MODIV INDUSTRIAL, INC. (MDV) FY 2021 MD&A

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

You should read the following discussion and analysis of our financial condition, results of operations and cash flows together with the consolidated financial statements and related notes included in this Annual Report on Form 10-K. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors. Also, see “Cautionary Note Regarding Forward-Looking Statements” preceding Part I of this Annual Report on Form 10-K and Part I, Item 1A. Risk Factors herein.

Management’s discussion and analysis of financial condition and results of operations are based upon our audited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

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Overview

We are a Maryland corporation with issued and outstanding stock consisting of Series A Preferred Stock, publicly traded on the NYSE under the symbol “MDV.PA,” and Class C Common Stock, publicly traded on the NYSE under the symbol “MDV.” We acquire, own and actively manage single-tenant net-lease industrial, retail and office properties throughout the United States, with a focus on strategically important and mission critical properties with predominantly investment grade tenants. We elected to be taxed as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 2016. We believe that we have operated in conformity with the requirements for qualification as a REIT for federal income tax purposes. Through various transactions, including the Merger, we created one of the largest non-listed REITs to be raised via crowdfunding technology. Since December 31, 2019, we have been internally managed, as further described below. Driven by innovation, an investor-first focus and an experienced management team, Modiv leveraged its history as a real estate crowdfunding pioneer to create an approximate $500 million (based on estimated fair value) real estate portfolio comprised of approximately 2.4 million square feet of income-producing real estate. As of December 31, 2021, we have a portfolio of 38 commercial real estate properties in 14 states, comprised of 12 industrial properties, including the approximate 72.7% TIC Interest in a 91,740 square foot Santa Clara, California industrial property, 12 retail properties and 14 office properties as discussed in Notes 3 and 4 to our accompanying consolidated financial statements for the year ended December 31, 2021 included in this Annual Report on Form 10-K. As of December 31, 2021, after reflecting lease extensions through the filing date of this Annual Report on Form 10-K, 69% of our tenants (based on ABR) are investment grade, our ABR was $28,914,077, all of our properties are 100% leased and our WALT was 6.3 years.

On a pro forma basis (unaudited), after giving effect to the recently completed acquisitions of a retail property leased to a KIA auto dealership on Interstate 405 in Carson, California and an industrial property in Saint Paul, Minnesota in January 2022, and the sales of three office properties and one industrial property in February 2022, we now own 36 properties including 12 industrial properties, including the TIC Interest, which represent approximately 40% of the portfolio, 13 retail properties, which represent approximately 21% of the portfolio, and 11 office properties, which represent approximately 39% of the portfolio (expressed as a percentage of ABR as of December 31, 2021). Approximately 56% of our tenants (based on pro forma ABR (unaudited)) are investment grade, our pro forma ABR (unaudited) was $30,406,425, all of our properties are 100% leased and our pro forma WALT was 9.2 years (unaudited) as of December 31, 2021.

Although we are not limited as to the form our investments may take, our investments in real estate will generally constitute acquiring fee title or interests in entities that own and operate real estate. We will make substantially all acquisitions of our real estate investments directly through the Operating Partnership or indirectly through limited liability companies or limited partnerships, including through other REITs, or through investments in joint ventures, partnerships, tenants-in-common, co-tenancies or other co-ownership arrangements with other owners of properties, some of which may be affiliated with us or our executive officers or directors. We are the sole general partner of, and owned an approximately 86% partnership interest in the Operating Partnership on December 31, 2021. Following our acquisition of the KIA auto dealership property in an “UPREIT” transaction that included the issuance of 1,312,382 Class C OP Units to the seller, we own an approximately 73% partnership interest in the Operating Partnership. The Operating Partnership’s limited partners include holders of several classes of units with various vesting and enhancement terms as further described in Note 12 to our accompanying consolidated financial statements for the year ended December 31, 2021 included in this Annual Report on Form 10-K.

On November 4, 2021, our board of directors reviewed and approved management’s recommendation to seek a listing of our Class C Common Stock on a national securities exchange in early 2022, subject to market conditions. In preparation for seeking a listing on a national securities exchange, our board of directors also approved management’s recommendation to terminate our Reg A Offering, effective upon the close of business on November 24, 2021, and to terminate our Prior SRPs. Our Class C Common Stock is now listed on the NYSE under the symbol “MDV” and has been trading since February 11, 2022. We completed our Listed Offering of 40,000 shares at a price of $25.00 per share on February 15, 2022 and sold all 40,000 shares to a related party (see Note 13 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details). We intend to maintain our monthly distributions and the ability for investors to reinvest their distributions via our Second Amended and Restated DRP. Our five-year emerging growth company registration with the SEC ended on December 31, 2021 but we will continue to report with the SEC as a smaller reporting company under Rule 12b-2 of the Exchange Act.

Self-Management Transaction and Merger on December 31, 2019

We were externally managed through December 31, 2019, by our former external advisor. On December 31, 2019, we acquired substantially all of the assets and assumed certain liabilities of our former external advisor and our former sponsor in exchange for units of limited partnership interest in the Operating Partnership. As a result of such acquisition, we became self-managed and eliminated all fees for acquisitions, dispositions and management of our properties, which were previously paid to our former external advisor.

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On December 31, 2019, pursuant to an Agreement and Plan of Merger dated September 19, 2019, REIT I merged with and into Merger Sub, with Merger Sub surviving as our direct, wholly-owned subsidiary. As a result, we issued 2,680,740.0 shares of our Class C Common Stock to former stockholders of REIT I. On December 31, 2020, Merger Sub was merged into the Operating Partnership and ceased to exist.

Common Stock Offerings

On July 15, 2015, we filed a registration statement on Form S-11 (File No. 333-205684) with the SEC to register an initial public offering of a maximum of 30,000,000 of our shares of common stock for sale to the public. We also registered a maximum of 3,333,333 of our shares of common stock pursuant to our DRP. During 2016, the SEC declared our registration statement effective and we began offering shares of common stock to the public through a dealer manager registered with the Financial Industry Regulatory Authority, Inc. (“FINRA”). Pursuant to the Initial Registered Offering, we sold shares of Class C Common Stock directly to investors, with a minimum investment in shares of $500. Commencing in August 2017, we began selling shares of our Class C Common Stock only to U.S. persons as defined under Rule 903 promulgated under the Securities Act, and began selling shares of our Class S Common Stock as a result of the commencement of the Class S Offering to non-U.S. Persons.

In August 2017, we began offering up to 33,333,333 shares of Class S Common Stock exclusively to non-U.S. Persons as defined under Rule 903 promulgated under the Securities Act, pursuant to an exemption from the registration requirements of the Securities Act and in accordance with Regulation S of the Securities Act. The Class S Common Stock had similar features and rights as our Class C Common Stock, including with respect to voting and liquidation, except that the Class S Common Stock offered in the Class S Offering was only authorized to be sold to non-U.S. Persons and was able to be sold through brokers or other persons who were able to be paid upfront and deferred selling commissions and fees. The Class S Offering was discontinued at the end of January 2020 except for existing investors’ participation in our DRP. Our Class S Common Stock was converted to Class C Common Stock in connection with our Listed Offering.

On December 23, 2019, we commenced the Follow-on Offering of up to $800,000,000 in share value of Class C Common Stock, including $725,000,000 in share value of Class C Common Stock pursuant to the primary portion of the Follow-on Offering and $75,000,000 in share value of Class C Common Stock pursuant to our DRP. We ceased offering shares pursuant to the Initial Registered Offering concurrently with the commencement of the Follow-on Offering.

On January 22, 2021, with the authorization of our board of directors, we amended and restated our DRP with respect to our shares of Class C Common Stock in order to reflect our corporate name change and to remove the ability of our stockholders to elect to reinvest only a portion of their cash distributions in shares through the DRP so that investors who elect to participate in the DRP must reinvest all cash distributions in shares. In addition, the amended and restated DRP provided for determinations by our board of directors of the estimated NAV per share more frequently than annually. The amended and restated DRP was effective with respect to distributions that were paid in February 2021.

On January 22, 2021, we filed a registration statement on Form S-3 (File No. 333-252321) to register a maximum of $100,000,000 of additional shares of Class C Common Stock to be issued pursuant to the amended and restated DRP. We commenced offering shares of Class C Common Stock pursuant to the 2021 DRP Offering upon termination of the Follow-on Offering.

Effective January 27, 2021, with the approval of our board of directors, we terminated the Follow-on Offering. In connection with the termination of the Follow-on Offering, we stopped accepting investor subscriptions on January 22, 2021. As of January 27, 2021, we had $600,547,672 in share value of unsold shares in the Follow-on Offering, which were deregistered with the SEC.

On February 1, 2021, we commenced the Private Offering and accepted investor subscriptions from only accredited investors until we terminated the Private Offering on August 12, 2021.

On June 29, 2021, we filed with the SEC a Regulation A Offering Statement on Form 1-A, including our preliminary offering circular, for a $75,000,000 offering of our Class C Common Stock and filed an amended Form 1-A on August 13, 2021. The SEC qualified the amended Regulation A Offering Statement on Form 1-A on August 16, 2021. We terminated the Reg A Offering effective upon the close of business on November 24, 2021, given our plan to seek a listing of our Class C Common Stock on a national securities exchange in early 2022, as discussed above.

