PKST 10-K Annual Report Dec. 31, 2018 | Alphaminr
Peakstone Realty Trust
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PKST 10-K Fiscal year ended Dec. 31, 2018

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10-K 1 gcearii1231201810-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________

FORM 10-K
____________________________________________________

ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-55605
_______________________________________________
Griffin Capital Essential Asset REIT II, Inc.
(Exact name of Registrant as specified in its charter)
________________________________________________

Maryland
46-4654479
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)

Griffin Capital Plaza
1520 E. Grand Ave
El Segundo, California 90245
(Address of principal executive offices)

(310) 469-6100
(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
None
None
Securities registered pursuant to Section 12(g) of the Act:
Class T Shares of Common Stock, $0.001 par value
Class S Shares of Common Stock, $0.001 par value
Class D Shares of Common Stock, $0.001 par value
Class I Shares of Common Stock, $0.001 par value
Class A Shares of Common Stock, $0.001 par value
Class AA Shares of Common Stock, $0.001 par value
Class AAA Shares of Common Stock, $0.001 par value



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment of this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
¨
Accelerated filer
¨
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x
There is currently no established public market for the Company's shares of common stock. Based on the Company's published net asset value (“NAV”) as of June 30, 2018, the last business day of the Company’s most recently completed second fiscal quarter, the market value of the 84,128 shares of Class T common stock, 274 shares of Class S common stock, 16,409 shares of Class D common stock, 405,081 shares of Class I common stock, 26,110,338 shares of Class A common stock, 50,231,926 shares of Class AA common stock and 987,251 shares of Class AAA common stock held by non-affiliates of the Registrant was $812,674 , $2,643 , $158,180 , $3,904,983 , $250,920,347 , $482,728,811 and $9,487,478 for Class T, Class S, Class D, Class I, Class A, Class AA and Class AAA shares, respectively, based upon the NAV of $9.66 , $9.65 , $9.64 and $9.61 per share for Class T, Class S, Classes D & I and Classes A-AAA, respectively.
Common stock outstanding as of March 11, 2019 :
Class T
Class S
Class D
Class I
Class A
Class AA
Class AAA
Outstanding shares
227,686
280
19,319
807,373
25,785,133
49,874,287
977,245

Documents Incorporated by Reference:
None.


GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
TABLE OF CONTENTS

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ITEM 7A.
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ITEM 9A.
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ITEM 15.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K of Griffin Capital Essential Asset REIT II, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend for all such forward-looking statements to be covered by the applicable safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements may discuss, among other things, our future capital expenditures, distributions and acquisitions (including the amount and nature thereof), business strategies, the expansion and growth of our operations, our net sales, gross margin, operating expenses, operating income, net income, cash flow, financial condition, impairments, expenditures, capital structure, organizational structure, and other developments and trends of the real estate industry. Such statements are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations and provide distributions to stockholders, our ability to find suitable investment properties, and our ability to be in compliance with certain debt covenants, may be significantly hindered. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission (the "SEC"). We cannot guarantee the accuracy of any such forward-looking statements contained in this Form 10-K, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable securities laws and regulations.
As used herein, the "Company," “we,” “us,” and “our” refer to Griffin Capital Essential Asset REIT II, Inc. and its consolidated subsidiaries, except where otherwise indicated or the context otherwise requires. All forward-looking statements should be read in light of the risks identified in, "Item 1A. Risk Factors "of this Form 10-K.


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PART I

ITEM 1. BUSINESS
Overview
Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation was formed on November 20, 2013 under the Maryland General Corporation Law ("MGCL") and qualified as a real estate investment trust ("REIT") commencing with the year ended December 31, 2015. We were organized primarily with the purpose of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and have used a substantial amount of the net proceeds from our initial public offering ("IPO") and our follow-on offering to invest in these properties. We operate as a daily net asset value ("NAV") REIT, posting a NAV for each of our share classes on every business day. We have no employees and are externally advised and managed by our advisor, Griffin Capital Essential Asset Advisor II, LLC (the "Advisor"), w hich is indirectly owned by our sponsor, Griffin Capital Real Estate Company, LLC ("GRECO" or our "Sponsor"). Prior to the execution of the Merger Agreement (as defined below), on December 14, 2018, Griffin Capital Essential Asset REIT, Inc. ("GCEAR"), a non-traded REIT sponsored by our former sponsor, Griffin Capital Company, LLC ("GCC"), entered into a series of transactions and became self-managed (the “Self Administration Transaction”) and succeeded to the advisory, asset management and property management arrangements formerly in place for us. Accordingly, our Sponsor has changed from GCC to GRECO until the Company Merger (defined below) is consummated. Our year end is December 31.
On September 20, 2017, we commenced a follow-on offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares (the "Follow-On Offering") in our primary offering and $0.2 billion of shares pursuant to our distribution reinvestment plan ("DRP"). We reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively, and offered to the public four new classes of shares of common stock: Class T shares, Class S shares, Class D shares and Class I shares (the "New Shares") with NAV based pricing in the primary portion of the Follow-On Offering. The DRP offering included all seven of our share classes. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. Our board of directors (the "Board"), including a majority of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of the NAV. On August 16, 2018, our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effective August 17, 2018. On December 12, 2018, we also temporarily suspended our DRP offering and our share redemption program ("SRP"). Beginning in January 2019, all distributions by us were paid in cash. The SRP was officially suspended as of January 19, 2019. On February 15, 2019, our Board determined it was in our best interests to reinstate the DRP effective with the February distribution to be paid on or around March 1, 2019. We intend to recommence our SRP once the Mergers (defined below) are completed. At this time, we intend to recommence our Follow-On Offering, if appropriate and at the appropriate time, once the Mergers are completed.
Our charter authorizes up to 1,000,000,000 shares of stock, of which 800,000,000 shares are designated as common stock at $0.001 par value per share and 200,000,000 shares are designated as preferred stock at $0.001 par value per share. Our 800,000,000 shares of common stock are classified as follows: 150,000,000 shares are classified as Class T shares, 150,000,000 shares are classified as Class S shares, 150,000,000 shares are classified as Class D shares, 150,000,000 shares are classified as Class I shares, 70,000,000 shares are classified as Class A shares, 120,000,000 shares are classified as Class AA shares and 10,000,000 shares are classified as Class AAA shares.

As of March 11, 2019 , we had 77,691,323 shares of our common stock outstanding, including shares issued pursuant to our DRP, less shares redeemed pursuant to our SRP.

Pending Merger of Griffin Capital Essential Asset REIT, Inc. into our Company
On December 14, 2018, we, Griffin Capital Essential Asset Operating Partnership II, L.P. (our "Operating Partnership"), our wholly owned subsidiary Globe Merger Sub, LLC ("Merger Sub"), Griffin Capital Essential Asset REIT, Inc. (“GCEAR”), and the Griffin Capital Essential Asset Operating Partnership, L.P. ( the "GCEAR Operating Partnership") entered into an Agreement and Plan of Merger (the “Merger Agreement”).

Subject to the terms and conditions of the Merger Agreement, (i) GCEAR will merge with and into Merger Sub, with Merger Sub surviving as our direct, wholly owned subsidiary (the “Company Merger”) and (ii) our Operating Partnership will merge with and into the GCEAR Operating Partnership (the “Partnership Merger” and, together with the Company Merger, the “Mergers”), with the GCEAR Operating Partnership surviving the Partnership Merger. At such time, (x) in accordance with the applicable provisions of the MGCL, the separate existence of GCEAR shall cease and (y) in accordance with the Delaware

5




Revised Uniform Limited Partnership Act, the separate existence of our Operating Partnership shall cease. We refer to our Company after the consummation of the Mergers as the "Combined Company."

At the effective time of the Company Merger, each issued and outstanding share of GCEAR’s common stock (or fraction thereof), $0.001 par value per share (the “GCEAR Common Stock”), will be converted into the right to receive 1.04807 shares of our newly created Class E common stock, $0.001 par value per share (the “Class E Common Stock”), and each issued and outstanding share of GCEAR’s Series A cumulative perpetual convertible preferred stock will be converted into the right to receive one share of our newly created Series A cumulative perpetual convertible preferred stock.

At the effective time of the Partnership Merger, each GCEAR Operating Partnership unit (“OP Units”) outstanding immediately prior to the effective time of the Partnership Merger will convert into the right to receive 1.04807 Class E OP Units in the surviving partnership and each Operating Partnership unit outstanding immediately prior to the effective time of the Partnership Merger will convert into the right to receive one OP Unit of like class in the surviving partnership. The special limited partnership interest in the Operating Partnership will be automatically redeemed, canceled and retired as described in the Merger Agreement.

GCEAR’s outstanding debt of approximately $1.4 billion is expected to be refinanced or assumed by us at closing under the terms of the Merger Agreement.

The Combined Company will have a total capitalization of approximately $4.72 billion, and will own 101 properties in 25 states, consisting of approximately 27.2 million square feet. On a pro forma basis, the Combined Company portfolio will be 96.8% occupied, with a remaining weighted average lease term of 7.3 years. Approximately 65.3% of the Combined Company portfolio net rent on a pro forma basis, will come from properties leased to tenants and/or guarantors who have, or whose non-guarantor parent companies have, investment grade or what management believes are generally equivalent ratings. In addition, no tenant will represent more than 4.0% of the net rents of the Combined Company, on a pro forma basis, with the top ten tenants comprising a collective 27.8% of the net rents of the Combined Company.

The Merger Agreement provides certain termination rights for us and GCEAR. In connection with the termination of the Merger Agreement, under certain specified circumstances, GCEAR may be required to pay us a termination fee of $52.2 million and we may be required to pay GCEAR a termination fee of $52.2 million.

Upon completion of the Company Merger, we estimate that our continuing stockholders will own approximately 31% of the issued and outstanding common stock of the Combined Company on a fully diluted basis, and former GCEAR stockholders will own approximately 69% of the issued and outstanding common stock of the Combined Company on a fully diluted basis.

The foregoing descriptions of the Merger Agreement and the Mergers are not complete and are subject to and qualified in their entirety by reference to the Merger Agreement, a copy of which was filed as an exhibit to our Current Report on Form 8-K filed with the SEC on December 20, 2018. There is no guarantee that the Mergers will be consummated.
Investment Objectives
Overview
We invest in a portfolio consisting primarily of single tenant business essential properties. Our investment objectives and policies may be amended or changed at any time by our Board. Although we have no plans at this time to change any of our investment objectives, our Board may change any and all such investment objectives, including our focus on single tenant business essential properties, if they believe such changes are in the best interests of our stockholders. We intend to notify our stockholders of any change to our investment policies by disclosing such changes in a public filing such as a prospectus supplement, or through a filing under the Exchange Act, as appropriate. In addition, we may invest in real estate properties other than single tenant business essential properties if our Board deems such investments to be in the best interests of our stockholders. We cannot assure our stockholders that our policies or investment objectives will be attained or that the value of our common stock will not decrease.
Primary Investment and Portfolio Management Objectives
Our primary investment and portfolio management objectives are to:
•
invest in income-producing real property in a manner that allows us to qualify as a REIT for federal income tax purposes;

6




• provide regular cash distributions to achieve an attractive distribution yield;
• preserve and protect invested capital;
• realize appreciation in NAV from proactive portfolio and asset management; and
•
provide an investment alternative for stockholders seeking to allocate a portion of their long-term investment portfolios to commercial real estate with lower volatility than public real estate companies.
We cannot assure our stockholders that we will attain these primary investment and portfolio management objectives.
Investment Strategy
We seek to acquire a portfolio consisting primarily of single tenant business essential properties throughout the United States diversified by corporate credit, physical geography, product type and lease duration. Although we have no current intention to do so, we may also invest a portion of the net investment proceeds in single tenant business essential properties outside the United States. We acquire assets consistent with our single tenant acquisition philosophy by focusing primarily on properties:
• essential to the business operations of the tenant;
• located in primary, secondary and certain select tertiary metropolitan statistical areas, or MSAs;
• leased to tenants with stable and/or improving credit quality; and
•
subject to long-term leases with defined rental rate increases or with short-term leases with high-probability renewal and potential for increasing rent.
Our management team has been acquiring single tenant business essential properties for over a decade. Our management team’s positive acquisition and ownership experience with single tenant business essential properties of the type we intend to acquire stems from the following:

7




•
the credit quality of the lease payment is determinable and equivalent to the senior unsecured credit rating of the tenant;
•
the essential nature of the asset to the tenant's business provides greater default protection relative to the tenant's balance sheet debt;
•
the percentage recovery in the event of a tenant default is empirically greater than an unsecured lender; and
•
long-term leases provide a consistent and predictable income stream across market cycles while short-term leases offer income appreciation upon renewal and reset.
We seek to provide investors the following benefits:
•
a cohesive management team experienced in all aspects of real estate investment with a track record of acquiring primarily single tenant business essential assets;
•
stable cash flow backed by a portfolio of primarily single tenant business essential real estate assets;
•
minimal exposure to operating and maintenance expense increases as we attempt to structure or acquire leases where the tenant assumes responsibility for these costs;
•
contractual lease rate increases enabling potential distribution growth and a potential hedge against inflation;
•
insulation from short-term economic cycles resulting from the long-term nature of underlying asset leases;
•
enhanced stability resulting from diversified credit characteristics of corporate credits; and
•
portfolio stability promoted through geographic and product type investment diversification.
We cannot assure you that any of the properties we acquire will result in the benefits discussed above.

General Acquisition and Investment Policies

We seek to make investments that satisfy the primary investment objective of providing regular cash distributions to our stockholders. However, because a significant factor in the valuation of income-producing real property is its potential for future appreciation, some properties we acquire may have the potential both for growth in value and for providing regular cash distributions to our stockholders.
Our Advisor has substantial discretion with respect to the selection of specific properties. However, each acquisition will be approved by our Board. In selecting a potential property for acquisition, we consider a number of factors, including, but not limited to, the following:
• tenant creditworthiness;
• whether a property is essential to the business operations of the tenant;
•
lease terms, including length of lease term, scope of landlord responsibilities, presence and frequency of contractual rental increases, renewal option provisions, exclusive and permitted use provisions, co-tenancy requirements and termination options;
• projected demand in the area;
• a property’s geographic location and type;
• proposed purchase price, terms and conditions;

8




• historical financial performance;
• projected net cash flow yield and internal rates of return;
• a property’s physical location, visibility, curb appeal and access;
• construction quality and condition;
• potential for capital appreciation;
•
demographics of the area, neighborhood growth patterns, economic conditions, and local market conditions;
• potential capital and tenant improvements and reserves required to maintain the property;
• prospects for liquidity through sale, financing or refinancing of the property;
• the potential for the construction of new properties in the area;
• treatment under applicable federal, state and local tax and other laws and regulations;
• evaluation of title and obtaining of satisfactory title insurance; and
• evaluation of any reasonable ascertainable risks such as environmental contamination.
There is no limitation on the number, size or type of properties that we may acquire or on the percentage of net offering proceeds that may be invested in any particular property type or single property. The number and mix of properties will depend upon real estate market conditions and other circumstances existing at the time of acquisition. In determining whether to purchase a particular property, we may obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased and may or may not be credited against the purchase price if the property is ultimately purchased.
Description of Leases
We primarily acquire single tenant properties with existing net leases. When spaces in a property become vacant, existing leases expire, or we acquire properties under development or requiring substantial refurbishment or renovation, we anticipate entering into "net" leases. "Net" leases means leases that typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance, common area maintenance charges and building repairs related to the property, in addition to the lease payments. There are various forms of net leases, typically classified as triple-net or double-net. Under most commercial leases, tenants are obligated to pay a predetermined annual base rent. Some of the leases also will contain provisions that increase the amount of base rent payable at points during the lease term and/or that require the tenant to pay rent based upon a number of factors. Triple-net leases typically require the tenant to pay common area maintenance, insurance, and taxes associated with a property in addition to the base rent and percentage rent, if any. Double-net leases typically require the tenant to pay two of those three expenses. In either instance, these leases will typically hold the landlord responsible for the roof and structure, or other major repairs and replacements with respect to the property, while the tenant is responsible for only those operating expenses specified in the lease.
Most of our acquisitions have lease terms of five to 15 years at the time of the property acquisition. We may acquire properties under which the lease term has partially expired. We also may acquire properties with shorter lease terms if the property is located in a desirable location, is difficult to replace, or has other significant favorable real estate attributes. Generally, the leases require each tenant to procure, at its own expense, commercial general liability insurance, as well as property insurance covering the building for the full replacement value and naming the ownership entity and the lender, if applicable, as the additional insured on the policy. As a precautionary measure, we obtain, to the extent available, contingent liability and property insurance and flood insurance, as well as loss of rents insurance that covers one or more years of annual rent in the event of a rental loss. In addition, we maintain a pollution insurance policy for all of our properties to insure against the risk of environmental contaminants; however, the coverage and amounts of our environmental and flood insurance policies may not be sufficient to cover our entire risk.

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Tenants are required to provide proof of insurance by furnishing a certificate of insurance to our Advisor on an annual basis. The insurance certificates are tracked and reviewed for compliance by our property manager.
Our Borrowing Strategy and Policies
We may incur our indebtedness in the form of bank borrowings, purchase money obligations to the sellers of properties and publicly-or privately-placed debt instruments or financing from institutional investors or other lenders. We may obtain a credit facility or separate loans for each acquisition. Our indebtedness may be unsecured or may be secured by mortgages or other interests in our properties, and by guarantees or pledges of membership interests. We may use borrowing proceeds to finance acquisitions of new properties, to pay for capital improvements, repairs or buildouts, to refinance existing indebtedness, to pay distributions, to fund redemptions of our shares or to provide working capital. To the extent we borrow on a short-term basis, we may refinance such short-term debt into long-term, amortizing mortgages once a critical mass of properties has been acquired and to the extent such debt is available at terms that are favorable to the then in-place debt.
There is no limitation on the amount we can borrow for the purchase of any property. Our aggregate borrowings, secured and unsecured, must be reasonable in relation to our net assets and must be reviewed by our Board at least quarterly. We anticipate that we will utilize approximately 50% leverage in connection with our acquisition strategy. However, our current charter limits our borrowing to 300% of our net assets (equivalent to 75% of the cost of our assets) unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report, along with the justification for such excess.
We may borrow amounts from our Sponsor and its affiliates only 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 fair, competitive, commercially reasonable and no less favorable to us than comparable loans between unaffiliated parties under the circumstances.
Except as set forth in our charter regarding debt limits, we may re-evaluate and change our debt strategy and policies in the future without a stockholder vote. Factors that we could consider when re-evaluating or changing our debt strategy and policies include then-current economic and market conditions, the relative cost of debt and equity capital, any acquisition opportunities, the ability of our properties to generate sufficient cash flow to cover debt service requirements and other similar factors. Further, we may increase or decrease our ratio of debt to equity in connection with any change of our borrowing policies. As of December 31, 2018 , our leverage ratio (defined in our credit agreement as debt to total acquisition price) was approximately 43.7% .
Acquisition Structure
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 joint ventures or similar entities that own and operate real estate. We may also acquire ground leases.
We will make acquisitions of our real estate investments directly through our Operating Partnership or indirectly through limited liability companies or limited partnerships, or through investments in joint ventures, partnerships, co-tenancies or other co-ownership arrangements with other owners of properties, affiliates of our Advisor or other persons.
Competition
As we purchase properties for our portfolio, we are in competition with other potential buyers for the same properties, and may have to pay more to purchase the property than if there were no other potential acquirers or we may have to locate another property that meets our investment criteria. Although we intend to acquire properties subject to existing leases, the leasing of real estate is highly competitive in the current market, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for our properties.

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Conditions to Closing Acquisitions
We obtain at least a Phase I environmental assessment and history for each property we acquire. In addition, we generally condition our obligation to close the purchase of any investment on the delivery and verification of certain documents from the seller or other independent professionals, including, but not limited to, where appropriate:
• property surveys and site audits;
• building plans and specifications, if available;
• soil reports, seismic studies, flood zone studies, if available;
• licenses, permits, maps and governmental approvals;
• tenant estoppel certificates;
• tenant financial statements and information, as permitted;
• historical financial statements and tax statement summaries of the properties;
• proof of marketable title, subject to such liens and encumbrances as are acceptable to us; and
• liability and title insurance policies.
Joint Venture Investments
We may acquire some of our properties in joint ventures, some of which may be entered into with affiliates of our Advisor. We may also enter into joint ventures, general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of owning and leasing real properties. Among other reasons, we may want to acquire properties through a joint venture with third parties or affiliates in order to diversify our portfolio of properties in terms of geographic region or property type. Joint ventures may also allow us to acquire an interest in a property without requiring that we fund the entire purchase price. In addition, certain properties may be available to us only through joint ventures. In determining whether to recommend a particular joint venture, our Advisor will evaluate the real property which such joint venture owns or is being formed to own under the same criteria that the Advisor uses to evaluate other real estate investments.
We may enter into joint ventures with affiliates of our Sponsor for the acquisition of properties, but only provided that:
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a majority of our directors, including a majority of our independent directors, not otherwise interested in the transaction, approve the transaction as being fair and reasonable to us; and
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the investment by us and such affiliate are on substantially the same terms and conditions otherwise dictated by the market.
To the extent possible and if approved by our Board, including a majority of our independent directors, we will attempt to obtain a right of first refusal or option to buy the property held by the joint venture and allow such venture partners to exchange their interest for our operating partnership’s units or to sell their interest to us in its entirety. In the event that the venture partner were to elect to sell property held in any such joint venture, however, we may not have sufficient funds to exercise our right of first refusal to buy the venture partner’s interest in the property held by the joint venture. Entering into joint ventures with affiliates of our Sponsor may result in certain conflicts of interest.
Construction and Development Activities
From time to time, we may construct and develop real estate assets or render services in connection with these activities. We may be able to reduce overall purchase costs by constructing and developing a property versus purchasing a completed property. Developing and constructing properties would, however, expose us to risks such as cost overruns, carrying costs of projects under construction or development, completion guarantees, availability and costs of materials and labor, weather conditions and government regulation. To comply with the applicable requirements under federal income tax law, we intend to limit our construction and development activities to performing oversight and review functions, including reviewing the construction design proposals, negotiating and contracting for feasibility studies and supervising compliance with local, state or

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federal laws and regulations, negotiating contracts, overseeing construction, and obtaining financing. In addition, we may use taxable REIT subsidiaries or certain independent contractors to carry out these oversight and review functions. We will retain independent contractors to perform the actual construction work.
Government Regulations
Our business is subject to many laws and governmental regulations. Changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently.
We and any operating subsidiaries that we may form may be subject to state and local tax in states and localities in which they or we do business or own property. The tax treatment of us, our Operating Partnership, any operating subsidiaries we may form and the holders of our shares in local jurisdictions may differ from our federal income tax treatment.
Americans with Disabilities Act
Under the Americans with Disabilities Act of 1990, or ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Complying with the ADA requirements could require us to remove access barriers. Failing to comply could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we acquire properties that substantially comply with these requirements, we may incur additional costs to comply with the ADA. In addition, a number of additional federal, state and local laws may require us to modify any properties we purchase, or may restrict further renovations thereof, with respect to access by disabled persons. Additional legislation could impose financial obligations or restrictions with respect to access by disabled persons. Although we believe that these costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions could be adversely affected.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real property may be held liable for the costs of removing or remediating hazardous or toxic substances. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of the hazardous or toxic substances. The costs of investigating, removing or remediating these substances may be substantial, and the presence of these substances may adversely affect our ability to rent properties or sell the property or to borrow using the property as collateral and may expose us to liability resulting from any release of or exposure to these substances. If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removing or remediating these substances at the disposal or treatment facility, whether or not the facility is owned or operated by us. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. We maintain a pollution insurance policy for all of our properties to insure against the potential liability of remediation and exposure risk.
Other Regulations
The properties we acquire likely will be subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We acquire properties that are in material compliance with all such regulatory requirements. However, we cannot assure you that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition and results of operations.
Disposition Policies
We generally intend to hold each property we acquire for an extended period. However, we may sell a property at any time if, in our judgment, the sale of the property is in the best interests of our stockholders.
The determination of whether a particular property should be sold or otherwise disposed of will generally be made after consideration of relevant factors, including prevailing economic conditions, other investment opportunities and considerations

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specific to the condition, value and financial performance of the property. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale.
We may sell assets to third parties or to affiliates of our Sponsor. Our nominating and corporate governance committee of our Board, which is comprised solely of independent directors, must review and approve all transactions between us and our Sponsor and its affiliates.

Investment Limitations in Our Charter
Our charter places numerous limitations on us with respect to the manner in which we may invest our funds, most of which are those typically required by various provisions of the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association ("NASAA REIT Guidelines").
Changes in Investment Policies and Limitations
Our charter requires that our independent directors review our investment policies at least annually to determine that the policies we are following are in the best interests of our stockholders. Each determination and the basis therefor is required to be set forth in the applicable meeting minutes. The methods of implementing our investment policies may also vary as new investment techniques are developed. The methods of implementing our investment objectives and policies, except as otherwise provided in our charter, may be altered by a majority of our directors, including a majority of our independent directors, without the approval of our stockholders. The determination by our Board that it is no longer in our best interests to continue to be qualified as a REIT shall require the concurrence of two-thirds of the Board. Investment policies and limitations specifically set forth in our charter, however, may only be amended by a vote of the stockholders holding a majority of our outstanding shares.
Investments in Mortgages
While we intend to emphasize equity real estate investments and, hence, operate as what is generally referred to as an "equity REIT," as opposed to a "mortgage REIT," we may invest in first or second mortgage loans, mezzanine loans secured by an interest in the entity owning the real estate or other similar real estate loans consistent with our REIT status. We may make such loans to developers in connection with construction and redevelopment of real estate properties. Such mortgages may or may not be insured or guaranteed by the Federal Housing Administration, the Veterans Benefits Administration or another third party. We may also invest in participating or convertible mortgages if our directors conclude that we and our stockholders may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation.
Affiliate Transaction Policy
Our Board has established a nominating and corporate governance committee, which reviews and approves all matters the Board believes may involve a conflict of interest. This committee is composed solely of independent directors. This committee of our Board approves all transactions between us and our Sponsor and its affiliates. We will not acquire any properties in which GCC, our former Sponsor, or its affiliates, owns an economic interest.
Investment Company Act and Certain Other Policies
We intend to operate in such a manner that we will not be subject to regulation under the Investment Company Act of 1940, as amended (the "1940 Act"). We will continually review our investment activity to attempt to ensure that we do not come within the application of the 1940 Act. Among other things, our Advisor will attempt to monitor the proportion of our portfolio that is placed in various investments so that we do not come within the definition of an "investment company" under the 1940 Act. If at any time the character of our investments could cause us to be deemed as an investment company for purposes of the 1940 Act, we will take all necessary actions to attempt to ensure that we are not deemed to be an "investment company." In addition, we do not intend to underwrite securities of other issuers or actively trade in loans or other investments.
Subject to the restrictions we must follow in order to qualify to be taxed as a REIT, we may make investments other than as previously described in this report, although we do not currently intend to do so. We have authority to purchase or otherwise reacquire our shares of common stock or any of our other securities. We have no present intention of repurchasing any of our shares of common stock except (1) pursuant to our SRP and (2) if the Mergers are consummated, pursuant to a tender offer as provided for in the Merger Agreement, and we would only take such action in conformity with applicable federal and state laws and the requirements for qualifying as a REIT under the Internal Revenue Code of 1986, as amended (the "Code").

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Exchange Listing and Other Strategic Transactions
While we are currently operating as a perpetual-life REIT with an ongoing offering and SRP (both of which are temporarily suspended during the pending Mergers), we may consider a liquidity event at any time in the future (such as a merger, listing, or sale of assets) (a "Strategic Transaction"). We are not prohibited by our charter or otherwise from engaging in such a Strategic Transaction at any time. We believe this perpetual-life REIT structure allows us to weather real estate cycles and provides for maximum flexibility to execute an exit strategy when it is in the best interests of our stockholders. Subject to certain significant transactions that require stockholder approval, such as dissolution, merger into another entity in which we are not the surviving entity, consolidation or the sale or other disposition of all or substantially all of our assets, our Board maintains sole discretion to change our current strategy as circumstances change if it believes such a change is in the best interest of our stockholders. If our Board determines that a Strategic Transaction is in the best interests of us and our stockholders, we expect that the Board will take all relevant factors at that time into consideration when making a Strategic Transaction decision, including prevailing market conditions.
Employees
We currently have no employees. The employees of our Sponsor and its affiliates currently provide and have provided in the past, management, acquisition, advisory and certain administrative services for us. Upon completion of the Mergers, all of our Sponsor’s acquisitions, asset management, investor relations, legal, compliance, financial reporting, and accounting personnel currently providing services to us will become our employees.
Industry Segments
We internally evaluate all of our properties and interests therein as one reportable segment.
ITEM 1A. RISK FACTORS
Below are risks and uncertainties that could adversely affect our operations that we believe are material to stockholders. Other risks and uncertainties may exist that we do not consider material based on the information currently available to us at this time.
Risks Related to an Investment in Griffin Capital Essential Asset REIT II, Inc.
There is currently no public trading market for our shares and there may never be one; therefore, it will be difficult for stockholders to sell their shares.
There is currently no public market for our shares and there may never be one. Stockholders may not sell their shares unless the buyer meets applicable suitability and minimum purchase standards. Our charter also prohibits the ownership by any one individual of more than 9.8% in value of the aggregate of our outstanding stock or more than 9.8% in value or number of shares, whichever is more restrictive, of the aggregate of our outstanding common stock, unless waived by our Board, which may inhibit large investors from desiring to purchase a stockholder's shares. Moreover, our share redemption programs include numerous restrictions that would limit a stockholder's ability to sell their shares to us. Our Board could choose to amend, suspend or terminate our share redemption programs upon 30 days' notice. Therefore, it may be difficult for stockholders to sell their shares promptly or at all. If stockholders are able to sell their shares, they will likely have to sell them at a substantial discount to the price they paid for the shares. It also is likely that a stockholder's shares would not be accepted as the primary collateral for a loan. Stockholders should purchase the shares only as a long-term investment because of the illiquid nature of the shares.
Stockholders may be unable to sell their shares because their ability to have their shares redeemed pursuant to our SRP is subject to significant restrictions and limitations and if stockholders are able to sell their shares under the SRP, they may not be able to recover the amount of their investment in our shares.
Even though our SRP is temporarily suspended, if and when it is reinstated, it may provide stockholders with a limited opportunity to sell their shares to us after they have held them for a period of one year, and stockholders should be fully aware that our SRP contains significant restrictions and limitations. Further, our Board may limit, suspend, terminate or amend any provision of the SRP upon 30 days' notice. Generally, our SRP imposes a quarterly cap on aggregate redemptions of our shares equal to the amount of shares with a value (based on the applicable redemption price per share on the day the redemption is effected) of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous calendar quarter.

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Valuations and appraisals of our properties, real estate-related assets and real estate-related liabilities are estimates of value and may not necessarily correspond to realizable value.
The valuation methodologies used to value our properties and certain real estate-related assets involve subjective judgments regarding such factors as comparable sales, rental revenue and operating expense data, the capitalization or discount rate, and projections of future rent and expenses based on appropriate analysis. As a result, valuations and appraisals of our properties, real estate-related assets and real estate-related liabilities are only estimates of current market value. Ultimate realization of the value of an asset or liability depends to a great extent on economic and other conditions beyond our control and the control of the independent valuation firm and other parties involved in the valuation of our assets and liabilities. Further, these valuations may not necessarily represent the price at which an asset or liability would sell, because market prices of assets and liabilities can only be determined by negotiation between a willing buyer and seller. Valuations used for determining our NAV also may be made without consideration of the expenses that would be incurred in connection with disposing of assets and liabilities. Therefore, the valuations of our properties, our investments in real estate-related assets and our liabilities may not correspond to the timely realizable value upon a sale of those assets and liabilities. Our NAV does not reflect fees that may become payable after the date of determination of the NAV, which fees may not ultimately be paid in certain circumstances, including if we are liquidated or if there is a listing of our common stock. Our NAV does not currently represent enterprise value and may not accurately reflect the actual prices at which our assets could be liquidated on any given day, the value a third party would pay for all or substantially all of our shares, or the price that our shares would trade at on a national stock exchange. There will be no retroactive adjustment in the valuation of such assets or liabilities, the price of our shares of common stock, the price we paid to redeem shares of our common stock or NAV-based fees we paid to our Advisor and our dealer manager to the extent such valuations prove to not accurately reflect the true estimate of value and are not a precise measure of realizable value.
Our NAV per share amounts may change materially if the appraised values of our properties materially change from prior appraisals or the actual operating results differ from what we originally budgeted.
We anticipate daily updates based on property and real estate market events that are material to our NAV. Notification of property and real estate market events may lag the actual event and events may be missed, unknown or difficult to value. The valuations will reflect information provided to the appraisers subject to a reasonable time to analyze the event and document the new market value. Third-party appraisals of our properties using an appraisal report format will be conducted on a rolling basis, such that properties will be appraised at different times but each property will be appraised at least once per calendar year. When these appraisals are reflected in our NAV calculations, there may be a material change in our NAV per share amounts for each class of our common stock from those previously reported. In addition, actual operating results may differ from what we originally budgeted, which may cause a material increase or decrease in the NAV per share amounts. We will not retroactively adjust the NAV per share of each class reported. Therefore, because a new annual appraisal may differ materially from the prior appraisal or the actual results from operations may be better or worse than what we previously budgeted, the adjustment to reflect the new appraisal or actual operating results may cause the NAV per share for each class of our common stock to increase or decrease, and such increase or decrease will occur on the day the adjustment is made.
The NAV per share that we publish may not necessarily reflect changes in our NAV that are not immediately quantifiable.
From time to time, we may experience events with respect to our investments that may have a material impact on our NAV. For example, and not by way of limitation, changes in governmental rules, regulations and fiscal policies, environmental legislation, acts of God, terrorism, social unrest, civil disturbances and major disturbances in financial markets may cause the value of a property to change materially. The NAV per share of each class of our common stock as published on any given day may not reflect such extraordinary events to the extent that their financial impact is not immediately quantifiable. As a result, the NAV per share that we publish may not necessarily reflect changes in our NAV that are not immediately quantifiable, and the NAV per share of each class published after the announcement of a material event may differ significantly from our actual NAV per share for such class until such time as the financial impact is quantified and our NAV is appropriately adjusted in accordance with our valuation procedures. The resulting potential disparity in our NAV may inure to the benefit of redeeming stockholders or non-redeeming stockholders and new purchasers of our common stock, depending on whether our published NAV per share for such class is overstated or understated.

