately $104.5 million from the Primary Series A Offering after commissions. A total of 170 shares of Series A Preferred Stock were subsequently redeemed. The number of Units issued was approximately 11.7% of the maximum number of Units anticipated to be issued under the Primary Series A Offering and the Follow-On Offering. Consequently, the Company cumulatively recognized approximately 11.7% of the approximate $6.9 million deferred to date, or approximately $801,000 as a reduction of stockholders' equity. The remaining balance of offering costs not yet reflected as a reduction of stockholder's equity, approximately $6.7 million, are reflected in the asset section of the consolidated balance sheet as deferred offering costs at June 30, 2014. The remainder of current and future deferred offering costs related to the Follow-on Offering 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 anticipated 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 offerings.

Aggregate offering expenses, including selling commissions and dealer manager fees, will be capped at 11.5% of the aggregate gross proceeds of the Primary Series A Offering and the Follow-On Offering, of which the Company will reimburse its Manager up to 1.5% of the gross proceeds of these offerings for all organization and offering expenses incurred, excluding selling commissions and dealer manager fees; however, upon approval by the conflicts committee of the board of directors, the Company may reimburse its Manager for any such expenses incurred above the 1.5% amount as permitted by the Financial Industry Regulatory Authority.

On January 17, 2013, the Company issued 40,000 shares of its Series B Preferred Stock at a purchase price of $1,000 per share through a private placement transaction. The net proceeds totaled approximately $37.0 million after commissions. On May 9, 2013, the common stockholders approved the issuance of Common Stock upon the conversion of the Series B Preferred Stock. As a result of such approval, the Series B Preferred Stock was converted into 5,714,274 shares of Common Stock on May 16, 2013.

On May 17, 2013, the Company filed a registration statement on Form S-3 (File No. 333-188677) for an offering up to $200 million of equity or debt securities, or Shelf Registration Statement, which was declared effective by the SEC on July 19, 2013. Deferred offering costs related to this Shelf Registration Statement totaled approximately $445,000 as of June 30, 2014. These costs will likewise be recognized as a reduction of stockholders' equity in the proportion of the proceeds from securities issued to the maximum amount of securities registered. During November 2013, the Company sold approximately 4.2 million shares of Common Stock and collected net proceeds of approximately $30.7 million, or 16.5% of the total amount of securities available for issuance under the Shelf Registration Statement. These offering costs related to the Shelf Registration Statement will likewise be recognized as a reduction of stockholders' equity in the proportion of the proceeds from securities issued to the maximum amount of securities registered.

On February 28, 2014, the Company filed a prospectus supplement to the Shelf Registration Statement to issue and sell up to $100 million of Common Stock from time to time in an "at the market" offering, or the ATM Offering, through MLV & Co. LLC as

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

sales agent. Through June 30, 2014, the Company sold approximately 1.2 million shares of Common Stock through the ATM offering and collected net proceeds of approximately $9.5 million.

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 Williams Opportunity Fund, LLC, or WOF, as well as Williams Realty Fund I, LLC, or WRF.

The Management Agreement 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				Six months ended
Type of Compensation	Basis of Compensation	June 30, 2014		June 30, 2013		June 30, 2014		June 30, 2013

Acquisition fees	1% of the gross purchase price of real estate assets acquired or loans advanced	$	332,902	$	475,633	$	400,958	$	1,538,207
Asset management fees	Monthly fee equal to one-twelfth of 0.50% of the total book value of assets, as adjusted	493,709		314,691		960,577		580,492
Property management fees	Monthly fee equal to 4% of the monthly gross revenues of the properties managed	268,674		217,719		530,795		405,361
General and administrative expense fees	Monthly fee equal to 2% of the monthly gross revenues of the Company	237,812		153,072		459,693		271,139

		$	1,333,097	$	1,161,115	$	2,352,023	$	2,795,199

In addition to property management fees, the Company incurred the following reimbursable on-site personnel salary and related benefits expenses at the properties, which are listed on the Consolidated Statements of Operations:



Three months ended June 30,				Six months ended June 30,
2014		2013		2014		2013
$	609,104	$	553,096	$	1,234,365	$	1,032,983

The Manager utilizes its own and its affiliates' personnel 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 was reimbursed $218,240 and $148,754 for the six-month periods ended June 30, 2014 and 2013, respectively. These costs are recorded as deferred offering costs until such time as additional closings occur on the Unit offerings or the Shelf Offering, at which time they are reclassified on a pro-rata basis as a reduction of offering proceeds within stockholders’ equity.

The Company's Haven West, Starkville, Kennesaw real estate loans and the Haven Campus Communities' line of credit are supported in part by guaranties of repayment and performance by John A. Williams, Jr., our Chief Executive Officer's son, a principal of the borrowers and a related party of the Company under GAAP.

Preferred Apartment Communities, Inc.

Notes to Consolidated Financial Statements – (continued)

June 30, 2014

(Unaudited)

In addition to the fees described above, the Management Agreement also entitles the Manager to other potential fees, including 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.

Furthermore, the Manager holds the special limited partnership interest in the Operating Partnership, which entitles the Manager to distributions from the Operating Partnership equal to 15% of any net proceeds from the sale of a property that are remaining after the payment of (i) the capital and certain expenses related 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 Series A Preferred Stock have been paid in full.

The Company did not incur any of these other potential fees during the three-month or six-month periods ended June 30, 2014 or 2013.

7. Dividends and Distributions

The Company declares and pays monthly cash dividend distributions on its Series A Preferred Stock in the amount of $5.00 per share per month, prorated for partial months at issuance as necessary. The Company's cash distributions on its Series A Preferred Stock were:



2014				2013
Record date	Number of shares	Aggregate dividends declared		Record date	Number of shares	Aggregate dividends declared

January 31, 2014	89,313	$	454,344	January 31, 2013	19,732	$	107,551
February 28, 2014	93,005	468,337		February 28, 2013	23,094	119,885
March 31, 2014	98,200	497,855		March 28, 2013	25,755	132,603
April 30, 2014	101,436	510,905		April 30, 2013	41,492	220,874
May 30, 2014	105,630	533,800		May 31, 2013	48,098	247,596
June 30, 2014	109,865	556,074		June 28, 2013	53,749	276,948

	Total	$	3,021,315		Total	$	1,105,457

In addition, the Company declared on February 7, 2013 and paid a cash dividend on its Series B Preferred Stock at the same rate and frequency as those dividends declared on the Common Stock, equal to 5,714,274 as-converted shares of Common Stock, in an aggregate amount of $690,476.

The Company's dividend activity on its Common Stock for the six-month periods ended June 30, 2014 and 2013 was:



2014						2013
Record date	Number of shares	Dividend per share		Aggregate dividends paid		Record date	Number of shares	Dividend per share		Aggregate dividends paid
March 14, 2014	15,336,059	$	0.16	$	2,453,769	March 28, 2013	5,323,605	$	0.145	$	771,923
June 16, 2014	16,613,827	0.16		2,658,212		June 26, 2013	11,066,895