On November 2, 2021, our board of directors terminated the Reg A Offering effective upon the close of business on November 24, 2021 and directed management to seek the listing of our Class C Common Stock on a national securities exchange in early 2022. Our board of directors also terminated the Prior SRPs effective November 24, 2021.

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On December 8, 2021, we filed with the SEC a Registration Statement on Form S-11 (File No. 333-261529), and, on February 9, 2022, we filed with the SEC Amendment No. 1 to the Registration Statement on Form S-11, in connection with the Listed Offering of our Class C Common Stock, which became effective on February 10, 2022. In connection with and upon the listing of our Class C Common Stock on the NYSE, each share of our Class S Common Stock was converted into a share of Class C Common Stock. Our Listed Offering of our Class C Common Stock closed on February 15, 2022. In connection with our Listed Offering, we sold 40,000 shares of our Class C Common Stock at $25.00 per share to a related party (see Note 13 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more details).

On February 15, 2022, our board of directors amended and restated our DRP with respect to the Class C Common Stock to change the purchase price at which the Class C Common Stock is issued to stockholders who elect to participate in the DRP. The purpose of this change was to reflect the fact that our Class C Common Stock is now listed on the NYSE. As more fully described in the Second Amended and Restated DRP, the purchase price for our Class C Common Stock under the DRP depends on whether we issue new shares to DRP participants or we or any third-party administrator obtains shares to be issued to DRP participants by purchasing them in the open market or in privately negotiated transactions. The purchase price for Class C Common Stock issued directly by us will be 97% (or such other discount as may then be in effect) of the Market Price (as defined in the Second Amended and Restated DRP) of the Class C Common Stock. This discount is subject to change from time to time, in our sole discretion, but will be between 0% to 5% of the Market Price. The purchase price for the Class C Common Stock that we or any third-party administrator purchases from parties other than the Company, either in the open market or in privately negotiated transactions, will be 100% of the “average price per share” (as described in the Second Amended and Restated DRP) actually paid for such shares of Class C Common Stock, excluding any processing fees. The Second Amended and Restated DRP also reflects the $0.05 per share of processing fees that will be paid by DRP participants for each share of Class C Common Stock purchased through the DRP. The Second Amended and Restated DRP was effective beginning with distributions paid in February 2022.

On February 15, 2022, our board of directors authorized up to $20,000,000 in repurchases of our outstanding shares of common stock through December 31, 2022. Purchases made pursuant to the program will be made from time-to-time in the open market, in privately negotiated transactions or in any other manner as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases will be determined by us at our discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time.

Preferred Stock Offering

On September 14, 2021, we and the Operating Partnership entered into an underwriting agreement (the “Preferred Stock Underwriting Agreement”) with B. Riley Securities, Inc., as representative of the underwriters listed on Schedule I thereto (collectively, the “Preferred Stock Underwriters”), pursuant to which we agreed to issue and sell 1,800,000 shares of our Series A Preferred Stock in an underwritten public offering (the “Preferred Offering”) at a price per share of $25.00. In addition, we granted the Preferred Stock Underwriters a 30-day option to purchase up to an additional 200,000 shares of the Series A Preferred Stock, which the Preferred Stock Underwriters exercised in full on September 16, 2021. The issuance and sale of the shares of Series A Preferred Stock, including the issuance and sale of an additional 200,000 shares pursuant to the Preferred Stock Underwriters’ full exercise of their option to purchase additional shares, closed on September 17, 2021. The gross proceeds from the Preferred Offering were $50,000,000 and the net proceeds were $47,607,309, after deducting the underwriting discount of $1,575,000 and other offering expenses of $817,691, which included the structuring fee of $250,000 (see Note 9 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional information).

Liquidity and Capital Resources

Generally, our cash requirements for property acquisitions, debt payments, capital expenditures and other investments will be funded by offerings of shares of our Class C Common Stock, Series A Preferred Stock and bank borrowings from financial institutions and mortgage indebtedness on our properties, and by assets sales and internally generated funds. Our cash requirements for operating and interest expenses and distributions will generally be funded by internally generated funds. Proceeds from the prior offerings of our common stock and debt financings have also been used to fund repurchases of common stock through our Prior SRPs and for the repurchase of shares in the open market as discussed above.

On March 29, 2021, we entered into a credit facility with Banc of California (the “Prior Credit Facility”) for an aggregate line of credit of $22,000,000, including a $17,000,000 revolving line of credit for real estate acquisitions and an additional $5,000,000 revolving line of credit for working capital, with a maturity date of March 30, 2023. The Prior Credit Facility replaced our prior $12,000,000 credit facility provided by Pacific Mercantile Bank (“PMB” and such credit facility, the “PMB Credit Facility”), which had a balance outstanding of $6,000,000 as of December 31, 2020. After our initial draw of $6,000,000 to fund the repayment of the PMB Credit Facility on March 31, 2021, and subsequent repayments of $3,000,000 in June 2021 and $1,500,000 each in July and August 2021, we had $17,000,000 available to finance real estate acquisitions and $5,000,000 available for working capital purposes. We paid Banc of California origination fees of $77,000 in connection with the Prior Credit

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Facility. Under the terms of the Prior Credit Facility, we paid a variable rate of interest on outstanding amounts equal to one percentage point over the prime rate published in The Wall Street Journal, provided that the interest rate in effect on any one day was not to be less than 4.75% per annum. We paid an unused commitment fee of 0.15% per annum of the unused portion of the Prior Credit Facility, charged quarterly in arrears based on the average unused commitment available under the Prior Credit Facility.

The Prior Credit Facility was secured by substantially all of our tangible and intangible assets, including intellectual property. The Prior Credit Facility required us to maintain a minimum debt service coverage ratio of 1.25 to 1.00 and minimum tangible NAV (as defined in the loan agreement) of $120,000,000, measured quarterly. Mr. Raymond E. Wirta, our former Chairman, and the Wirta Family Trust, guaranteed the $6,000,000 initial borrowing, which was due by September 30, 2021. This guarantee expired upon the full repayment of the $6,000,000 in August 2021. Mr. Wirta and the Wirta Family Trust also guaranteed the $5,000,000 revolving line of credit for working capital. On March 29, 2021, we entered into an updated indemnification agreement with Mr. Wirta and the Wirta Family Trust with respect to their guarantees of borrowings under the Prior Credit Facility.

On January 18, 2022, our Operating Partnership entered into a Credit Agreement providing for a $100,000,000 four-year revolving line of credit, which may be extended by up to 12 months subject to certain conditions (the “Revolver”), and a $150,000,000 five-year term loan (the “Term Loan” and together with the Revolver, the “Facility”), with KeyBank and the other lending institutions party thereto (collectively, the “Lenders”), KeyBank as Agent for the Lenders (in such capacity, the “Agent”), BMO Capital Markets, Truist Bank and The Huntington National Bank, as Co-Syndication Agents, and KeyBanc Capital Markets Inc., BMO Capital Markets, Inc., Truist Securities, Inc. and The Huntington National Bank, as Joint-Lead Arrangers. The Facility is available for general corporate purposes, including, but not limited to, acquisitions, repayment of existing indebtedness and capital expenditures.

On January 18, 2022, we borrowed $100,000,000 under the Term Loan and $55,775,000 under the Revolver and used the proceeds from the Facility to repay our previous line of credit, existing mortgages and related interest aggregating $153,428,764, including the mortgage on the KIA property which was acquired on January 18, 2022. We also used proceeds from the Facility to pay total commitment and arrangement fees of $2,020,000 to the Agent, the Lenders, the Joint-Lead Arrangers and Co-Syndication Agents. The Facility is priced on a leverage-based pricing grid that fluctuates based on our actual leverage ratio. If our leverage ratio is below or equal to 50%, the interest rate on the Revolver would be 175 basis points over SOFR plus a ten (10) basis point credit adjustment, which would equate to a floating interest rate of 1.90% as of December 31, 2021.

The Facility is secured by a pledge of all of our Operating Partnership’s equity interests in certain of the single-purpose, property-owning entities (the “Subsidiary Guarantors”) that are indirectly owned by us, and various cash collateral owned by our Operating Partnership and the Subsidiary Guarantors. The Facility includes customary covenants, including minimum fixed charge coverage of 1.50x, minimum tangible net worth of $208,629,727 plus 85% of offering proceeds and maximum leverage of 60% of our borrowing base. In connection with the Facility, we and each of the Subsidiary Guarantors entered into an Unconditional Guaranty of Payment and Performance in favor of the Agent, pursuant to which we and each of the Subsidiary Guarantors agreed to guarantee the full and prompt payment of our Operating Partnership’s obligations under the Credit Agreement. While the Facility allows for borrowings up to 60% of our borrowing base and our board of directors has approved a maximum leverage ratio of 55% of the aggregate fair value of our real estate properties plus our cash and cash equivalents, over the near term we are targeting leverage of 40% with a long term goal of lower leverage, and we do not plan to allow our leverage ratio to exceed 45% in order to minimize the interest rate payable on the Revolver and Term Loan. We also have the right to increase the Facility to a maximum of $500,000,000, subject to customary conditions, including the receipt of new commitments from the Lenders.

Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our tangible assets. Our maximum leverage as defined and approved by our board of directors is 55% of the aggregate fair value of our real estate properties, plus our cash and cash equivalents. We use available leverage based on the relative cost of debt and equity capital, and to address strategic borrowing advantages potentially available to us. Our borrowings on one or more individual properties may exceed 55% of their individual cost, so long as our overall leverage does not exceed 55% of the aggregate fair value of our real estate properties, plus our cash and cash equivalents. There is no limitation on the amount we may borrow for the purchase of any single asset. As of December 31, 2021, our leverage ratio was 40%.

We may borrow amounts from our affiliates including directors and executive officers if such loan is approved by a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, as being fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances.

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While we intend for the Facility to be our primary source of financing, we may continue to use mortgage debt financing for certain real estate investments and acquisitions. This financing may be obtained at the time an asset is acquired or an investment is made or at such later time as determined to be appropriate. In addition, debt financing may be used from time-to-time for property improvements, lease inducements, tenant improvements and other working capital needs.

As of December 31, 2021, the outstanding principal balance of our mortgage notes payable on our operating properties was $152,975,437, excluding mortgage notes related to assets held for sale of $22,036,319, and the outstanding principal balance of our revolving credit facility was $8,022,000. As of December 31, 2021, our approximately 72.7% pro-rata share of the TIC Interest’s mortgage note payable was $9,709,710, which is not included in our consolidated balance sheets in this Annual Report on Form 10-K.

We had approximately $65,000,000 of cash and restricted cash as of February 28, 2022, primarily from remaining funds from our Preferred Offering and the sales of real estate investments in February 2022 which were classified as held for sale in our accompanying consolidated financial statements for the year ended December 31, 2021 included in this Annual Report on Form 10-K. On March 8, 2022, we used $35,000,000 of our cash on hand to prepay a portion of our Revolver. Our cash and restricted cash, along with approximately $80,000,000 of available capacity on our Revolver and proceeds from future offerings of shares of Class C Common Stock will primarily be used to invest in real estate and real estate-related investments or to re-lease and reposition our properties in accordance with our investment strategy and policies, including costs and fees associated with such investments, such as capital expenditures, tenant improvement costs and leasing costs. We also may use a portion of the proceeds from our offerings for payment of principal on our outstanding indebtedness, reserves required by financings of our real estate investments and for general corporate purposes.

Refinancing Transactions and Sale of Real Estate Investments

During the year ended December 31, 2021, we refinanced the following mortgage notes, which were all subsequently repaid through the new Facility on January 18, 2022:

During the year ended December 31, 2021, we sold the following retail and industrial real estate investments:

On September 24, 2021, we received a notice of refund amounting to $115,133 related to the sale of our Las Vegas, Nevada retail property on December 16, 2020, which was formerly leased to 24 Hour Fitness. The refund relates to a portion of a holdback from sales proceeds to cover expenses by the buyer to prepare the property for lease, including the payment of accrued interest, common area maintenance, taxes, insurance and other related expenses and building permits to begin construction of improvements on the property. The refund is an adjustment to the estimate of the amount which was expected to be received.

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On February 11, 2022, we completed our sale of two medical office properties located in Dallas, Texas and Richmond, Virginia leased to Texas Health and Bon Secours, respectively, and one medical industrial property in Richmond, Virginia leased to Omnicare for an aggregate sales price of $26,000,000, which generated net proceeds of $11,883,639 after payment of commissions, closing costs and existing mortgages.

On February 24, 2022, we completed our sale of a medical office property in Orlando, Florida leased to Accredo for a sale price of $14,000,000, which generated net proceeds of $5,000,941 after payment of commissions, closing costs and repayment of the existing mortgage.

Sales Pursuant to Our Private Offering and Our Reg A Offering

We commenced the Private Offering to accredited investors only under Regulation D promulgated under the Securities Act on February 1, 2021, and during the period from February 1, 2021 to August 11, 2021, we sold 36,207 shares of Class C Common Stock pursuant to the Private Offering for aggregate proceeds of $851,273. We terminated the Private Offering on August 12, 2021.

On June 29, 2021, we filed with the SEC a Regulation A Offering Statement on Form 1-A, including our preliminary offering circular, for a $75,000,000 offering of our Class C Common Stock and filed an amended Form 1-A on August 13, 2021. The SEC qualified the amended Regulation A Offering Statement on Form 1-A on August 16, 2021. The Reg A Offering allowed us to once again accept subscriptions from investors who were not accredited. On November 2, 2021, our board of directors reviewed and approved management’s recommendation to terminate the Reg A Offering effective upon the close of business on November 24, 2021. During the period from August 16, 2021 to November 24, 2021, we sold 73,802 shares of Class C Common Stock pursuant to the Reg A Offering for aggregate gross proceeds of $1,949,512.

Impact of the COVID-19 Pandemic on Our Capital Resources

Uncertainties over the future utilization of office and retail properties which arose as a result of the COVID-19 pandemic, the resulting decrease in our NAV per share as of April 30, 2020 and the reduction in our distribution rate in May 2020 severely impacted our ability to raise capital through our common stock offerings. From January 1, 2021 through November 2, 2021, we raised approximately $8,900,000 through our common stock offerings, including our DRP, a 50% decrease compared with approximately $17,900,000 raised during the year ended December 31, 2020. In addition, share repurchases increased from approximately $17,600,000 during the year ended December 31, 2020 to approximately $19,100,000 from January 1, 2021 through November 24, 2021.

In April 2020, one of our subsidiaries was successful in obtaining a $517,000 loan through the Small Business Administration’s (the “SBA”) Paycheck Protection Program (“PPP”), which was funded by PMB on April 20, 2020. In December 2020, our subsidiary submitted its application for forgiveness of the total amount of the loan to PMB. After PMB’s review, our subsidiary updated its forgiveness application on February 10, 2021. PMB submitted the application to the SBA on February 10, 2021, and on February 16, 2021, our subsidiary was notified by PMB that its application for forgiveness of the PPP loan had been approved by the SBA in the full amount of $517,000. Accordingly, the forgiveness of the PPP loan is reflected in other income for the year ended December 31, 2021 in our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

As of December 31, 2021, the outstanding principal balance of our mortgage notes payable, including mortgage notes payable related to real estate investments held for sale, and our unsecured revolving credit facility were $175,011,756 and $8,022,000, respectively. On January 18, 2022, we refinanced an aggregate of $108,178,317, representing 20 property mortgages. The 20 mortgages that were paid off were for the following 27 properties: eight Dollar Generals (including Dollar General, California and Dollar General, Big Spring), Northrop Grumman, exp Maitland, Wyndham, Williams Sonoma, EMCOR, Husqvarna, AvAir, 3M, Cummins, Levins, Labcorp, GSA (MHSA), PreK Education, ITW Rippey, Solar Turbines, Wood Group, Gap, L3Harris and Walgreens. After the 20 property mortgages were paid-off, seven property mortgages as of December 31, 2021 remained outstanding, including four property mortgages related to the assets held for sale. Those four mortgages were paid off pursuant to sales of the properties in February 2022. The principal portion of our remaining mortgage notes payable as of December 31, 2021 after the January 2022 refinancing and February 2022 sales was $44,797,120, including $304,320 due during 2022.

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Funds from Operations and Adjusted Funds from Operations

In order to provide a more complete understanding of the operating performance of a REIT, the National Association of Real Estate Investment Trusts (“Nareit”) promulgated a measure known as Funds from Operations (“FFO”). FFO is defined as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships, joint ventures, preferred dividends and real estate impairments. Because FFO calculations adjust for such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and between other REITs. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. It should be noted, however, that other REITs may not define FFO in accordance with the current Nareit definition or may interpret the current Nareit definition differently than we do, making comparisons less meaningful.

Additionally, we use AFFO as a non-GAAP financial measure to evaluate our operating performance. AFFO excludes non-routine and certain non-cash items such as revenues in excess of cash received, amortization of stock-based compensation, deferred rent, amortization of in-place lease valuation intangibles, acquisition-related costs, deferred financing fees, gain or loss from the extinguishment of debt, unrealized gains (losses) on derivative instruments, write-offs of transaction costs and other one-time transactions.

We also believe that AFFO is a recognized measure of sustainable operating performance of the REIT industry. Further, we believe AFFO is useful in comparing the sustainability of our operating performance with the sustainability of the operating performance of other real estate companies.

Management believes that AFFO is a beneficial indicator of our ongoing portfolio performance and ability to sustain our current distribution level. More specifically, AFFO isolates the financial results of our operations. AFFO, however, is not considered an appropriate measure of historical earnings as it excludes certain significant costs that are otherwise included in reported earnings. Further, since the measure is based on historical financial information, AFFO for the period presented may not be indicative of future results or our future ability to pay our dividends. By providing FFO and AFFO, we present information that assists investors in aligning their analysis with management’s analysis of long-term operating activities.