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Our NAV is not subject to Generally Accepted Accounting Principles ("GAAP"), will not be independently audited and will involve subjective judgments by the independent valuation firm and other parties involved in valuing our assets and liabilities.
Our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit. Our NAV may differ from equity (net assets) reflected on our audited financial statements, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes. Additionally, we are dependent on our Advisor to be reasonably aware of material events specific to our properties (such as tenant disputes, damage, litigation and environmental issues) that may cause the value of a property to change materially and to promptly notify the independent valuation firm so that the information may be reflected in our real estate portfolio valuation. In addition, the implementation and coordination of our valuation procedures include certain subjective judgments of our Advisor, such as whether the independent valuation firm should be notified of events specific to our properties that could affect their valuations, as well as of the independent valuation firm and other parties we engage, as to whether adjustments to asset and liability valuations are appropriate. Accordingly, stockholders must rely entirely on our Board to adopt appropriate valuation procedures and on the independent valuation firm and other parties we engage in order to arrive at our NAV, which may not correspond to realizable value upon a sale of our assets.
No rule or regulation requires that we calculate our NAV in a certain way, and our Board, including a majority of our independent directors, may adopt changes to the valuation procedures.
There are no existing rules or regulatory bodies that specifically govern the manner in which we calculate our NAV. As a result, it is important that stockholders pay particular attention to the specific methodologies and assumptions we use to calculate our NAV. Other public REITs may use different methodologies or assumptions to determine their NAV. In addition, each year our Board, including a majority of our independent directors, will review the appropriateness of our valuation procedures and may, at any time, adopt changes to the valuation procedures. For example, we do not currently include any enterprise value or real estate acquisition costs in our assets calculated for purposes of our NAV. If we acquire real property assets as a portfolio, we may pay a premium over the amount that we would pay for the assets individually. Our Board may change this or other aspects of our valuation procedures, which changes may have an adverse effect on our NAV and the price at which stockholders may sell shares to us under our share redemption programs.
We have paid, and may continue to pay, distributions from sources other than cash flow from operations, including out of net proceeds from our offerings; therefore, we will have fewer funds available for the acquisition of properties, and our stockholders' overall return may be reduced.
In the event we do not have enough cash from operations to fund our distributions, we may borrow, issue additional securities, or sell assets in order to fund the distributions or make the distributions out of net proceeds from our Follow-On Offering. We are not prohibited from undertaking such activities by our charter, bylaws, or investment policies, and we may use an unlimited amount from any source to pay our distributions. Through December 31, 2018 , we funded 4% of our cash distributions using offering proceeds and 96% of our cash distributions using cash flows from operations as shown on the statement of cash flows. If we continue to pay distributions from sources other than cash flow from operations, we will have fewer funds available for acquiring properties and investing in the existing portfolio, which may reduce our stockholders' overall returns. Additionally, to the extent distributions exceed cash flow from operations, a stockholder's basis in our stock may be reduced and, to the extent distributions exceed a stockholder's basis, the stockholder may recognize a capital gain.
We may be unable to maintain cash distributions or increase distributions over time.
There are many factors that can affect the availability and timing of cash distributions to stockholders. Distributions will be based principally on distribution expectations of our potential investors and cash available from our operations. The amount of cash available for distribution will be affected by many factors, such as our ability to buy properties as offering proceeds become available and our operating expense levels, as well as many other variables. Actual cash available for distribution may vary substantially from estimates. We cannot assure our stockholders that we will be able to pay or maintain distributions or that distributions will increase over time, nor can we give any assurance that rents from the properties will increase, or that future acquisitions of real properties will increase our cash available for distribution to stockholders. Our actual results may differ significantly from the assumptions used by our Board in establishing the distribution rate to stockholders.
If we are unable to find suitable investments, then we may not be able to achieve our investment objectives or continue to pay distributions.

Our ability to achieve our investment objectives and continue to pay distributions is dependent upon our performance in selecting our investments and arranging financing. As of December 31, 2018, we owned 35 buildings located on 27 properties in 17 states. We cannot be sure that we will be successful in obtaining suitable investments on financially attractive terms or

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that, if such investments are made, our objectives will be achieved. If we are unable to find suitable investments, we will hold the proceeds of our public offering in an interest-bearing account or invest the proceeds in short-term, investment-grade investments. In such an event, our ability to continue to pay distributions at our current level to our stockholders would be adversely affected.

If the Mergers are consummated, we will issue Series A Preferred Shares, which will rank senior to our common stock and therefore, any cash we have to pay distributions will be used to pay distributions to the holders of Series A Preferred Shares first, which could have a negative impact on our ability to pay distributions to our common stockholders.

If the Mergers are consummated, the Series A Preferred Shares that we will issue will rank senior to all common stock, and therefore, the rights of holders of Series A Preferred Shares to distributions will be senior to distributions to our common stockholders. Furthermore, distributions on the Series A Preferred Shares will be cumulative and will be declared and payable quarterly. We will be obligated to pay the holders of the Series A Preferred Shares their current distributions and any accumulated and unpaid distributions prior to any distributions being paid to our common stockholders and, therefore, any cash available for distribution will be used first to pay distributions to the holders of the Series A Preferred Shares. The Series A Preferred Shares will also have a liquidation preference in the event of our involuntary liquidation, dissolution or winding up of our affairs (a “liquidation”) which could negatively affect any payments to the common stockholders in the event of a liquidation. In addition, our right to redeem the Series A Preferred Shares could have a negative effect on our ability to operate profitably and our ability to pay distributions to our common stockholders.

There is no guarantee that we will resume our Follow-On Offering. Even if we resume our Follow-On Offering, there is no guarantee that we will raise substantial funds.

There is no guarantee that we will resume our Follow-On Offering. Even if we resume our offering, there is no guarantee that we will raise substantial funds in such offering. If we are unable to raise a substantial amount of funds, we will make fewer investments resulting in less diversification in terms of the number of investments owned, the types of investments that we make, and the geographic regions in which our investments are located. In such event, the likelihood of our profitability being affected by the performance of any one of our investments will increase. Additionally, we are not limited in the number or size of our investments or the percentage of net investment proceeds we may dedicate to a single investment. A stockholder’s investment in our shares will be subject to greater risk to the extent that we lack a diversified portfolio of investments. Further, we will have certain fixed operating expenses, regardless of whether we are able to raise substantial funds in the future. Our inability to raise substantial funds could increase our fixed operating expenses as a percentage of gross income, potentially reducing our net income and cash flow and potentially limiting our ability to make distributions.

We may suffer from delays in locating suitable investments, which could adversely affect our ability to make distributions at our current level and the value of a stockholder's investment.
We could suffer from delays in locating suitable investments. Delays we encounter in the selection, acquisition and development of income-producing properties likely would adversely affect our ability to make distributions at our current level and the value of a stockholder's investment. In particular, if we acquire properties prior to the start of construction or during the early stages of construction, it will typically take several months to complete construction and rent available space. Therefore, stockholders could suffer delays in the receipt of cash distributions attributable to those particular properties. In such event, we may pay all or a substantial portion of our distributions from the proceeds of our public offering or from borrowings in anticipation of future cash flow, which may constitute a return of a stockholder's capital. We are not prohibited from undertaking such activities by our charter, bylaws or investment policies, and there are no current limits on the amount of distributions to be paid from such funds. Distributions from the proceeds of our public offering or from borrowings also could reduce the amount of capital we ultimately invest in properties. This, in turn, would reduce the value of a stockholder's investment. In particular, if we acquire properties prior to the start of construction or during the early stages of construction, it will typically take up to one year or more to complete construction and rent available space. Therefore, stockholders could suffer delays in the receipt of cash distributions attributable to those particular properties.
If our Sponsor loses or is unable to obtain key personnel, our ability to implement our investment objectives could be delayed or hindered, which could adversely affect our ability to make distributions at our current level and the value of a stockholder's investment.
Our success depends to a significant degree upon the contributions of our executive officers and other key personnel of our Advisor and Sponsor, including Kevin A. Shields, Michael J. Escalante, Javier F. Bitar, Howard S. Hirsch, Louis K. Sohn and Scott Tausk, each of whom would be difficult to replace. Our Sponsor has employment agreements with Messrs. Escalante, Bitar, Hirsch, Sohn and Tausk, but not with Mr. Shields; however we cannot guarantee that all, or any particular one, will

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remain affiliated with us and/or our Advisor or Sponsor. If any of our key personnel were to cease their affiliation with our Advisor or Sponsor, our operating results could suffer. We believe that our future success depends, in large part, upon our Advisor's ability to hire and retain highly skilled managerial and operational personnel. Competition for such personnel is intense, and we cannot assure stockholders that our Advisor or Sponsor will be successful in attracting and retaining such skilled personnel. If our Advisor or Sponsor loses or is unable to obtain the services of key personnel or does not establish or maintain appropriate strategic relationships, our ability to implement our investment strategies could be delayed or hindered, and the value of a stockholder's investment may decline.
Our ability to operate profitably depends upon the ability of our Advisor to efficiently manage our day-to-day operations.
We rely on our Advisor to manage our business and assets. Our Advisor makes all decisions with respect to our day-to-day operations. Thus, the success of our business depends in large part on the ability of our Advisor to manage our operations. Any adversity experienced by our Advisor or problems in our relationship with our Advisor could adversely impact the operation of our properties and, consequently, our cash flow and ability to make distributions to our stockholders at our current level.
We have incurred net losses in the past and may incur net losses in the future, and we have an accumulated deficit and may continue to have an accumulated deficit in the future.

For the year ended December 31, 2018 , we had a net loss of approximately $3.3 million . We incurred net income attributable to common stockholders of approximately $11.1 million and a net loss attributed to common stockholders of approximately $6.1 million for the fiscal years ended December 31, 2017 and 2016, respectively. Our accumulated deficit was approximately $16.0 million , $12.7 million and $23.8 million as of December 31, 2018, 2017 and 2016, respectively. We may incur net losses in the future, and may continue to have an accumulated deficit.

We are an “emerging growth company” under the federal securities laws and are subject to reduced public company reporting requirements.
In April 2012, President Obama signed into law the Jumpstart Our Business Startups Act, or the JOBS Act. We are an "emerging growth company," as defined in the JOBS Act, and are eligible to take advantage of certain exemptions from, or reduced disclosure obligations relating to, various reporting requirements that are normally applicable to public companies.
We may retain our status as an "emerging growth company" for a maximum of five years, or until the earliest of (1) the last day of the first fiscal year in which we have total annual gross revenue of $1.07 billion or more, (2) December 31 of the fiscal year that we become a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act (which would occur if the market value of our common stock held by non-affiliates exceeds $700 million, measured as of the last business day of our most recently completed second fiscal quarter, and we have been publicly reporting for at least 12 months) or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period. Under the JOBS Act, emerging growth companies are not required to (1) provide an auditor's attestation report on management's assessment of the effectiveness of internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act, (2) comply with new audit rules adopted by the Public Company Accounting Oversight Board ("PCAOB") after April 5, 2012 (unless the SEC determines otherwise), (3) provide certain disclosures relating to executive compensation generally required for larger public companies or (4) hold shareholder advisory votes on executive compensation. If we take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result.
Additionally, the JOBS Act provides that an "emerging growth company" may take advantage of an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies. This means an "emerging growth company" can delay adopting certain accounting standards until such standards are otherwise applicable to private companies. However, we have elected to "opt out" of such extended transition period, and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards are required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
Increases in interest rates may adversely affect the demand for our shares.
One of the factors that influences the demand for purchase of our shares is the annual rate of distributions that we pay on our shares, as compared with interest rates. An increase in interest rates may lead potential purchasers of our shares to demand higher annual distribution rates, which could adversely affect our ability to sell our shares and raise proceeds in our offerings, which could result in higher leverage or a less diversified portfolio of real estate.

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Cybersecurity risks and cyber incidents may adversely affect our business by causing a disruption to our operations, a compromise or corruption of our confidential information, and/or damage to our business relationships, all of which could negatively impact our financial results.
A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of our information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to our information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, financial loss, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our tenant and investor relationships. As our reliance on technology increases, so will the risks posed to our information systems, both internal and those we outsource. There is no guarantee that any processes, procedures and internal controls we have implemented or will implement will prevent cyber intrusions, which could have a negative impact on our financial results, operations, business relationships or confidential information.
We disclose funds from operations ("FFO") and adjusted funds from operations ("AFFO"), each a non-GAAP financial measure, in communications with investors, including documents filed with the SEC; however, FFO and AFFO are not equivalent to our net income or loss or cash flow from operations as determined under GAAP, and stockholders may consider GAAP measures to be more relevant to our operating performance.
We use and we disclose to investors, FFO, and AFFO, which are non-GAAP financial measures. FFO and AFFO are not equivalent to our net income or loss or cash flow from operations as determined in accordance with GAAP, and investors may consider GAAP measures to be more relevant in evaluating our operating performance and ability to pay distributions. FFO and AFFO and GAAP net income differ because FFO and AFFO exclude gains or losses from sales of property and asset impairment write-downs, and add back depreciation and amortization and adjustments for unconsolidated partnerships and joint ventures. AFFO further adjusts for revenues in excess of cash received, amortization of in-place lease valuation, acquisition-related costs, unrealized gains or losses on derivative instruments, gain or loss from extinguishment of debt and performance participation allocation not paid in cash.

Because of these differences, FFO and AFFO may not be accurate indicators of our operating performance. In addition, FFO and AFFO are not indicative of cash flow available to fund cash needs and investors should not consider FFO and AFFO as alternatives to cash flows from operations or an indication of our liquidity, or indicative of funds available to fund our cash needs, including our ability to pay distributions to our stockholders.

Neither the SEC nor any other regulatory body has passed judgment on the acceptability of the adjustments that we use to calculate FFO and AFFO. Also, because not all companies calculate FFO and AFFO the same way, comparisons with other companies may not be meaningful.

Risks Related to Conflicts of Interest
Our Sponsor, Advisor, property manager and their officers and certain of their key personnel will face competing demands relating to their time, which may cause our operating results to suffer.
Our Sponsor, Advisor, property manager and their officers and certain of their key personnel and their respective affiliates serve as key personnel, advisors and managers to GCEAR. Certain of our officers are also officers to some or all of 12 other programs affiliated with our former sponsor, including Griffin-American Healthcare REIT III, Inc. ("GAHR III"), Griffin-American Healthcare REIT IV, Inc. ("GAHR IV") and Phillips Edison Grocery Center REIT III, Inc. ("PECO III"), each of which are publicly-registered, non-traded real estate investment trusts, and Griffin Institutional Access Real Estate Fund (“GIA Real Estate Fund”) and Griffin Institutional Access Credit Fund ("GIA Credit Fund"), both of which are non-diversified, closed-end management investment companies that are operated as interval funds under the 1940 Act. It is difficult to estimate the amount of time that our Sponsor, Advisor, property manager and their officers and certain of their key personnel and their respective affiliates will devote to our business. Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity with GCEAR, they may devote less time and fewer resources to our business than is necessary or appropriate. If this occurs, the returns on a stockholder's investment may suffer.
In addition, our dealer manager serves as dealer manager for GAHR IV and PECO III, and is the exclusive wholesale marketing agent for GIA Real Estate Fund and GIA Credit Fund, and may potentially enter into dealer manager agreements to serve as dealer manager for other issuers affiliated with our former sponsor. As a result, our dealer manager will have contractual duties to these issuers, which contractual duties may conflict with the duties owed to us. The duties owed to these issuers could result in actions or inactions that are detrimental to our business, which could harm the implementation of our

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investment objectives. Conflicts with our business and interests are most likely to arise from involvement in activities related to allocation of management time and services between us and these issuers. If our dealer manager is unable to devote sufficient time and effort to the distribution of shares of our common stock, we may not be able to raise significant additional proceeds for investment in real estate. Accordingly, competing demands of our dealer manager's personnel may cause us to be unable to successfully implement our investment objectives, or generate cash needed to make distributions to stockholders at our current level, and to maintain or increase the value of our assets.

Our officers and two of our directors face conflicts of interest related to the positions they hold with affiliated entities, which could hinder our ability to successfully implement our investment objectives and to generate returns to our stockholders.
Currently, certain of our executive officers and two of our directors are officers of our Sponsor, Advisor, our property manager, and other affiliated entities, and one of our executive officers and directors holds ownership interests in our former sponsor. As a result, these individuals owe fiduciary duties to these other entities and their owners, which fiduciary duties may conflict with the duties that they owe to our stockholders and us. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our investment objectives. Conflicts with our business and interests are most likely to arise from involvement in activities related to: (1) allocation of new investments and management time and services between us and the other entities; (2) our purchase of properties from, or sale of properties to, affiliated entities; (3) the timing and terms of the investment in or sale of an asset; (4) development of our properties by affiliates; (5) investments with affiliates of our Advisor; (6) compensation to our Advisor; and (7) our relationship with our property manager. If we do not successfully implement our investment objectives, we may be unable to generate cash needed to make distributions to our stockholders at our current level and to maintain or increase the value of our assets.

Our Advisor will face conflicts of interest relating to the purchase of properties, including conflicts with GCEAR, and such conflicts may not be resolved in our favor, which could adversely affect our investment opportunities.
We may be buying properties at the same time as GCEAR, a public non-traded REIT with a real estate portfolio of approximately $3.0 billion as of December 31, 2018 . GCEAR may have access to significantly greater capital than us. Our Sponsor, Advisor and our property manager will have conflicts of interest in allocating potential properties, acquisition expenses, management time, services and other functions between GCEAR or future enterprises with which they may be or become involved. There is a risk that our Advisor will choose a property that provides lower returns to us than a property purchased by another program sponsored by our Sponsor. We cannot be sure that officers and key personnel acting on behalf of our Advisor and on behalf of these other programs will act in our best interests when deciding whether to allocate any particular property to us. Such conflicts that are not resolved in our favor could result in a reduced level of distributions we may be able to pay to stockholders and a reduction in the value of our stockholders' investments. If our Advisor or its affiliates breach their legal or other obligations or duties to us, or do not resolve conflicts of interest in the manner described in our prospectus, we may not meet our investment objectives, which could reduce our expected cash available for distribution to stockholders and the value of our stockholders' investments.
Our Advisor will face conflicts of interest relating to the fee and distribution structure under our advisory agreement and operating partnership agreement, which could result in actions that are not necessarily in the long-term best interests of our stockholders.
Pursuant to our advisory agreement and operating partnership agreement, our Advisor and its affiliates will be entitled to certain fees and distributions that are structured in a manner which may provide incentives to our Advisor to perform in a manner which may not be in our best interests and in the best interests of our stockholders. The amount of such compensation has not been determined as a result of arm's-length negotiations, and such amounts may be greater than otherwise would be payable to independent third parties. However, because our Advisor does not maintain a significant equity interest in us and is entitled to receive substantial minimum compensation regardless of performance, our Advisor's interests will not be wholly aligned with those of our stockholders. In that regard, our Advisor could be motivated to recommend riskier or more speculative investments in order for us to generate the specified levels of performance or sales proceeds that would entitle our Advisor to fees or distributions.

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Our Advisor will face conflicts of interest relating to joint ventures that we may form with affiliates of our Advisor, which conflicts could result in a disproportionate benefit to other joint venture partners at our expense.
We may enter into joint ventures with other programs sponsored by our Sponsor, including other REITs, for the acquisition, development or improvement of properties. Our Advisor may have conflicts of interest in determining which program sponsored by our Sponsor should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our Advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since our Advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm's-length negotiation of the type normally conducted between unrelated co-venturers, which may result in the co­venturer receiving benefits greater than the benefits that we receive. In addition, we may assume liabilities related to the joint venture that exceed the percentage of our investment in the joint venture, and this could reduce the returns on our stockholders' investments.
There is no separate counsel for us and our affiliates, which could result in conflicts of interest.
Nelson Mullins Riley & Scarborough LLP ("Nelson Mullins") acts as legal counsel to us and also represents our Sponsor, Advisor, and some of their affiliates. There is a possibility in the future that the interests of the various parties may become adverse and, under the code of professional responsibility of the legal profession, Nelson Mullins may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of our Advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should a conflict of interest not be readily apparent, Nelson Mullins may inadvertently act in derogation of the interest of the parties which could affect our ability to meet our investment objectives.
Our Chief Executive Officer and Chairman of our Board is a controlling person of an entity that has purchased, and may continue to purchase, shares of our common stock and preferred units of limited partnership interest in our operating partnership, and therefore may face conflicts with regard to his fiduciary duties to us and that entity related to that entity making investments in or redeeming our common stock or the preferred units.
Our Chief Executive Officer is a controlling person of an entity that has purchased shares of our common stock. Our Chief Executive Officer owes fiduciary duties to that entity and its security holders that may conflict with the fiduciary duties he owes to us and our stockholders.  Our Chief Executive Officer may also make decisions on behalf of that entity related to investments in and redemptions of our common stock, which may result in that entity making an investment in or disposition of our common stock which may be to the detriment of our stockholders.
Further, because such entity holds investments in other entities sponsored by our sponsor, the interests of such entity and its security holders may not be aligned with our interests or those of our stockholders.
In addition, our ability to redeem shares pursuant to our SRP is subject to certain limitations, including a limitation on the number of shares we may redeem during each quarter.  If that entity should elect to redeem shares in a given quarter, or if any single stockholder who owns a significant number of shares of our common stock elects to redeem shares in a given quarter, the limitations on redemption contained in our SRP may be met or exceeded.
Risks Related to Our Pending Mergers
The exchange ratio is fixed and will not be adjusted in the event of any change in the relative values of the shares of our common stock or GCEAR common stock.

Upon consummation of the Company Merger, each issued and outstanding share of GCEAR common stock (or fraction thereof) will be converted into the right to receive 1.04807 shares of our newly created Class E common stock, and each issued and outstanding share of GCEAR preferred stock will be converted into the right to receive one share of our newly created Series A Preferred Shares. This exchange ratio is fixed pursuant to the Merger Agreement and will not be adjusted to reflect events, circumstances or other developments of which we or GCEAR become aware or which occur after the date of the Merger Agreement, or any changes in the relative values of us and GCEAR including, but not limited to:
•
changes in the respective businesses, operations, assets, liabilities or prospects of us and GCEAR;
•
changes in general market and economic conditions and other factors generally affecting the relative values of our and GCEAR’s assets;

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•
federal, state and local legislation, governmental regulation and legal developments in the businesses in which we and GCEAR operate; or
•
other factors beyond the control of us and GCEAR, including those described or referred to elsewhere in this “Risk Factors” section.
Any such changes may materially alter or affect the relative values of shares of our common stock or GCEAR common stock. Therefore, if, between the date of the Merger Agreement and the consummation of the Mergers, the value of shares of GCEAR common stock decreases or the value of shares of our common stock increases, the Merger Consideration may be more than the fair value of GCEAR stockholders’ shares of GCEAR common stock.

Completion of the Mergers is subject to a number of conditions, and if these conditions are not satisfied or waived, the Mergers will not be completed, which could result in the requirement that we pay certain termination fees or, in certain circumstances, that we pay expenses to GCEAR.

The Merger Agreement is subject to many conditions which must be satisfied or waived in order to complete the Mergers. The mutual conditions of the parties include, among others: (i) the approval of the Company Merger by the holders of a majority of the outstanding shares of GCEAR common stock; (ii) the approval of the Company Merger by our stockholders; (iii) the absence of any law, order or other legal restraint or prohibition that would prohibit, make illegal, enjoin, or otherwise restrict, or prevent the Mergers or any of the transactions contemplated by the Merger Agreement; and (iv) the effectiveness of the registration statement on Form S-4 filed by us for purposes of registering our Class E common stock to be issued in connection with the Company Merger. In addition, each party’s obligation to consummate the Company Merger is subject to certain other conditions, including, among others: (w) the accuracy of the other party’s representations and warranties (subject to customary materiality qualifiers and other customary exceptions); (x) the other party’s compliance with its covenants and agreements contained in the Merger Agreement; (y) the absence of any event, change, or occurrence arising during the period from the date of the Merger Agreement until the effective time of the Company Merger that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the other party; and (z) the receipt of an opinion of counsel of each party to the effect that such party has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT and that the Company Merger will qualify as a tax-free reorganization.

There can be no assurance that the conditions to closing of the Mergers will be satisfied or waived or that the Mergers will be consummated. Failure to consummate the Mergers may adversely affect our results of operations and business prospects for the following reasons, among others: (i) we will incur certain transaction costs, regardless of whether the proposed Mergers close, which could adversely affect our financial condition, results of operations and ability to make distributions to our stockholders; and (ii) the proposed Mergers, whether or not they close, will divert the attention of certain management and other key employees of us and our affiliates from ongoing business activities, including the pursuit of other opportunities that could be beneficial to us, In addition, we or GCEAR may terminate the Merger Agreement under certain circumstances, including, among other reasons, if the Mergers are not completed by August 31, 2019 and if the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, we may be required to pay the GCEAR a termination fee of $52.2 million. The Merger Agreement also provides that we may be required to reimburse GCEAR’s transaction expenses, not to exceed $5.0 million, if the Merger Agreement is terminated under certain circumstances.

The pendency of the Mergers could adversely affect our business and operations.

Prior to the effective date of the Mergers, some of our tenants, prospective tenants or vendors may delay or defer decisions, which could negatively affect our revenues, earnings, cash flows and expenses, regardless of whether the Mergers are completed. Similarly, our current and prospective employees of our affiliates may experience uncertainty about their future roles with the Combined Company following the Mergers, which may materially adversely affect the ability of such entities to attract and retain key personnel during the pendency of the Mergers. In addition, due to operating restrictions in the Merger Agreement, subject to certain exclusions, we may be unable during the pendency of the Mergers to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.

The ownership percentage of our common stockholders will be diluted by the Company Merger.

The Company Merger will dilute the ownership percentage of our common stockholders. Following the issuance of shares of our Class E common stock to GCEAR stockholders pursuant to the Merger Agreement, our common stockholders are expected to hold approximately 31% of our common stock issued and outstanding immediately after the effective time of the Company Merger, based on the number of shares of our common stock, limited partnership units in our Operating Partnership,

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and shares of GCEAR common stock currently outstanding and various assumptions regarding share issuances by us prior to the effective time of the Company Merger. Consequently, our common stockholders, as a general matter, may have less influence over our management and policies after the effective date of the Company Merger than they currently exercise over our management and policies.

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

The Merger Agreement contains provisions that, subject to limited exceptions necessary to comply with the duties of our directors, restrict the ability of us to solicit, initiate, knowingly encourage, or knowingly facilitate competing third-party proposals to acquire all, or a significant part, of us. In addition, each of us and GCEAR generally has an opportunity to offer to modify the terms of the proposed Mergers in response to any competing acquisition proposals that may be made before the GCEAR board of directors or our Board, as the case may be, may withdraw or qualify its recommendation. Upon termination of the Merger Agreement in certain circumstances, we may be required to pay a termination fee to GCEAR, and in certain other circumstances, we may be required to pay GCEAR’s transaction expenses.

These provisions could discourage a potential competing acquirer that might have an interest in acquiring all, or a significant part, of either GCEAR or us from considering or proposing an acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value imputed to the exchange ratio proposed to be received or realized in the Mergers, or might result in a potential competing acquirer proposing to pay a lower price than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances.

The Merger Agreement includes restrictions on our ability to make excess distributions to our stockholders, even if we would otherwise have net income and net cash available to make such distributions.

The Merger Agreement generally prohibits us from making distributions to our stockholders in excess of $0.55 per share of our common stock (determined on an annual basis), unless we obtain the prior written consent of GCEAR. While we and GCEAR have generally agreed to use our reasonable best efforts to close the Mergers in an expeditious manner, factors could cause the delay of the closing, which include obtaining the approval of the Company Merger from the common stockholders of us and GCEAR. Therefore, even if we have available net income or net cash to make distributions to our stockholders and satisfy any other conditions to make such distributions, the terms of the Merger Agreement could prohibit such action.

The borrowings we incur in connection with the Mergers may limit our financial and operating flexibility and we may incur additional borrowings, which could increase the risks associated with our borrowings.

In connection with the Mergers, we expect to incur approximately $715.0 million of new borrowings in order to extinguish GCEAR’s credit facility. In addition, we may determine to incur additional borrowings in the future pursuant to our unsecured credit facility with KeyBank, National Association (“KeyBank”). Following consummation of the Mergers, we expect to have approximately $481.0 million of borrowing availability under such unsecured credit facility. Our borrowings could have material adverse consequences for our business and may:
•
require us to dedicate a large portion of our cash flow to pay principal and interest on our borrowings, which will reduce the availability of cash flow to fund working capital, capital expenditures, and other business activities;
•
increase our vulnerability to general adverse economic and industry conditions;
•
subject us to maintaining various debt, operating income, net worth, cash flow, and other financial covenant ratios;
•
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•
restrict our operating policies and ability to make strategic acquisitions, dispositions, or exploiting business opportunities;
•
place us at a competitive disadvantage compared to our competitors that have less borrowings;
•
limit our ability to borrow more funds (even when necessary to maintain adequate liquidity), dispose of assets, or make distributions to stockholders; or

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•
increase our costs of capital.
Under the agreements governing our outstanding borrowings, we may incur additional borrowings. If new borrowings are added to our existing borrowing levels, the related risks that we now face would increase. In addition, at the time that any of our outstanding borrowings or new borrowings mature, we may not be able to refinance such borrowings or have the funds to pay them off.

Furthermore, the amounts borrowed pursuant to our unsecured credit facility bear interest at variable rates. If market interest rates increase, the interest rate on our variable rate borrowings will increase and will create higher debt service requirements, which would adversely affect our cash flow and could adversely impact our results of operations. While we may enter into agreements limiting our exposure to higher debt service requirements, any such agreements may not offer complete protection from this risk.

The Company Merger is subject to approval by common stockholders of GCEAR and us.

In order for the Company Merger to be completed, GCEAR stockholders must approve the Company Merger, which requires the affirmative vote of a majority of all the votes entitled to be cast on such proposal at the GCEAR annual meeting. Pursuant to the Merger Agreement, as a condition to completing the Company Merger, our stockholders must also approve the Company Merger, which requires the affirmative vote of a majority of all the votes cast on such proposal at our annual meeting. If these required votes are not obtained, the Company Merger may not be consummated.

The Merger Agreement contains provisions that grant the GCEAR board of directors or our Board the ability to change its recommendation regarding the Mergers in certain circumstances based on the exercise of the GCEAR or our directors’ duties.

GCEAR may change its recommendation regarding the Mergers, subject to the terms of the Merger Agreement, in response to a material change in circumstances or development that was not known to the GCEAR board of directors prior to the execution of the Merger Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which change in circumstances or development, or any material consequence thereof, becomes known to the GCEAR board of directors prior to the effective time of the Mergers if the GCEAR board of directors determines in good faith, after consultation with its outside legal counsel, that failure to change its recommendation with respect to the Mergers would be inconsistent with the GCEAR directors’ duties under applicable law.

In addition, we may change our recommendation regarding the Mergers, subject to the terms of the Merger Agreement, in response to a material change in circumstances or development that was not known to our Board prior to the execution of the Merger Agreement (or if known, the consequences of which were not known or reasonably foreseeable), which change in circumstances or development, or any material consequence thereof, becomes known to our Board prior to the effective time of the Mergers if our Board determines in good faith, after consultation with its outside legal counsel, that failure to change its recommendation with respect to the Mergers would be inconsistent with our directors’ duties under applicable law.

There may be unexpected delays in the consummation of the Mergers.

The Mergers are expected to close during the first half of 2019 assuming that all of the conditions in the Merger Agreement are satisfied or waived. The Merger Agreement provides that either we or GCEAR may terminate the Merger Agreement if the Mergers have not occurred by August 31, 2019. Certain events may delay the consummation of the Mergers. Some of the events that could delay the consummation of the Mergers include difficulties in obtaining the approval of our and GCEAR's stockholders, or satisfying the other closing conditions to which the Mergers are subject.

We may incur adverse tax consequences if GCEAR has failed or fails to qualify as a REIT for U.S. federal income tax purposes.

If GCEAR has failed or fails to qualify as a REIT for U.S. federal income tax purposes and the Mergers are completed, we may inherit significant tax liabilities and could lose our REIT status should disqualifying activities continue after the Mergers.

Risks Related to the Combined Company Following Consummation of the Proposed Mergers

The future results of the Combined Company will suffer if the Combined Company does not effectively manage its expanded operations following the Mergers.

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Following the Mergers, the Combined Company expects to continue to expand its operations through additional acquisitions and other strategic transactions, some of which may involve complex challenges. The future success of the Combined Company will depend, in part, upon the ability of the Combined Company to manage its expansion opportunities, which may pose substantial challenges for the Combined Company to integrate new operations into its existing business in an efficient and timely manner, and upon its ability to successfully monitor its operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. There is no assurance that the Combined Company’s expansion or acquisition opportunities will be successful, or that the Combined Company will realize its expected operating efficiencies, cost savings, revenue enhancements, or other benefits.

The Combined Company will be newly self-managed.

The Self Administration Transaction (as described in Item 1 above) was consummated on December 14, 2018, and assuming the Mergers are consummated, the Combined Company will be a self-managed REIT. The Combined Company will no longer bear the costs of the various fees and expense reimbursements previously paid to the former external advisors of GCEAR and us and their affiliates; however, the Combined Company’s expenses will include the compensation and benefits of the Combined Company’s officers, employees and consultants, as well as overhead previously paid by the former external advisors of GCEAR and us and their affiliates. The Combined Company’s employees will provide services historically provided by the external advisors and their affiliates. The Combined Company will be subject to potential liabilities that are commonly faced by employers, such as workers’ disability and compensation claims, potential labor disputes, and other employee-related liabilities and grievances, and the Combined Company will bear the cost of the establishment and maintenance of any employee compensation plans. In addition, the Combined Company has not previously operated as a self-managed REIT and may encounter unforeseen costs, expenses, and difficulties associated with providing these services on a self-advised basis. If the Combined Company incurs unexpected expenses as a result of its self-management, its results of operations could be lower than they otherwise would have been.

The Combined Company may need to incur additional indebtedness in the future.

In connection with executing the Combined Company’s business strategies following the Mergers, the Combined Company expects to evaluate the possibility of acquiring additional properties and making strategic investments, and the Combined Company may elect to finance these endeavors by incurring additional indebtedness. The amount of such indebtedness could have material adverse consequences for the Combined Company, including: (i) hindering the Combined Company’s ability to adjust to changing market, industry or economic conditions; (ii) limiting the Combined Company’s ability to access the capital markets to refinance maturing debt or to fund acquisitions or emerging businesses; (iii) limiting the amount of free cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses; (iv) making the Combined Company more vulnerable to economic or industry downturns, including interest rate increases; and (v) placing the Combined Company at a competitive disadvantage compared to less leveraged competitors.

Following the consummation of the Mergers, the Combined Company will assume certain potential liabilities relating to GCEAR.

Following the consummation of the Mergers, the Combined Company will have assumed certain potential liabilities relating to GCEAR. These liabilities could have a material adverse effect on the Combined Company’s business to the extent the Combined Company has not identified such liabilities or has underestimated the amount of such liabilities.

If and when the Combined Company has a Strategic Transaction, the market value ascribed to the shares of common stock of the Combined Company upon the Strategic Transaction may be significantly lower than the estimated value per share of us and GCEAR considered by our respective boards in approving and recommending the Mergers.

In approving and recommending the Mergers, our Board, our special committee, the GCEAR board of directors, and the GCEAR special committee considered the most recent estimated value per share of us and GCEAR as determined by our respective boards with the assistance of our respective third-party valuation experts. In the event that the Combined Company completes a Strategic Transaction after consummation of the Mergers, such as a listing of its shares on a national securities exchange, a merger in which stockholders of the Combined Company receive securities that are listed on a national securities exchange, or a sale of the Combined Company for cash, the market value of the shares of the Combined Company upon consummation of such Strategic Transaction may be significantly lower than the current estimated values considered by our Board, our special committee, the GCEAR board of directors and the GCEAR special committee and the estimated value per share of us that may be reflected on the account statements of stockholders of the Combined Company after consummation of the Mergers. For example, if the shares of the Combined Company are listed on a national securities exchange at some point

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after the consummation of the Mergers, the trading price of the shares may be significantly lower than our estimated value per share of $9.62 (as of December 31, 2018). There can be no assurance, however, that any such Strategic Transaction will occur.

The estimated NAV of the Combined Company’s common stock may decline as a result of the Company Merger.

The estimated NAV of the Combined Company’s common stock may decline as a result of the Mergers if the Combined Company does not achieve the perceived benefits of the Mergers as rapidly or to the extent anticipated by our management or if the effect of the Mergers on our financial results is not consistent with the expectations of our management. In addition, if the Company Merger is consummated, our stockholders will own interests in a company operating an expanded business with a different mix of properties, risks and liabilities. Current stockholders may not wish to continue to invest in us if the Company Merger is consummated or for other reasons and may wish to submit some or all of their shares of our common stock for redemption. In addition, GCEAR stockholders are expected to own approximately 69% of the outstanding shares of our common stock, on a pro forma basis, following the Company Merger. They may determine not to continue to hold their shares of our common stock and submit their shares for redemption following the Company Merger, which may result in additional pressure on the value of our common stock.

Risks Related to Our Corporate Structure
The limit on the number of shares a person may own may discourage a takeover that could otherwise result in a premium price to our stockholders.
In order for us to continue to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To ensure that we do not fail to qualify as a REIT under this test, our charter restricts ownership by one person or entity to no more than 9.8% in value of our outstanding stock or 9.8% in value or number, whichever is more restrictive, of our outstanding common stock. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (consisting, in this instance, of actions such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
Our charter permits our Board to issue stock with terms that may subordinate the rights of common stockholders or discourage a third party from acquiring us in a manner that might result in a premium price to our stockholders.
Our charter permits our Board to issue up to 1,000,000,000 shares of capital stock. In addition, our Board, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares or the number of shares of any class or series of stock that we have authority to issue. Our Board may classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Thus, our Board could authorize the issuance of preferred stock with terms and conditions that could have a priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Preferred stock could also have the effect of delaying, deferring or preventing a change in control of our company, including an extraordinary transaction (consisting, in this instance, of actions such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price for holders of our common stock.
If the Mergers are consummated, we will issue Series A Preferred Shares, which will rank junior to our existing and future indebtedness and will rank junior to any class or series of stock we may issue in the future with terms specifically providing that such stock ranks senior to our Series A Preferred Shares with respect to the payment of dividends and the distribution of assets in the event of our involuntary liquidation, dissolution or winding up, and the interests of the holders of our Series A Preferred Shares could be diluted by the issuance of additional shares of preferred stock and by other transactions.

If the Mergers are consummated, we will issue Series A Preferred Shares, and the payment of amounts due on our Series A Preferred Shares will be junior in payment preference to all of our existing and future debt and any securities we may issue in the future that have rights or preferences senior to those of our Series A Preferred Shares. We may issue additional shares of preferred stock in the future which, upon the prior affirmative vote or consent of the holders of at least two-thirds of the Series A Preferred Shares outstanding at the time, are on a parity with or senior to the Series A Preferred Shares with respect to the payment of dividends and the distribution of assets upon involuntary liquidation, dissolution or winding up. Additional issuance of preferred securities or other transactions could reduce the pro-rata assets available for distribution upon liquidation and the holders of our Series A Preferred Shares may not receive their full liquidation preference if there are not sufficient assets. In addition, issuance of additional preferred securities or other transactions could dilute voting rights of the holders of the Series A Preferred Shares with respect to certain matters that require votes or the consent of such holders.

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If the Mergers are consummated, we may not be able to pay dividends or other distributions on our Series A Preferred Shares.

If the Mergers are consummated, there can be no guarantee that we will have sufficient cash to pay dividends on the Series A Preferred Shares. Payment of our dividends depends upon our earnings, our financial condition, maintenance of our REIT qualification and other factors as our Board may deem relevant from time to time. We cannot assure the holders of our Series A Preferred Shares that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our Series A Preferred Shares and on our common stock, to pay our indebtedness or to fund our other liquidity needs.

If the Mergers are consummated, our Series A Preferred Shares will be subject to interest rate risk.

If the Mergers are consummated, dividends payable on the Series A Preferred Shares will be subject to interest rate risk. Because dividends on our Series A Preferred Shares will be predetermined, our costs may increase upon maturity or redemption of the securities. This risk might require us to sell investments at a time when we would otherwise not do so, which could adversely affect our ability to generate cash flow.

We are not afforded the protection of Maryland law relating to business combinations.
Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
•
any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation's outstanding voting stock; or
•
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation.
These prohibitions are intended to prevent a change of control by interested stockholders who do not have the support of our Board. Since our charter contains limitations on ownership of 9.8% or more of our common stock, we opted out of the business combinations statute in our charter. Therefore, we will not be afforded the protections of this statute and, accordingly, there is no guarantee that the ownership limitations in our charter would provide the same measure of protection as the business combinations statute and prevent an undesired change of control by an interested stockholder.
Our stockholders' investment return may be reduced if we are required to register as an investment company under the 1940 Act. If we lose our exemption from registration under the 1940 Act, we will not be able to continue our business unless and until we register under the 1940 Act.
We do not intend to register as an investment company under the 1940 Act. As of December 31, 2018 , we owned 35 buildings located on 27 properties, and our intended investments in real estate will represent the substantial majority of our total asset mix, which would not subject us to the 1940 Act. In order to maintain an exemption from regulation under the 1940 Act, we must engage primarily in the business of buying real estate.
To maintain compliance with our 1940 Act exemption, we may be unable to sell assets we would otherwise want to sell and may need to sell assets we would otherwise wish to retain. In addition, we may be required to acquire additional income- or loss-generating assets that we might not otherwise acquire or forego opportunities to acquire interests in companies that we would otherwise want to acquire. If we are required to register as an investment company but fail to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
Our stockholders are bound by the majority vote on matters on which our stockholders are entitled to vote and, therefore, a stockholder's vote on a particular matter may be superseded by the vote of other stockholders.

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Our stockholders may vote on certain matters at any annual or special meeting of stockholders, including the election of directors. However, our stockholders will be bound by the majority vote on matters requiring approval of a majority of the stockholders even if they do not vote with the majority on any such matter.
If stockholders do not agree with the decisions of our Board, they only have limited control over changes in our policies and operations and may not be able to change such policies and operations, except as provided for in our charter and under applicable law.
Our Board determines our major policies, including our policies regarding investments, operations, capitalization, financing, growth, REIT qualification and distributions. Our Board may amend or revise these and other policies without a vote of our stockholders. Under the MGCL and our charter, our stockholders have a right to vote only on the following:
• the election or removal of directors;
•
amendment of our charter, except that our Board may amend our charter without stockholder approval to increase or decrease the aggregate number of our shares, to increase or decrease the number of our shares of any class or series that we have the authority to issue, to change our name, to change the name or other designation or the par value of any class or series of our shares and the aggregate par value of our shares, or to effect certain reverse stock splits, provided however, that any such amendment does not adversely affect the rights, preferences and privileges of the stockholders;
• our liquidation or dissolution; and
•
any merger, consolidation, conversion, statutory share exchange or sale or other disposition of substantially all of our assets.
All other matters are subject to the discretion of our Board. Therefore, our stockholders are limited in their ability to change our policies and operations.
Our rights and the rights of our stockholders to recover claims against our officers and directors are limited, which could reduce our stockholders’ and our recovery against them if they cause us to incur losses.

Maryland law provides that a director has no liability in that capacity if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in the corporation’s best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter generally requires us to indemnify our directors, officers, employees and agents for actions taken by them in good faith and without negligence or misconduct or, in the care of independent directors, gross negligence or willful misconduct. Additionally, our charter limits the liability of our directors and officers for monetary damages subject to certain restrictions set forth under Maryland law or in our charter. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents than might
otherwise exist under common law, which could reduce our stockholders’ and our recovery against them. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents in some cases which would decrease the cash otherwise available for distribution to stockholders.

Our Board may change any of our investment objectives, including our focus on single tenant business essential properties.
Our Board may change any of our investment objectives, including our focus on single tenant business essential properties. If stockholders do not agree with a decision of our Board to change any of our investment objectives, they only have limited control over such changes. Additionally, we cannot assure stockholders that we would be successful in attaining any of these investment objectives, which may adversely impact our financial performance and ability to make distributions at our current level to stockholders.
Our stockholders' interests in us will be diluted as we issue additional shares.
Our stockholders do not have preemptive rights to any shares issued by us in the future. Subject to any limitations set forth under Maryland law, our Board may increase the number of authorized shares of stock (currently 1,000,000,000 shares), increase or decrease the number of shares of any class or series of stock designated, or reclassify any unissued shares without the necessity of obtaining stockholder approval. All of such shares may be issued in the discretion of our Board. Therefore, as we (1) sell shares in our offerings or sell additional shares in the future, including those issued pursuant to our DRP, (2) sell securities that are convertible into shares of our common stock, (3) issue shares of our common stock in a private offering of securities to institutional investors, (4) issue shares of restricted common stock or stock options to our independent directors or

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(5) issue shares of our common stock in connection with an exchange of limited partnership interests of our Operating Partnership, existing stockholders and investors purchasing shares in our public offering will experience dilution of their equity investment in us. Because the limited partnership interests of our operating partnership may, in the discretion of our Board, be exchanged for shares of our common stock, any merger, exchange or conversion between our operating partnership and another entity ultimately could result in the issuance of a substantial number of shares of our common stock, thereby diluting the percentage ownership interest of other stockholders. Our Advisor may elect to receive the performance distribution in units of our operating partnership and may also elect to receive reimbursements of expenses in such units or in our Class I shares, which would dilute the percentage ownership interest of our other stockholders. Because of these and other reasons described in this "Risk Factors" section, stockholders should not expect to be able to own a significant percentage of our shares.
Payment of substantial fees and expenses to our Advisor and its affiliates will reduce cash available for investment and distribution.
Our Advisor and its affiliates will perform services for us in connection with the offer and sale of our shares, the selection and acquisition of our investments, and the management of our properties. They will be paid substantial fees and expense reimbursements for these services, which will reduce the amount of cash available for investment in properties or distribution to stockholders.
We are uncertain of our sources of debt or equity for funding our future capital needs. If we cannot obtain funding on acceptable terms, our ability to make necessary capital improvements to our properties may be impaired or delayed.
The gross proceeds of our public offering will be used primarily to purchase real estate investments and to pay various fees and expenses. In addition, to continue to qualify as a REIT, we generally must distribute to our stockholders at least 90% of our taxable income each year, excluding capital gains. Because of this distribution requirement, it is not likely that we will be able to fund a significant portion of our future capital needs from retained earnings. We have not identified all of our sources of debt or equity for funding, and such sources of funding may not be available to us on favorable terms or at all. If we do not have access to sufficient funding in the future, we may not be able to make necessary capital improvements to our properties, pay other expenses or expand our business.
Risks Related to Investments in Single Tenant Real Estate
Many of our properties depend upon a single tenant for all or a majority of their rental income, and our financial condition and ability to make distributions may be adversely affected by the bankruptcy or insolvency, a downturn in the business, or a lease termination of a single tenant, including those caused by the current economic climate.
Most of our properties are occupied by only one tenant or will derive a majority of their rental income from one tenant and, therefore, the success of those properties is materially dependent on the financial stability of such tenants. The nation as a whole and our local economies are currently experiencing economic uncertainty affecting companies of all sizes and industries. A tenant at one or more of our properties may be negatively affected by the current economic climate. Lease payment defaults by tenants, including those caused by the current economic climate, could cause us to reduce the amount of distributions we pay. A default of a tenant on its lease payments to us and the potential resulting vacancy would cause us to lose the revenue from the property and force us to find an alternative source of revenue to meet any mortgage payment and prevent a foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-letting the property. If a lease is terminated or an existing tenant elects not to renew a lease upon its expiration, there is no assurance that we will be able to lease the property for the rent previously received or sell the property without incurring a loss. A default by a tenant, the failure of a guarantor to fulfill its obligations or other premature termination of a lease, or a tenant's election not to extend a lease upon its expiration could have an adverse effect on our financial condition and our ability to pay distributions at our current level.
As of December 31, 2018 , our five largest tenants represented approximately 39.8% of net rent; therefore, we currently rely on these five tenants for a substantial amount of revenue and adverse effects to their business could negatively affect our performance.
As of December 31, 2018 , our five largest tenants, based on net rental income, were Southern Company Services, located in Alabama (approximately 10.9% ), American Express Travel Related Services Company, Inc., located in Arizona (approximately 7.5% ), Amazon.com.dedc, LLC, located in Ohio (approximately 7.3% ), Bank of America, N.A., located in California (approximately 7.2% ), and Wyndham Worldwide Operations, located in New Jersey (approximately 6.9% ). The revenues generated by the properties these tenants occupy are substantially reliant upon the financial condition of these tenants and, accordingly, any event of bankruptcy, insolvency, or a general downturn in the business of any of these tenants may result in the failure or delay of such tenant's rental payments which may have a substantial adverse effect on our financial performance.

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A high concentration of our properties in a particular geographic area, or that have tenants in a similar industry, would magnify the effects of downturns in that geographic area or industry.
We expect that our properties will be diverse according to geographic area and industry of our tenants. However, in the event that we have a concentration of properties in any particular geographic area, any adverse situation that disproportionately affects that geographic area would have a magnified adverse effect on our portfolio. Similarly, if our tenants are concentrated in a certain industry or industries, any adverse effect to that industry generally would have a disproportionately adverse effect on our portfolio. As of December 31, 2018 , approximately 16.6% , 13.3% , 13.3% , and 12.5% of our net rent subsequent to December 31, 2018 was concentrated in the Consumer Services, Utilities, Capital Goods, and Technology Hardware & Equipment industries, respectively. Additionally, as of December 31, 2018 , approximately 12.8% , 11.3% , 11.2% , 10.9% , and 10.6% , of our net rent subsequent to December 31, 2018 was concentrated in the states of Ohio, Illinois, California, Alabama, and New Jersey, respectively.
A significant portion of our leases are due to expire around the same period of time, which may (i) cause a loss in the value of our stockholders’ investment until the affected properties are re-leased, (ii) increase our exposure to downturns in the real estate market during the time that we are trying to re-lease such space and (iii) increase our capital expenditure requirements during the releasing period.
The tenant lease expirations by year based on net rent subsequent to December 31, 2018 are as follows (dollars in thousands):
Year of Lease Expiration
Net Rent (1)
(unaudited)
Number of
Lessees
Approx. Square
Feet
Percentage of
Net Rent
2019 - 2021
$
8,956

3

746,900

11.4
%
2022
1,204

1

312,000

1.5

2023
6,913

2

658,600

8.8

2024
9,034

4

571,500

11.5

2025
7,557

5

728,800

9.6

2026
9,909

3

1,331,700

12.6

2027 and beyond
34,820

9

2,991,100

44.6

Total
$
78,393

27

7,340,600

100.0
%
(1)
Net rent is based on (a) the contractual base rental payments assuming the lease requires the tenant to reimburse us for certain operating expenses or the property is self-managed by the tenant and the tenant is responsible for all, or substantially all, of the operating expenses; or (b) contractual rent payments less certain operating expenses that are our responsibility for the 12-month period subsequent to December 31, 2018 and includes assumptions that may not be indicative of the actual future performance of a property, including the assumption that the tenant will perform its obligations under its lease agreement during the next 12 months.

We may experience similar concentrations of lease expiration dates in the future. As the expiration date of a lease for a single-tenant building approaches, the value of the property generally declines because of the risk that the building may not be re-leased upon expiration of the existing lease or may not be re-leased on terms as favorable as those of the current leases. Therefore, if we were to list or liquidate our portfolio prior to the favorable re-leasing of the space, our stockholders may suffer a loss on their investment. Our stockholders may also suffer a loss (and a reduction in distributions) after the expiration of the lease terms if we are not able to re-lease such space on favorable terms. These expiring leases, therefore, increase our risk to real estate downturns during and approaching these periods of concentrated lease expirations. In addition, we may have to spend significant capital in order to ready the space for new tenants. To meet our need for cash at this time, we may have to increase borrowings or reduce our distributions, or both.
If a tenant declares bankruptcy, we may be unable to collect balances due under relevant leases.
Any of our tenants, or any guarantor of a tenant's lease obligations, could be subject to a bankruptcy proceeding pursuant to Title 11 of the bankruptcy laws of the United States. Such a bankruptcy filing would bar all efforts by us to collect pre-bankruptcy debts from these entities or their properties, unless we receive an enabling order from the bankruptcy court. Post-bankruptcy debts would be paid currently. If a lease is assumed, all pre-bankruptcy balances owing under it must be paid in full. If a lease is rejected by a tenant in bankruptcy, we would have a general unsecured claim for damages. If a lease is rejected, it is unlikely we would receive any payments from the tenant because our claim is capped at the rent reserved under the lease, without acceleration, for the greater of one year or 15% of the remaining term of the lease, but not greater than three years, plus rent already due but unpaid. This claim could be paid only in the event funds were available, and then only in the same percentage as that realized on other unsecured claims.

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A tenant or lease guarantor bankruptcy could delay efforts to collect past due balances under the relevant leases, and could ultimately preclude full collection of these sums. Such an event could cause a decrease or cessation of rental payments that would mean a reduction in our cash flow and the amount available for distributions to stockholders. In the event of a bankruptcy, we cannot assure stockholders that the tenant or its trustee will assume our lease. If a given lease, or guaranty of a lease, is not assumed, our cash flow and the amounts available for distributions to stockholders may be adversely affected. Further, our lenders may have a first priority claim to any recovery under the leases, any guarantees and any credit support, such as security deposits and letters of credit.
If a sale-leaseback transaction is recharacterized in a tenant's bankruptcy proceeding, our financial condition could be adversely affected.
We may enter into sale-leaseback transactions, whereby we would purchase a property and then lease the same property back to the person from whom we purchased it. In the event of the bankruptcy of a tenant, a transaction structured as a sale-leaseback may be recharacterized as either a financing or a joint venture, either of which outcomes could adversely affect our business. If the sale-leaseback were recharacterized as a financing, we might not be considered the owner of the property, and as a result would have the status of a creditor in relation to the tenant. In that event, we would no longer have the right to sell or encumber our ownership interest in the property. Instead, we would have a claim against the tenant for the amounts owed under the lease, with the claim arguably secured by the property. The tenant/debtor might have the ability to propose a plan restructuring the term, interest rate and amortization schedule of its outstanding balance. If confirmed by the bankruptcy court, we could be bound by the new terms, and prevented from foreclosing our lien on the property. If the sale-leaseback were recharacterized as a joint venture, our lessee and we could be treated as co-venturers with regard to the property. As a result, we could be held liable, under some circumstances, for debts incurred by the lessee relating to the property. Either of these outcomes could adversely affect our cash flow and the amount available for distributions to stockholders.
Net leases may not result in fair market lease rates over time.
A large portion of our rental income is derived from net leases. Net leases are typically (1) longer lease terms; and (2) fixed rental rate increases during the primary term of the lease and, thus, there is an increased risk that these contractual lease terms will fail to result in fair market rental rates. As a result, our income and distributions to our stockholders could be lower than they would otherwise be if we did not engage in net leases.
Our real estate investments may include special use single tenant properties that may be difficult to sell or re-lease upon tenant defaults or early lease terminations.
We focus our investments on commercial and industrial properties, a number of which may include manufacturing facilities and special use single tenant properties. These types of properties are relatively illiquid compared to other types of real estate and financial assets. This illiquidity will limit our ability to quickly change our portfolio in response to changes in economic or other conditions. With these properties, if the current lease is terminated or not renewed or, in the case of a mortgage loan, if we take such property in foreclosure, we may be required to renovate the property or to make rent concessions in order to lease the property to another tenant or sell the property. In addition, in the event we are forced to sell the property, we may have difficulty selling it to a party other than the tenant or borrower due to the special purpose for which the property may have been designed. These and other limitations may affect our ability to sell or re-lease properties and adversely affect returns to stockholders.
General Risks Related to Investments in Real Estate
Our operating results will be affected by economic and regulatory changes that have an adverse impact on the real estate market in general, and we cannot assure stockholders that we will be profitable or that we will realize growth in the value of our real estate properties.
Our operating results will be subject to risks generally incident to the ownership of real estate, including, and without limitation:
•
changes in general economic or local conditions;
•
changes in supply of or demand for similar or competing properties in an area;
•
changes in interest rates and availability of permanent mortgage funds that may render the sale of a property difficult or unattractive;
•
changes in tax, real estate, environmental and zoning laws;

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•
changes in property tax assessments and insurance costs;
•
increases in interest rates and tight money supply; and
•
loss of entitlements.
These and other reasons may prevent us from being profitable or from realizing growth or maintaining the value of our real estate properties.
We may obtain only limited warranties when we purchase a property.
The seller of a property will often sell such property in its "as is" condition on a "where is" basis and "with all faults," without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. Also, most sellers of large commercial properties are special purpose entities without significant assets other than the property itself. The purchase of properties with limited warranties or from undercapitalized sellers increases the risk that we may lose some or all of our invested capital in the property as well as the loss of rental income from that property.
Our inability to sell a property when we desire to do so could adversely impact our ability to pay cash distributions to stockholders at our current level.
The real estate market is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We cannot predict the length of time needed to find a willing purchaser and to close the sale of a property. Real estate generally cannot be sold quickly. Also, the tax laws applicable to REITs require that we hold our properties for investment, rather than for sale in the ordinary course of business, which may cause us to forego or defer sales of properties that otherwise would be in our best interest. Therefore, we may not be able to dispose of properties promptly, or on favorable terms, in response to economic or other market conditions, and this may adversely impact our ability to make distributions to stockholders at our current level.
In addition, we may be required to expend funds to correct defects or to make improvements before a property can be sold. We cannot assure stockholders that we will have funds available to correct such defects or to make such improvements.
In acquiring a property, we may agree to restrictions that prohibit the sale of that property for a period of time or impose other restrictions, such as a limitation on the amount of debt that can be placed or repaid on that property. These provisions would also restrict our ability to sell a property.
We may not be able to sell our properties at a price equal to, or greater than, the price for which we purchased such properties, which may lead to a decrease in the value of our assets.
We may be purchasing our properties at a time when capitalization rates are at historically low levels and purchase prices are high. Therefore, the value of our properties may not increase over time, which may restrict our ability to sell our properties, or in the event we are able to sell such property, may lead to a sale price less than the price that we paid to purchase the properties.
We may acquire or finance properties with lock-out provisions, which may prohibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Lock-out provisions are provisions that generally prohibit repayment of a loan balance for a certain number of years following the origination date of a loan. Such provisions are typically provided for by the Code or the terms of the agreement underlying a loan. Lock-out provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distribution to stockholders. Lock-out provisions may prohibit us from reducing the outstanding indebtedness with respect to any properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties. Any mortgage debt that we place on our properties may also impose prepayment penalties upon the sale of the mortgaged property. If a lender invokes these penalties upon the sale of a property or prepayment of a mortgage on a property, the cost to us to sell the property could increase substantially.
Lock-out provisions could impair our ability to take actions during the lock-out period that would otherwise be in our stockholders' best interests and, therefore, may have an adverse impact on the value of the shares, relative to the value that would result if the lock-out provisions did not exist. In particular, lock-out provisions could preclude us from participating in

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major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in our stockholders' best interests.
Adverse economic conditions may negatively affect our property values, returns and profitability.
The following market and economic challenges may adversely affect our property values or operating results:
• poor economic times may result in a tenant's failure to meet its obligations under a lease or bankruptcy;
• re-leasing may require reduced rental rates under the new leases;
• increase in the cost of supplies and labor that impact operating expenses; and
•
increased insurance premiums, resulting in part from the increased risk of terrorism, may reduce funds available for distribution, or, to the extent we are able to pass such increased insurance premiums on to our tenants, may increase tenant defaults.
We are susceptible to the effects of macroeconomic factors that can result in unemployment, shrinking demand for products, large-scale business failures, and tight credit markets. Our property values and operations could be negatively affected by such adverse economic conditions.
If we suffer losses that are not covered by insurance or that are in excess of insurance coverage, we could lose invested capital and anticipated profits.
Material losses may occur in excess of insurance proceeds with respect to any property, as insurance may not be sufficient to fund the losses. However, there are types of losses, generally of a catastrophic nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are either uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. In addition, we may decide not to obtain any or adequate earthquake or similar catastrophic insurance coverage because the premiums are too high even in instances where it may otherwise be available. Insurance risks associated with potential terrorism acts could sharply increase the premiums we pay for coverage against property and casualty claims. Additionally, mortgage lenders in some cases have begun to insist that commercial property owners purchase specific coverage against terrorism as a condition for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable cost, which could inhibit our ability to finance or refinance our potential properties. In these instances, we may be required to provide other financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot assure stockholders that we will have adequate coverage for such losses. The Terrorism Risk Insurance Act of 2002 is designed for a sharing of terrorism losses between insurance companies and the federal government. We cannot be certain how this act will impact us or what additional cost to us, if any, could result. If such an event damaged or destroyed one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
We are subject to risks from natural disasters such as earthquakes and severe weather conditions.
Our properties are located in areas that may be subject to natural disasters, such as earthquakes, and severe weather conditions. Natural disasters and severe weather conditions may result in significant damage to our properties. The extent of our casualty losses and loss in operating income in connection with such events is a function of the severity of the event and the total amount of exposure in the affected area. When we have a geographic concentration of exposures, a single catastrophe (such as an earthquake, especially in California or Oregon) affecting a region may have a significant negative effect on our financial condition and results of operations. As a result, our operating and financial results may vary significantly from one period to the next, and our financial results may be adversely affected by our exposure to losses arising from natural disasters or severe weather conditions.
Delays in the acquisition, development and construction of properties may have adverse effects on our results of operations and returns to stockholders.
Delays we encounter in the selection, acquisition and development of real properties could adversely affect our stockholders' returns. Investments in unimproved real property, properties that are in need of redevelopment, or properties that are under development or construction will be subject to the uncertainties associated with the development and construction of real property, including those related to re-zoning land for development, environmental concerns of governmental entities and/or community groups and our builders' ability to build in conformity with plans, specifications, budgets and timetables. If a builder fails to perform, we may resort to legal action to rescind the purchase or the construction contract or to compel performance. A builder's performance may also be affected or delayed by conditions beyond the builder's control.

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Where properties are acquired prior to the start of construction or during the early stages of construction, it will typically take up to one year or more to complete construction and lease available space. Therefore, stockholders could suffer delays in the receipt of cash distributions attributable to those particular real properties. We may incur additional risks when we make periodic progress payments or other advances to builders before they complete construction. These and other factors can result in increased costs of a project or loss of our investment. We also must rely on rental income and expense projections and estimates of the fair market value of a property upon completion of construction when agreeing upon a purchase price at the time we acquire the property. If our projections are inaccurate, we may pay too much for a property, and the return on our investment could suffer.
Costs of complying with governmental laws and regulations, including those relating to environmental matters, may adversely affect our income and the cash available for distribution.
All real property we acquire, and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. This liability could be substantial. In addition, the presence of hazardous substances, or the failure to properly remediate these substances, may adversely affect our ability to sell, rent or pledge such property as collateral for future borrowings.
Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations or stricter interpretation of existing laws may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. Additionally, our tenants' operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties may affect our properties. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply, and that may subject us to liability in the form of fines or damages for noncompliance. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions to stockholders and may reduce the value of our stockholders' investments.
We cannot assure stockholders that the independent third-party environmental assessments we obtain prior to acquiring any properties we purchase will reveal all environmental liabilities or that a prior owner of a property did not create a material environmental condition not known to us. We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist in the future. We cannot assure stockholders that our business, assets, results of operations, liquidity or financial condition will not be adversely affected by these laws, which may adversely affect cash available for distribution, and the amount of distributions to stockholders.
Our costs associated with complying with the Americans with Disabilities Act may affect cash available for distribution.
Our properties will be subject to the Americans with Disabilities Act of 1990, or ADA. Under the ADA, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The ADA has separate compliance requirements for "public accommodations" and "commercial facilities" that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The ADA's requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties, or, in some cases, an award of damages. We will attempt to acquire properties that comply with the ADA or place the burden on the seller or other third party to ensure compliance with the ADA. However, we cannot assure stockholders that we will be able to acquire properties or allocate responsibilities in this manner. If we cannot, our funds used for ADA compliance may affect cash available for distribution and the amount of distributions to stockholders.