For all of these reasons, we believe the non-GAAP measures of FFO and AFFO, in addition to income (loss) from operations, net income (loss) and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful to investors in evaluating the performance of our real estate portfolio. However, a material limitation associated with FFO and AFFO is that they are not indicative of our cash available to fund distributions since other uses of cash, such as capital expenditures at our properties and principal payments of debt, are not deducted when calculating FFO and AFFO. AFFO is useful in assisting management and investors in assessing our ongoing ability to generate cash flow from operations and continue as a going concern in future operating periods. However, FFO and AFFO are not useful measures in evaluating NAV because impairments are taken into account in determining NAV but not in determining FFO and AFFO. Therefore, FFO and AFFO should not be viewed as a more prominent measure of performance than income (loss) from operations, net income (loss) or cash flows from operating activities and each should be reviewed in connection with GAAP measurements.

Neither the SEC, Nareit, nor any other applicable regulatory body has opined on the acceptability of the adjustments contemplated to adjust FFO in order to calculate AFFO and its use as a non-GAAP performance measure. In the future, the SEC or Nareit may decide to standardize the allowable exclusions across the REIT industry, and we may have to adjust the calculation and characterization of this non-GAAP measure. Furthermore, as described in Note 12 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K, the conversion ratios for Class M OP Units, Class P OP Units and Class R OP Units can increase if the specified performance hurdles are achieved.

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The following are the calculations of FFO and AFFO for the years ended December 31, 2021 and 2020:

(1)    Management, based on further evaluation, concluded that impairment of goodwill and intangible assets of $34,572,403 recognized in the year ended December 31, 2020 should have been included in the calculation of AFFO but not FFO. As such, that amount was reclassified in the table above to be included only in AFFO in order to conform to the current year presentation.

(2)    Includes the Class M, Class P and pro rata Class R OP Units to compute the weighted average number of shares.

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Distributions

Historically, the sources of cash used to pay our distributions have been from net rental income received and the waiver and deferral of management fees by our former advisor through December 31, 2019. The leases for certain of our real estate acquisitions may provide for rent abatements. These abatements are an inducement for the tenant to enter into or extend the term of its lease. In connection with the acquisition of some properties, we may be able to negotiate a reduced purchase price for the acquired property in an amount that equals the previously agreed-upon rent abatement. During the period of any rent abatement on properties that we acquire, we may be unable to fully fund our distributions from net rental income received. In connection with the extension of the lease term of some properties, we may agree to pay a lease extension fee. In those events, we may expand the sources of cash used to fund our stockholder distributions to include proceeds from the sale of our common stock, but only during the periods, and up to the amounts, of any rent abatements where we are able to negotiate a reduced purchase price or pay lease extension fees.

A table of distributions declared, distributions paid out, the impact on cash flows from operations and the source of distribution payments is disclosed in Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities - Distribution Information.

Going forward, we expect that our board of directors will continue to declare distributions based on a single record date as of the end of the month and to pay these distributions on a monthly basis. Distributions will be determined by our board of directors based on our financial condition and such other factors as our board of directors deems relevant. We have not established a minimum dividend or distribution level, and our charter does not require that we make dividends or distributions to our stockholders other than as necessary to meet REIT qualification standards.

Cash Flow Summary

The following table summarizes our cash flow activity for the years ended December 31, 2021 and 2020:

Cash Flows from Operating Activities

Net cash provided by operating activities was $9,728,685 and $5,577,576 for the years ended December 31, 2021 and 2020, respectively.

The cash provided by operating activities for the year ended December 31, 2021 primarily reflects adjustments to our net loss of $435,505 for distributions from an unconsolidated investment in a real estate property of $337,072; net non-cash charges for write-off of abandoned intangible assets of $3,767,190; and net non-cash charges of $7,514,084 primarily related to depreciation and amortization, stock compensation expense, amortization of deferred financing costs, amortization of deferred lease incentives, amortization of above-market lease intangibles and amortization of deferred rents, which were partially offset by gain on sale of real estate investments, amortization of below-market lease intangibles, unrealized gain on interest rate swap valuation, gain on forgiveness of economic relief note payable, reversal of impairment of real estate property and undistributed income from our unconsolidated investment in a real estate property. The cash provided by operations was also offset in part by cash used due to changes in operating assets and liabilities of $1,454,156 during the year ended December 31, 2021 primarily due to increases in note receivable and prepaid expenses and other assets, partially offset by a decrease in tenant receivable and an increase in accounts payable, accrued and other liabilities.

The cash provided by operating activities for the year ended December 31, 2020 primarily reflects adjustments to our net loss of $49,141,910 for distributions from our unconsolidated investment in a real estate property of $683,000; net non-cash charges for impairment of goodwill, intangible assets and impairment of real estate investment property aggregating $44,840,028 due to the COVID-19 pandemic; and net non-cash charges of $12,762,668 primarily related to depreciation and amortization, unrealized loss on interest rate swap valuation, amortization of deferred financing costs, stock compensation expense, and amortization of above-market lease intangibles, which were partially offset by gain on sale of real estate investments, amortization of deferred rents, amortization of below-market lease intangibles and undistributed income from our unconsolidated investment in a real estate property. The cash provided by operations was also offset in part by cash used in operating assets and liabilities of $3,566,210 during the year ended December 31, 2020 primarily due to increases in prepaid expenses and other assets and decreases in accounts payable, accrued and other liabilities and amounts due to affiliates, offset in part by a decrease in tenant receivables.

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We continue to expect that our cash flows from operating activities will be positive in the next twelve months; however, there can be no assurance that this expectation will be realized.

Cash Flows from Investing Activities

Net cash provided by investing activities was $21,830,288 for the year ended December 31, 2021 and consisted primarily of the following:

•$37,719,998 from proceeds from sales of real estate investments; and

•$1,824,383 from collection of a note receivable from sale of real estate property; partially offset by

•$15,162,305 for acquisitions of real estate investments;

•$1,356,038 for capitalized costs for improvements to existing real estate properties;

•$1,000,000 for a refundable purchase deposit; and

•$195,750 for additions to intangible assets.

Net cash provided by investing activities was $24,778,295 for the year ended December 31, 2020 and consisted primarily of the following:

•$27,008,028 from proceeds from sales of real estate investments, partially offset by:

•$673,631 for capitalized costs for improvements to existing real estate investments;

•$566,102 for additions to intangible assets; and

•$990,000 for payments to lease incentives.

Cash Flows from Financing Activities

Net cash provided by financing activities was $18,471,017 for the year ended December 31, 2021 and consisted primarily of the following:

•$47,607,309 in net proceeds from issuance of preferred stock;

•$4,336,086 of proceeds from issuance of common stock, partially offset by payments for offering costs and commissions of $1,418,334;

•$25,436,000 of proceeds from refinanced mortgage notes payable;

•$14,022,000 of proceeds from borrowings on our credit facility; and

•$18,804 of refundable loan deposits recovered.

These proceeds were partially offset by:

•$36,569,537 of mortgage notes principal payments and deferred financing cost payments of $404,971 to third parties;

•$12,000,000 of repayments under our credit facilities;

•$19,082,962 used for repurchases of shares under the Prior SRPs; and

•$3,473,378 of cash distributions paid to common stockholders.

Net cash used in financing activities was $28,915,271 for the year ended December 31, 2020 and consisted primarily of the following:

•$45,299,688 of mortgage notes principal payments and deferred financing cost payments of $387,341 to third parties;

•$6,000,000 of repayments on our credit facility;

•$4,800,000 for repayments of short-term notes payable;

•$17,576,261 used for repurchases of shares under the Prior SRPs;

•$5,019,216 of cash distributions paid to common stockholders; and

•$18,804 of refundable loan deposits made.

These uses were partially offset by:

•$10,908,856 of proceeds from issuance of common stock, partially offset by payments for offering costs and commissions of $1,205,317;

•$35,705,500 of proceeds from mortgage notes payable;

•$4,260,000 of proceeds from borrowings on our unsecured credit facility; and

•$517,000 borrowed under the PPP.

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Results of Operations

As of December 31, 2021, we owned (i) 38 operating properties (including four operating properties held for sale); (ii) one parcel of land which currently serves as an easement to one of our office properties; and (iii) the TIC Interest. We acquired two operating properties in 2021 and made no acquisitions in 2020 due to the COVID -19 pandemic. Also due to the COVID-19 pandemic, we sold five operating properties in both years 2021 and 2020 to support share repurchase payments and provide additional liquidity to our stockholders. We expect that rental income, tenant reimbursements, depreciation and amortization expense and interest expense will be higher on a year-over-year basis due to our expected execution of acquisitions and initiatives for our growth strategy. Our results of operations for the year ended December 31, 2021 are not indicative of those expected in future periods as we have significant unused capacity on our Revolver and expect to continue to raise capital through future offerings of our Class C Common Stock and acquire additional operating properties. We make no assurance that our future offerings of our Class C Common Stock, if any, will be successful in the near term.

Due to the continuing COVID-19 pandemic, including the spread of the Delta and Omicron variants, in the United States and globally, our tenants and operating partners continue to be impacted, although the pandemic's impact on the economy appears to have diminished and the general commercial real estate market appears to be recovering. The continued impact of the COVID-19 pandemic and the Delta, Omicron and other future variants on our future results will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information regarding mutations of COVID-19, the success of actions taken to contain or treat COVID-19, the effectiveness of the current vaccines to contain the COVID-19 variants, including the Delta, Omicron and any future variants, and reactions by consumers, companies, governmental entities and capital markets.