34




If we sell properties by providing financing to purchasers, defaults by the purchasers would adversely affect our cash flows.
In some instances we may sell our properties by providing financing to purchasers. When we provide financing to purchasers, we will bear the risk that the purchaser may default, which could negatively impact our cash distributions to stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon the sale are actually paid, sold, refinanced or otherwise disposed of. In some cases, we may receive initial down payments in cash and other property in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. If any purchaser defaults under a financing arrangement with us, it could negatively impact our ability to make distributions to stockholders at our current level.
We will be subject to risks associated with the co-owners in our co-ownership arrangements that otherwise may not be present in other real estate investments.
We may enter into joint ventures or other co-ownership arrangements with respect to a portion of the properties we acquire. Ownership of co-ownership interests involves risks generally not otherwise present with an investment in real estate such as the following:
•
the risk that a co-owner may at any time have economic or business interests or goals that are or become inconsistent with our business interests or goals;
•
the risk that a co-owner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives;
•
the risk that disputes with co-owners may result in litigation, which may cause us to incur substantial costs and/or prevent our management from focusing on our business objectives;
•
the possibility that an individual co-owner might become insolvent or bankrupt, or otherwise default under the applicable mortgage loan financing documents, which may constitute an event of default under all of the applicable mortgage loan financing documents or allow the bankruptcy court to reject the tenants-in-common agreement or management agreement entered into by the co-owner owning interests in the property;
•
the possibility that a co-owner might not have adequate liquid assets to make cash advances that may be required in order to fund operations, maintenance and other expenses related to the property, which could result in the loss of current or prospective tenants and may otherwise adversely affect the operation and maintenance of the property, and could cause a default under the mortgage loan financing documents applicable to the property and may result in late charges, penalties and interest, and may lead to the exercise of foreclosure and other remedies by the lender;
•
the risk that a co-owner could breach agreements related to the property, which may cause a default under, or result in personal liability for, the applicable mortgage loan financing documents, violate applicable securities laws and otherwise adversely affect the property and the co-ownership arrangement; or
•
the risk that a default by any co-owner would constitute a default under the applicable mortgage loan financing documents that could result in a foreclosure and the loss of all or a substantial portion of the investment made by the co-owner.
Any of the above might subject a property to liabilities in excess of those contemplated and thus reduce the amount available for distribution to our stockholders.
In the event that our interests become adverse to those of the other co-owners, we may not have the contractual right to purchase the co-ownership interests from the other co-owners. Even if we are given the opportunity to purchase such co-ownership interests in the future, we cannot guarantee that we will have sufficient funds available at the time to purchase co-ownership interests from the co-owners.
We might want to sell our co-ownership interests in a given property at a time when the other co-owners in such property do not desire to sell their interests. Therefore, we may not be able to sell our interest in a property at the time we would like to sell. In addition, we anticipate that it will be much more difficult to find a willing buyer for our co-ownership interests in a property than it would be to find a buyer for a property we owned outright.
Risks Associated with Debt Financing

35




If we breach covenants under our current credit agreement with KeyBank and other syndication partners, we could be held in default under such agreement, which could accelerate our repayment date and materially adversely affect the value of our stockholders' investment in us.
We entered into an Amended and Restated Credit Agreement with KeyBank and other syndication partners under which we through our Operating Partnership, as the Borrower, were provided with a revolving credit facility in an initial commitment amount of up to $550 million and a term loan in an initial commitment amount of up to $200 million, which commitments may be increased under certain circumstances up to a maximum total commitment of $1.25 billion.
In addition to customary representations, warranties, covenants, and indemnities, the Amended and Restated Credit Agreement contains a number of financial covenants and requires us and the Borrower to comply with the following at all times, which will be tested on a quarterly basis: (i) a maximum consolidated leverage ratio of 60%, or, the ratio may increase to 65% for up to four consecutive quarters after a material acquisition; (ii) a minimum consolidated tangible net worth of approximately $530 million, plus 75% of net future equity issuances (including Operating Partnership units), minus 75% of the amount of any payments used to redeem equity (including Operating Partnership units) after June 28, 2018; (iii) a minimum consolidated fixed charge coverage ratio of not less than 1.50:1.00; (iv) a maximum total secured debt ratio of not greater than 40%, which ratio will increase by five percentage points for four quarters after closing of a material acquisition that is financed with secured debt; (v) a maximum total secured recourse debt ratio, excluding recourse obligations associated with interest rate hedges, of 10% of our total asset value (as defined); (vi) aggregate maximum unhedged variable rate debt of not greater than 30% of our total asset value; and (vii) a maximum payout ratio (as defined) of not greater than 95%.
If we were to default under the Amended and Restated Credit Agreement, the lenders could accelerate the date for our repayment of the loans, and could sue to enforce the terms of the loans.
We have broad authority to incur debt, and high debt levels could hinder our ability to make distributions and could decrease the value of our stockholders' investments.
Although, technically, our Board may approve unlimited levels of debt, our charter generally limits us to incurring debt no greater than 300% of our net assets before deducting depreciation or other non-cash reserves (equivalent to 75% leverage), unless any excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in our next quarterly report, along with a justification for such excess borrowing. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. These factors could limit the amount of cash we have available to distribute and could result in a decline in the value of our stockholders' investments.
We have incurred, and intend to continue to incur, mortgage indebtedness and other borrowings, which may increase our business risks.
We have placed, and intend to continue to place, permanent financing on our properties or obtain a credit facility or other similar financing arrangement in order to acquire properties as funds are being raised in our public offering. We may also decide to later further leverage our properties. We may incur mortgage debt and pledge all or some of our real properties as security for that debt to obtain funds to acquire real properties. We may borrow if we need funds to pay a desired distribution rate to our stockholders. We may also borrow if we deem it necessary or advisable to assure that we qualify and maintain our qualification as a REIT for federal income tax purposes. If there is a shortfall between the cash flow from our properties and the cash flow needed to service mortgage debt, then the amount available for distribution to our stockholders may be reduced.
We have incurred, and intend to continue to incur, indebtedness secured by our properties, which may result in foreclosure.
Most of our borrowings to acquire properties will be secured by mortgages on our properties. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan, which could adversely affect distributions to our stockholders. To the extent lenders require us to cross-collateralize our properties, or our loan agreements contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosure.
High interest rates may make it difficult for us to finance or refinance properties, which could reduce the number of properties we can acquire and the amount of cash distributions we can make.
If we place mortgage debt on properties, we run the risk of being unable to refinance the properties when the loans come due, or of being unable to refinance at cost effective rates. If interest rates are higher when the properties are refinanced, we may not be able to finance the properties and our income could be reduced. If any of these events occur, our cash flow would be

36




reduced. This, in turn, would reduce cash available for distribution to our stockholders and may hinder our ability to raise more capital by issuing more stock or by borrowing more money.
If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt, which could reduce the amount of distributions we pay to stockholders and decrease the value of our stockholders' investments.
We may have a significant amount of acquisition indebtedness secured by first priority mortgages on our properties. In addition, a majority of our properties contain, and any future acquisitions we make will likely contain, mortgage financing. If we are unable to make our debt payments when required, a lender could foreclose on the property or properties securing such debt. In any such event, we could lose some or all of our investment in these properties, which would reduce the amount of distributions we pay to stockholders and decrease the value of our stockholders' investments.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to stockholders at our current level.
When providing financing, a lender could impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage or replace our Advisor. These or other limitations may adversely affect our flexibility and limit our ability to make distributions to stockholders at our current level.
Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make distributions to stockholders at our current level.
We expect that we will incur indebtedness in the future. Interest we pay will reduce cash available for distribution. Additionally, if we incur variable rate debt, increases in interest rates would increase our interest costs, which could reduce our cash flows and our ability to make distributions to stockholders at our current level. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times that may not permit realization of the maximum return on such investments.
Disruptions in the credit markets could have a material adverse effect on our results of operations, financial condition and ability to pay distributions to stockholders at our current level.
In the past, domestic and international financial markets experienced significant disruptions which were brought about in large part by failures in the U.S. banking system. These disruptions severely impacted the availability of credit and contributed to rising costs associated with obtaining credit. If debt financing is not available on terms and conditions we find acceptable, we may not be able to obtain financing for investments. If these disruptions in the credit markets resurface, our ability to borrow monies to finance the purchase of, or other activities related to, real estate assets will be negatively impacted. If we are unable to borrow monies on terms and conditions that we find acceptable, we may be forced to use a greater proportion of our offering proceeds to finance our acquisitions, reduce the number of properties we can purchase, and/or dispose of some of our assets. These disruptions could also adversely affect the return on the properties we do purchase. In addition, if we pay fees to lock in a favorable interest rate, falling interest rates or other factors could require us to forfeit these fees. All of these events would have a material adverse effect on our results of operations, financial condition and ability to pay distributions to stockholders at our current level.
Federal Income Tax Risks
Failure to continue to qualify as a REIT would adversely affect our operations and our ability to make distributions at our current level as we will incur additional tax liabilities.
We believe we operate in a manner that allows us to qualify as a REIT for U.S. federal income tax purposes under the Code. Qualification as a REIT involves highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. Our qualification as a REIT will depend upon our ability to meet, through investments, actual operating results, distributions and satisfaction of specific stockholder rules, the various tests imposed by the Code.
If we fail to qualify as a REIT for any taxable year, we will be subject to federal income tax on our taxable income at corporate rates. If our REIT status is terminated for any reason, we would generally be disqualified from treatment as a REIT for the four taxable years following the year of such termination. Losing our REIT status would reduce our net earnings available for investment or distribution to stockholders because of the additional tax liability. If this occurs, we might be required to borrow funds or liquidate some investments in order to pay the applicable tax. In addition, distributions to stockholders would no longer qualify for the distributions paid deduction, and we would no longer be required to make distributions.

37




Qualification as a REIT is subject to the satisfaction of tax requirements and various factual matters and circumstances that are not entirely within our control. New legislation, regulations, administrative interpretations, or court decisions could change the tax laws with respect to qualification as a REIT or the federal income tax consequences of being a REIT. Our failure to continue to qualify as a REIT would adversely affect the return of a stockholder's investment.
To qualify as a REIT, and to avoid the payment of federal income and excise taxes and maintain our REIT status, we may be forced to borrow funds, use proceeds from the issuance of securities (including our Follow-On Offering), or sell assets to pay distributions, which may result in our distributing amounts that may otherwise be used for our operations.
To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our REIT taxable income, generally determined without regard to the deduction for distributions paid and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (i) 85% of our ordinary income, (ii) 95% of our capital gain net income, and (iii) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on the acquisition, maintenance or development of properties and it is possible that we might be required to borrow funds, use proceeds from the issuance of securities (including our Follow-On Offering), or sell assets in order to distribute enough of our taxable income to maintain our REIT status and to avoid the payment of federal income and excise taxes. We may be required to make distributions to stockholders at times it would be more advantageous to reinvest cash in our business or when we do not have cash readily available for distribution, and we may be forced to liquidate assets on terms and at times unfavorable to us. These methods of obtaining funding could affect future distributions by increasing operating costs and decreasing available cash. In addition, such distributions may constitute a return of capital.
Foreign purchasers of our common stock may be subject to Foreign Investment in Real Property Tax Act ("FIRPTA") tax upon the sale of their shares.
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to a tax, known as FIRPTA tax, on the gain recognized on the disposition. Such FIRPTA tax does not apply, however, to the disposition of stock in a REIT if the REIT is "domestically controlled." A REIT is "domestically controlled" if less than 50% of the REIT's stock, by value, has been owned directly or indirectly by persons who are not qualifying U.S. persons during a continuous five-year period ending on the date of disposition or, if shorter, during the entire period of the REIT's existence.
We cannot assure stockholders that we will qualify as a "domestically controlled" REIT. If we were to fail to so qualify, gain realized by foreign investors on a sale of our shares would be subject to FIRPTA tax, unless the non-U.S. stockholder is a qualified foreign pension fund (or an entity wholly owned by a qualified foreign pension fund) or our shares were traded on an established securities market and the foreign investor did not at any time during a specified testing period directly or indirectly own more than 10% of the value of our outstanding common stock.
If our operating partnership fails to maintain its status as a partnership for federal income tax purposes, its income would be subject to taxation and our REIT status would be terminated.
We intend to maintain the status of our operating partnership as a partnership for federal income tax purposes. However, if the Internal Revenue Service ("IRS") were to successfully challenge the status of our operating partnership as a partnership, it would be taxable as a corporation. In such event, this would reduce the amount of distributions that our operating partnership could make to us. This would also result in our losing REIT status and becoming subject to a corporate level tax on our own income. This would substantially reduce our cash available to pay distributions and the return on our stockholders' investments. In addition, if any of the entities through which our operating partnership owns its properties, in whole or in part, loses its characterization as a partnership for federal income tax purposes, the underlying entity would become subject to taxation as a corporation, thereby reducing distributions to our operating partnership and jeopardizing our ability to maintain REIT status.
Stockholders may have tax liability on distributions they elect to reinvest in our common stock.
If stockholders participate in our DRP, they will be deemed to have received, and for income tax purposes will be taxed on, the amount reinvested in common stock to the extent the amount reinvested was not a tax-free return of capital. As a result, unless a stockholder is a tax-exempt entity, a stockholder may have to use funds from other sources to pay its tax liability on the value of the common stock received.
In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to stockholders.

38




Even if we qualify and maintain our status as a REIT, we may be subject to federal income taxes or state taxes. For example, net income from a "prohibited transaction" will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the operating partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to stockholders.
We may be required to pay some taxes due to actions of our taxable REIT subsidiary which would reduce our cash available for distribution to stockholders.
Any net taxable income earned directly by our taxable REIT subsidiary, or through entities that are disregarded for federal income tax purposes as entities separate from our taxable REIT subsidiaries, will be subject to federal and possibly state corporate income tax. We have elected to treat Griffin Capital Essential Asset TRS II, Inc. as a taxable REIT subsidiary, and we may elect to treat other subsidiaries as taxable REIT subsidiaries in the future. In this regard, several provisions of the laws applicable to REITs and their subsidiaries ensure that a taxable REIT subsidiary will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary is limited in its ability to deduct certain interest payments made to an affiliated REIT. In addition, the REIT has to pay a 100% penalty tax on some payments that it receives or on some deductions taken by a taxable REIT subsidiary if the economic arrangements between the REIT, the REIT's customers, and the taxable REIT subsidiary are not comparable to similar arrangements between unrelated parties. Finally, some state and local jurisdictions may tax some of our income even though as a REIT we are not subject to federal income tax on that income because not all states and localities follow the federal income tax treatment of REITs. To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to stockholders.
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary or capital gain distributions with respect to our common stock, nor gain from the sale of common stock, should generally constitute unrelated business taxable income (UBTI) to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
•
part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as UBTI if shares of our common stock are predominately held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT share ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as UBTI;
•
part of the income and gain recognized by a tax exempt investor with respect to our common stock would constitute UBTI if the investor incurs debt in order to acquire the common stock; and
•
part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from federal income taxation under Sections 501(c)(7), (c)(9), (c)(17) or (c)(20) of the Code may be treated as UBTI.
Complying with the REIT requirements may cause us to forego otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of shares of our common stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, or we may be required to liquidate otherwise attractive investments in order to comply with the REIT tests. Thus, compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.

39




Legislative or regulatory action could adversely affect investors.
Individuals with incomes below certain thresholds are subject to federal income taxation on qualified dividends at a maximum rate of 15%. For those with income above such thresholds, the qualified dividend rate is 20%. These tax rates are generally not applicable to distributions paid by a REIT, unless such distributions represent earnings on which the REIT itself has been taxed. As a result, distributions (other than capital gain distributions) we pay to individual investors generally will be subject to the tax rates that are otherwise applicable to ordinary income for federal income tax purposes, subject to a 20% deduction for REIT dividends available under the 2017 Tax Act. Stockholders are urged to consult with their own tax advisors with respect to the impact of recent legislation on their investment in our common stock and the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our common stock.
To the extent our distributions represent a return of capital for tax purposes, a stockholder could recognize an increased capital gain upon a subsequent sale of the stockholder's common stock.
Distributions in excess of our current and accumulated earnings and profits and not treated by us as a dividend will not be taxable to a stockholder to the extent those distributions do not exceed the stockholder’s adjusted tax basis in his or her common stock, but instead will constitute a return of capital and will reduce such adjusted basis. (Such distributions to Non-U.S. Stockholders may be subject to withholding, which may be refundable.) If distributions exceed such adjusted basis, then such adjusted basis will be reduced to zero and the excess will be capital gain to the stockholder. If distributions result in a reduction of a stockholder’s adjusted basis in his or her common stock, then subsequent sales of such stockholder’s common stock potentially will result in recognition of an increased capital gain.
Because of the complexity of the tax aspects of our Follow-On Offering and because those tax aspects are not the same for all investors, stockholders should consult their independent tax advisors with reference to their tax situation before investing in our shares.
Employee Retirement Income Security Act of 1974 ("ERISA") Risks
There are special considerations that apply to employee benefit plans, Individual Retirement Accounts ("IRAs") or other tax-favored benefit accounts investing in our shares which could cause an investment in our shares to be a prohibited transaction which could result in additional tax consequences.
If stockholders are investing the assets of a pension, profit-sharing, 401(k), Keogh or other qualified retirement plan or the assets of an IRA in our common stock, they should satisfy themselves that, among other things:
• their investment is consistent with their fiduciary obligations under ERISA and the Code;
•
their investment is made in accordance with the documents and instruments governing their plan or IRA, including their plan's investment policy;
• their investment satisfies the prudence and diversification requirements of ERISA;
• their investment will not impair the liquidity of the plan or IRA;
• their investment will not produce UBTI for the plan or IRA;
• they will be able to value the assets of the plan annually in accordance with ERISA requirements; and
• their investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.
Persons investing the assets of employee benefit plans, IRAs, and other tax-favored benefit accounts should consider ERISA and related risks of investing in our shares.
ERISA and Code Section 4975 prohibit certain transactions that involve (1) certain pension, profit-sharing, employee benefit, or retirement plans or individual retirement accounts and Keogh plans, and (2) any person who is a "party-in-interest" or "disqualified person" with respect to such a plan. Consequently, the fiduciary of a plan contemplating an investment in the shares should consider whether we, any other person associated with the issuance of the shares, or any of their affiliates is or might become a "party-in-interest" or "disqualified person" with respect to the plan and, if so, whether an exemption from such prohibited transaction rules is applicable. In addition, the Department of Labor plan asset regulations provide that, subject to certain exceptions, the assets of an entity in which a plan holds an equity interest may be treated as assets of an investing plan, in which event the underlying assets of such entity (and transactions involving such assets) would be subject to the prohibited transaction provisions. We intend to take such steps as may be necessary to qualify us for one or more of the exemptions available, and thereby prevent our assets as being treated as assets of any investing plan.

40




In addition, if stockholders are investing the assets of an IRA or a pension, profit sharing, 401(k), Keogh or other employee benefit plan, they should satisfy themselves that their investment (i) is consistent with their fiduciary obligations under ERISA and other applicable law, (ii) is made in accordance with the documents and instruments governing their plan or IRA, including their plan’s investment policy, and (iii) satisfies the prudence and diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA. Stockholders should also determine that their investment will not impair the liquidity of the plan or IRA and will not produce UBTI for the plan or IRA; or, if it does produce UBTI, that the purchase and holding of the investment is still consistent with their fiduciary obligations. Stockholders should also satisfy themselves that they will be able to value the assets of the plan annually in accordance with ERISA requirements, and that their investment will not constitute a prohibited transaction under Section 406 of ERISA or Code Section 4975.


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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

42




ITEM 2. PROPERTIES
As of December 31, 2018 , we owned a fee simple interest in 27 properties, encompassing approximately 7.3 million rentable square feet. See Part IV, Item 15. “Exhibits, Financial Statement Schedules—Schedule III—Real Estate and Accumulated Depreciation and Amortization,” of this Annual Report on Form 10-K for a detailed listing of all our properties.

Revenue Concentration
The percentage of net rent for the 12-month period subsequent to December 31, 2018 , by state, based on the respective in-place leases, is as follows (dollars in thousands):
State
Net Rent
(unaudited)
Number of
Properties
Percentage of
Net Rent
Ohio
$
10,054

4

12.8
%
Illinois
8,862

2

11.3

California
8,778

3

11.2

Alabama
8,519

1

10.9

New Jersey
8,278

2

10.6

Arizona
7,527

2

9.6

Nevada
6,943

2

8.9

Texas
4,176

1

5.3

Oregon
3,312

1

4.2

North Carolina
2,750

2

3.5

All Others (1)
9,194

7

11.7

Total
$
78,393

27

100.0
%
(1)
All others account for approximately 3.0% or less of total annualized net rent on an individual basis.

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The percentage of net rent for the 12-month period subsequent to December 31, 2018 , by industry, based on the respective in-place leases, is as follows (dollars in thousands):
Industry (1)
Net Rent
(unaudited)
Number of
Lessees
Percentage of
Net Rent
Consumer Services
$
13,031

4

16.6
%
Utilities
10,462

2

13.3

Capital Goods
10,437

6

13.3

Technology Hardware & Equipment
9,821

3

12.5

Diversified Financials
5,863

1

7.5

Retailing
5,753

1

7.3

Banks
5,644

2

7.2

Energy
4,176

1

5.3

Consumer Durables and Apparel
3,312

1

4.2

Transportation
3,203

2

4.1

Pharmaceuticals, Biotechnology & Life Sciences
2,881

1

3.7

All Others (2)
3,810

3

5.0

Total
$
78,393

27

100.0
%
(1)
Industry classification based on the Global Industry Classification Standards.
(2)
All others represent 3.5% or less of total net rent on an individual basis.
The percentage of net rent for the 12-month period subsequent to December 31, 2018 , by tenant, based on the respective in-place leases, is as follows (dollars in thousands):
Tenant
Net Rent
(unaudited)
Percentage of
Net Rent
Southern Company Services, Inc.
$
8,519

10.9
%
American Express Travel Related Services Company, Inc.
5,863

7.5

Amazon.com.dedc, LLC
5,753

7.3

Bank of America, N.A.
5,644

7.2

Wyndham Worldwide Operations
5,397

6.9

IGT
4,774

6.1

3M Company
4,544

5.8

Zebra Technologies Corporation
4,318

5.5

Wood Group Mustang, Inc.
4,176

5.3

Nike
3,312

4.2

Other (1)
26,093

33.3

Total
$
78,393

100.0
%
(1)
All others account for 4.0% or less of total net rent on an individual basis.

44





The tenant lease expirations by year based on net rent for the 12-month period subsequent to December 31, 2018 are as follows (dollars in thousands):
Year of Lease Expiration
Net Rent
(unaudited)
Number of
Lessees
Approx. Square
Feet
Percentage of
Net Rent
2019 - 2021
$
8,956

3

746,900

11.4
%
2022
1,204

1

312,000

1.5

2023
6,913

2

658,600

8.8

2024
9,034

4

571,500

11.5

2025
7,557

5

728,800

9.6

2026
9,909

3

1,331,700

12.6

2027 and beyond
34,820

9

2,991,100

44.6

Total
$
78,393

27

7,340,600

100.0
%
Acquisition Indebtedness
For a discussion of our acquisitions and indebtedness, see Note 3, Real Estate, and Note 4, Debt, to the consolidated financial statements.

45




ITEM 3. LEGAL PROCEEDINGS

(a)    From time to time, we may become subject to legal proceedings, claims and litigation arising in the ordinary course of our business. We are not a party to any material legal proceedings, nor are we aware of any pending or threatened litigation that would have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
(b)    Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

46




PART II

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

Market Information
As of March 11, 2019 , we had approximately 227,686 of Class T shares, 280 of Class S shares, 19,319 of Class D shares, 807,373 of Class I shares, 25,785,133 of Class A shares, 49,874,287 of Class AA shares and 977,245 of Class AAA shares of common stock outstanding, including common stock issued pursuant to our DRP and stock distributions held by a total of approximately 16,000 stockholders of record. There is currently no established public trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sell our stock at a time or price acceptable to the stockholder, or at all.
Additionally, we provide discounts in our Follow-On Offering for certain categories of purchasers, including based on volume discounts. Pursuant to the terms of our charter, certain restrictions are imposed on the ownership and transfer of shares.
NAV and NAV per Share Calculation
In our Follow-On Offering, we offered the New Shares with NAV-based pricing to the public. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. Our Board, including a majority of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of the NAV.
As a public company, we are required to issue financial statements generally based on historical cost in accordance with GAAP as applicable to our financial statements. To calculate our NAV for the purpose of establishing a purchase and redemption price for our shares, we have adopted a model, which adjusts the value of certain of our assets from historical cost to fair value. As a result, our NAV may differ from the amount reported as stockholder’s equity on the face of our financial statements prepared in accordance with GAAP. When the fair value of our assets is calculated for the purposes of determining our NAV per share, the calculation is done using the fair value methodologies detailed within the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") under Topic 820, Fair Value Measurements and Disclosures . However, our valuation procedures and our NAV are not subject to GAAP and will not be subject to independent audit. Our NAV may differ from equity reflected on our audited financial statements, even if we are required to adopt a fair value basis of accounting for GAAP financial statement purposes in the future. Furthermore, no rule or regulation requires that we calculate NAV in a certain way. Although we believe our NAV calculation methodologies are consistent with standard industry principles, there is no established practice among public REITs, whether listed or not, for calculating NAV in order to establish a purchase and redemption price. As a result, other public REITs may use different methodologies or assumptions to determine NAV.
Our NAV is calculated for the New Shares and our IPO Shares by ALPS Fund Services, Inc. (the "NAV Accountant"), a third-party firm approved by our Board, including a majority of our independent directors, after the end of each business day that the New York Stock Exchange is open for unrestricted trading. Our Board, including a majority of our independent directors, may replace our NAV Accountant with another party, including our Advisor, if it is deemed appropriate to do so.
At the end of each such trading day, before taking into consideration accrued distributions or class-specific expense accruals, any change in the aggregate company NAV (whether an increase or decrease) is allocated among each class of shares based on each class’s relative percentage of the previous aggregate company NAV plus issuances of shares that were effective the previous trading day. Changes in the aggregate company NAV reflect factors, including, but not limited to, unrealized/realized gains (losses) on the value of our real property portfolio, any applicable organization and offering costs and any expense reimbursements, real estate-related liabilities, and daily accruals for income and expenses (including the allocation/accrual of any performance distribution and accruals for advisory fees and distribution fees) and distributions to investors. Changes in our aggregate company NAV also include material non-recurring events, such as capital expenditures and material property acquisitions and dispositions.
Our most significant source of net income is property income. We accrue estimated income and expenses on a daily basis based on annual budgets as adjusted from time to time to reflect changes in the business throughout the year. For the first month following a property acquisition, we calculate and accrue portfolio income with respect to such property based on the performance of the property before the acquisition and the contractual arrangements in place at the time of the acquisition, as identified and reviewed through our due diligence and underwriting process in connection with the acquisition. For the purpose

47




of calculating our NAV, all organizational and offering costs reduce NAV as part of our estimated income and expense accrual. On a periodic basis, our income and expense accruals are adjusted based on information derived from actual operating results.
Our liabilities are included as part of our NAV calculation generally based on GAAP. Our liabilities include, without limitation, property-level mortgages, accrued distributions, the fees payable to the Advisor and the dealer manager, accounts payable, accrued company-level operating expenses, any company or portfolio-level financing arrangements and other liabilities.
Following the calculation and allocation of changes in the aggregate company NAV as described above, NAV for each share class is adjusted for accrued distributions and the accrued distribution fee, to determine the current day’s NAV. Selling commissions and dealer manager fees, which are effectively paid by purchasers of Class T and Class S shares in the Follow-On Offering at the time of purchase, because the purchase price of such shares is equal to the applicable NAV per share plus the applicable selling commission and/or dealer manager fee, will generally have no effect on the NAV of any class.
NAV per share for each class is calculated by dividing such class’s NAV at the end of each trading day by the number of shares outstanding for that class on such day.
Under GAAP, we accrue the full cost of the distribution fee as an offering cost for the New Shares up to the 9.0% limit at the time such shares are sold. For purposes of NAV, we recognize the distribution fee as a reduction of NAV on a daily basis as such fee is accrued. We intend to reduce the net amount of distributions paid to stockholders by the portion of the distribution fee accrued for such class of shares, so that the result is that although the obligation to pay future distribution fees is accrued on a daily basis and included in the NAV calculation, it is not expected to impact the NAV of the shares because of the adjustment to distributions.
Set forth below are the components of the daily NAV as of December 31, 2018 and September 30, 2018 , calculated in accordance with our valuation procedures (in thousands, except share and per share amounts):
As of December 31, 2018
As of September 30, 2018
Gross Real Estate Asset Value
$
1,229,797

$
1,225,400

Other Assets, net
7,131

11,567

Mortgage Debt
(490,055
)
(490,055
)
NAV
$
746,873

$
746,912

Total Shares Outstanding
77,669,752

77,620,432

NAV per share
$
9.62

$
9.62

Our independent valuation firm utilized a blend of the direct capitalization and discounted cash flow approach for 2 of the 27 properties in our portfolio and the discounted cash flow approach for the remaining 25 properties in our portfolio with a weighted average of approximately 9.3 years remaining on their existing leases. The following summarizes the range of overall capitalization rates for the 27 properties using the cash flow discount rates:
Range
Weighted Average
Overall Capitalization Rate (direct capitalization approach)
5.25%
6.25%
5.36%
Terminal Capitalization Rate (discounted cash flow approach)
5.25%
9.25%
6.40%
Cash Flow Discount Rate (discounted cash flow approach)
6.00%
11.50%
7.14%

48




The following table sets forth the quarterly changes to the components of NAV for the Company and the reconciliation of NAV changes for each class of shares:
Share Classes
Class T
Class S
Class D
Class I
IPO
OP Units
Total
NAV as of September 30, 2018
$
2,186,326

$
2,672

$
184,665

$
7,750,410

$
735,402,166

$
1,385,707

$
746,911,946

Fund Level Changes to NAV
Realized/unrealized losses on net assets
33,223

40

2,809

117,672

11,169,582

20,947

11,344,273

Dividend Accrual
(25,907
)
(32
)
(2,546
)
(111,538
)
(10,648,972
)
(19,932
)
(10,808,927
)
Class specific changes to NAV
Stockholder Servicing fees/distribution fees
(5,508
)
(6
)
(117
)
—

(1,042,990
)
(1,971
)
(1,050,592
)
NAV as of December 31, 2018 before share/unit sale/redemption activity
$
2,188,134

$
2,674

$
184,811

$
7,756,544

$
734,879,786

$
1,384,751

$
746,396,700

Unit sale/redemption activity- Dollars
Amount sold
14,621

31

1,591

42,394

5,283,483

—

5,342,120

Amount redeemed
—

—

—

—

(4,865,417
)
—

(4,865,417
)
NAV as of December 31, 2018
$
2,202,755

$
2,705

$
186,402

$
7,798,938

$
735,297,852

$
1,384,751

$
746,873,403

Shares/ units outstanding as of
September 30, 2018
225,801

276

19,103

801,630

76,429,842

143,779

77,620,431

Shares/units sold
1,510

3

165

4,384

549,223

—

555,285

Shares/units redeemed
—

—

—

—

(505,964
)
—

(505,964
)
Shares/units outstanding as of
December 31, 2018
227,311

279

19,268

806,014

76,473,101

143,779

77,669,752

NAV per share/unit as of
September 30, 2018
$
9.68

$
9.68

$
9.67

$
9.67

$
9.62

Change in NAV per share/unit
0.01

0.01

—

0.01

—

NAV per share/unit as of December 31, 2018
$
9.69

$
9.69

$
9.67

$
9.68

$
9.62


Equity Compensation Plans
Information regarding our equity compensation plans and the securities authorized under the plans is included in Item 12 below.
Recent Sales of Unregistered Securities
During the year ended December 31, 2018 , there were no sales of unregistered securities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share Redemption Program
We had a share redemption program for holders of IPO Shares who held their shares for less than four years (“IPO SRP”), which enabled IPO stockholders to sell their shares back to us in limited circumstances. On June 4, 2018, our Board approved the termination of the IPO SRP, effective as of July 5, 2018.

In connection with the Follow-On Offering, our Board adopted the SRP for the New Shares (and IPO Shares that have been held for four years or longer). On June 4, 2018, our Board amended and restated the SRP to allow stockholders of our IPO Shares to utilize the SRP, effective as of July 5, 2018. Under the SRP, we will redeem shares as of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th of the month prior to quarter end. Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of our common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the SRP, as applicable.
There are several restrictions under the SRP. Stockholders generally have to hold their shares for one year before submitting their shares for redemption under the program; however, we will waive the one-year holding period in the event of

49




the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, the SRP generally imposes a quarterly cap on aggregate redemptions of our shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter. Our Board has the right to modify or suspend the SRP upon 30 days' notice at any time if it deems such action to be in our best interest. Any such modification or suspension will be communicated to stockholders through our filings with the SEC.
As of December 31, 2018 , the quarterly cap was approximately $37.4 million and $4.9 million of common stock was reclassified from common stock to accrued expenses and other liabilities in the consolidated balance sheet as of December 31, 2018 .
On December 12, 2018, in connection with the proposed Company Merger, our Board approved the temporary suspension of the SRP. Redemptions submitted for the fourth quarter of 2018 will be honored in accordance with the terms of the SRP, and the SRP was officially suspended as of January 19, 2019. The SRP shall remain suspended until such time, if any, as our Board may approve the resumption of the SRP.
During the three months ended December 31, 2018 , we redeemed shares as follows:
For the Month Ended
Total
Number of
Shares
Redeemed
Weighted Average
Price Paid
per Share
Total Number of
Shares Redeemed as
Part of Publicly
Announced Plans or
Programs
Maximum Number (or
Approximate Dollar Value)
of Shares (or Units) that May
Yet Be Purchased Under the Plans or Programs
October 31, 2018
—

$
—

—

(1)
November 30, 2018
—

$
—

—

(1)
December 31, 2018
505,977

$
9.62

505,977

(1)
(1)
A description of the maximum number of shares that may be purchased under our SRP is included in the narrative preceding this table.

During the year ended December 31, 2017, we redeemed 623,499 shares of common stock for approximately $5.7 million at a weighted average price per share of $9.21 . During the year ended December 31, 2018, we redeemed 2,506,298 shares of common stock for approximately $23.8 million at a weighted average price per share of 9.48 . Since our inception, we have honored all redemption requests and have redeemed a total of 3,297,239 shares of common stock for approximately $31.1 million at a weighted average price per share of $9.44 .
For information regarding redemptions after December 31, 2018, please see Note 14, Subsequent Events to the consolidated financial statements contained in this report.
Use of Proceeds
As of the quarter ended March 31, 2018, we had raised net proceeds of approximately $714.0 million in our IPO and had applied all such proceeds as of that date as detailed in the Form 10-Q for that period.


50




ITEM 6. SELECTED FINANCIAL DATA
The following selected financial and operating information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K (dollars in thousands):
Year Ended December 31,
For the Period from February 11, 2014 (Date of Initial Capitalization) through December 31,
2018
2017
2016
2015
2014
Operating Data
Total revenue
$
106,394

$
107,381

$
62,812

$
25,149

$
—

Income before other income and (expenses)
$
16,876

$
26,107

$
4,264

$
(11,653
)
$
(439
)
Net (loss) income
$
(3,287
)
$
11,119

$
(6,107
)
$
(16,504
)
$
(495
)
Net (loss) income attributable to common stockholders
$
(3,281
)
$
11,116

$
(6,104
)
$
(17,247
)
$
(437
)
Net (loss) income attributable to common stockholders per share, basic and diluted (1)
$
(0.04
)
$
0.15

$
(0.12
)
$
(1.19
)
$
(0.86
)
Distributions declared per common share
$
0.55

$
0.55

$
0.55

$
0.55

$
0.26

Balance Sheet Data
Total assets
$
1,137,335

$
1,179,948


$
1,184,475

$
536,720

$
10,588

Total liabilities
$
583,470

$
584,999


$
613,090

$
307,213

$
1,057

Redeemable common stock
$
37,357

$
32,405

$
16,930

$
4,566

$
51

Total stockholders’ equity
$
515,326

$
562,468

$
554,371

$
224,844

$
9,341

Total equity
$
516,508

$
562,544

$
554,455

$
224,941

$
9,480

Other Data

Net cash provided by (used in) operating activities
$
40,955

$
39,712

$
16,444

$
(2,935
)
$
54

Net cash used in investing activities
$
(2,305
)
$
(87,207
)
$
(533,806
)
$
(486,148
)
$
(2,000
)
Net cash (used in) provided by financing activities
$
(43,173
)
$
29,984

$
563,313

$
500,522

$
7,917

(1)
Amounts were retroactively adjusted to reflect stock dividends. (See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, for additional detail).

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

The following “Management’s Discussion and Analysis of Financial Condition and Result of Operations” should be read in conjunction with the financial statements and the notes thereto contained in this report.
Overview
Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation, was formed on November 20, 2013 under the MGCL and qualified as a REIT commencing with the year ended December 31, 2015. We were organized primarily with the purpose of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and expect to use a substantial amount of the net proceeds from our Follow-On Offering to invest in these properties. We have no employees and are externally advised and managed by our Advisor. Our year end is December 31.
On September 20, 2017, we commenced a follow-on offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in our primary offering and $0.2 billion of shares pursuant to our DRP. We reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively, and offered to the public New Shares of common stock with NAV based pricing in the primary portion of the Follow-On Offering. See Note 10, Related Party Transactions , for additional details on changes in fees to affiliates. The DRP offering included all seven of our share classes. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. Our Board, including a majority of the independent directors, has adopted valuation procedures that contain a comprehensive set of methodologies to be used in connection with the calculation of the NAV. On August 16, 2018, our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effective August 17, 2018. On December 12, 2018, we also temporarily suspended our DRP offering and our SRP. Beginning in January 2019, all distributions by us were paid in cash. The SRP was officially suspended as of January 19, 2019. We intend to recommence our SRP once the Mergers are completed. On February 15, 2019, our Board determined it was in the best interests to reinstate the DRP effective with the February distribution to be paid on or around

51




March 1, 2019. At this time, we intend to recommence our Follow-On Offering, if appropriate and at the appropriate time, once the Mergers are completed.
As of December 31, 2018 , our real estate portfolio consisted of 27 properties ( 35 buildings) consisting substantially of office, industrial, distribution, and data center facilities with a combined acquisition value of $1.1 billion , including the allocation of the purchase price to above and below-market lease valuation, encompassing approximately 7.3 million square feet. Our annualized net rent for the 12- months period subsequent to December 31, 2018 was approximately $78.4 million with approximately 75.8% generated by properties leased to tenants and/or guarantors or whose non-guarantor parent companies have investment grade or, in management's belief, equivalent ratings. Our rentable square feet under lease as of December 31, 2018 was 100% , with a weighted average remaining lease term of 9.3 with a weighted average annual rent increases of approximately 2.4% , and a debt to total real estate acquisition price of 43.7% .
On December 14, 2018, we entered into the Merger Agreement with GCEAR in connection with the Mergers. Under the terms of the Merger Agreement, each share of common stock of GCEAR issued and outstanding will be converted into the right to receive 1.04807 shares of our common stock. The Mergers are subject to customary closing conditions, including the receipt of approval of both our and GCEAR’s stockholders, thus, there is no guarantee that the Mergers will be consummated. See Part I, Item 1. and 1a., Business and Risk Factors , respectively, for additional details.
Inflation
The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. However, in the event inflation does become a factor, we expect that our leases typically will not include provisions that would protect us from the impact of inflation. We will attempt to acquire properties with leases that require the tenants to pay, directly or indirectly, all operating expenses and certain capital expenditures, which will protect us from increases in certain expenses, including, but not limited to, material and labor costs. In addition, we will attempt to acquire properties with leases that include rental rate increases, which will act as a potential hedge against inflation.
Summary of Significant Accounting Policies
We have established accounting policies which conform to GAAP as contained in the FASB ASC. The preparation of our consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different estimates would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may use different estimates and assumptions that may impact the comparability of our financial condition and results of operations to those companies.
The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements. This discussion of our critical accounting policies is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments. For further discussion of our significant accounting policies, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies , to the consolidated financial statements included in this report.
Real Estate - Valuation and Purchase Price Allocation
When we acquire operating properties, we allocate the purchase price on an asset acquisition to the various components of the acquisition based upon the relative fair value of each component. The components typically include land, building and improvements, tenant improvements, intangible assets related to above and below market leases, intangible assets related to in-place leases, debt and other assumed assets and liabilities. Transaction costs are capitalized as a component of the cost of the asset acquisition.
We allocate the purchase price to the relative fair value of the tangible assets of a property by valuing the property as if it were vacant. This “as-if vacant” value is estimated using an income, or discounted cash flow, approach that relies upon Level 3 inputs, which are unobservable inputs based on our assumptions about the assumptions a market participant would use. These Level 3 inputs include discount rates, capitalization rates, market rents and comparable sales data for similar properties. 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.

52




In determining the relative fair value of intangible lease assets or liabilities, we also consider Level 3 inputs. Acquired above- and below-market leases are valued based on the present value of the difference between prevailing market rates and the in-place rates measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases, if applicable. The estimated relative fair value of acquired in-place at-market tenant leases are the costs that would have been incurred to lease the property to the occupancy level of the property at the date of acquisition. Such estimates include the value associated with leasing commissions, legal and other costs, as well as the estimated period necessary to lease such property that would be incurred to lease the property to its occupancy level at the time of its acquisition. Acquisition costs associated with an asset acquisition are capitalized as a component of the transaction.
The difference between the relative fair value and the face value of debt assumed in connection with an acquisition is recorded as a premium or discount and amortized to “interest expense” over the life of the debt assumed. The valuation of assumed liabilities is based on our estimate of the current market rates for similar liabilities in effect at the acquisition date.
For acquisitions that do not meet the accounting criteria to be accounted for as an asset acquisition, we allocate the cost of the acquisition, which excludes any associated acquisition costs that are expensed when incurred, to the individual assets and liabilities assumed on a fair value basis.
Impairment of Real Estate and Related Intangible Assets and Liabilities
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of 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 will assess the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and the eventual disposition. If based on this analysis we do not believe that we will be able to recover the carrying value of the asset, we will record an impairment loss to the extent the carrying value exceeds the estimated fair value of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. As of December 31, 2018 , we did not record any impairment charges related to our real estate assets or intangible assets.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. If a lease provides for contingent rental income, we will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (collectively, "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on our estimate of the property's operating expenses for the year, pro rated based on leased square footage of the property, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the lease. At least quarterly, we reconcile the amount of additional rent paid by the tenant during the year to the actual amount of the Recoverable Expenses incurred by us for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances, the lease may restrict the amount we can recover from the tenant such as a cap on certain or all property operating expenses.
Recently Issued Accounting Pronouncements
See Note 2, Basis of Presentation and Summary of Significant Accounting Policies , to the consolidated financial statements.

53





Results of Operations
Overview
Same Store Analysis
Comparison of the Years Ended December 31, 2018 and 2017
For the year ended December 31, 2018 , our "Same Store" portfolio consisted of 25 properties with an acquisition value of $1.1 billion. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented.
The following table provides a comparative summary of the results of operations for 25 properties for the years ended December 31, 2018 and 2017 (dollars in thousands):
Year Ended December 31,
Increase/(Decrease)
Percentage
Change
2018
2017
Rental income
$
84,561

$
87,407

$
(2,846
)
(3
)%
Property expense recoveries
17,828

16,969

859

5
%
Property operating expenses
7,232

6,592

640

10
%
Property management fees to affiliates
1,764

1,748

16

1
%
Property tax expense
9,529

9,591

(62
)
(1
)%
Depreciation and amortization
42,578

42,425

153

—
%
Rental Income
The decrease in rental income was primarily related to an expiring rent reimbursement at one property.
Property Expense Recoveries
The increase in property expense recoveries for the year ended December 31, 2018 compared to the same period a year ago is primarily the result of higher operating expenses and a prior year common area maintenance reconciliation.
Property Operating Expenses
The increase in property operating expense of $0.6 million for the year ended December 31, 2018 compared to the same period a year ago is primarily the result of higher property expenses at one property due to adverse weather conditions and timing of repair and maintenance costs incurred during the current year.

54




Same Store Analysis
Comparison of the Years Ended December 31, 2017 and 2016
For the year ended December 31, 2017, our "Same Store" portfolio consisted of 15 properties with an acquisition value of $479.2 million. Our "Same Store" portfolio includes properties which were held for a full period for all periods presented. The following table provides a comparative summary of the results of operations for 15 properties for the years ended December 31, 2017 and 2016 (dollars in thousands):
Year Ended December 31,
Increase/(Decrease)
Percentage
Change
2017
2016
Rental income
$
38,879

$
38,903

$
(24
)
—
%
Property management fees to affiliates
778

779

(1
)
—
%
Property expense recoveries
9,220

8,633

587

7
%
Property operating expenses
3,520

3,384

136

4
%
Property tax expense
5,734

5,420

314

6
%
Depreciation and amortization
21,496

21,547

(51
)
—
%
Property Expense Recoveries
The increase in property expense recoveries for the year ended December 31, 2017 was primarily related to an increase in recoverable operating expenses and property tax expenses incurred during 2017.
Property Tax Expense
The increase in property tax expense for the year ended December 31, 2017 was primarily related to a property tax reassessment.
Portfolio Analysis
Comparison of the Years Ended December 31, 2018 and 2017
As of December 31, 2017 and 2018, we owned 27 properties. The variances as it relates to advisory fees, performance distribution allocation expenses and asset management fees from our results of operations for the year ended December 31, 2018 compared to the same period in the prior year are primarily a result of our Advisor's new management compensation structure related to our Follow-On Offering with a daily NAV structure.

55




The following table provides summary information about our results of operations for the year ended December 31, 2018 and 2017 (dollars in thousands):
Year Ended December 31,
Increase/(Decrease)
Percentage
Change
2018
2017
Rental income
$
87,789

$
89,797

$
(2,008
)
(2
)%
Property expense recoveries
18,605

17,584

1,021

6
%
Property operating expense
7,382

6,724

658

10
%
Property tax expense
10,120

10,049

71

1
%
Property management fees to affiliates
1,832

1,799

33

2
%
Asset management fees to affiliates
—

8,027

(8,027
)
(100
)%
Advisory fees to affiliates
9,316

2,550

6,766

265
%
Performance distributions to affiliates
7,783

2,394

5,389

225
%
Acquisition fees and expenses to non-affiliates
1,938

—

1,938

100
%
General and administrative expenses
3,471

3,445

26

1
%
Corporate operating expenses to affiliates
3,011

2,336

675

29
%
Depreciation and amortization
44,665

43,950

715

2
%
Interest expense
20,375

15,519

4,856

31
%
Property Expense Recoveries
The increase in property expense recoveries of approximately $1.0 million for the year ended December 31, 2018 compared to the same period a year ago is primarily the result of higher operating expenses and a prior year common area maintenance reconciliation.
Property Operating Expenses
The increase in property operating expense of $0.7 million for the year ended December 31, 2018 compared to the same period a year ago is primarily the result of higher property expenses at one property due to adverse weather conditions and timing of repair and maintenance costs incurred during the current year.
Acquisition Fees and Expenses to Non-Affiliates
The increase in acquisition fees and expenses to non-affiliates of $1.9 million for the year ended December 31, 2018 compared to the same period a year ago is primarily the result of costs related to the Company Merger.
Corporate Operating Expenses to Affiliates
Corporate operating expenses to affiliates for the year ended December 31, 2018 increased by approximately $0.7 million compared to the same period a year ago primarily as a result of an increase in allocated personnel costs by our Advisor.
Interest Expense
The increase in interest expense for the year ended December 31, 2018 was primarily related to (1) approximately $7.4 million related to the execution of the BofA/KeyBank loan during the current year; (2) approximately $2.0 million related to the execution of the term loan in the current year; offset by (3) a $4.0 million decrease due to the paydown of principal balance of the Revolving Credit Facility; and (4) approximately $0.9 million as a result of favorable swap positions in the current period.

56




Comparison of the Years Ended December 31, 2017 and 2016
We owned 27 properties as of December 31, 2017. The variance differences from our results of operations for the year ended December 31, 2017 compared to the same period in the prior year, is primarily a result of current year activity including rental income and property expenses for prior year acquisitions and activity for acquisitions subsequent to December 31, 2016.
The following table provides summary information about our results of operations for the year ended December 31, 2017 and 2016 (dollars in thousands):
Year Ended December 31,
Increase/(Decrease)
Percentage
Change
2017
2016
Rental income
$
89,797

$
51,403

$
38,394

75
%
Property expense recoveries
17,584

11,409

6,175

54
%
Property operating expense
6,724

4,428

2,296

52
%
Property tax expense
10,049

7,046

3,003

43
%
Property management fees to affiliates
1,799

1,052

747

71
%
Asset management fees to affiliates
8,027

6,413

1,614

25
%
Advisory fees to affiliates
2,550

—

2,550

100
%
Performance distribution allocation to affiliates
2,394

—

2,394

100
%
Acquisition fees and expenses to non-affiliates
—

1,113

(1,113
)
(100
)%
Acquisition fees and expenses to affiliates
—

6,176

(6,176
)
(100
)%
General and administrative expenses
3,445

2,804

641

23
%
Corporate operating expenses to affiliates
2,336

1,622

714

44
%
Depreciation and amortization
43,950

27,894

16,056

58
%
Interest expense
15,519

10,384

5,135

49
%
Asset Management Fees to Affiliates
The increase in asset and property management fees to affiliates for the year ended December 31, 2017 was primarily the result of portfolio growth during 2016 and 2017, offset by changes in the management fee structure attributed to the Follow-On Offering with a daily NAV structure.
Performance Distributions and Advisory Fees to Affiliates
The total increase in performance distributions and advisory fees to affiliates for the year ended December 31, 2017 was a result of changes in the fee structure attributed to the Follow-On Offering with a daily NAV structure.
Acquisition Fees and Expenses to Non-Affiliates and Affiliates
The total decrease in acquisition fees and expenses to non-affiliates and affiliates for the year ended December 31, 2017 compared to the same period a year ago was approximately $7.3 million . The decrease was a result of an accounting standard, which clarified the definition of a business combination. Under the clarified definition, our two acquisitions through the year ended December 31, 2017 did not qualify as a business combination; consequently, we accounted for each transaction as an asset acquisition. Thus, approximately $1.2 million of acquisition expense was capitalized as part of the asset acquisition and allocated on a relative fair value basis.

57




General and Administrative Expenses and Corporate Operating Expenses to Affiliates
The total increase in general and administrative expenses and corporate operating expenses to affiliates for the year ended December 31, 2017 compared to the same period a year ago was approximately $1.4 million . The increase was related to: (1) the issuance of restricted stock to our independent directors, which contributed approximately $0.3 million ; (2) approximately $0.4 million of professional fees; and (3) approximately $0.6 million in corporate payroll due to an increase in headcount.
Interest Expense
The increase in interest expense for the year ended December 31, 2017 was primarily related to draws that totaled $274.2 million from our Revolving Credit Facility to fund six acquisitions subsequent to January 1, 2016.
Funds from Operations and Adjusted Funds from Operations
Our management believes that historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient.
Management is responsible for managing interest rate, hedge and foreign exchange risks. To achieve our objectives, we may borrow at fixed rates or variable rates. In order to mitigate our interest rate risk on certain financial instruments, if any, we may enter into interest rate cap agreements or other hedge instruments and in order to mitigate our risk to foreign currency exposure, if any, we may enter into foreign currency hedges. We view fair value adjustments of derivatives, impairment charges and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of ongoing operations and are therefore typically adjusted for when assessing operating performance.
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 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, adding back asset impairment write-downs, 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 and preferred distributions. Because FFO calculations exclude 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. We previously used Modified Funds from Operations (as defined by the Institute for Portfolio Alternatives) as a non-GAAP measure of operating performance. Management elected to replace the Modified Funds from Operations measure with AFFO as management believes AFFO provides investors with an operating performance measure that is consistent with the performance models and analysis used by management, including the addition of non-cash performance distributions not defined in the calculation of MFFO. In addition, AFFO is a measure used among our peer group, which includes daily NAV REITs. We also believe that AFFO is a recognized measure of sustainable operating performance by 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.

58




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 the Company's 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. As explained below, management’s evaluation of our operating performance excludes items considered in the calculation of AFFO based on the following economic considerations:
•
Revenues in excess of cash received, net. Most of our leases provide for periodic minimum rent payment increases throughout the term of the lease. In accordance with GAAP, these contractual periodic minimum rent payment increases during the term of a lease are recorded to rental revenue on a straight-line basis in order to reconcile the difference between accrual and cash basis accounting. As straight-line rent is a GAAP non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of straight-line rent to arrive at AFFO as a means of determining operating results of our portfolio. In addition, when applicable, in conjunction with certain acquisitions, we may enter into a master escrow or lease agreement with a seller, whereby the seller is obligated to pay us rent pertaining to certain spaces impacted by existing rental abatements. In accordance with GAAP, these proceeds are recorded as an adjustment to the allocation of real estate assets at the time of acquisition, and, accordingly, are not included in revenues, net income, or FFO. This application results in income recognition that can differ significantly from current contract terms. By adjusting for this item, we believe AFFO is reflective of the realized economic impact of our leases (including master agreements) that is useful in assessing the sustainability of our operating performance.
•
Amortization of in-place lease valuation. Acquired in-place leases are valued as above-market or below-market as of the date of acquisition based on the present value of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management's estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease for above-market leases. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases. As amortization of in-place lease valuation is a non-cash adjustment and is included in historical earnings, FFO is adjusted for the effect of the amortization to arrive at AFFO as a means of determining operating results of our portfolio.
•
Acquisition-related costs. We were organized primarily with the purpose of acquiring or investing in income-producing real property in order to generate operational income and cash flow that will allow us to provide regular cash distributions to our stockholders. In the process, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs, which in accordance with GAAP are capitalized and included as part of the relative fair value when the property acquisition meets the definition of an asset acquisition or are expensed as incurred and are included in the determination of income (loss) from operations and net income (loss), for property acquisitions accounted for as a business combination. By excluding acquisition-related costs, AFFO may not provide an accurate indicator of our operating performance during periods in which acquisitions are made. However, it can provide an indication of our on-going ability to generate cash flow from operations and continue as a going concern after we cease to acquire properties on a frequent and regular basis, which can be compared to the AFFO of other non-listed REITs that have completed their acquisition activity and have similar operating characteristics to ours. Management believes that excluding these costs from AFFO provides investors with supplemental performance information that is consistent with the performance models and analyses used by management.
•
Gain or loss from the extinguishment of debt. We use debt as a partial source of capital to acquire properties in our portfolio. As a term of obtaining this debt, we will pay financing costs to the respective lender. Financing costs are presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and amortized into interest expense on a straight-line basis over the term of the debt. We consider the amortization expense to be a component of operations if the debt was used to acquire properties. From time to time, we may cancel certain debt obligations and replace these canceled debt obligations with new debt at more favorable terms to us. In doing so, we are required to write off the remaining capitalized financing costs associated with the canceled debt, which we consider to be a cost, or loss, on extinguishing such debt. Management believes that this loss is

59




considered an event not associated with our operations, and therefore, deems this write off to be an exclusion from AFFO.
•
Unrealized gains (losses) on derivative instruments. These adjustments include unrealized gains (losses) from mark-to-market adjustments on interest rate swaps and losses due to hedge ineffectiveness.  The change in the fair value of interest rate swaps not designated as a hedge and the change in the fair value of the ineffective portion of interest rate swaps are non-cash adjustments recognized directly in earnings and are included in interest expense.  We have excluded these adjustments in our calculation of AFFO to more appropriately reflect the economic impact of our interest rate swap agreements.
•
Performance distribution allocation. Our Advisor holds a special limited partnership interest in our Operating Partnership that entitles it to receive a special distribution from our Operating Partnership equal to 12.5% of the total return, subject to a 5.5% hurdle amount and a high water mark, with a catch-up. At the election of the advisor, the performance distribution allocation may be paid in cash or Class I units in our Operating Partnership. We believe that the distribution, to the extent it is paid in cash, is appropriately included as a component of corporate operating expenses to affiliates and therefore included in FFO and AFFO. If, however, the special distribution is paid in Class I units, management believes the distribution would be excluded from AFFO to more appropriately reflect the on-going portfolio performance and our ability to sustain the current distribution level.
•
Dead deal costs. As part of investing in income-producing real property, we incur non-reimbursable affiliated and non-affiliated acquisition-related costs for transactions that fail to close, which in accordance with GAAP, are expensed and are included in the determination of income (loss) from operations and net income (loss). Similar to acquisition-related costs (see above), management believes that excluding these costs from AFFO provides investors with supplemental performance information that is consistent with the performance models and analyses used by management.
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. The use of AFFO as a measure of long-term operating performance on value is also limited if we do not continue to operate under our current business plan as noted above. 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, and in particular, after the offering and acquisition stages are complete. 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 to 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.

60




Our calculation of FFO and AFFO is presented in the following table for the years ended December 31, 2018 , 2017 and 2016 (dollars in thousands):
Year Ended December 31,
2018
2017
2016
Net (loss) income
$
(3,287
)
$
11,119

$
(6,107
)
Adjustments:
Depreciation of building and improvements
20,466

20,194

11,630

Amortization of leasing costs and intangibles
24,199

23,756

16,264

FFO
$
41,378

$
55,069

$
21,787

Distributions to noncontrolling interests
(70
)
(11
)
(11
)
FFO, net of noncontrolling interest distributions
$
41,308

$
55,058

$
21,776

Reconciliation of FFO to AFFO
FFO, net of noncontrolling interest distributions
$
41,308

$
55,058

$
21,776

Adjustments:
Acquisition fees and expenses to non-affiliates
1,938

—

1,113

Acquisition fees and expenses to affiliates
—

—

6,176

Revenues in excess of cash received, net
(5,882
)
(10,528
)
(3,699
)
Amortization of below market rent, net
(4,695
)
(4,573
)
(3,592
)
Unrealized loss (gain) on derivatives
77

83

(155
)
Loss on extinguishment of debt - write-off of deferred financing costs
—

—

377

Performance distribution adjustment
3,904

1,197

—

Dead deal costs
316

—

—

AFFO
$
36,966

$
41,237

$
21,996

Liquidity and Capital Resources

Long-Term Liquidity and Capital Resources
On a long-term basis, our principal demands for funds will be for property acquisitions, either directly or through entity interests, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness and other investments. Generally, cash needs for items, other than property acquisitions, will be met from operations and proceeds received from offerings. However, there may be a delay between the sale of our shares and our purchase of properties that could result in a delay in the benefits to our stockholders, if any, of returns generated from our investment operations. Our Advisor will evaluate potential property acquisitions and engage in negotiations with sellers on our behalf. After a purchase contract is executed that contains specific terms, the property will not be purchased until the successful completion of due diligence, which includes review of the title insurance commitment, an appraisal and an environmental analysis. In some instances, the proposed acquisition will require the negotiation of final binding agreements, which may include financing documents. During this period, we may decide to temporarily invest any unused proceeds from our public offerings in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions.

61




Offerings
On January 20, 2017, we closed the primary portion of our IPO; however, we continued to offer shares pursuant to our DRP under our IPO registration statement through May 2017. We are currently offering shares pursuant to our DRP as part of our Follow-On Offering. The DRP may be terminated at any time upon 10 days’ prior written notice to stockholders, which may be provided through our filings with the SEC.
On September 20, 2017, we commenced our Follow-On Offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in the primary portion of our Follow-On Offering and $0.2 billion of shares pursuant to the DRP. On September 20, 2017, we reclassified all Class T shares sold in the IPO as "Class AA" shares and all Class I shares sold in the IPO as "Class AAA" shares.
On August 16, 2018, our Board approved the temporary suspension of the primary portion of our Follow-On Offering, effective August 17, 2018. On December 12, 2018, we also temporarily suspended our DRP offering and our SRP. Beginning in January 2019, all distributions by us were paid in cash. The SRP was officially suspended as of January 19, 2019. We intend to recommence our SRP once the Mergers are completed. On February 15, 2019, our Board determined it was in the best interests to reinstate the DRP effective with the February distribution to be paid on or around March 1, 2019. At this time, we intend to recommence our Follow-On Offering, if appropriate and at the appropriate time, once the Mergers are completed.
The following table summarizes shares issued and gross proceeds received for each share class as of December 31, 2018 (dollars in thousands):
Class
T
S
D
I
A
AA
AAA
Total
Gross proceeds from primary portion of offerings
$
2,245

$
3

$
182

$
7,538

$
240,780

$
474,858

$
8,381

$
733,987

Gross proceeds from DRP
$
26

$
—

$
3

$
187

$
26,535

$
34,656

$
545

$
61,952

Shares issued in primary portion of offerings
224,647

264

18,921

786,573

24,199,764

47,562,870

901,225

73,694,264

DRP shares issued
2,664

15

347

19,441

2,794,547

3,650,017

57,433

6,524,464

Stock distribution shares issued
—

—

—

—

263,642

300,166

4,677

568,485

Restricted stock units issued
—

—

—

—

—

—

36,000

36,000

Total shares issued prior to redemptions
227,311

279

19,268

806,014

27,257,953

51,513,053

999,335

80,823,213

In order to maintain a reasonable level of liquidity for redemptions of our shares, shares are not eligible for redemption for the first year after purchase except upon death or qualifying disability of a stockholder; provided, however, shares issued pursuant to the DRP are not subject to the one-year holding period. In addition, our SRP generally imposes a quarterly cap on aggregate redemptions of our shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter.
Should redemption requests, in the business judgment of our Board, place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on us as a whole, or should we otherwise determine that investing our liquid assets in real properties or other illiquid investments rather than redeeming our shares is in the best interests of us as a whole, we may choose to redeem fewer shares in any particular quarter than have been requested to be redeemed, or none at all. Further, our Board may modify, suspend or terminate our SRP if it deems such action to be in our best interest. Material modifications, including any amendment to the 5% quarterly limitation on redemptions, to and suspensions of the SRP will be promptly disclosed to stockholders in a prospectus supplement (or post-effective amendment if required by the Securities Act) or special or periodic reports filed by us.
Amended and Restated Credit Agreement
On June 28, 2018, we, through our Operating Partnership, entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement") related to a revolving credit facility and a term loan (collectively, the "Unsecured Credit Facility") with a syndicate of lenders, under which KeyBank serves as administrative agent, and various notes related thereto. In addition, we entered into a guaranty agreement.


62




Pursuant to the Amended and Restated Credit Agreement, we were provided with a revolving credit facility (the "Revolving Credit Facility") in an initial commitment amount of up to $550.0 million and a term loan (the "Term Loan") in an initial commitment amount of up to $200.0 million, which commitments may be increased under certain circumstances up to a maximum total commitment of $1.25 billion. Any increase in the total commitment will be allocated to the Revolving Credit Facility and/or the Term Loan in such amounts as the Operating Partnership and KeyBank may determine.The Revolving Credit Facility may be prepaid and terminated, in whole or in part, at any time without fees or penalty.

The Revolving Credit Facility has an initial term of four years, maturing on June 28, 2022. The Revolving Credit Facility may be extended for a one-year period if certain conditions are met and the Operating Partnership pays an extension fee. Payments under the Revolving Credit Facility are interest only and are due on the first day of each quarter. Amounts borrowed under the Revolving Credit Facility may be repaid and reborrowed, subject to the terms of the Amended and Restated Credit Agreement.

The Term Loan has an initial term of five years, maturing on June 28, 2023. Payments under the Term Loan are interest only and are due on the first day of each quarter. Amounts borrowed under the Term Loan may not be repaid and reborrowed.

The Unsecured Credit Facility has an interest rate calculated based on London Interbank Offered Rate ("LIBOR") plus the applicable LIBOR margin, as provided in the Amended and Restated Credit Agreement, or the Base Rate plus the applicable base rate margin, as provided in the agreement. The applicable LIBOR margin and base rate margin are dependent on the consolidated leverage ratio of the Operating Partnership, us, and our Company's subsidiaries, as disclosed in the periodic compliance certificate provided to the administrative agent each quarter. If the Operating Partnership obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services or Moody's Investors Service, Inc., the applicable LIBOR margin and base rate margin will be dependent on such rating. As of December 31, 2018 the LIBOR was 2.35% .

The Amended and Restated Credit Agreement relating to the Revolving Credit Facility provides that the Operating Partnership must maintain a pool of real properties (each a "Pool Property" and collectively the "Pool Properties") that meet certain requirements contained in the Amended and Restated Credit Agreement. The agreement sets forth certain covenants relating to the Pool Properties, including, without limitation, the following:
• there must be no less than 15 Pool Properties;
• no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;
• no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;
• no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development;
• the minimum aggregate leasing percentage of all Pool Properties must be no less than 90%; and
• other limitations as determined by KeyBank upon further due diligence of the Pool Properties.
Borrowing availability under the Amended and Restated Credit Agreement is limited to the lesser of (i) an asset pool leverage ratio of no greater than 60%, or (ii) an asset pool debt service coverage ratio of no less than 1.35:1.00.

As of December 31, 2018 , we were in compliance with all applicable covenants. As of December 31, 2018 , the remaining capacity pursuant to the Revolving Credit Facility was $221.1 million .
BofA/KeyBank Loan
On April 27, 2018, we, through four special purpose entities owned by our Operating Partnership, entered into the Loan Agreement with Bank of America, N.A. and KeyBank (the "BofA/KeyBank Loan"), in which we borrowed $250.0 million. The BofA/KeyBank Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on four properties. The BofA/KeyBank Loan has a term of 10 years, maturing on May 1, 2028. The BofA/KeyBank Loan bears interest at a rate of 4.32%. The BofA/KeyBank Loan requires monthly payments of interest only.
As of December 31, 2018 , there was approximately $250.0 million outstanding pursuant to the BoA/KeyBank Loan.
As of December 31, 2018 , we were in compliance with all applicable covenants.

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AIG Loan
On October 22, 2015, six special purpose entities that are wholly-owned by our Operating Partnership entered into promissory notes with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company (collectively, the "Lenders"), pursuant to which the Lenders provided such special purpose entities with a loan in the aggregate amount of approximately $127.0 million (the "AIG Loan").
The AIG Loan has a term of 10 years, maturing on November 1, 2025. The AIG Loan bears interest at a rate of 4.15%. The AIG Loan requires monthly payments of interest only for the first five years and fixed monthly payments of principal and interest thereafter. The AIG Loan is secured by cross-collateralized and cross-defaulted first lien deeds of trust and second lien deeds of trust on certain properties. Commencing October 31, 2017, each of the individual promissory notes comprising the AIG Loan may be prepaid but only if such prepayment is made in full, subject to 30 days' prior notice to the holder and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment.
As of December 31, 2018 , there was approximately $127.0 million outstanding pursuant to the AIG Loan.
As of December 31, 2018 , we were in compliance with all applicable covenants.
Derivative Instruments
As discussed in Note 5, Interest Rate Contracts, to the consolidated financial statements, on February 25, 2016, we entered into an interest rate swap agreement to hedge the variable cash flows associated with the existing LIBOR-based variable-rate debt on our Revolving Credit Facility. The interest rate swap is effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million .
Effective as of November 1, 2017, the GCEAR Operating Partnership novated a $100.0 million interest rate swap agreement with an expiration date of June 1, 2018 to our Operating Partnership. We paid approximately nine thousand dollars, which approximated fair value.
On April 30, 2018, we settled the $100.0 million cash flow hedge contract purchased from the GCEAR Operating Partnership, which resulted in us receiving a net settlement of approximately $0.1 million .
The effective portion of the change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments and accruals are made on our variable-rate debt.
As of December 31, 2018, all of our interest rate swap agreements have matured.
The following table sets forth a summary of the interest rate swaps at December 31, 2018 and December 31, 2017 (dollars in thousands):
Fair value (1)
Current Effective Notional Amount (2)
Derivative Instrument
Effective Date
Maturity Date
Interest Strike Rate
December 31, 2018
December 31, 2017
December 31, 2018
December 31, 2017
Interest Rate Swap
4/1/2016
12/12/2018
0.74%
$
—

$
967

$
—

$
100,000

Interest Rate Swap
11/1/2017
4/30/2018
1.50%
—

65

—

100,000

Total
$
—

$
1,032

$
—

$
200,000

(1)
We record all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of December 31, 2018 , all our derivatives have matured.
(2)
Represents the notional amount of our swaps that was effective as of the balance sheet date of December 31, 2018 and December 31, 2017 .