We, our tenants and operating partners are also impacted by the increasing inflation rate. According to the U.S. Labor Department, the annual inflation rate for the U.S. was 7% for the year ended December 2021, the highest since June 1982. As a result, the Federal Reserve is planning to use its policy tools to try to rein in inflation by gradually raising borrowing costs, which will negatively impact our future results due to higher borrowing costs. The ongoing Russia-Ukraine conflict may exacerbate the already high inflation, rattle the global economies and markets and worsen the fragile global supply chain. The resulting retaliatory sanctions from the U.S. and its allies to Russia may temper the recovering global economy.

Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020

Rental Income

Rental income, including tenant reimbursements, was $36,222,717 and $38,639,460 for the years ended December 31, 2021 and 2020, respectively. Rental income during 2021 included $2,212,090 of revenue from the early termination of the lease related to an industrial property sold during the third quarter of 2021. Excluding the effect of the revenue from early termination of the lease on the industrial property sold in July 2021, the year-over-year rental income decreased by $4,628,833, or 12%. This decrease primarily reflects the reduction of rental income from the ten properties (eight retail properties and two industrial properties) sold during 2020 and 2021. All five properties sold during 2020 were sold in the second half of 2020, while the properties sold in 2021 included three properties sold in the first quarter, one property sold in the beginning of the third quarter and one property sold at the end of the fourth quarter of 2021. The decreases in rental income due to these asset sales were offset in part by the rental income from the two retail properties acquired on July 26, 2021 and December 3, 2021. During 2022, the loss of rental income from the sold properties will be offset by rental income from the properties acquired in January 2022. Pursuant to most of our lease agreements, tenants are required to pay or reimburse all or a portion of the property operating expenses. The ABR income of the operating properties owned as of December 31, 2021, excluding the four properties held for sale, was $25,905,895 and the pro forma ABR as of December 31, 2021 after taking into account the two properties acquired in January 2022 and four properties sold in February 2022 is $30,406,425 (unaudited).

General and Administrative

General and administrative expenses were $12,649,042 and $10,399,194 for the years ended December 31, 2021 and 2020, respectively. The increase of $2,249,848, or 22%, year-over-year primarily reflects increases of $2,032,247 in stock compensation expense related to the Class R OP Units granted in January 2021 (discussed in detail in Note 12 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K), and legal expenses in the current year compared to the prior year. We expect general and administrative expenses will decrease by approximately $2,200,000 in 2022 as a result of the termination of our crowdfunding business and other cost savings initiatives.

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Merger Costs

Merger costs or self-management transaction expenses of $201,920 for the year ended December 31, 2020 primarily reflect a final allocation of fees of the financial advisor to the special committee of our board of directors, along with legal fees for the special committee's legal counsel.

Depreciation and Amortization

Depreciation and amortization expenses for the years ended December 31, 2021 and 2020 were $15,266,936 and $17,592,253, respectively. The purchase price of the acquired properties was allocated to tangible assets, identifiable intangibles and assumed liabilities and depreciated or amortized over their estimated useful lives. The decrease of $2,325,317, or 13%, year-over-year primarily reflects the reduction of depreciation and amortization expenses related to the ten properties (eight retail properties and two industrial properties) sold. The properties sold include four retail properties and one industrial property sold in the second half of 2020, three retail properties, one industrial property and one retail property sold in the first, third and fourth quarters of 2021, respectively, offset in part by the depreciation and amortization expenses of two retail properties acquired on July 26, 2021 and December 3, 2021.

Interest Expense

Interest expense was $7,586,197 and $11,460,747 for the years ended December 31, 2021 and 2020, respectively (see Note 7 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for the detail of the components of interest expense). The decrease of $3,874,550, or 34%, year-over-year was primarily due to our current year gain on interest rate swaps of $847,730 compared to prior year loss on interest rate swaps of $1,172,781. In addition, the decrease was due to reduced outstanding borrowings from both our mortgage notes payable and our credit facilities and reduced amortization of loan fees. There was also a decrease in the average principal balance of our mortgage notes payable, including mortgage notes payable related to real estate investments held for sale, from approximately $201,863,000 in 2020 compared to approximately $183,656,000 in 2021 and our average credit facility borrowings were approximately $8,748,000 in 2020 compared to $4,000,000 in 2021.

Property Expenses

Property expenses were $6,691,899 and $6,999,178 for the years ended December 31, 2021 and 2020, respectively. These expenses primarily relate to property taxes as well as insurance, utilities, and repairs and maintenance expenses. The decrease of $307,279, or 4%, year-over-year primarily reflects the reduction in expenses related to the ten properties (eight retail properties and two industrial properties) sold. The properties sold include four retail properties and one industrial property sold in the second half of 2020, three retail properties, one industrial property and one retail property sold in the first, third and fourth quarters of 2021, respectively, offset in part by the rental income from the two retail properties acquired on July 26, 2021 and December 3, 2021.

Impairment of Real Estate Investment Properties

Impairment of real estate investment properties was a credit of $400,999 for the year ended December 31, 2021 and a charge of $10,267,625 for the year ended December 31, 2020. The current year credit resulted from an adjustment to revalue impairment charge recorded in December 2020 for the property located in Bedford, Texas due to its reclassification from held for sale to held for use in June 2021. The prior year impairment charges were related to the impairments of six properties which consisted of impairments on the sale of three properties located in Lake Elsinore, California, Morgan Hill, California and Las Vegas Nevada, one vacant property located in Cedar Park, Texas and one held for sale property located in San Jose, California. These impairment charges were primarily due to the negative impacts of the COVID-19 pandemic as discussed further in Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K.

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Impairment of Goodwill and Intangible Assets

Impairment charges for non-property intangible assets were $3,767,190 and $34,572,403 during the years ended December 31, 2021 and 2020, respectively. The impairment charge of $3,767,190 during the current year relates to the abandoned unamortized balance of intangible assets used as the primary mechanism through which we sold our shares of Class C Common Stock to the market and raised equity capital through our crowdfunding activities when we planned our Listed Offering in the fourth quarter of 2021. Our Listed Offering became effective on February 10, 2022. The impairment charge of $34,572,403 in the prior year relates to goodwill impairment of $33,267,143 and intangible assets impairment of $1,305,260 related to our investor list, a portion of which we determined would no longer be viable. These impairments reflected the negative impacts of the COVID-19 pandemic on the carrying values of goodwill and intangible assets (see Note 5 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for additional details).

Gain on Sale of Real Estate Investments, net

The gain on sale of real estate investments, net was $7,803,702 and $4,139,749 for the years ended December 31, 2021 and 2020, respectively, and related primarily to the sale of five properties (four retail and one industrial) in each of the current year and prior year (see Note 3 to our accompanying consolidated financial statements included in this Annual Report on Form 10-K for more gain on sale details). Our 2021 sales of real estate investments were primarily due to our strategic plan to reduce our exposure to office properties and increase our WALT and to a certain extent the continued effect of the COVID-19 pandemic. In 2020, we sold certain of our real estate investments primarily due to the COVID-19 pandemic to support the significant increase in share repurchase payments to our stockholders and to provide additional liquidity as a result of the significant decrease in proceeds from issuance of common stock.

Other (Expense) Income, Net

The lease termination expense of $1,039,648 for the year ended December 31, 2020 reflects the fee for early termination of our Costa Mesa, California office lease following the surrender of the leased premises to the lessor during the second quarter of 2020.

Interest income was $21,328 and $4,923 for the years ended December 31, 2021 and 2020, respectively.

Income from unconsolidated investment in a real estate property was $276,042 and $296,780 for the years ended December 31, 2021 and 2020, respectively. This represents our approximate 72.7% TIC Interest in the Santa Clara, California property's results of operations for the years ended December 31, 2021 and 2020, respectively.

Gain on forgiveness of economic relief note payable for the year ended December 31, 2021 reflects the SBA’s forgiveness in February 2021 of our economic relief note payable of $517,000 obtained in April 2020 under the terms of the PPP.

Other income of $283,971 and $310,146 for the years ended December 31, 2021 and 2020, respectively, primarily reflects our monthly management fee from the entities that own the TIC Interest property which is equal to 0.1% of the total investment value of the property. The total management fee was $263,971 for each of the years ended December 31, 2021 and 2020, of which our portion of expense relating to the TIC Interest was $191,933 for each year and is reflected as a component of income from unconsolidated investment in a real estate property in the statement of operations included in this Annual Report on Form 10-K.

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Quarterly Data

Our quarterly operating results have fluctuated significantly in the past and will likely continue to do so in the future as a result of various factors as more fully described in Part I, Item 1A. Risk Factors herein. The following table sets forth certain unaudited quarterly historical financial data for each of the eight quarters in the two years ended December 31, 2021. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in our opinion, includes all adjustments necessary for a fair statement of the selected quarterly information. This information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The operating results for any quarter shown are not necessarily indicative of results for any future period.

(1)    The first quarter of 2021 includes the impact of a gain of $517,000 on forgiveness of economic relief note payable loan and an impairment credit of $400,999 on the reclassification of a real estate investment to held for investment from held for sale in the third quarter of 2021. The fourth quarter includes the impact of intangible assets impairment charge of $3,767,190.

(2)    The first, second and fourth quarters of 2020 include the impacts of real estate investments impairment charges of $9,157,068, $349,457 and $761,100, respectively. The first quarter includes the impact of a goodwill impairment charge of $33,267,143 and intangible assets impairment charge of $1,305,260 and costs related to the Merger of $201,920.

Organizational and Offering Costs

Organizational and offering costs include all expenses incurred in connection with the Pre-Listing Offerings, including investor relations' payroll expenses and other expenses incurred in connection with our Offerings, including, but not limited to legal fees, federal and state filing fees, and other costs. Through November 24, 2021, the termination date of the Reg A Offering, and for the year ended December 31, 2020, we incurred organizational and offering costs aggregating $1,154,336 and $1,205,317, respectively, which are recorded in our financial statements as an offset to equity. Through November 24, 2021, we had recorded cumulative organizational and offering costs of $8,298,499, including $5,429,105 paid to our former sponsor or affiliates. In connection with our Listed Offering of Class C Common Stock, we also incurred additional organizational and offering costs of $263,998 as of December 31, 2021.

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Properties

Portfolio Information

Our wholly-owned investments in real estate properties as of December 31, 2021 and 2020, including four assets held for sale as of each of the years ended December 31, 2021 and 2020, and the 91,740 square foot industrial property underlying the TIC Interest for all balance sheet dates presented were as follows:

(1)    Includes four healthcare related properties held for sale as of December 31, 2021, which consisted of three office properties and one industrial property.

(2)    Includes four retail properties held for sale as of December 31, 2020, three of which were sold during the first quarter of 2021 and the fourth property was reclassified as real estate investment held for investment and use during the second quarter of 2021 since we decided to discontinue marketing the property for sale. This property was sold on December 21, 2021.

We have a limited operating history. In evaluating the above properties as potential acquisitions, including the determination of an appropriate purchase price to be paid for the properties, we considered a variety of factors, including the condition and financial performance of the properties, the terms of the existing leases and the creditworthiness of the tenants, property location, visibility and access, age of the properties, physical condition and curb appeal, neighboring property uses, local market conditions, including vacancy rates, area demographics, including trade area population and average household income and neighborhood growth patterns and economic conditions.

Acquisitions of Real Estate Investments

On July 26, 2021, we completed the acquisition of a 3,853 square-foot restaurant property leased to Raising Cane’s located in San Antonio, Texas. The restaurant property, which also features a drive-thru, is subject to a triple-net lease whereby the tenant is responsible for all property expenses including taxes, insurance and maintenance. The lease expires on February 28, 2028, with five, 5-year lease renewal options which allows Raising Cane’s to extend the term of its lease for up to 25 additional years. The contract purchase price for the property was $3,607,424 which was funded with our available cash on hand. The purchase price represents a 6.25% cap rate and the lease includes rent escalations of 10% every five years.

On December 3, 2021, we completed the acquisition of a 206,155 square-foot industrial property leased to Arrow Tru-Line located in Archbold, Ohio through a sale leaseback transaction. The industrial property, which is used in the manufacture of garage door parts, is subject to a triple-net lease whereby the tenant is responsible for all property expenses including taxes, insurance and maintenance. The lease expires on December 31, 2041, with two, 10-year lease renewal options which allows Arrow Tru-Line to extend the term of its lease for up to 20 additional years. The contract purchase price for the property was $11,460,000 which was funded with a drawdown under our Prior Credit Facility and with a portion of the proceeds from our Preferred Offering. The purchase price represents a 6.65% cap rate and the lease includes annual rent escalations of 2%.

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On January 18, 2022, we completed the acquisition of one of the three largest KIA auto dealership properties in the U.S., located on Interstate 405 in Carson, California, for $69,275,000 in an ‘‘UPREIT’’ transaction wherein the seller received 1,312,382 Class C OP Units for approximately 47% of the property value and we repaid a $36,465,449 existing mortgage, including accrued interest, on the property with a draw on the Facility. The purchase price represents a 5.70% cap rate and the property has a 25-year lease with annual rent escalations of 2%.

On January 31, 2022, we acquired an industrial property and related equipment in Saint Paul, Minnesota that is used in indoor vertical farming for $8,079,000. The purchase price represents a 7.00% initial cap rate for the 20-year lease with annual rent escalations of 2.5%. We funded this acquisition with a portion of the proceeds from our Preferred Offering.

On March 4, 2022, we entered into a purchase and sale agreement to acquire eight industrial properties leased to Lindsay Precast, LLC (“Lindsay”) in a sale and leaseback transaction, which is expected to have a 25-year lease term with 2% annual rent increases. Lindsay is an industry-leading precast concrete manufacturer and steel fabricator with a 60-year operating history. These properties are used in outdoor storage and manufacturing, and are located in Ohio, Colorado, North Carolina, South Carolina and Florida. The purchase price is $53,350,000, which reflects a cap rate of 6.65%, and we expect to complete this purchase in April 2022, subject to completion of due diligence and customary closing conditions. We plan to fund the purchase with a draw on our Facility and available cash on hand. There can be no assurances that we will be able close this transaction.

Sales of Real Estate Investments

We completed the sale of five properties during each of the years ended December 31, 2021 and 2020, as follows:

(1)    Net of commissions, closing costs paid and repayment of any outstanding mortgages.

During February 2022, we completed the sale of all four real estate investments classified as held for sale as of December 31, 2021, which generated aggregate net proceeds of $16,884,580 after payment of commissions, closing costs and existing mortgages as further described below.

On February 11, 2022, we completed the sale of two medical office properties in Dallas, Texas and Richmond, Virginia leased to Texas Health and Bon Secours and one medical industrial property in Richmond, Virginia leased to Omnicare for aggregate sales proceeds of $26,000,000, which generated net proceeds of $11,883,639 after payment of commissions, closing costs and existing mortgages.

On February 24, 2022, we also completed the sale of a medical office property in Orlando, Florida leased to Accredo for sales proceeds of $14,000,000, which generated net proceeds of $5,000,941 after payment of commission, closing costs and repayment of the existing mortgage.

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Extension of Leases

During the year ended December 31, 2021, we completed lease extensions for six properties, including the properties leased to two Dollar Generals in Castalia, Ohio and Lakeside, Ohio, Northrop Grumman in Melbourne, Florida, PreK Education in San Antonio, Texas, L3Harris in Carlsbad, California, and 3M Company in DeKalb, Illinois. These six lease extensions resulted in an average increase in lease term of 10 years and an average increase in rents of 6%.

Effective January 12, 2022, we extended the lease terms of our Cummins property located in Nashville, Tennessee from March 1, 2023 to February 28, 2024 with a 2% increase in annual rent commencing March 1, 2023. Cummins accepted the extension of the lease terms and possession of the property on an "AS-IS" basis. We also granted to Cummins an option to extend the lease term for an additional five years commencing March 1, 2024 and paid a leasing commission of $30,000 in connection with this extension.

Effective January 26, 2022, we extended the lease term of our ITW Rippey property located in El Dorado Hills, California from August 1, 2022 to July 31, 2029 with a 6% increase in annual rent commencing August 1, 2022 and 3% annual escalations thereafter. We also agreed to provide a tenant improvements allowance of $481,250 in connection with this extension and granted ITW Rippey an option to extend the lease term for an additional five years commencing August 1, 2029.

Effective March 4, 2022, we extended the lease term of our Williams Sonoma property located in Summerlin, Nevada from October 31, 2022 to October 31, 2025 with a 4% increase in annual rent commencing November 1, 2022 and 2.7% annual escalations thereafter. We also agreed to provide the tenant with one month of free rent, an inducement payment of $100,000 and tenant improvements allowance of $166,450 and will pay a leasing commission of $90,383 in connection with this extension.

We are continuing to explore potential lease extensions for certain of our other properties.

Other than as discussed below, we do not have other plans to incur any significant costs to renovate, improve or develop our properties. We believe that our properties are adequately insured. Pursuant to lease agreements, as of December 31, 2021 and December 31, 2020, we had obligations to pay $189,136 and $60,598, respectively, for on-site and tenant improvements to be incurred by tenants. We expect that the related improvements will be completed during the 2022 calendar year and will be funded from cash on hand, operating cash flow or offering proceeds. Subsequent to December 31, 2021, we also agreed to additional on-site and tenant improvement obligations of $647,700 in connection with the lease extensions for our ITW Rippey and Williams Sonoma properties, as discussed above.

As of December 31, 2021, our restricted cash deposits held to fund other improvements and leasing commissions totaled $2,271,462, and these deposits were released pursuant to our refinancing transaction on January 18, 2022.

In addition, we have identified approximately $2,157,000 of roof replacement, exterior painting and sealing and parking lot repairs/restriping that are expected to be completed in 2022, including approximately $703,000 for tenant improvements for the Northrop Grumman property. Approximately $1,037,000 of these improvements are expected to be recoverable from tenants through their operating expense reimbursements. In addition, following the release of the deposits discussed above, there are no restricted cash deposits that were reserved to pay for these improvements. We will initially pay for the improvements and the recoveries will be billed over an extended period of time according to the terms of the lease. The remaining costs of approximately $1,120,000 are not recoverable from tenants. These improvements will be funded from cash on hand, operating cash flows, debt financings or proceeds from the sale of shares of our common stock.