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Contractual Commitments and Contingencies
The following is a summary of our contractual obligations as of December 31, 2018 (dollars in thousands):
Payments Due During the Years Ending December 31,
Total
2019
2020-2021
2022-2023
Thereafter
Outstanding debt obligations (1) (2)
$
490,055

$
—

$
2,178

$
4,637

$
483,240

Interest on outstanding debt obligations (3)
159,295

20,483

41,068

39,592

58,152

Total
$
649,350

$
20,483

$
43,246

$
44,229

$
541,392

(1)
Amount relates to principal payments for the outstanding balance on the Unsecured Credit Facility, BofA/KeyBank Loan and AIG Loan at December 31, 2018 .
(2)
Deferred financing costs are excluded from total contractual obligations above.
(3)
Projected interest payments are based on the outstanding principal amounts under the Unsecured Credit Facility, BofA/KeyBank Loan and AIG Loan at December 31, 2018 . Projected interest payments are based on the interest rate in effect at December 31, 2018 .

Other Potential Future Sources of Capital
Potential future sources of capital include proceeds from our public or private offerings, proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of our properties and undistributed funds from operations. In connection with the Mergers, we expect to enter into a larger unsecured credit facility. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures. To the extent we are not able to secure additional financing in the form of a credit facility or other third party source of liquidity, we will be heavily dependent upon the proceeds of our public offerings and income from operations in order to meet our long-term liquidity requirements and to fund our distributions.
Short-Term Liquidity and Capital Resources
We expect to meet our short-term operating liquidity requirements from advances from our Advisor and its affiliates, proceeds received from our offerings, and operating cash flows generated from our properties and other properties we acquire in the future. Any advances from our Advisor will be repaid, without interest, as funds are available after meeting our current liquidity requirements, subject to the limitations on reimbursement set forth in the “Management Compensation” section of our prospectus.
Our cash, cash equivalents and restricted cash balances decreased by approximately $4.5 million during the year ended December 31, 2018 and were used in or provided by the following:
Operating Activities . Cash flows provided by operating activities are primarily dependent on the occupancy level, the rental rates of our leases, the collectability of rent and recovery of operating expenses from our tenants, and the timing of acquisitions. Net cash provided by operating activities for the year ended December 31, 2018 increased to $ 41.0 million compared to cash provided by operating activities of approximately $ 39.7 million for the year ended December 31, 2017 . Net cash provided by operating activities before changes in operating assets and liabilities for the year ended December 31, 2018 decreased by $ 1.1 million to $ 33.6 million , compared to approximately $ 34.7 million for the year ended December 31, 2017 .
Investing Activities. During the year ended December 31, 2018 , we used $ 2.3 million in cash for investing activities compared to $ 87.2 million used during the same period in 2017 . The $84.9 million decrease in cash utilization in investing activities is primarily related to the following:
•
$44.2 million decrease in cash used to acquire properties as a result of no acquisitions for the year ended December 31, 2018 versus two acquisitions in 2017; and
•
$40.6 million decrease in restricted reserves primarily as a result of payments of tenant improvement disbursements in the prior period.
Financing Activities. During the year ended December 31, 2018 , we used $ 43.2 million in financing activities compared to $30.0 million generated during the same period in 2017 , a decrease in cash provided by financing activities of $73.2 million which is comprised primarily of the following:

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•
$24.3 million decrease in cash provided from borrowings from the Revolving Credit Facility due to the acquisition of the MISO property in May 2017 and a tenant improvement disbursement for the Southern Company property in December 2017;
•
$357.7 million increase in cash used for principal repayments of the Revolving Credit Facility in the current year provided by the proceeds of the BofA/KeyBank Loan and Term Loan borrowings in the current year;
•
$28.0 million decrease in cash provided by the issuance of common stock, net of discounts and offering costs due to the closing of the primary portion of our IPO during the first quarter of 2017;
•
$6.6 million increase in cash used in deferred financing costs related to the BofA/KeyBank Loan in the current year; and
•
$ 19.5 million increase in cash used for payments of distributions and repurchases of common stock due to an increase in number of shareholders; offset by
•
$250.0 million increase in proceeds from borrowings on the BofA/KeyBank Loan. $249.8 million of the proceeds provided by the loan was used to pay down a portion of our Revolving Credit Facility; and
•
$113.0 million increase in proceeds from borrowings on the Term Loan. $107.9 million of the proceeds provided by the Term Loan was used to pay down a portion of our Revolving Credit Facility.
Distributions and Our Distribution Policy
Distributions will be paid to our stockholders as of the record date selected by our Board. We expect to continue to pay distributions monthly based on daily declaration and record dates so that investors may be entitled to distributions immediately upon purchasing our shares. We expect to regularly pay distributions unless our results of operations, our general financial condition, general economic conditions, or other factors inhibit us from doing so. Distributions will be authorized at the discretion of our Board, which will be directed, in substantial part, by its obligation to cause us to comply with the REIT requirements of the Code. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
•
the amount of time required for us to invest the funds received in our public offerings;
•
our operating and interest expenses;
•
the amount of distributions or dividends received by us from our indirect real estate investments, if applicable;
•
our ability to keep our properties occupied;
•
our ability to maintain or increase rental rates;
•
tenant improvements, capital expenditures and reserves for such expenditures;
•
the issuance of additional shares; and
•
financings and refinancings.

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Distributions may be funded with operating cash flow, offering proceeds, or a combination thereof. To the extent that we do not have taxable income, distributions paid will be considered a return of capital to stockholders. The following table shows distributions declared, distributions paid, and cash flows provided by operating activities during the years ended December 31, 2018 and 2017 , excluding stock distributions (dollars in thousands):
Year Ended December 31, 2018
Year Ended December 31, 2017
Distributions paid in cash — noncontrolling interests
$
65

$
11

Distributions paid in cash — common stockholders
20,753

19,232

Distributions of DRP
19,998

22,208

Total distributions
$
40,816

(1)
$
41,451

Source of distributions (2)
Paid from cash flows provided by operations
$
20,818

51
%
$
19,243

46
%
Offering proceeds from issuance of common stock
—

0
%
—

0
%
Offering proceeds from issuance of common stock pursuant to the DRP
19,998

49
%
22,208

54
%
Total sources
$
40,816

(3)
100
%
$
41,451

100
%
Net cash provided by operating activities
$
40,955

$
39,712

(1)
Distributions are paid on a monthly basis in arrears. Distributions for all record dates of a given month are paid on or about the first business day of the following month. Total distributions declared but not paid as of December 31, 2018 were approximately $3.6 million for common stockholders and noncontrolling interests.
(2)
Percentages were calculated by dividing the respective source amount by the total sources of distributions.
(3)
Allocation of total sources are calculated on a quarterly basis.
For the year ended December 31, 2018 , we paid and declared distributions of approximately $42.7 million to common stockholders including shares issued pursuant to the DRP and approximately $0.07 million to the limited partners of our Operating Partnership, as compared to FFO, net of noncontrolling interest distributions and AFFO for the year ended December 31, 2018 of approximately $41.3 million and $37.0 million , respectively. The payment of distributions from sources other than FFO or AFFO may reduce the amount of proceeds available for investment and operations or cause us to incur additional interest expense as a result of borrowed funds. From our inception through December 31, 2018 , we paid approximately $116.6 million of cumulative distributions, including approximately $62.0 million reinvested through our DRP, as compared to net cash provided by operating activities of approximately $41.0 million .
Off-Balance Sheet Arrangements
As of December 31, 2018 , we had no off-balance sheet transactions, nor do we currently have any such arrangements or obligations.
Subsequent Events
See Note 14, Subsequent Events , to the consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market-sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk. Our current indebtedness consists of the Revolving Credit Facility and the AIG Loan. These instruments were entered into for other than trading purposes.
Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we may borrow at fixed rates or variable rates. We may also utilize a variety of financial instruments, including interest rate swap agreements, caps, floors, and other interest rate exchange contracts. We will not enter into these financial instruments for speculative purposes. The use of these types of instruments to hedge a portion of our exposure to changes in interest rates carries additional risks, such as counterparty credit risk and the legal enforceability of hedging contracts.
As of December 31, 2018 , our debt consisted of approximately $377.0 million in fixed rate debt and approximately $113.1 million in variable rate debt (excluding deferred financing costs of approximately $8.1 million ). As of December 31,

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2017 , our debt consisted of approximately $327.0 million in fixed rate debt (including the interest rate swap) and approximately $157.8 million in variable rate debt (excluding deferred financing costs of approximately $2.9 million ). Changes in interest rates have different impacts on the fixed and variable rate debt. A change in interest rates on fixed rate debt impacts its fair value but has no impact on interest incurred or cash flows. A change in interest rates on variable rate debt could impact the interest incurred and cash flows and its fair value.
Our future earnings and fair values relating to variable rate financial instruments are primarily dependent upon prevalent market rates of interest, such as LIBOR. However, our interest rate swap agreements are intended to reduce the effects of interest rate changes. The effect of an increase of 100 basis points in interest rates, assuming a LIBOR floor of 0% , on our variable rate debt, which currently consists of our Revolving Credit Facility, after considering the effect of our interest rate swap agreement would decrease our future earnings and cash flows by approximately $1.1 million annually.
Interest rate risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments. These analyses do not consider the effect of any change in overall economic activity that could occur. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements and supplementary data filed as part of this annual report are set forth beginning on page F-1 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.


ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, with the participation of our principal executive and principal financial officers, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for us. Our management, including our chief executive officer and chief financial officer, evaluated, as of December 31, 2018 , the effectiveness of our internal control over financial reporting using the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2018 .

There have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION


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(a)    During the quarter ended December 31, 2018 , there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.

(b)    During the quarter ended December 31, 2018 , there were no material changes to the procedures by which security holders may recommend nominees to our Board.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information Concerning the Executive Officers and Directors
Included below is certain information regarding our executive officers and directors. All of our directors, including our three independent directors, have been reelected at the 2018 annual meeting of stockholders. All of our executive officers serve at the pleasure of our Board. Our executive officers are elected annually by our Board and serve at the discretion of our Board. No family relationships exist between any directors or executive officers, as such term is defined in Item 401 of Regulation S-K promulgated under the Exchange Act.
Name
Age
Position(s)
Period with Company
Kevin A. Shields
60
Chairman of the Board of Directors and Chief Executive Officer
11/2013 - present
Michael J. Escalante
58
Director and President
11/2013 - present
Javier F. Bitar
57
Chief Financial Officer and Treasurer
6/2016 - present
David C. Rupert
62
Executive Vice President
11/2013 - present
Mary P. Higgins
59
Vice President and General Counsel
11/2013 - present
Howard S. Hirsch
53
Vice President and Secretary
6/2014 - present
Don G. Pescara
55
Vice President - Acquisitions
11/2013 - present
Julie A. Treinen
59
Vice President - Asset Management
11/2013 - present
Samuel Tang
58
Independent Director
2/2015 - present
J. Grayson Sanders
78
Independent Director
3/2016 - present
Kathleen S. Briscoe
59
Independent Director
3/2016 - present

Kevin A. Shields, our Chief Executive Officer and the Chairman of our Board, has been an officer and director since our formation. Mr. Shields is also the Chairman, Chief Executive Officer and sole director of GCC, which he founded in 1995 and which indirectly owns our dealer manager. Mr. Shields has been the Chief Executive Officer of our Advisor since its formation in November 2013, and served as the Chief Executive Officer of our dealer manager until June 2017. Mr. Shields also currently serves as Chairman of the Board and as Executive Chairman of GCEAR. Prior to December 14, 2018, Mr. Shields served as Chief Executive Officer of GCEAR, a position he had held since August 2008. Mr. Shields serves as President and trustee of Griffin Institutional Access Real Estate Fund (“GIA Real Estate Fund”), positions he has held since November 2013; and as President and trustee of Griffin Institutional Access Credit Fund (“GIA Credit Fund”), positions he has held since January 2017. He also serves as a non-voting special observer of the board of directors of Griffin-American Healthcare REIT III, Inc. (“GAHR III”), and Griffin-American Healthcare REIT IV, Inc. (“GAHR IV”), both of which are public non-traded REITs co-sponsored by GCC, and as a member of the investment committee of the advisor of GAHR III. Before founding GCC, Mr. Shields was a Senior Vice President and head of the Structured Real Estate Finance Group at Jefferies & Company, Inc. in Los Angeles and a Vice President in the Real Estate Finance Department of Salomon Brothers Inc. in both New York and Los Angeles. Over the course of his 30-year real estate and investment-banking career, Mr. Shields has structured and closed over 200 transactions totaling in excess of $8 billion of real estate acquisitions, financings and dispositions. Mr. Shields graduated from the University of California at Berkeley where he earned a J.D. degree from Boalt Hall School of Law, an M.B.A. from the Haas Graduate School of Business, graduating Summa Cum Laude with Beta Gamma Distinction, and a B.S. from Haas Undergraduate School of Business, graduating with Phi Beta Kappa distinction. Mr. Shields is a licensed securities professional holding Series 7, 63, 24 and 27 licenses, and an inactive member of the California Bar. Mr. Shields is a full member of the Urban Land Institute and frequent guest lecturer at the Haas Graduate School of Business. Mr. Shields is also a member of the Policy Advisory Board for the Fisher Center for Real Estate at the Haas School of Business, the Chair Emeritus of the Board of Directors for the Institute for Portfolio Alternatives and an executive member of the Public Non-Listed REIT Council of the National Association of Real Estate Investment Trusts.
We believe that Mr. Shields’ active participation in the management of our operations and his extensive experience in the real estate and real estate financing industries support his appointment to our Board.
Michael J. Escalante is our President, and has held this position since our formation. Mr. Escalante has been a member of our Board since February 2015. Mr. Escalante has also served as President of our advisor since its initial formation and

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served as GCC’s Chief Investment Officer from June 2006 until December 2018. Mr. Escalante currently serves as Chief Executive Officer (since December 14, 2018) and President of GCEAR, a position he has held since June 2015. Prior to his appointment as Chief Executive Officer, he served as Chief Investment Officer of GCEAR, a position he had held since August 2008. He also serves as a member of the investment committee of the respective advisors of GAHR III, GAHR IV and GIA Real Estate Fund. With more than 30 years of real estate related investment experience, he has been responsible for completing in excess of $8.2 billion of commercial real estate transactions throughout the United States. Prior to joining GCC in June 2006, Mr. Escalante founded Escalante Property Ventures in March 2005, a real estate investment management company, to invest in value-added and development-oriented infill properties within California and other western states. From 1997 to March 2005, Mr. Escalante served at Trizec Properties, Inc., one of the largest publicly-traded U.S. office REITs, with his final position being Executive Vice President - Capital Transactions and Portfolio Management. While at Trizec, Mr. Escalante was directly responsible for all capital transaction activity for the Western U.S., which included the acquisition of several prominent office projects. Mr. Escalante’s work experience at Trizec also included significant hands-on operations experience as the firm’s Western U.S. Regional Director with bottom-line responsibility for asset and portfolio management of a 4.6 million square foot office/retail portfolio (11 projects/23 buildings) and associated administrative support personnel (110 total/65 company employees). Prior to joining Trizec, from 1987 to 1997, Mr. Escalante held various acquisitions, asset management and portfolio management positions with The Yarmouth Group, an international investment advisor. Mr. Escalante holds an M.B.A. from the University of California, Los Angeles, and a B.S. in Commerce from Santa Clara University. Mr. Escalante is a full member of the Urban Land Institute and active in many civic organizations.
We believe that Mr. Escalante’s broad experience in the real estate industry and his years of service at our GCC and its affiliates support his appointment to our Board.
Javier F. Bitar is our Chief Financial Officer and Treasurer, and has served in that capacity since June 2016. Mr. Bitar also currently serves as Chief Financial Officer and Treasurer of GCEAR, positions he has held since June 2016. Mr. Bitar has over 33 years of commercial real estate related accounting and financial experience, including over 20 years of senior management-level experience. Mr. Bitar has been involved in over $11 billion of real estate transactions. Prior to joining us, from July 2014 to May 2016, Mr. Bitar served as the Chief Financial Officer of New Pacific Realty Corporation, a real estate investment and development company. From January 2014 to July 2014, Mr. Bitar served as the Proprietor of JB Realty Advisors, a real estate consulting and advisory company. From July 2008 to December 2013, Mr. Bitar served as the Chief Operating Officer of Maguire Investments, where he was responsible for overseeing operating and financial matters for the company’s real estate investment and development portfolio. Mr. Bitar also served as Senior Investment Officer at Maguire Properties, Inc. from 2003 to 2008 and as Partner and Senior Financial Officer at Maguire Partners from 1987 to 2003. Mr. Bitar graduated Magna Cum Laude from California State University, Los Angeles, with a Bachelor of Business Administration degree and is a Certified Public Accountant in the State of California.
David C. Rupert has been our Executive Vice President since our initial formation. Mr. Rupert also serves as Executive Vice President of our advisor, a position he has held since our advisor’s initial formation. In addition, Mr. Rupert served as Executive Vice President of GCEAR from June 2015 to December 2018; and currently serves as President of GCC, having re-joined GCC in September 2010. Mr. Rupert previously served as President of GCEAR from July 2012 through June 2015. Mr. Rupert’s 35 years of commercial real estate and finance experience includes over $9 billion of transactions executed on four continents: North America, Europe, Asia and Australia. From July 2009 to August 2010, Mr. Rupert co-headed an opportunistic hotel fund in partnership with The Olympia Companies, a hotel owner-operator with more than 800 employees, headquartered in Portland, Maine. From March 2008 through June 2009 Mr. Rupert was a partner in a private equity firm focused on Eastern Europe, in particular extended stay hotel and multifamily residential development, and large-scale agribusiness in Ukraine. Mr. Rupert previously served as Chief Operating Officer of GCC from August 1999 through February 2008. From 1999 to 2000, Mr. Rupert served as President of CB5, a real estate and restaurant development company that worked closely with the W Hotel division of Starwood Hotels. From 1997 to 1998 Mr. Rupert provided consulting services in the U.S. and UK to Lowe Enterprises, a Los Angeles-headquartered institutional real estate management firm. From 1986 to 1996, Mr. Rupert was employed at Salomon Brothers in New York, where he served in various capacities, including the head of REIT underwriting, and provided advice, raised debt and equity capital and provided brokerage and other services for leading public and private real estate institutions and entrepreneurs. Since 1984, Mr. Rupert has served on the Advisory Board to Cornell University’s Endowment for Real Estate Investments, and in August 2010 Mr. Rupert was appointed Co-Chairman of that Advisory Board. For more than 15 years, Mr. Rupert has lectured in graduate-

71




level real estate and real estate finance courses in Cornell’s masters-level Program in Real Estate, where he is a founding Board Member. Mr. Rupert received his B.A. degree from Cornell in 1979 and his M.B.A. from Harvard in 1986.
Mary P. Higgins is our Vice President and our General Counsel, and has held these positions since our formation. Ms. Higgins is also the Vice President, General Counsel and Secretary of our advisor and GCC. From our inception through June 2014, Ms. Higgins served as our Secretary. Ms. Higgins previously served as Vice President, General Counsel and Secretary of GCEAR from August 2008 to December 2018. Prior to joining GCC in August 2004, Ms. Higgins was a partner at the law firm of Wildman, Harrold, Allen & Dixon LLP in Chicago, Illinois. Ms. Higgins has been GCC’s primary real estate transaction counsel for more than 10 years and has worked together with GCC’s principals on nearly all of their acquisition, due diligence, leasing, financing and disposition activities during that time period. Ms. Higgins has over 20 years of experience representing both public and private real estate owners, tenants and investors in commercial real estate matters, including development, leasing, acquisitions, dispositions, and securitized and non-securitized financings. Representative transactions include sales and dispositions of regional malls, including some of the premier regional malls in the nation; sale of a golf course in an UPREIT structure; a $38 million credit tenant loan transaction; acquisition of various Florida office properties for a $150 million office property equity fund; representation of the ground lessor in a subordinated tenant development ground lease and a $350 million property roll up. Ms. Higgins additionally has extensive commercial leasing experience. Ms. Higgins earned her undergraduate degree in Law Firm Administration from Mallinckrodt College (now part of Loyola University) and her J.D. degree from DePaul University College of Law, both of which are located in Illinois.
Howard S. Hirsch is our Vice President and Secretary, and has held these positions since June 2014. Mr. Hirsch previously served as Vice President and General Counsel - Securities of GCC from June 2014 to December 2018. Mr. Hirsch serves as Vice President and Secretary of our advisor, positions he has held since November 2014. In addition, Mr. Hirsch serves as Chief Legal Officer and Secretary of GCEAR, positions he has held since December 2018. He previously served as Vice President and Assistant Secretary of GCEAR from January 2015 to December 2018. He also serves as Vice President and Assistant Secretary of GIA Real Estate Fund, positions he has held since January 2015; and as Vice President and Assistant Secretary of GIA Credit Fund, positions he has held since January 2017. He also serves as a member of the investment committee of the advisor of GIA Credit Fund. Prior to joining GCC in June 2014, Mr. Hirsch was a shareholder at the law firm of Baker, Donelson, Bearman, Caldwell & Berkowitz, PC in Atlanta, Georgia. From July 2007 through the time he joined Baker Donelson in April 2009, Mr. Hirsch was counsel at the law firm of Bryan Cave LLP in Atlanta, Georgia. Prior to joining Bryan Cave LLP, Mr. Hirsch was a partner at the law firm of Holland and Knight LLP. Mr. Hirsch has approximately 20 years of experience in public securities offerings, SEC reporting, corporate and securities compliance matters, and private placements. He previously handled securities, transactional and general corporate matters for various publicly-traded and non-traded REITs. Mr. Hirsch’s experience also includes registrations under the Securities Act and the 1940 Act, reporting under the Exchange Act, and advising boards of directors and the various committees of public companies. He has counseled public companies on corporate governance best practices and compliance matters, and has represented issuers on SEC, Financial Industry Regulatory Authority, Inc. (“FINRA”), and “Blue Sky” regulatory matters in connection with registrations of public offerings of non-traded REITs and real estate partnerships. He also has experience representing broker dealers on various FINRA compliance matters. Mr. Hirsch earned his B.S. degree from Indiana University and his J.D. degree from The John Marshall Law School in Chicago, Illinois.
Don G. Pescara is our Vice President - Acquisitions, and has held that position since our formation. Mr. Pescara has also served as Vice President - Acquisitions for GCEAR since August 2008. Mr. Pescara is responsible for our sponsor’s activities in the Midwestern U.S. and is based in the firm’s Chicago office. Prior to joining GCC in January 1997, Mr. Pescara was a Director at Cohen Financial in the Capital Markets Unit, responsible for all types of real estate financing including private placements of both debt and equity, asset dispositions, and acquisitions on behalf of Cohen’s merchant banking group. Prior to joining Cohen, Mr. Pescara was a Director at CB Commercial Mortgage Banking Group. During his more than 25-year career, Mr. Pescara has been responsible for many innovative financing programs, including structuring corporate sale/leaseback transactions utilizing synthetic and structured lease bond financing. Formerly Co-Chairman of the Asian Real Estate Association, Mr. Pescara was responsible for creating a forum for idea exchange between Pacific Rim realty investors and their United States counterparts. An active member of the Urban Land Institute, Mortgage Bankers Association and the International Council of Shopping Centers, Mr. Pescara is a graduate of the University of Illinois at Urbana-Champaign with a B.A. in Economics and a minor in Finance and is a licensed Illinois Real Estate Broker.

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Julie A. Treinen is our Vice President - Asset Management, and has held that position since our formation. Ms. Treinen also currently serves as Vice President - Asset Management for GCEAR, a position she has held since August 2008. Before joining GCC in September 2004, Ms. Treinen was a Vice President at Cornerstone Real Estate Advisers, Inc., a Hartford-based, SEC-registered real estate investment and advisory firm with $4.6 billion of assets under management. During her five years at Cornerstone, Ms. Treinen managed the acquisition diligence of approximately 1.2 million square feet of existing assets totaling $238 million, the development of five apartment joint venture projects totaling $152 million, and the disposition of five properties totaling $125 million. Ms. Treinen was also the senior asset manager for a $400 million portfolio of office, industrial and apartment investments. Prior to joining Cornerstone, from 1996 to 1999, Ms. Treinen was Director, Field Production at Northwestern Mutual Life in Newport Beach where she initiated, negotiated, and closed three development projects totaling over $100 million and three mortgage originations totaling over $100 million, and acquired four existing assets totaling over $50 million. Prior to joining Northwestern, from 1989 to 1996, Ms. Treinen was a Vice President at Prudential Realty Group in Los Angeles. Over the course of her seven-year tenure at Prudential, Ms. Treinen originated over $235 million in new commercial mortgage loans, structured and negotiated problem loan workouts, note sale and foreclosures totaling over $140 million and managed a portfolio of office, industrial and apartment investments totaling approximately $500 million. Prior to joining the real estate industry, Ms. Treinen spent several years in finance and as a certified public accountant. Ms. Treinen holds an M.B.A. degree from the University of California at Berkeley and a B.A. degree in Economics from the University of California at Los Angeles.
Samuel Tang is one of our independent directors and is the chairperson of our audit committee and a member of our nominating and corporate governance committee and compensation committee. Mr. Tang has over 25 years of experience in private equity and real estate investing. From 2008 to the present, Mr. Tang has been a Managing Partner of TriGuard Management LLC, an entity which he co-founded and which acquires private equity fund-of-funds in the secondary market and serves as a platform for other private equity investment businesses. He is also a co-founder and Managing Partner of Montauk TriGuard Management Inc. since 2004 to the present, where he is responsible for sourcing, analyzing, structuring, and closing the acquisition of private equity funds in the secondary market. From 1999 to 2004, Mr. Tang was Managing Director, Equities, of Pacific Life Insurance Company, where he co-chaired the workout committee to maximize recovery on bond investments and worked on various strategic and direct equity investments. Before joining Pacific Life Insurance Company, from 1989 to 1999, he was a Managing Partner at The Shidler Group, a specialized private equity firm focused on finance, insurance and real estate companies. Mr. Tang was also previously a Manager in Real Estate Consulting with KPMG Peat Marwick Main and a Senior, CPA with Arthur Young. Mr. Tang has an M.B.A. in Finance from University of California, Los Angeles and a B.S. in Accounting from University of Southern California. Mr. Tang also currently serves in leadership positions, including as a member of the board of directors with several private equity fund advisory, corporate and charitable entities.
We believe that Mr. Tang’s extensive experience in the private equity and real estate industries support his appointment to our Board.
J. Grayson Sanders is one of our independent directors and is the chairperson of our compensation committee and a member of our audit committee and nominating and corporate governance committee. He has been one of our independent directors since March 2016. Mr. Sanders also serves as an independent director on the board of directors of GAHR III, a position he has held since February 2014. Since March 2013, Mr. Sanders has served as the Co-Founder, President and Chief Investment Officer of PREDEX Capital Management, a registered investment adviser. Mr. Sanders has also served as the Co-Founder and Chief Executive Officer of Mission Realty Advisors, the majority owner of PREDEX Capital Management and provider of advisory and equity capital raising services to institutional quality real estate operators, since February 2011. From March 2009 to March 2010, Mr. Sanders served as Chief Executive Officer of Steadfast Capital Markets Group, where he managed the development and registration of Steadfast Income REIT, a non-traded REIT, and oversaw the development of that company’s FINRA registered managing broker-dealer. From November 2004 to March 2009, Mr. Sanders served as President of CNL Fund Advisors Company in Orlando, where he created and managed a global REIT mutual fund, and served as President of CNL Capital Markets, which focused on wholesale distribution of non-traded REITs and private placements plus ongoing servicing of thousands of investors. Prior to joining CNL, Mr. Sanders served from 2000 to 2004 as a Managing Director with AIG Global Real Estate Investment Corp. in New York, where he managed product development and capital formation for several international real estate funds for large institutional investors investing in Europe, Asia and Mexico. From 1997 to 2000, Mr. Sanders was the Executive Managing Director for CB Richard Ellis Investors where he was involved in product development and placement with institutional investors. From 1991 to 1996, Mr. Sanders served as the

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Director of Real Estate Investments for Ameritech Pension Trust, where he managed a $1.5 billion real estate portfolio within the $13 billion defined benefit plan. Mr. Sanders has also previously served on the board of directors of both the Pension Real Estate Association and the National Association of Real Estate Investment Trusts, where he was Co-Chairman of its Institutional Investor Committee. He has also served on the board of directors of several non-profits. Mr. Sanders has been a frequent speaker at trade association events and other forums over his entire career. Mr. Sanders received a B.A. in History from the University of Virginia and an M.B.A. from Stanford Business School. He attended Officer Candidate School and served for over four years in the Navy, attaining the rank of Lieutenant.
We believe that Mr. Sanders’ decades of experience in the real estate industry, including as a director of a non-traded REIT, and his significant experience raising equity capital support his appointment to our Board.
Kathleen S. Briscoe is one of our independent directors and is the chairperson of our nominating and corporate governance committee and a member of our audit committee and compensation committee. She has been one of our independent directors since March 2016. Since March 2018, Ms. Briscoe has served as a Partner and Chief Capital Officer at Dermody Properties. She has also served as an advisor to Arixa Capital since November 2017. From March 2016 to March 2017, Ms. Briscoe served as a consultant at Cordia Capital Management, LLC, a privately owned real estate investment management company, where from November 2013 to March 2016, she held the positions of Chief Operating Officer and Chief Investment Officer for real estate, overseeing approximately $100 million of commercial real estate investments per year throughout the Western United States. From November 2011 to November 2013, Ms. Briscoe was a real estate consultant with Institutional Real Estate, Inc. and Crosswater Realty Advisors. From 2009 to 2011, Ms. Briscoe was the Chief Investment Officer for the IDS Real Estate Group in Los Angeles, California, where she managed two joint ventures with CalSTRS. From 2008 to 2009, Ms. Briscoe was a real estate consultant with Crosswater Realty Advisors, where she worked with CalPERS analyzing its real estate fund managers. From 2007 to 2008, she was a Managing Director and the head of the Los Angeles office for Buchanan Street Partners, a real estate investment management company. From 1987 to 2007, Ms. Briscoe was a Shareholder at Lowe Enterprises, a real estate investment, asset management, and development company, where she managed the firm’s investment clients, was a key member of a value-add private REIT, managed a portfolio, and served on the Executive Committee and as a voting member of the Investment Committee. Ms. Briscoe received a B.A. from Dartmouth College and an M.B.A. from Harvard Business School. Ms. Briscoe is an independent director of the Resmark Companies, a national private equity firm focused on real estate. Ms. Briscoe is a council member of the Urban Land Institute, an advisory board member for Institutional Real Estate, Inc., has been an executive member of the National Association of Real Estate Investment Managers, and is active in a number of other real estate organizations.
We believe Ms. Briscoe’s years of experience in real estate investing and investment management experience, as well as her background in the commercial real estate industry generally, support her appointment to our Board.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires each director, officer, and individual beneficially owning more than 10% of a registered security (collectively, the "Reporting Persons") to file with the SEC, within specified time frames, initial statements of beneficial ownership (Form 3) and statements of changes in beneficial ownership (Forms 4 and 5). Reporting Persons are required to furnish us with copies of all Section 16(a) forms filed with the SEC. Based solely on a review of the copies of such forms furnished to us during and with respect to the fiscal year ended December 31, 2018 or written representations that no additional forms were required, to the best of our knowledge, all Reporting Persons complied with the applicable requirements of Section 16(a) of the Exchange Act. There are no known failures to file a required Form 3, Form 4 or Form 5.

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Code of Ethics
Our Board adopted a Code of Ethics and Business Conduct on July 21, 2014, which was amended and restated on November 2, 2016 (the “Code of Ethics”) and which contains general guidelines applicable to our executive officers, including our principal executive officer, principal financial officer and principal accounting officer, our directors, and employees and officers of our advisor and its affiliates, who perform material functions for us. We make sure that each individual subject to the Code of Ethics acknowledges reviewing and receipt thereof. We adopted our Code of Ethics with the purpose of promoting the following: (1) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (2) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with or submit to the SEC and in other public communications made by us; (3) compliance with applicable laws and governmental rules and regulations; (4) the prompt internal reporting of violations of the Code of Ethics to our Code of Ethics Compliance Officer; and (5) accountability for adherence to the Code of Ethics. A copy of the Code of Ethics is available in the “Corporate Governance” section of our website, www.griffincapital.com . We intend to satisfy the disclosure requirement regarding any amendment to, or waiver of, a provision of the Code of Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on our website.
Director Nominations
During the year ended December 31, 2018, we made no material changes to the procedures by which stockholders may recommend nominees to our board of directors, as described in our most recent proxy statement.
Audit Committee
Our Board has an audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act, which assists the Board in fulfilling its responsibilities to stockholders concerning our financial reporting and internal controls and facilitates open communication among the audit committee, the Board, outside auditors and management. Our audit committee adopted a charter on July 21, 2014, which was most recently amended and restated on March 2, 2016 (the “Audit Committee Charter”), and was ratified by our Board. A copy of our Audit Committee Charter is available in the “Corporate Governance” section of our website, www.griffincapital.com. The audit committee assists our Board by: (1) selecting an independent registered public accounting firm to audit our annual financial statements; (2) reviewing with the independent registered public accounting firm the plans and results of the audit engagement; (3) approving the audit and non-audit services provided by the independent registered public accounting firm; (4) reviewing the independence of the independent registered public accounting firm; (5) considering the range of audit and non-audit fees; and (6) reviewing the adequacy of our internal accounting controls. The audit committee fulfills these responsibilities primarily by carrying out the activities enumerated in the Audit Committee Charter and in accordance with current laws, rules and regulations.
The members of the audit committee are our three independent directors, Samuel Tang, Kathleen S. Briscoe, and J. Grayson Sanders, each of whom is also independent as defined in Rule 10A-3 under the Exchange Act, with Mr. Tang serving as Chairperson of the audit committee. Our Board has determined that Mr. Tang satisfies the requirements for an “audit committee financial expert” as defined in Item 407(d)(5) of Regulation S-K and has designated Mr. Tang as the audit committee financial expert in accordance with applicable SEC rules. The audit committee held four meetings during 2018.
ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis - Executive Compensation
We do not compensate our executive officers for services rendered to us.  If the proposed Mergers are consummated, we plan to compensate our executive officers directly; however until such time we do not intend to pay any compensation directly to our executive officers. As a result, we do not have, and our compensation committee has not considered, a compensation policy or program for our executive officers. If we determine to compensate our executive officers directly in the future (due to the proposed Mergers or otherwise), the compensation committee will review all forms of compensation and approve all equity-based awards. If we compensated our executive officers directly, the following executive officers

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would be considered our "Named Executive Officers" as defined in Item 402 of Regulation S-K for the fiscal year ended December 31, 2018:
•
Kevin A. Shields, Chief Executive Officer;
•
Javier F. Bitar, Chief Financial Officer;
•
Michael J. Escalante, President;
•
David C. Rupert, Executive Vice President; and
•
Howard S. Hirsch, Vice President and Secretary.

Our executive officers also are officers of our Advisor and its affiliates, and are compensated by such entities for their services to us.  We pay these entities fees and reimburse expenses pursuant to our advisory agreement. Certain of these reimbursements to our Advisor include reimbursements of a portion of the compensation paid by our Advisor and its affiliates to our Named Executive Officers for services provided to us, for which we do not pay our Advisor a fee. For the year ended December 31, 2018, these reimbursements to our Advisor totaled approximately $0.92 million. Of this amount, $0.50 million was attributed to Mr. Bitar, $0.05 million was attributed to Mr. Rupert and $0.27 million was attributed to Mr. Hirsch. No reimbursements were attributed to Mr. Shields or Mr. Escalante. The reimbursable expenses include components of salaries, bonuses, benefits and other overhead charges and are based on the percentage of time each such Named Executive Officer spends on our affairs. Our compensation committee does not determine these amounts, but does review with management the allocations of time to us and determines that such allocations are fair and reasonable to us. Our Named Executive Officers receive significant additional compensation from our Advisor and its affiliates that we do not reimburse.
Compensation Report
The compensation committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the compensation committee has determined that the Compensation Discussion and Analysis - Executive Compensation be included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
J. Grayson Sanders (Chairperson)
Samuel Tang
Kathleen S. Briscoe
March 13, 2019
The preceding Compensation Report to stockholders is not soliciting material and is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Director Compensation
Summary Compensation Table

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The following table provides a summary of the compensation earned by our directors for the year ended December 31, 2018 :
Name
Fees Earned or Paid in Cash
Stock Awards
Option Awards
Non-Equity Incentive Plan Compensation
Change in Pension Value and Nonqualified Deferred Compensation Earnings
All other Compensation
Total
Kevin A. Shields
$
—

$
—

$
—

$
—

$
—

$
—

$
—

Michael J. Escalante
—

—

—

—

—

—

—

Samuel Tang
62,500

—

—

—

—

—

62,500

J. Grayson Sanders
60,000

—

—

—

—

—

60,000

Kathleen S. Briscoe
61,500

—

—

—

—

—

61,500

Total
$
184,000

$
—

$
—

$
—

$
—

$
—

$
184,000

We believe that our director compensation program is competitive with those of similarly situated companies in our industry, and further aligns the interests of our directors with those of our stockholders.  In establishing our director compensation, we have taken note of and considered compensation paid by similarly situated companies in our industry, but we have not performed systematic reviews of such compensation nor engaged in benchmarking.  Consequently, information about other companies’ specific compensation policies has not been a primary consideration in forming our director compensation policies and decisions.  Like many other companies, we issue restricted stock awards to our directors, in addition to providing for an annual retainer.  We have found that the value of these compensation components may be difficult to measure, and therefore believe that comparing them in an objective way to similar arrangements developed by other companies may be of limited value.

Our compensation committee fulfills all of the responsibilities with respect to employee, officer and director compensation. We do not have any employees and our executive officers currently do not receive any compensation directly from us, so these responsibilities are limited to setting director compensation and administering our Employee and Director Long Term Incentive Plan (the "Plan"). At the time we begin having employees, our compensation committee will begin overseeing such compensation. Our non-director officers have no role in determining or recommending director compensation. Directors who are also our officers do not receive any special or additional remuneration for service on our Board or any of its committees. Each non-employee independent director received compensation for services on our Board and its committees as provided below.
On March 7, 2017, our Board adopted a Director Compensation Plan (the "Director Compensation Plan"). The Director Compensation Plan governs cash and equity compensation to the independent directors.
Cash Compensation to Directors
Pursuant to our Director Compensation Plan, for the year ended December 31, 2018 , we paid each of our independent directors a retainer of $40,000, plus $1,000 for each board of directors or committee meeting the independent director attended in person or by telephone ($2,000 for attendance by the Chairperson of the audit committee at each meeting of the audit committee and $1,500 for attendance by the Chairperson of any other committee at each of such committee's meetings). In the event there were multiple meetings of our board of directors and one or more committees in a single day, the fees were limited to $3,000 per day ($3,500 for the Chairperson of the audit committee if there was a meeting of such committee).
All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of our Board.
Employee and Director Long-Term Incentive Plan Awards to Independent Directors
The Plan was approved and adopted on April 22, 2014, prior to the commencement of our IPO in order to (1) provide incentives to individuals who are granted awards because of their ability to improve our operations and increase profits; (2) encourage selected persons to accept or continue employment with us or with our Advisor or its affiliates that we deem

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important to our long-term success; and (3) increase the interest of our independent directors in our success through their participation in the growth in value of our stock. Pursuant to the Plan, we may issue options, stock appreciation rights and other equity-based awards, including, but not limited to, restricted stock. As of the year ended December 31, 2018 , we had issued 36,000 shares pursuant to the Plan.
Pursuant to the Director Compensation Plan, we issued 5,000 shares of restricted stock to each independent director on January 18, 2017, which are fully vested (the "Initial Restricted Stock Awards") and 7,000 shares of restricted stock to each independent director on each of June 14, 2017 and March 14, 2019 upon each of their respective re-elections to our board of directors, which vested 50% at the time of grant and 50% upon the first anniversary of the grant date, subject to the independent director's continued service as a director during such vesting period (the "Annual Restricted Stock Awards"). Such Annual Restricted Stock Award consists of 1,000 shares of restricted stock under Section 7.4 of the Plan and an additional 6,000 shares of restricted stock. The Annual Restricted Stock Awards would have immediately vested in the event of certain liquidation events, as defined in the Annual Restricted Stock Awards. Both the Initial Restricted Stock Awards and the Annual Restricted Stock Awards are subject to a number of other conditions set forth in such awards.
Compensation Committee Interlocks and Insider Participation
The directors who served as members of our compensation committee during the year ended December 31, 2018 were Messrs. Tang and Sanders and Ms. Briscoe, our independent directors. No member of the compensation committee was an officer or employee of the Company while serving on the compensation committee. During the year ended December 31, 2018 , Mr. Shields also served as a director of GCEAR, one of whose executive officers, Mr. Escalante, served on our Board.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 28, 2019, the amount of each class of our common stock beneficially owned by: (1) any person who is known by us to be the beneficial owner of more than 5% of the outstanding shares of such class of our common stock; (2) each of our directors; (3) each of our Named Executive Officers; and (4) all of our current directors and executive officers as a group. The percentage of beneficial ownership is calculated based on 77,691,364 shares of common stock outstanding as of February 28, 2019.
Common Stock Beneficially Owned (2)

Name and Address of Beneficial Owner (1)
Amount and Nature of Beneficial Ownership
Percent of Class
Kevin A. Shields, Chairman of the Board of Directors and Chief Executive Officer
280

Class T
(3)
*
280

Class S
(3)
*
283

Class D
(3)
*
283,016

Class I
(3)
*
287,323

Class A
(3)
*
Michael J. Escalante, Director and President
—
Javier F. Bitar, Chief Financial Officer and Treasurer
—
David C. Rupert, Executive Vice President
—
Howard S. Hirsch, Vice President and Secretary
—
Samuel Tang, independent director
12,021

Class AAA
(4)
*
J. Grayson Sanders, independent director
12,021

Class AAA
(4)
*
Kathleen S. Briscoe, independent director
12,021

Class AAA
(4)
*
All directors and current executive officers as a group (11 persons)
607,245

(3)
*
* Represents less than 1% of our outstanding common stock as of February 28, 2019.
(1)
The address of each beneficial owner listed is Griffin Capital Plaza, 1520 E. Grand Avenue, El Segundo, California 90245.
(2)
Beneficial ownership is determined in accordance with SEC rules and generally includes voting or investment power with respect to securities and shares issuable pursuant to options, warrants and similar rights held by the respective person or group that may be exercised within 60 days following

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February 28, 2019. Except as otherwise indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
(3)
Consists of shares owned by Griffin Capital Vertical Partners, L.P., which is indirectly owned by Mr. Shields.
(4)
Each independent director was awarded 5,000 shares of restricted stock on January 18, 2017, which are fully vested and 7,000 shares of restricted stock on June 14, 2017, which are fully vested. Our 2018 Annual Meeting was not held until March 13, 2019, at which time the 2018 grants of restricted stock were awarded.

Equity Compensation Plan Information

On April 22, 2014, our Board adopted the Plan in order to: (1) provide incentives to individuals who are granted awards because of their ability to improve our operations and increase profits; (2) encourage selected persons to accept or continue employment with us or with our Advisor or its affiliates that we deem important to our long-term success; and (3) increase the interest of our independent directors in our success through their participation in the growth in value of our stock. Pursuant to the Plan, we may issue stock-based awards to our directors and full-time employees (should we ever have employees), executive officers and full-time employees of our Advisor and its affiliates that provide services to us and who do not have any beneficial ownership of our Advisor and its affiliates, entities and full-time employees of entities that provide services to us, and certain consultants to us, our Advisor and its affiliates that provide services to us.
The term of the Plan is 10 years and the total number of shares of common stock reserved for issuance under the Plan is 10% of the outstanding shares of stock at any time, not to exceed 10,000,000 shares in the aggregate. As of February 28, 2019, approximately 7,769,136 shares were available for future issuance under the Plan. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period. As of December 31, 2018 , awards totaling 36,000 shares of restricted stock have been granted to our independent directors under the Plan.
In the event of an “equity restructuring” (meaning a nonreciprocal transaction between us and our stockholders that causes the per-share fair market value of the shares of stock underlying an award to change, such as a stock dividend, stock split, spinoff, rights offering, or recapitalization through a large, nonrecurring cash dividend), then the number of shares of stock and the class(es) of stock subject to the Plan and each outstanding award and the exercise price (if applicable) of each outstanding award shall be proportionately adjusted. Upon our reorganization, merger or consolidation with one or more corporations as a result of which we are not the surviving corporation, or upon sale of all or substantially all of our assets, that, in each case, is not an equity restructuring, appropriate adjustments as to the number and kind of shares and exercise prices will be made either by our compensation committee or by such surviving entity. Such adjustment may provide for the substitution of such awards with new awards of the successor entity or the assumption of such awards by such successor entity. Alternatively, rather than providing for the adjustment, substitution or assumption of awards, the compensation committee may either (1) shorten the period during which awards are exercisable, or (2) cancel an award upon payment to the participant of an amount in cash that the compensation committee determines is equivalent to the amount of the fair market value of the consideration that the participant would have received if the participant exercised the award immediately prior to the effective time of the transaction.
In the event that the compensation committee determines that any distribution, recapitalization, stock split, reorganization, merger, liquidation, dissolution or sale, transfer, exchange or other disposition of all or substantially all of our assets, or other similar corporate transaction or event, affects the stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or with respect to an award, then the compensation committee shall, in such manner as it may deem equitable, adjust the number and kind of shares or the exercise price with respect to any award.

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The following table provides information about the common stock that may be issued under the Plan as of December 31, 2018 :
Plan Category
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Securities
Remaining for Future
Issuance Under Equity
Compensation Plans (1)
Equity Compensation Plans Approved by Security Holders
—

—

7,752,597

Equity Compensation Plans Not Approved by Security Holders
—

—

—

Total
—

—

7,752,597

(1)
The total number of shares of our common stock (or common stock equivalents) reserved for issuance under the Plan is equal to 10% of our outstanding shares of stock at any time, but not to exceed 10,000,000 shares in the aggregate. As of December 31, 2018 , we had 77,525,973 outstanding shares of common stock, including shares issued pursuant to the DRP and our stock distributions.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

Certain Relationships and Related Transactions
General
Currently, certain of our executive officers and two of our directors are officers of our Advisor, our property manager, and other affiliated entities, and one of our directors holds ownership interests in our former sponsor. As a result, these individuals owe fiduciary duties to these other entities and their owners, which fiduciary duties may conflict with the duties that they owe to our stockholders and us. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our investment objectives. Conflicts with our business and interests are most likely to arise from involvement in activities related to: (1) allocation of new investments and management time and services between us and the other entities; (2) our purchase of properties from, or sale of properties to, affiliated entities; (3) the timing and terms of the investment in or sale of an asset; (4) development of our properties by affiliates; (5) investments with affiliates of our Advisor; (6) compensation to our Advisor; and (7) our relationship with our property manager.

Our nominating and corporate governance committee will consider and act on any conflicts-related matter required by our charter or otherwise permitted by MGCL where the exercise of independent judgment by any of our directors (who is not an independent director) could reasonably be compromised, including approval of any transaction involving our Advisor and its affiliates. In addition, our charter contains a number of restrictions relating to: (1) transactions we enter into with our Advisor and its affiliates; (2) certain future offerings; and (3) allocation of investment opportunities among affiliated entities.
Our independent directors reviewed the material transactions between us and our affiliates during the year ended December 31, 2018. As described in more detail below, we are currently a party to four types of agreements giving rise to material transactions between us and our affiliates: our advisory agreement, our operating partnership agreement, our property management agreements, and our dealer manager agreement. Set forth below is a description of the relevant transactions with our affiliates, which we believe have been executed on terms that are fair to us.
Advisory Agreement
Our Advisor was formed in Delaware in November 2013 and is now owned by our new sponsor, GRECO. Some of our officers and directors are also officers of our Advisor. Our Advisor has contractual responsibility to us and our stockholders pursuant to the Amended and Restated Advisory Agreement dated September 20, 2017, as renewed (the "Advisory Agreement").
Our Advisor manages our day-to-day activities pursuant to our Advisory Agreement. Pursuant to our Advisory Agreement, we are obligated to reimburse our Advisor for certain services and payments, including payments made by our Advisor to third parties, including in connection with potential acquisitions. Under our Advisory Agreement, our Advisor has undertaken to use its commercially reasonable efforts to present to us investment opportunities consistent with our investment

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policies and objectives as adopted by our Board. In its performance of this undertaking, our Advisor, either directly or indirectly by engaging an affiliate, shall, among other duties and subject to the authority of our Board:
•
find, evaluate, present and recommend to us investment opportunities consistent with our investment policies and objectives;
•
serve as our investment and financial advisor and provide research and economic and statistical data in connection with our assets and our investment policies;
•
perform due diligence and prepare and obtain reports regarding prospective investments;
•
provide supporting documentation and recommendations necessary for the our Board to evaluate proposed investments;
•
acquire properties and make investments on our behalf in compliance with our investment objectives and policies;
•
structure and negotiate the terms and conditions of our real estate acquisitions, sales or joint ventures;
•
monitor applicable markets, obtain reports and evaluate the performance and value of our investments;
•
implement and coordinate the processes with respect to the calculation of NAV and obtain appraisals performed by independent third-party appraisal firms concerning the value of properties;
•
supervise our independent valuation firm and monitor its valuation process to ensure that it complies with our valuation procedures;
•
review and analyze each property’s operating and capital budget;
•
arrange, structure and negotiate financing and refinancing of properties;
•
perform all operational functions for the maintenance and administration of our assets, including the servicing of mortgages;
•
consult with our officers and Board and assist the Board in formulating and implementing our financial policies, operational planning services and portfolio management functions;
•
prepare and review on our behalf, with the participation of one designated principal executive officer and principal financial officer, all reports and returns required by the SEC, IRS and other state or federal governmental agencies;
•
provide the daily management and perform and supervise the various administrative functions reasonably necessary for our management and operations; and
•
investigate, select, and, on our behalf, engage and conduct business with such third parties as our Advisor deems necessary to the proper performance of its obligations under the Advisory Agreement.
The term of our Advisory Agreement is one year and will end on September 19, 2019, but may be renewed for an unlimited number of successive one-year periods. However, a majority of our independent directors must approve the Advisory Agreement and the fees thereunder annually prior to any renewal, and the criteria for such renewal shall be set forth in the applicable meeting minutes. The independent directors will determine at least annually that our total fees and expenses are reasonable in light of our investment performance, our net income, and the fees and expenses of other comparable unaffiliated REITs. Each such determination shall be reflected in the applicable meeting minutes. Additionally, any party may terminate the Advisory Agreement without cause or penalty upon 60 days’ written notice. If we elect to terminate the Advisory Agreement, we will be required to obtain the approval of a majority of our independent directors. In the event of

81




the termination of our Advisory Agreement, our Advisor will be required to cooperate with us and take all reasonable steps requested by us to assist our Board in making an orderly transition of the advisory function.
Our Advisor and its officers, employees and affiliates expect to engage in other business ventures and, as a result, their resources will not be dedicated exclusively to our business. However, pursuant to the Advisory Agreement, our Advisor will be required to devote sufficient resources to our administration to discharge its obligations. Our Advisor has the right to assign the Advisory Agreement to an affiliate subject to approval by our independent directors. We have the right to assign the Advisory Agreement to any successor to all of our assets, rights and obligations. Our Board shall determine whether any successor advisor possesses sufficient qualifications to perform the advisory function for us and whether the compensation provided for in its advisory agreement with us is justified. Our independent directors will base their determination on the general facts and circumstances that they deem applicable, including the overall experience and specific industry experience of the successor advisor and its management. Other factors that will be considered are the compensation to be paid to the successor advisor and any potential conflicts of interest that may occur.
Under the terms of our Advisory Agreement, our Advisor is entitled to receive an advisory fee that will be payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 1.25% of the NAV for each class of common stock for each day. We will not pay the Advisor any acquisition, financing or other similar fees from proceeds raised in the Follow-On Offering in connection with making investments.
Generally, we are required under the Advisory Agreement to reimburse our Advisor for organization and offering costs as and when incurred. Our Advisor may waive or defer all or a portion of these reimbursements or elect to receive Class I shares or Class I units in our Operating Partnership in lieu of these reimbursements at any time and from time to time, in its sole discretion. The Advisory Agreement also requires our Advisor to reimburse us within 60 days after the end of the month in which a public offering terminates, to the extent that organization and offering expenses, including sales commissions, dealer manager fees, distribution fees, and any additional underwriting compensation, are in excess of 15.0% of gross proceeds from the public offering.
The Advisory Agreement provides for reimbursement of our Advisor’s direct and indirect costs of providing administrative and management services to us. Our operating expenses shall (in the absence of a satisfactory showing to the contrary) be deemed to be excessive, and our Advisor must reimburse us in the event our total operating expenses for the 12 months then ended exceed the greater of 2.0% of our average invested assets or 25.0% of our net income, unless a majority of our independent directors has determined that such excess expenses were justified based on unusual and non-recurring factors. For the year ended December 31, 2018, our expenses were within such limits.
If we consummate the Mergers, we will no longer be externally advised pursuant to our Advisory Agreement.  Our management team will handle many of these responsibilities formerly handled by our Advisor.  See "Item 1--Business" for additional details regarding the proposed Mergers.

Operating Partnership Agreement
On September 20, 2017, we entered into a Third Amended and Restated Limited Partnership Agreement with our Operating Partnership and our Advisor. We conduct substantially all of our operations through the Operating Partnership, of which we are the general partner. Our Advisor has a special limited partnership interest in the Operating Partnership and is a party to the operating partnership agreement. If we consummate the Mergers, the special limited partnership interest held by our Advisor in our Operating Partnership will be redeemed, canceled, and retired.
So long as the Advisory Agreement has not been terminated (including by means of non-renewal), our Advisor will be entitled to receive a performance distribution from our Operating Partnership equal to 12.5% of the Total Return, subject to a 5.5% Hurdle Amount and a High Water Mark, with a Catch-Up (each term as defined in the operating partnership agreement). Such distribution will be made annually and accrue daily. The performance distribution for the year ended December 31, 2018 was $7.8 million . If we consummate the Mergers, we will amend the Third Amended and Restated Limited Partnership Agreement to remove the provisions related to the performance distribution, among other changes.

82




Property Management Agreements
Griffin Capital Essential Asset Property Management II, LLC, our property manager, is wholly owned by Griffin Capital Property Management, LLC. Our Sponsor, through a series of holding companies, is the owner of Griffin Capital Property Management, LLC. Our property manager manages our properties pursuant to our property management agreements. If we consummate the Mergers, we will directly own Griffin Capital Property Management, LLC.
We expect that we will contract directly with non-affiliated third party property managers with respect to our individual properties. In such event, or in the event an individual property is self-managed by the tenant, we will pay our property manager an oversight fee equal to 1.0% of the gross revenues of the property managed, plus reimbursable costs as applicable. Reimbursable costs and expenses include wages and salaries and other expenses of employees engaged in operating, managing and maintaining our properties, as well as certain allocations of office, administrative, and supply costs. Our property manager may waive or defer all or a portion of these reimbursements or elect to receive Class I shares or Class I units in our Operating Partnership in lieu of these reimbursements at any time and from time to time, in its sole discretion. In the event that we contract directly with our property manager with respect to a particular property, we will pay the property manager up to 3.0%, or greater if the lease so allows, of the gross monthly revenues collected for each property it manages, plus reimbursable costs as applicable. Our property manager may pay some or all of these fees to third parties with whom it subcontracts to perform property management services. In no event will we pay both a property management fee to the property manager and an oversight fee to our property manager with respect to a particular property.
In addition, we may pay our property manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. Further, although a substantial majority of the properties that we intend to acquire are leased under net leases in which the tenants are responsible for tenant improvements, we may also pay our property manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which we are responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. Our property manager will also be entitled to a construction management fee of 5.0% of the cost of improvements.
All costs and expenses incurred by our property manager on our behalf in fulfilling its duties to us under the property management agreements are to be paid out of an account that is fully funded by us, or paid directly by us. Such costs and expenses may include, but are not limited to, reasonable wages and salaries of on-site and off-site employees of our property manager who are directly engaged in the operation, management, maintenance, leasing, construction, or access control of our properties, including taxes, insurance and benefits relating to such employees, along with the legal, travel and other out-of-pocket expenses that are directly related to the management and leasing of specific properties we own. Our property manager will also allocate a portion of its office, administrative and supplies expense to us to the extent directly related to the foregoing reasonable reimbursable expenses for the management of our properties.
We anticipate that the property management agreements with our property manager will have terms of one year and shall be automatically extended for additional one-year periods unless we or our property manager give 60 days’ prior written notice of such party’s intention to terminate a property management agreement. Under the property management agreements, our property manager is not prevented from engaging in other activities or business ventures, whether or not such other activities or business ventures are in competition with us or our business, including, without limitation, property management services for other parties, including other REITs, or for other programs advised, sponsored or organized by our Sponsor or its affiliates.
Dealer Manager Agreement
Griffin Capital Securities, LLC, which is wholly owned by GCC, our former sponsor, through a holding company, serves as our dealer manager.
Our dealer manager provides wholesaling, sales promotional and marketing services to us in connection with our Follow-On Offering. Specifically, our dealer manager ensures compliance with SEC rules and regulations and FINRA rules relating to the sales process. In addition, our dealer manager oversees participating broker-dealer relationships, assists in the assembling of prospectus kits, assists in the due diligence process and ensures proper handling of investment proceeds.

83




We commenced our Follow-On Offering on September 20, 2017 and offered Class T shares, Class S shares, Class D shares and Class I shares in our Follow-On Offering.
Pursuant to the dealer manager agreement, we will pay to the dealer manager selling commissions of up to 3.0% of the total purchase price for each sale of Class T shares and selling commissions of up to 3.5% of the total purchase price for each sale of Class S shares. We will not pay to the dealer manager any selling commissions in respect of the purchase of any Class D shares, Class I shares or DRP shares. We also will pay to the dealer manager dealer manager fees of up to 0.5% of the total purchase price for each sale of Class T shares. We will not pay to the dealer manager any dealer manager fees in respect of the purchase of any Class S shares, Class D shares, Class I shares or DRP shares. Substantially all of the selling commissions and dealer manager fees may be reallowed by the dealer manager to the participating broker-dealers who sold the shares giving rise to such selling commissions and dealer manager fees. In addition, subject to FINRA’s limitations on underwriting compensation, we will pay to the dealer manager a distribution fee for ongoing services rendered to stockholders by participating broker-dealers or broker-dealers servicing investors’ accounts, referred to as servicing broker-dealers. The fee accrues daily and is paid monthly in arrears and is calculated based on the average daily NAV for the applicable month (the “Average NAV”).  The distribution fees for the different share classes are as follows: (i) for Class T shares, 1/365th of 1.0% of the Average NAV of the outstanding Class T shares for each day, consisting of an advisor distribution fee of 1/365th of 0.75% and a dealer distribution fee of 1/365th of 0.25% of the Average NAV of the Class T shares for each day; (ii) for Class S shares, 1/365th of 1.0% of the Average NAV of the outstanding Class S shares for each day; and (iii) for Class D shares, 1/365th of 0.25% of the Average NAV of the outstanding Class D shares for each day. The dealer manager is not entitled to any distribution fee with respect to Class I shares.
We will cease paying the distribution fee with respect to any Class T share, Class S share or Class D share held in a stockholder's account at the end of the month in which the dealer manager in conjunction with the transfer agent determines that total selling commissions, dealer manager fees and distribution fees paid with respect to all shares from the Follow-On Offering held by such stockholder within such account would exceed, in the aggregate, 9.0% (or a lower limit as set forth in any applicable agreement between the dealer manager and a participating broker-dealer) of the gross proceeds from the sale of such shares (including the gross proceeds of any shares issued under the DRP with respect thereto). At the end of such month, such Class T share, Class S share or Class D share (and any shares issued under the DRP with respect thereto) will convert into a number of Class I shares (including any fractional shares) with an equivalent NAV as such share. In addition, we will cease paying the distribution fee on the Class T shares, Class S shares and Class D shares on the earlier to occur of the following: (i) a listing of our shares; (ii) a merger or consolidation with or into another entity, or the sale or other disposition of all or substantially all of our assets, including any liquidation of us; or (iii) the date following the completion of the primary portion of the Follow-On Offering on which, in the aggregate, underwriting compensation from all sources in connection with the Follow-On Offering, including selling commissions, dealer manager fees, the distribution fee and other underwriting compensation, is equal to 9.0% of the gross proceeds from the primary portion of our Follow-On Offering.
Our dealer manager has entered into participating dealer agreements with certain other broker-dealers authorizing them to sell our shares. Upon sale of our shares by such broker-dealers, our dealer manager re-allows all of the sales commissions paid in connection with sales made by these broker-dealers. Our dealer manager may also re-allow to these broker-dealers a portion of the dealer manager fee as marketing fees, reimbursement of certain costs and expenses of attending training and education meetings sponsored by our dealer manager, payment of attendance fees required for employees of our dealer manager or other affiliates to attend retail seminars and public seminars sponsored by these broker-dealers, or to defray other distribution-related expenses. The dealer manager will re-allow the distribution fees to participating broker-dealers and servicing broker-dealers for ongoing services performed by such broker-dealers, and will retain any such distribution fees to the extent a broker-dealer is not eligible to receive it for failure to provide such services.
We also pay an additional amount of gross offering proceeds as reimbursements to participating broker-dealers (either directly or through our dealer manager) for bona fide accountable due diligence expenses incurred by such participating broker-dealers. Such reimbursement of due diligence expenses may include travel, lodging, meals and other reasonable out-of-pocket expenses incurred by participating broker-dealers and their personnel when visiting our office to verify information relating to us and our offerings and, in some cases, reimbursement of the allocable share of actual out-of-pocket expenses of internal due diligence personnel of the participating broker-dealer conducting due diligence on the offering.
Fees Paid to Our Affiliates

84




For details regarding the related party costs and fees incurred, paid and due to affiliates as of December 31, 2018, and due to affiliates as of December 31, 2017, please see Note 10, Related Party Transactions , to the consolidated financial statements.
Director Independence
While our shares are not listed for trading on any national securities exchange, as required by our charter, a majority of the members of our Board and each committee of our Board are "independent" as determined by our Board by applying the definition of "independent" adopted by the New York Stock Exchange, consistent with the NASAA Statement of Policy Regarding Real Estate Investment Trusts and applicable rules and regulations of the SEC. Our Board has determined that Messrs. Tang and Sanders and Ms. Briscoe each meet the relevant definition of "independent" and has no material relationship with us other than by virtue of his or her service on our Board. Our audit, compensation, and nominating and corporate governance committees are comprised entirely of independent directors.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees Paid to Principal Auditor
The audit committee reviewed the audit and non-audit services performed by Ernst & Young LLP ("Ernst & Young"), as well as the fees charged by Ernst & Young for such services. In its review of the non-audit service fees, the audit committee considered whether the provision of such services is compatible with maintaining the independence of Ernst & Young. The aggregate fees billed to us for professional accounting services provided by Ernst & Young, including the audits of our annual financial statements, for the years ended December 31, 2018 and 2017, respectively, are set forth in the table below.
2018
2017
Audit Fees
$
421,605

$
446,679

Audit-Related Fees
93,180

—

Tax Fees
118,785

113,744

All Other Fees
1,250

1,250

Total
$
634,820

$
561,673

For purposes of the preceding table, the professional fees are classified as follows:
• Audit Fees - These are fees for professional services performed for the audit of our annual financial statements and the required review of our quarterly financial statements and other procedures performed by the independent auditors to be able to form an opinion on our consolidated financial statements. These fees also cover services that are normally provided by independent auditors in connection with statutory and regulatory filings or engagements, and services that generally only an independent auditor reasonably can provide, such as services associated with filing registration statements, periodic reports and other filings with the SEC.
• Audit-Related Fees - These are fees for assurance and related services that traditionally are performed by an independent auditor, such as due diligence related to acquisitions and dispositions, audits related to acquisitions, attestation services that are not required by statute or regulation, internal control reviews and consultation concerning financial accounting and reporting standards.
• Tax Fees - These are fees for all professional services performed by professional staff in our independent auditor's tax division, except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning and tax advice, including federal, state and local issues. Such services may also include assistance with tax audits and appeals before the IRS and similar state and local agencies, as well as federal, state and local tax issues related to due diligence.

85




• All Other Fees - These are fees for other permissible services that do not meet one of the above-described categories, including assistance with internal audit plans and risk assessments.
Audit Committee Pre-Approval Policies
The Audit Committee Charter imposes a duty on the audit committee to pre-approve all auditing services performed for us by our independent auditor, as well as all permitted non-audit services (including the fees and terms thereof) in order to ensure that the provision of such services does not impair the auditor's independence. In determining whether or not to pre-approve services, the audit committee considers whether the service is permissible under applicable SEC rules. The audit committee may, in its discretion, delegate to one or more of its members the authority to pre-approve any services to be performed by our independent auditors, provided such pre-approval is presented to the full audit committee at its next scheduled meeting.
All services rendered by Ernst & Young in the year ended December 31, 2018 were pre-approved in accordance with the policies set forth above.
PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a) List of Documents Filed.
1. The list of the financial statements contained herein is set forth on page F-1 hereof.
2. Schedule III — Real Estate and Accumulated Depreciation is set forth beginning on page S-1 hereof. All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
3. The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index below.
(b) See (a)(3) above.
(c) See (a)(2) above.

EXHIBIT INDEX
The following exhibits are included in this Annual Report on Form 10-K for the year ended December 31, 2018 (and are numbered in accordance with Item 601 of Regulation S-K).
Exhibit No.
Description

86







87




101*
The following Griffin Capital Essential Asset REIT II, Inc. financial information for the period ended December 31, 2018 formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
*
Filed herewith.
**
Furnished herewith.
+
Management contract, compensatory plan or arrangement filed in response to Item 15(a)(3) of Instructions to Form 10-K.