More information on our properties and investments can be found in Part I, Item 2. Properties of this Annual Report on Form 10-K.

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Critical Accounting Policies

The discussion below is regarding the accounting policies that management believes are or will be critical to our operations. We consider these policies critical in that they involve significant management judgments and assumptions, require estimates about matters that are inherently uncertain and because they are important for understanding and evaluating our reported financial results. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our consolidated financial statements. Additionally, other companies may have utilized different estimates that may impact the comparability of our results of operations to those of companies in similar businesses.

Noncontrolling Interest in Consolidated Entities

We account for the noncontrolling interests in our Operating Partnership in accordance with the related accounting guidance. Due to our control of the Operating Partnership through our general partnership interest therein and the limited rights of the limited partners, the Operating Partnership and its wholly-owned subsidiaries are consolidated with us, and the limited partner interests not held by us are reflected as noncontrolling interests in the accompanying consolidated balance sheets and statements of equity. The noncontrolling interests were issued on December 31, 2019 and represent non-voting, non-dividend accruing interests with no allocation of profits or losses.

Revenue Recognition

We account for revenue in accordance with FASB Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), which includes revenue generated by sales of real estate, other operating income and tenant reimbursements for substantial services earned at our properties. Such revenues are recognized when the services are provided and the performance obligations are satisfied. Tenant reimbursements, consisting of amounts due from tenants for common area maintenance, property taxes and other recoverable costs, are recognized in rental income subsequent to the adoption of Topic 842, as discussed below, in the period the recoverable costs are incurred. Tenant reimbursements, for which we pay the associated costs directly to third-party vendors and is reimbursed by the tenants, are recognized and recorded on a gross basis.

We account for leases accordance with FASB ASU No. 2016-02, Leases (Topic 842) and the related FASB ASU Nos. 2018-10, 2018-11, 2018-20 and 2019-01, which provide practical expedients, technical corrections and improvements for certain aspects of ASU 2016-02 (collectively “Topic 842”). Topic 842 established a single comprehensive model for entities to use in accounting for leases. Topic 842 applies to all entities that enter into leases. Lessees are required to report assets and liabilities that arise from leases. Lessor accounting has largely remained unchanged; however, certain refinements are made to conform with revenue recognition guidance, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Topic 842 primarily impacts our accounting for leases primarily as a lessor. Topic 842 also impacts our accounting as a lessee; however, such impact is not considered material.

As a lessor, our leases with tenants generally provide for the lease of real estate properties, as well as common area maintenance, property taxes and other recoverable costs. To reflect recognition as one lease component, rental income and tenant reimbursements and other lease related property income that meet the requirements of the practical expedient provided by ASU No. 2018-11 have been combined under rental income in our consolidated statements of operations.

We recognize rental income from tenants under operating leases on a straight-line basis over the noncancelable term of the lease when collectability of such amounts is reasonably assured. Recognition of rental income on a straight-line basis includes the effects of rental abatements, lease incentives and fixed and determinable increases in lease payments over the lease term. If the lease provides for tenant improvements, our management determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by us.

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When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance (including amounts that the tenant can take in the form of cash or a credit against its rent) that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:

•whether the lease stipulates how a tenant improvement allowance may be spent;

•whether the amount of a tenant improvement allowance is in excess of market rates;

•whether the tenant or landlord retains legal title to the improvements at the end of the lease term;

•whether the tenant improvements are unique to the tenant or general-purpose in nature; and

•whether the tenant improvements are expected to have any residual value at the end of the lease.

Tenant reimbursements of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the expenses are incurred and presented gross if we are the primary obligor and, with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk. In instances where the operating lease agreement has an early termination option, the termination penalty is based on a predetermined termination fee or based on the unamortized tenant improvements and leasing commissions.

We evaluate the collectability of rents and other receivables on a regular basis based on factors including, among others, payment history, credit rating, the asset type, and current economic conditions. If our evaluation of these factors indicates we may not recover the full value of the receivable, we provide an allowance against the portion of the receivable that we estimate may not be recovered. This analysis requires us to determine whether there are factors indicating a receivable may not be fully collectible and to estimate the amount of the receivable that may not be collected.

Bad Debts and Allowances for Tenant and Deferred Rent Receivables

Our determination of the adequacy of our allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. In addition, for tenant and deferred rent receivables deemed probable of collection, we also may record an allowance under other authoritative GAAP depending upon our evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income in our consolidated statements of operations.

With respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectability of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, we will record a bad debt allowance for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until either cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments.

Gain or Loss on Sale of Real Estate Investments

We recognize gain or loss on sale of real estate property when we have executed a contract for sale of the property, transferred controlling financial interest in the property to the buyer and determined that it is probable that we will collect substantially all of the consideration for the property. When properties are sold, operating results of the properties remain in continuing operations, and any associated gain or loss from the disposition is included in gain or loss on sale of real estate investments in our accompanying consolidated statements of operations included in this Annual Report on Form 10-K.

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Income Taxes

We have elected to be taxed as a REIT for U.S. federal income tax purposes under Section 856 through 860 of the Internal Revenue Code. We expect to operate in a manner that will allow us to continue to qualify as a REIT for U.S. federal income tax purposes. To qualify as a REIT, we must meet certain organizational and operational requirements, including meeting various tests regarding the nature of our assets and our income, the ownership of our outstanding stock and distribution of at least 90% of our annual REIT taxable income to our stockholders (which is computed without regard to the dividends paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, we generally will not be subject to U.S. federal income tax to the extent we distribute qualifying dividends to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income tax on our taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for U.S. federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants us relief under certain statutory provisions.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy, which is based on three levels of inputs, the first two of which are considered observable and the last unobservable, that may be used to measure fair value, is as follows:

Level 1: quoted prices in active markets for identical assets or liabilities;

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The fair value for certain financial instruments is derived using valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of our financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. We evaluate several factors when determining if a market is inactive or when market transactions are not orderly. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instrument for which it is practicable to estimate the fair value:

Cash and cash equivalents; restricted cash; receivable from sale of real estate property; tenant receivables; prepaid expenses and other assets; accounts payable, accrued and other liabilities: These balances approximate their fair values due to the short maturities of these items.

Derivative instruments: Our derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, we classify these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.

Goodwill and intangible assets: The fair value measurements of goodwill and intangible assets are considered Level 3 nonrecurring fair value measurements. For goodwill, fair value measurement involves the determination of fair value of a reporting unit. We have used a Monte Carlo simulation model to estimate future performance, generating the fair value of the reporting unit's business. For intangible assets, fair value measurements include assumptions with inherent uncertainty, including projected securities offering volumes and related projected revenues and long-term growth rates, among others. The carrying value of our intangible assets is at risk of impairment if we experience an adverse change in our business climate or have a current expectation that, more likely than not, an asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

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Credit facility and economic relief note payable: The fair value of our credit facility and economic relief note payable approximates the carrying value of the credit facility and economic relief note payable as their interest rates and other terms are comparable to those available in the market place for a similar credit facility and short-term note, respectively.

Mortgage notes payable: The fair value of our mortgage notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, we measure fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. We classify these inputs as Level 3 inputs.

Related party transactions: We have concluded that it is not practical to determine the estimated fair value of related party transactions. Disclosure rules for fair value measurements require that for financial instruments for which it is not practicable to estimate fair value, information pertinent to those instruments be disclosed. Further information as to these financial instruments with related parties is included in Note 10 to our consolidated financial statements in this Annual Report on Form 10-K.

Real Estate

Real Estate Acquisition Valuation

We record acquisitions that meet the definition of a business as a business combination. If the acquisition does not meet the definition of a business, we record the acquisition as an asset acquisition. Under both methods, all assets acquired and liabilities assumed are measured based on their acquisition-date fair values. Transaction costs that are related to a business combination are charged to expense as incurred. Transaction costs that are related to an asset acquisition are capitalized as incurred.

We assess the acquisition date fair values of all tangible assets, identifiable intangibles, and assumed liabilities using methods similar to those used by independent appraisers, generally utilizing a discounted cash flow analysis that applies appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors, including historical operating results, known and anticipated trends, and market and economic conditions. The fair value of tangible assets of an acquired property considers the value of the property as if it were vacant.

We record above-market and below-market in-place lease values for acquired properties based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of above-market in-place leases plus any extended term for any leases with below-market renewal options. We amortize any recorded above-market or below-market lease values as a reduction or increase, respectively, to rental income over the remaining non-cancelable terms of the respective lease, including any below-market renewal periods.

We estimate the value of tenant origination and absorption costs by considering the estimated carrying costs during hypothetical expected lease-up periods, considering current market conditions. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease up periods. We amortize the value of tenant origination and absorption costs to depreciation and amortization expense over the remaining non-cancelable term of the respective lease.

Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require us to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of our acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of our net income (loss).

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Depreciation and Amortization

Real estate costs related to the acquisition and improvement of properties are capitalized and depreciated or amortized over the expected useful life of the asset on a straight-line basis. Repair and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. Significant replacements and betterments are capitalized. We anticipate the estimated useful lives of our assets by class to be generally as follows:

Impairment of Real Estate and Related Intangible Assets

We regularly monitor events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, management assesses whether the carrying value of the assets will be recovered through the future undiscounted operating cash flows expected from the use of and eventual disposition of the property. If, based on the analysis, we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment charge to the extent the carrying value exceeds the estimated fair value of the asset.

Leasing Costs

We account for leasing costs under Topic 842. Initial direct costs would include only those costs that are incremental to the lease arrangement and would not have been incurred if the lease had not been obtained. We charge to expense internal leasing costs and third-party legal leasing costs as incurred. These expenses are included in general and administrative expense and property expenses, respectively, in our consolidated statements of operations.

Real Estate Investments Held for Sale

We consider a real estate investment to be “held for sale” when the following criteria are met: (i) management commits to a plan to sell the property, (ii) the property is available for sale immediately, (iii) the property is actively being marketed for sale at a price that is reasonable in relation to its current fair value, (iv) the sale of the property within one year is considered probable and (v) significant changes to the plan to sell are not expected. Real estate that is held for sale and its related assets are classified as “real estate investment held for sale, net” and “assets related to real estate investment held for sale,” respectively, in the accompanying consolidated balance sheets. Mortgage notes payable and other liabilities related to real estate investments held for sale are classified as “mortgage notes payable related to real estate investments held for sale, net” and “liabilities related to real estate investments held for sale,” respectively, in the accompanying consolidated balance sheets. Real estate investments classified as held for sale are no longer depreciated and are reported at the lower of their carrying value or their estimated fair value less estimated costs to sell. Operating results of properties that were classified as held for sale in the ordinary course of business are included in continuing operations in our accompanying consolidated statements of operations.

Unconsolidated Investment

We account for investments in an entity over which we have the ability to exercise significant influence under the equity method of accounting. Under the equity method of accounting, an investment is initially recognized at cost and is subsequently adjusted to reflect our share of earnings or losses of the investee. The investment is also increased for additional amounts invested and decreased for any distributions received from the investee. Equity method investment is reviewed for impairment whenever events or circumstances indicate that the carrying amount of the investment might not be recoverable. If an equity method investment is determined to be other-than-temporarily impaired, the investment is reduced to fair value and an impairment charge is recorded as a reduction to earnings.

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Goodwill and Other Intangible Assets

We record goodwill when the purchase price of a business combination exceeds the estimated fair value of net identified tangible and intangible assets acquired. We evaluate goodwill and other intangible assets for possible impairment in accordance with ASC 350, Intangibles–Goodwill and Other, on an annual basis, or more frequently when events or changes in circumstances indicate that the fair value of a reporting unit has more likely than not declined below its carrying value. If the carrying amount of the reporting unit exceeds its fair value, an impairment charge is recognized.

In assessing goodwill impairment, we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that the fair value of a reporting unit is less than its carrying amount. Our qualitative assessment of the recoverability of goodwill considers various macro-economic, industry-specific and company-specific factors. These factors include: (i) severe adverse industry or economic trends; (ii) significant company-specific actions, including exiting an activity in conjunction with restructuring of operations; (iii) current, historical or projected deterioration of our financial performance; or (iv) a sustained decrease in our market capitalization below its net book value. If, after assessing the totality of events or circumstances, we determine it is unlikely that the fair value of such reporting unit is less than its carrying amount, then a quantitative analysis is unnecessary.

However, if we concluded otherwise, or if we elect to bypass the qualitative analysis, then it is required that we perform a quantitative analysis that compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered impaired; otherwise, a goodwill impairment loss is recognized for the lesser of: (a) the amount that the carrying amount of a reporting unit exceeds its fair value; or (b) the amount of the goodwill allocated to that reporting unit.

Intangible assets consist of purchased customer-related intangible assets, marketing related intangible assets, developed or acquired technology and other intangible assets. Intangible assets are amortized over their estimated useful lives using the straight-line method ranging from three years to five years. No significant residual value is estimated for intangible assets. An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate. We evaluate long-lived assets (including intangible assets) for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable.

Restricted Stock Units and Restricted Stock Unit Awards

The fair values of the Operating Partnership's units or restricted stock unit awards issued or granted by us were based on the estimated NAV per share of our common stock on the date of issuance or grant, adjusted for an illiquidity discount due to the illiquid nature of the underlying equity. Operating Partnership units issued as purchase consideration in connection with the Self-Management Transaction are recorded in equity under noncontrolling interest in the Operating Partnership in our consolidated balance sheets and statements of equity. For units granted to our employees that are not included in the purchase consideration, the fair value of the award is amortized using the straight-line method over the requisite service period of the award, which is generally the vesting period. We have elected to record forfeitures as they occur.

On February 15, 2022, we completed our Listed Offering of our Class C Common Stock. The fair values of future grants of the Operating Partnership's units or restricted stock unit awards will be determined based on the NYSE's market closing price of our Class C Common Stock on the date of grant.

We determine the accounting classification of equity instruments (e.g., restricted stock units) that are issued as purchase consideration or part of the purchase consideration in a business combination, as either liability or equity, by first assessing whether the equity instruments meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“ASC 480-10”), and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (“ASC 815-40”). Under ASC 480-10, equity instruments are classified as liabilities if the equity instruments are mandatorily redeemable, obligate the issuer to settle the equity instruments or the underlying shares by paying cash or other assets, or must or may require an unconditional obligation that must be settled by issuing a variable number of shares.

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If equity instruments do not meet liability classification under ASC 480-10, we assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the equity instruments do not require liability classification under ASC 815-40, in order to conclude equity classification, we assess whether the equity instruments are indexed to our common stock and whether the equity instruments are classified as equity under ASC 815-40 or other applicable GAAP guidance. After all relevant assessments are made, we conclude whether the equity instruments are classified as liability or equity. Liability classified equity instruments are accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the statements of operations as a gain or loss. Equity classified equity instruments are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

As of December 31, 2021, we had no off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources.

Recent Market Conditions

The recent developments in the Russian war against Ukraine and sanctions which have been announced by the United States and other countries against Russia have caused significant uncertainty in the market, adding to continuing concerns about supply chain disruptions and inflation.

In addition, we continue to face significant uncertainties due to the COVID-19 pandemic, including any future variants thereof, although the impacts of the COVID-19 pandemic on the economy appear to have diminished and the general commercial real estate market appears to be recovering from such impacts. Both the investing and leasing environments are currently highly competitive. The COVID-19 pandemic has resulted in significant disruptions in utilization of office and retail properties and uncertainty over how tenants will respond when their leases are scheduled to expire.

Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows from investment properties. Furthermore, rent abatements for tenants severely impacted by the COVID-19 pandemic, inflation or international business interests, particularly if affected by the Russian war against Ukraine, may also result in decreases in cash flows from investment properties. We have no leases scheduled to expire in 2022 and three leases (two office and one industrial) scheduled to expire in 2023, which comprise an aggregate of 142,146 leasable square feet and represent approximately 4.8% of projected 2022 ABR from properties after taking into account the impact of recent acquisitions and dispositions. The tenants of these properties could reevaluate their use of such properties in light of the impacts of the COVID-19 pandemic, including their ability to have workers succeed in working at home, and determine not to renew these leases or to seek rent or other concessions as a condition of renewing their leases.

Potential future declines in economic conditions could negatively impact commercial real estate fundamentals and result in lower occupancy, lower rental rates and declining values in our real estate portfolio, which could have the following negative effects on us: the values of our investments in commercial properties could decrease below the amounts paid for such investments; and/or revenues from our properties could decrease due to fewer tenants and/or lower rental rates, making it more difficult for us to make distributions or meet our debt service obligations. However, we have successfully negotiated lease extensions for six properties in 2021 (two Dollar General stores in Castalia, Ohio and Lakeside, Ohio, Northrop Grumman in Melbourne, Florida, PreK in San Antonio, Texas, L3Harris in Carlsbad, California and 3M Company in DeKalb, Illinois), and an additional three properties in the first quarter of 2022 (Cummins in Nashville, Tennessee, ITW Rippey in El Dorado Hills, California and Williams Sonoma in Summerlin, Nevada). We are in the process of negotiating potential lease extensions with several other tenants.

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The debt market remains sensitive to the macro environment, such as inflation, impacts of the COVID-19 pandemic, Federal Reserve policy, market sentiment or regulatory factors affecting the banking and commercial mortgage-backed securities industries. In January 2022, we refinanced all but four of our properties (including the TIC Interest) in the $250,000,000 Facility. The mortgage on our Sutter Health property does not mature until March 9, 2024 and the other three mortgages do not mature until after September 2027. Our Revolver does not mature until January 18, 2026 and can be extended for an additional 12 months thereafter, while our Term Loan does not mature until January 18, 2027. Any future uncertainties in the capital markets may cause difficulty in refinancing debt obligations prior to maturity at terms as favorable as the terms of existing indebtedness. If we are not able to refinance our indebtedness on attractive terms at the various maturity dates, we may be forced to dispose of some of our assets. Market conditions can change quickly, potentially negatively impacting the value of real estate investments. We continuously review our investment and debt financing strategies to optimize our portfolio and the cost of our debt exposure. We expect to manage the current lending environment by considering interest rate swaps to hedge against future rate increases.