88




ITEM 16. FORM 10-K SUMMARY
None.


























89




SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of El Segundo, State of California, on March 14, 2019 .
GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
By:
/s/ Kevin A. Shields
Kevin A. Shields
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ Kevin A. Shields
Chief Executive Officer and Chairman (Principal Executive Officer)
March 14, 2019
Kevin A. Shields
/s/ Javier F. Bitar
Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
March 14, 2019
Javier F. Bitar
/s/ Michael J. Escalante
Director and President
March 14, 2019
Michael J. Escalante
/s/ J. Grayson Sanders
Independent Director
March 14, 2019
J. Grayson Sanders
/s/ Kathleen S. Briscoe
Independent Director
March 14, 2019
Kathleen S. Briscoe
/s/ Samuel Tang
Independent Director
March 14, 2019
Samuel Tang



90




GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



F-1




Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Griffin Capital Essential Asset REIT II, Inc.

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Griffin Capital Essential Asset REIT II, Inc. (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2018 and 2017, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2014.
Los Angeles, California
March 14, 2019


F-2




GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31, 2018

December 31, 2017

ASSETS
Cash and cash equivalents
$
28,623

$
33,164

Restricted cash
12,904

12,886

Real estate:
Land
122,482

122,482

Building
819,224

815,721

Tenant origination and absorption cost
240,364

240,364

Construction in progress
144

299

Total real estate
1,182,214

1,178,866

Less: accumulated depreciation and amortization
(128,570
)
(83,905
)
Total real estate, net
1,053,644

1,094,961

Intangible assets, net
2,923

3,294

Due from affiliates
1,202

686

Deferred rent
31,189

22,733

Other assets, net
6,850

12,224

Total assets
$
1,137,335

$
1,179,948

LIABILITIES AND EQUITY
Total debt
$
481,955

$
481,848

Restricted reserves
11,565

13,368

Accrued expenses and other liabilities
21,023

19,903

Distributions payable
3,650

1,689

Due to affiliates
19,048

16,896

Below market leases, net
46,229

51,295

Total liabilities
583,470

584,999

Commitments and contingencies (Note 11)



Common stock subject to redemption
37,357

32,405

Stockholders' equity:
Common Stock, $0.001 par value - Authorized:800,000,000; 77,525,973 and 77,175,283 shares outstanding in the aggregate, as of December 31, 2018 and December 31, 2017, respectively (1)
76

76

Additional paid-in capital
656,500

656,705

Cumulative distributions
(125,297
)
(82,590
)
Accumulated deficit
(15,953
)
(12,672
)
Accumulated other comprehensive income
—

949

Total stockholders' equity
515,326

562,468

Noncontrolling interests
1,182

76

Total equity
516,508

562,544

Total liabilities and equity
$
1,137,335

$
1,179,948

(1)
See Note 8, Equity , for the number of shares outstanding of each class of common stock as of December 31, 2018 and December 31, 2017 .
See accompanying notes.

F-3




GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share
Year Ended December 31,
2018
2017
2016
Revenue:
Rental income
$
87,789

$
89,797

$
51,403

Property expense recovery
18,605

17,584

11,409

Total revenue
106,394

107,381

62,812

Expenses:
Property operating
7,382

6,724

4,428

Property tax
10,120

10,049

7,046

Property management fees to affiliates
1,832

1,799

1,052

Asset management fees to affiliates
—

8,027

6,413

Advisory fees to affiliates
9,316

2,550

—

Performance distribution allocation to affiliates
7,783

2,394

—

Acquisition fees and expenses to affiliates
—

—

6,176

Acquisition fees and expenses to non-affiliates
1,938

—

1,113

General and administrative
3,471

3,445

2,804

Corporate operating expenses to affiliates
3,011

2,336

1,622

Depreciation and amortization
44,665

43,950

27,894

Total expenses
89,518

81,274

58,548

Income before other income and (expenses)
16,876

26,107

4,264

Other income (expenses):
Interest expense
(20,375
)
(15,519
)
(10,384
)
Other income, net
212

531

13

Net (loss) income
(3,287
)
11,119

(6,107
)
Net loss (income) attributable to noncontrolling interests
6

(3
)
3

Net (loss) income attributable to common stockholders
$
(3,281
)
$
11,116

$
(6,104
)
Net (loss) income attributable to common stockholders per share, basic and diluted
$
(0.04
)
$
0.15

$
(0.12
)
Weighted average number of common shares outstanding, basic and diluted
77,657,627

75,799,415

50,712,589


See accompanying notes.

F-4




GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)

Year Ended December 31,
2018
2017
2016
Net (loss) income
$
(3,287
)
$
11,119

$
(6,107
)
Other comprehensive (loss) income:
Change in fair value of swap agreement
(952
)
108

841

Total comprehensive (loss) income
(4,239
)
11,227

(5,266
)
Comprehensive loss (income) attributable to noncontrolling interests
9

(3
)
3

Comprehensive (loss) income attributable to common stockholders
$
(4,230
)
$
11,224

$
(5,263
)


F-5




GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands, except share amounts)
Common Stock
Additional
Paid-In
Capital
Cumulative
Distributions
Accumulated
Deficit
Accumulated Other Comprehensive Income
Total
Stockholders’
Equity
Non-
controlling
Interests
Total
Equity
Shares
Amount
Balance December 31, 2015
28,556,170

$
29

$
250,757

$
(8,258
)
$
(17,684
)
$
—

$
224,844

$
98

$
224,942

Gross proceeds from issuance of common stock
40,700,406

40

406,423

—

—

—

406,463

—

406,463

Discount on issuance of common stock
—

—

(696
)
—

—

—

(696
)
—

(696
)
Offering costs including dealer manager fees to affiliates
—

—

(43,340
)
—

—

—

(43,340
)
—

(43,340
)
Distributions to common stockholders
—

—

—

(12,479
)
—

—

(12,479
)
—

(12,479
)
Issuance of shares for distribution reinvestment plan
1,599,355

2

15,157

(15,159
)
—

—

—

—

—

Repurchase of common stock
(167,442
)
—

(1,627
)
—

—

—

(1,627
)
—

(1,627
)
Additions to common stock subject to redemption
—

—

(13,531
)
—

—

—

(13,531
)
—

(13,531
)
Issuance of stock dividends
251,158

—

2,510

(2,510
)
—

—

—

—

—

Distributions to noncontrolling interest
—

—

—

—

—

—

—

(11
)
(11
)
Net loss


—

—

—

(6,104
)
—

(6,104
)
(3
)
(6,107
)
Other comprehensive income
—

—

—

—

—

841

841

—

841

Balance December 31, 2016
70,939,647

$
71

$
615,653

$
(38,406
)
$
(23,788
)
$
841

$
554,371

$
84

$
554,455

Gross proceeds from issuance of common stock
4,205,673

4

41,822

—

—

—

41,826

—

41,826

Discount on issuance of common stock
—

—

(16
)
—

—

—

(16
)
—

(16
)
Stock-based compensation
25,500

—

292

—

—

—

292

—

292

Offering costs including dealer manager fees and stockholder servicing fees to affiliates
—

—

(3,593
)
—

—

—

(3,593
)
—

(3,593
)
Distributions to common stockholders
—

—

—

(19,427
)
—

—

(19,427
)
—

(19,427
)
Issuance of shares for distribution reinvestment plan
2,358,188

2

22,206

(22,208
)
—

—

—

—

—

Repurchase of common stock
(623,499
)
(1
)
(5,741
)
—

—

—

(5,742
)
—

(5,742
)
Additions to common stock subject to redemption
—

—

(16,467
)
—

—

—

(16,467
)
—

(16,467
)
Issuance of stock dividends
269,774

—

2,549

(2,549
)
—

—

—

—

—

Distributions to noncontrolling interest
—

—

—

—

—

—

—

(11
)
(11
)
Net income
—

—

—

—

11,116

—

11,116

3

11,119

Other comprehensive income
—

—

—

—

—

108

108

—

108

Balance December 31, 2017
77,175,283

$
76

$
656,705

$
(82,590
)
$
(12,672
)
$
949

$
562,468

$
76

$
562,544


F-6




Gross proceeds from issuance of common stock
762,537

1

7,429

—

—

—

7,430

—

7,430

Changes in redeemable common stock
—

—

(6,538
)
—

—

—

(6,538
)
—

(6,538
)
Discount on issuance of common stock
—

—

(1
)
—

—

—

(1
)
—

(1
)
Stock-based compensation
10,500

—

44

—

—

—

44

—

44

Offering costs including dealer manager fees and stockholder servicing fees to affiliates
—

—

(1,140
)
—

—

—

(1,140
)
—

(1,140
)
Distributions to common stockholders
—

—

—

(22,709
)
—

—

(22,709
)
—

(22,709
)
Issuance of shares for distribution reinvestment plan
2,083,950

2

19,996

(19,998
)
—

—

—

—

—

Repurchase of common stock
(2,506,299
)
(3
)
(23,763
)
—

—

—

(23,766
)
—

(23,766
)
Additions to common stock subject to redemption
—

—

3,768

—

—

—

3,768

—

3,768

Issuance of stock dividends
2

—

—

—

—

—

—

—

—

Issuance of limited partnership units
—

—

—

—

—

—

—

1,185

1,185

Distributions to noncontrolling interest
—

—

—

—

—

—

—

(70
)
(70
)
Net (loss)
—

—

—

—

(3,281
)
—

(3,281
)
(6
)
(3,287
)
Other comprehensive loss
—

—

—

—

—

(949
)
(949
)
(3
)
(952
)
Balance December 31, 2018
77,525,973

$
76

$
656,500

$
(125,297
)
$
(15,953
)
$
—

$
515,326

$
1,182

$
516,508


See accompanying notes.

F-7




GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2018
2017
2016
Net (loss) income
$
(3,287
)
$
11,119

$
(6,107
)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of building and improvements
20,466

20,194

11,630

Amortization of tenant origination and absorption costs
24,199

23,756

16,264

Amortization of above and below market leases
(4,695
)
(4,573
)
(3,592
)
Amortization of deferred financing costs
1,384

1,106

1,196

Deferred rent
(8,456
)
(17,308
)
(3,924
)
Stock based compensation
44

292

—

Unrealized loss (gain) on interest rate swap
77

83

(155
)
Performance distribution allocation (non-cash)
3,904

—

—

Change in operating assets and liabilities:
Other assets, net
1,397

4,590

(1,040
)
Accrued expenses and other liabilities, net
3,376

(2,615
)
3,094

Due to affiliates, net
2,546

3,068

(922
)
Net cash provided by operating activities
40,955

39,712

16,444

Investing Activities:
Acquisition of properties, net
—

(44,234
)
(538,845
)
Restricted reserves
(1,803
)
(42,430
)
(3,541
)
Improvements to real estate
—

(21
)
(40
)
Payments for construction in progress
(502
)
(772
)
(80
)
Real estate acquisition deposits
—

250

8,700

Net cash used in investing activities
(2,305
)
(87,207
)
(533,806
)
Financing Activities:
Proceeds from borrowings - Revolving Credit Facility
—

24,300

249,900

Proceeds from borrowings - BofA/KeyBank Loan
250,000

—

—

Proceeds from borrowings - Term Loan
113,000

—

—

Principal payoff of indebtedness - Revolving Credit Facility
(357,673
)
—

(55,000
)
Deferred financing costs
(6,603
)
(30
)
(1,578
)
Issuance of common stock
7,465

30,699

383,170

Offering costs
(4,778
)
—

—

Repurchase of common stock
(23,766
)
(5,742
)
(1,627
)
Distributions paid to common stockholders
(20,753
)
(19,232
)
(11,541
)
Distributions paid to noncontrolling interests
(65
)
(11
)
(11
)
Net cash (used in) provided by financing activities
(43,173
)
29,984

563,313

Net (decrease) increase in cash, cash equivalents and restricted cash
(4,523
)
(17,511
)
45,951

Cash, cash equivalents and restricted cash at the beginning of the period
46,050

63,561

17,610

Cash, cash equivalents and restricted cash at the end of the period
$
41,527

$
46,050

$
63,561

Supplemental disclosure of cash flow information:
Cash paid for interest
$
19,200

$
13,116

$
9,228

Supplemental disclosures of non-cash investing and financing transactions:
(Decrease) Increase in fair value swap agreement
$
(952
)
$
108

$
841

Increase in Stock Servicing Fee Payable
$
174

$
660

$
17,449

Increase in distributions payable to common stockholders
$
1,955

$
195

$
938

Common stock issued pursuant to the distribution reinvestment plan
$
19,998

$
22,208

$
15,158

See accompanying notes.

F-8



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)


1. Organization

Griffin Capital Essential Asset REIT II, Inc., a Maryland corporation (the “Company”), was formed on November 20, 2013 under the Maryland General Corporation Law ("MGCL") and qualified as a real estate investment trust (“REIT”) commencing with the year ended December 31, 2015. The Company was organized primarily with the purpose of acquiring single tenant net lease properties that are considered essential to the occupying tenant, and has used a substantial amount of the net proceeds from its initial public offering ("IPO") to invest in such properties. The Company’s year end is December 31.
Prior to the execution of the Merger Agreement (as defined below), on December 14, 2018, Griffin Capital Essential Asset REIT, Inc. ("GCEAR"), a non-traded REIT sponsored by our former sponsor, entered into a series of transactions and became self-managed (the “Self Administration Transaction”) and succeeded to the advisory, asset management and property management arrangements formerly in place for the Company. Accordingly, the sponsor of the Company has changed from Griffin Capital Company, LLC ("GCC") to Griffin Capital Real Estate Company, LLC (the "Sponsor" or "GRECO") until the Company Merger (defined below) is consummated.
Griffin Capital Essential Asset Advisor II, LLC, a Delaware limited liability company (the “Advisor”), was formed on November 19, 2013. GRECO, is the sole member of the Advisor. GRECO is owned by Griffin Capital Essential Asset Operating Partnership, L.P. (the "GCEAR Operating Partnership") and Griffin Capital Essential Asset TRS, Inc., a Delaware corporation. The Advisor is responsible for managing the Company’s affairs on a day-to-day basis and identifying and making acquisitions and investments on behalf of the Company under the terms of the Advisory Agreement (as defined below). The Company's officers are also officers of the Advisor and certain of the officers are also officers of the Sponsor.
Griffin Capital Securities, LLC (the “Dealer Manager”) is a Delaware limited liability company and is a wholly-owned subsidiary of Griffin Capital, LLC (“GC”), a Delaware limited liability company.  The Company’s former sponsor, GCC, is the sole member of GC. The Dealer Manager is responsible for marketing the Company’s shares offered pursuant to the Company's public offerings.
The Company’s property manager is Griffin Capital Essential Asset Property Management II, LLC, a Delaware limited liability company (the “Property Manager”), which was formed on November 19, 2013 to manage the Company’s properties, or provide oversight of other property managers engaged by the Company or an affiliate of the Company. The Property Manager derives substantially all of its income from the property management services it performs for the Company.
Griffin Capital Essential Asset Operating Partnership II, L.P., (the "Operating Partnership") owns, and will own, directly or indirectly, all of the properties acquired by the Company. The Operating Partnership will conduct certain activities through the Company’s taxable REIT subsidiary, Griffin Capital Essential Asset TRS II, Inc., a Delaware corporation (the “TRS”), formed on November 22, 2013, which is a wholly-owned subsidiary of the Operating Partnership. The TRS had no activity as of December 31, 2018 .
On September 20, 2017, the Company commenced a follow-on offering of up to $2.2 billion of shares (the "Follow-On Offering"), consisting of up to $2.0 billion of shares in the Company's primary offering and $0.2 billion of shares pursuant to the distribution reinvestment plan ("DRP").
Pursuant to the Follow-On Offering, the Company offered to the public four new classes of shares of common stock: Class T shares, Class S shares, Class D shares and Class I shares (the “New Shares”) with net asset value (“NAV”) based pricing. The share classes have different selling commissions, dealer manager fees and ongoing distribution fees. In connection with the Follow-On Offering, the Company reclassified all Class T and Class I shares sold in its IPO as "Class AA" and "Class AAA" shares, respectively.

On September 20, 2017, the Company entered into an amended and restated advisory agreement (the "Advisory Agreement") with the Advisor and the Operating Partnership, which replaced the Original Advisory Agreement and modified various provisions including the fees and expense reimbursements payable to the Advisor. See Note 10, Related Party Transactions , for additional details.

F-9



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

In connection with the Follow-On Offering, the Company's board of directors (the "Board") adopted an amended and restated DRP effective as of September 30, 2017 to include all of its shares, including the New Shares, under the DRP.
In connection with the Follow-On Offering, the Company’s Board adopted a share redemption program for the New Shares (and IPO shares that have been held for four years or longer) (the “SRP”). On June 4, 2018, the Company’s Board amended and restated the SRP to allow stockholders of the Company’s IPO shares to utilize the SRP, effective as of July 5, 2018.  Prior to that time, the Company had a separate share redemption program for its IPO shares.  See Note 8, Equity , for additional details.  Under the SRP, stockholders are allowed to redeem their shares after a one -year holding period at a redemption price equal to the NAV per share for the applicable class generally on the 13th of the month prior to quarter end.
On August 16, 2018, the Company’s Board approved the temporary suspension of the primary portion of the Follow-On Offering, effective August 17, 2018. On December 12, 2018, the Company also temporarily suspended the DRP offering and the SRP. Beginning in January 2019, all distributions by the Company were paid in cash. The SRP was officially suspended as of January 19, 2019.

On December 14, 2018, the Company, the Operating Partnership, Globe Merger Sub, LLC, a wholly owned subsidiary of the Company (“Merger Sub”), GCEAR, and the GCEAR Operating Partnership, entered into an Agreement and Plan of Merger (the “Merger Agreement”).
Subject to the terms and conditions of the Merger Agreement, (i) GCEAR will merge with and into Merger Sub, with Merger Sub surviving as a direct, wholly owned subsidiary of the Company (the “Company Merger”) and (ii) the Operating Partnership will merge with and into the GCEAR Operating Partnership (the “Partnership Merger” and, together with the Company Merger, the “Mergers”), with the GCEAR Operating Partnership surviving the Partnership Merger. At such time, (x) in accordance with the applicable provisions of the Maryland General Corporation Law, the separate existence of GCEAR shall cease and (y) in accordance with the Delaware Revised Uniform Limited Partnership Act, the separate existence of the Operating Partnership shall cease. See Note 11, Commitments and Contingencies , for additional details .
2. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying cons olidated financial statements of the Company are prepared by management on the accrual basis of accounting and in accordance with generally accepted accounting principles in the United States (“GAAP”) as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), and in conjunction with rules and regulations of the Securities and Exchange Commission ("SEC"). The consolidated financial statements include accounts and related adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the years ended December 31, 2018 and 2017 .
The consolidated financial statements of the Company include all accounts of the Company, the Operating Partnership, and its subsidiaries. Intercompany transactions are not shown on the consolidated statements. However, each property owning entity is a wholly owned subsidiary which is a special purpose entity ("SPE"), whose assets and credit are not available to satisfy the debts or obligations of any other entity, except to the extent required with respect to any co-borrower or guarantor under the same credit facility.
Revenue Recognition
Leases associated with the acquisition and contribution of certain real estate assets have net minimum rent payment increases during the term of the lease and are recorded to rental revenue on a straight-line basis, commencing as of the contribution or acquisition date. See Note 3, Real Estate , for more details. If a lease provides for contingent rental income, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved.
Tenant reimbursement revenue, which is comprised of additional amounts collected from tenants for the recovery of certain operating expenses, including repair and maintenance, property taxes and insurance, and capital expenditures, to the extent allowed pursuant to the lease (collectively, "Recoverable Expenses"), is recognized as revenue when the additional rent is due. Recoverable Expenses to be reimbursed by a tenant are determined based on the Company's estimate of the property's

F-10



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

operating expenses for the year, pro rated based on leased square footage of the property, and are collected in equal installments as additional rent from the tenant, pursuant to the terms of the lease. At least quarterly, the Company reconciles the amount of additional rent paid by the tenant during the quarter to the actual amount of the Recoverable Expenses incurred by the Company for the same period. The difference, if any, is either charged or credited to the tenant pursuant to the provisions of the lease. In certain instances, the lease may restrict the amount the Company can recover from the tenant such as a cap on certain or all property operating expenses.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.
Principles of Consolidation
The Company's financial statements, and the financial statements of the Company's Operating Partnership, including its wholly-owned subsidiaries, are consolidated in the accompanying consolidated financial statements. The portion of these entities not wholly-owned by the Company is presented as noncontrolling interests. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value. There were no cash equivalents, nor were there restrictions on the use of the Company’s cash balance as of December 31, 2018 and 2017 .
The Company maintains its cash accounts with major financial institutions. The cash balances consist of business checking accounts. These accounts are insured by the Federal Deposit Insurance Corporation up to $250,000 at each institution. The Company has not experienced any losses with respect to cash balances in excess of government provided insurance. Management believes there was no significant concentration of credit risk with respect to these cash balances as of December 31, 2018 .
Restricted Cash
In conjunction with acquisitions of certain assets, as required by certain lease provisions or certain lenders in conjunction with an acquisition or debt financing, or credits received by the seller of certain assets, the Company assumed or funded reserves for specific property improvements and deferred maintenance, re-leasing costs, and taxes and insurance, which are included on the consolidated balance sheets as restricted cash. As of December 31, 2018 , the Company had approximately $12.9 million in restricted cash, which includes tenant improvement funds.
Real Estate Purchase Price Allocation
The Company applies the provisions in ASC 805-10, Business Combinations ("ASC 805-10"), to account for the acquisition of real estate, or real estate related assets, in which a lease, or other contract, is in place representing an active revenue stream, as an asset acquisition (in rare cases, a business combination). In accordance with the provisions of ASC 805-10 (on an asset acquisition), the Company recognizes the assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity at their relative fair values. The accounting provisions have also established that transaction costs associated with an asset acquisition are capitalized.
Acquired in-place leases are valued as above-market or below-market as of the date of acquisition. The valuation is measured based on the present value (using an interest rate, which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) management’s estimate of fair market lease rates for the corresponding in-place leases over a period equal to the remaining non-cancelable term of the lease

F-11



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

for above-market leases, taking into consideration below-market extension options for below-market leases. In addition, renewal options are considered and will be included in the valuation of in-place leases if (1) it is likely that the tenant will exercise the option, and (2) the renewal rent is considered to be sufficiently below a fair market rental rate at the time of renewal. The above-market and below-market lease values are capitalized as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
The aggregate relative fair value of in-place leases includes direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals, which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated using methods similar to those used in independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are considered intangible lease assets and are included with real estate assets on the consolidated balance sheets. The intangible lease assets are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid, including real estate taxes, insurance, and other operating expenses, pursuant to the in-place leases over a market lease-up period for a similar lease. Customer relationships are valued based on management’s evaluation of certain characteristics of each tenant’s lease and the Company’s overall relationship with that respective tenant. Characteristics management will consider in allocating these values include the nature and extent of the Company’s existing business relationships with tenants, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals (including those existing under the terms of the lease agreement), among other factors. These intangibles will be included in intangible lease assets on the consolidated balance sheets and are amortized to expense over the remaining term of the respective leases.
The determination of the relative fair values of the assets and liabilities acquired requires the use of significant assumptions about current market rental rates, rental growth rates, discount rates and other variables.
Depreciation and Amortization
The purchase price of real estate acquired and the costs related to development, construction, and property improvements are capitalized. Repairs and maintenance costs include all costs that do not extend the useful life of the real estate asset and are expensed as incurred. The Company considers the period of future benefit of an asset to determine the appropriate useful life. The Company anticipates the estimated useful lives of its assets by class to be generally as follows:
Buildings
40 years
Building Improvements
5-20 years
Land Improvements
15-25 years
Tenant Improvements
Shorter of estimated useful life or remaining contractual lease term
Tenant Origination and Absorption Cost
Remaining contractual lease term
In-place Lease Valuation
Remaining contractual lease term with consideration as to below-market extension options for below-market leases
If a lease is terminated or amended prior to its scheduled expiration, the Company will accelerate the remaining useful life of the unamortized lease-related costs.
Impairment of Real Estate and Related Intangible Assets
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, including credit ratings of all tenants to stay abreast of any material changes in credit quality. The Company monitors tenant credit by (1) reviewing the credit ratings of tenants (or their parent companies or lease guarantors) that are rated by nationally recognized rating agencies; (2) reviewing financial statements and related metrics and information that are publicly available or that are required to be provided pursuant to the lease; (3) monitoring news reports and press releases regarding the tenants (or their parent companies or lease guarantors), and their underlying business and industry; and (4) monitoring the timeliness of rent collections.

F-12



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

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 the assets and the eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the asset, the Company will record an impairment charge to the extent the carrying value exceeds the net present value of the estimated future cash flows of the asset.
Projections of expected future undiscounted cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to re-lease the property and the number of years the property is held for investment. For the year ended December 31, 2018 , the Company did not record any impairment charges related to its real estate assets or intangible assets .
Derivative Instruments and Hedging Activities
ASC Topic 815: Derivatives and Hedgin g ("ASC 815") provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how the entity accounts for derivative instruments and related hedged items; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, ASC 815 requires qualitative disclosures regarding the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company recorded all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, and whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. See Note 5, Interest Rate Contracts .
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code") for the year ended December 31, 2015. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders.  As a REIT, the Company generally will not be subject to federal income tax on taxable income that is distributed to stockholders.  If the Company fails to qualify as a REIT in any taxable year, after the Company initially qualifies to be taxed as a REIT, the Company will then be subject to federal income taxes on the taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions.  Such an event could materially adversely affect net income and net cash available for distribution to stockholders.  However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner that it will remain qualified as a REIT for federal income tax purposes.
The Company could engage in certain business activities that could have an adverse effect on its REIT qualification. The Company has elected to isolate these business activities in the books and records of the TRS. In general, the TRS may perform additional services for the Company’s tenants and generally may engage in any real estate or non-real estate related business.

F-13



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

The TRS will be subject to corporate federal and state income tax. As of December 31, 2018 , the TRS has not commenced operations.
Per Share Data
The Company reports earnings per share for the period as (1) basic earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period, and (2) diluted earnings per share computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding, including common stock equivalents. As of December 31, 2018 and December 31, 2017 , there were no material common stock equivalents that would have a dilutive effect on earnings (loss) per share for common stockholders.
The Company retroactively adjusted the number of common shares outstanding in accordance with ASC 260-10, Earnings per Share ("ASC 260-10"). ASC 260-10 requires retroactively adjusting the computations of basic and diluted earnings per share for all periods presented to reflect the change in capital structure, if the number of common shares outstanding increases as a result of a stock dividend or stock split or decreases as a result of a reverse stock split. If changes in common stock resulting from stock dividends, stock splits, or reverse stock splits occur after the close of the period but before the consolidated financial statements are issued or are available to be issued, the per-share computations for those and any prior-period consolidated financial statements presented shall be based on the new number of shares.
Segment Information
ASC Topic 280, Segment Reporting , establishes standards for reporting financial and descriptive information about a public entity’s reportable segments. The Company internally evaluates all of the properties and interests therein as one reportable segment.
Unaudited Data
Any references to the number of buildings, square footage, number of leases, occupancy, and any amounts derived from these values in the notes to the consolidated financial statements are unaudited and outside the scope of the Company's independent registered public accounting firm's audit of its consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases ("ASU No. 2016-02"). ASU No. 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU No. 2016-02 will direct how the Company accounts for payments from the elements of leases that are generally fixed and determinable at the inception of the lease (“Fixed Lease Payments”) while ASU No. 2014-09 (defined below) will direct how the Company accounts for the non-lease components of lease contracts, primarily expense reimbursements (“Non-Lease Payments”) and the accounting for the disposition of real estate facilities. ASU No. 2016-02 will be effective beginning in the first quarter of 2019. Early adoption of ASU No. 2016-02 as of its issuance is permitted.
ASU No. 2016-02 requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. Based on the required adoption date of January 1, 2019, the modified retrospective method for ASU No. 2016-02 requires application of the standard to all leases that exist at, or commence after, January 1, 2017 (beginning of the earliest comparative period presented in the 2019 financial statements), with a cumulative adjustment to the opening balance of accumulated earnings (deficit) on January 1, 2017, for the effect of applying the standard at the date of initial application, and restatement of the amounts presented prior to January 1, 2019.
The FASB has also issued an amendment to the standard that would provide an entity an optional transition method to initially account for the impact of the adoption of the standard with a cumulative adjustment to accumulated earnings (deficit) on January 1, 2019 (the effective date of ASU No. 2016-02), rather than January 1, 2017, which would eliminate the

F-14



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

need to restate amounts presented prior to January 1, 2019. Under ASU No. 2016-02, an entity may elect a practical expedient package, which states that: (1) an entity need not reassess whether any expired or existing contracts are leases or contain leases; (2) an entity need not reassess the lease classification for any expired or existing leases; and (3) an entity need not reassess initial direct costs for any existing leases. These three practical expedients are available as a single election that must be elected as a package and must be consistently applied to all existing leases at the date of adoption. The FASB has also tentatively noted in May 2017 board meeting minutes that lessors that adopt this package of practical expedients are not expected to reassess expired or existing leases at the date of initial application, which is January 1, 2017 under ASU No. 2016-02, or January 1, 2019, if the Company elects the optional transition method. The FASB noted that the transition provisions generally enable entities to “run off” their existing leases for the remainder of the lease term, which would effectively eliminate the need to calculate adjustment to the opening balance of accumulated earnings (deficit).
In July 2018, the FASB approved an amendment to the ASU to allow lessors to elect, as a practical expedient, not to allocate the total consideration to lease and non-lease components based on their relative standalone selling prices. The single-lease component practical expedient allows lessors to elect a combined single-lease component presentation if (1) the timing and pattern of transfer of the lease component and the non-lease component(s) associated with it are the same, and (2) the lease component would be classified as an operating lease if it were accounted for separately. Non-lease components that do not meet the criteria of this practical expedient and combined components in which the non-lease component is the predominant component will be accounted for under the new revenue recognition ASU.
The Company does not expect that ASU No. 2016-02 will impact the Company's accounting for Fixed Lease Payments because the Company's accounting policy is currently consistent with the provisions of the standard. The Company plans to elect the practical expedient mentioned above, which will treat payments for expense reimbursements that qualify as Non-Lease Payments and meet the criteria above as a single lease component. Under ASU No. 2016-02, reimbursements relating to property taxes and insurances are Fixed Lease Payments as the payments relates to the right to use the leased assets, while reimbursements relating to maintenance activities and common area expense are Non-Lease Payments and would be accounted under ASU No. 2016-02, assuming the Non-Lease Payments meet the criteria above.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 replaces substantially all industry-specific revenue recognition requirements and converges areas under this topic with International Financial Reporting Standards. ASU No. 2014-09 implements a five-step process for customer contract revenue recognition that focuses on transfer of control, as opposed to transfer of risk and rewards. ASU No. 2014-09 also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenues and cash flows from contracts with customers. Other major provisions in ASU No. 2014-09 include capitalizing and amortizing certain contract costs, ensuring the time value of money is considered in the applicable transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. ASU No. 2014-09 was originally effective for reporting periods beginning after December 31, 2016 (for public entities). On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year to annual reporting periods beginning after December 15, 2017. On July 9, 2015, the FASB affirmed its proposal to defer the effective date to annual reporting periods beginning after December 15, 2017, although entities may elect to adopt the standard as of the original effective date. The Company adopted the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The impact was minimal upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of gains and losses on the sale of real estate assets as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle. Rental income from leasing arrangements is a substantial portion of the Company’s revenue, is specifically excluded from ASU No. 2014-09 and will be governed by the applicable lease codification ASU No. 2016-02.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) . The amendments clarify how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation, and how it should apply the control principle to certain types of arrangements, such as service transactions, by explaining what a principal controls before the specified good or service is transferred to the customer. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements of ASU No. 2014-09 described above. The Company adopted the guidance using the modified retrospective approach for the fiscal year beginning January 1, 2018. The impact was minimal upon adoption of the new accounting guidance on its consolidated financial statements relating to the recognition of reporting

F-15



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

revenue gross versus net on its consolidated financial statements as the Company’s current accounting for such transactions is consistent with the new guidance’s core principle.
3. Real Estate
As of December 31, 2018 , the Company's real estate portfolio consisted of 27 properties ( 35 buildings) in 17 states consisting of office, industrial, distribution, and data center facilities with a combined acquisition value of $1.1 billion including the allocation of the purchase price to above-market and below-market lease valuation, encompassing approximately 7.3 million square feet.
Depreciation expense for buildings and improvements for the year ended December 31, 2018 was $20.5 million . Amortization expense for intangibles, including, but not limited to, tenant origination and absorption costs, for the year ended December 31, 2018 was $24.2 million .
Future Minimum Contractual Rent Payments
The future minimum contractual rent payments pursuant to the current lease terms are shown in the table below. The Company's current leases have expirations ranging from 2020 to 2044.
As of December 31, 2018
2019
$
78,887

2020
80,492

2021
72,677

2022
73,538

2023
71,308

Thereafter
457,495

Total
$
834,397

Intangibles
The Company allocated a portion of the acquired real estate asset value to in-place lease valuation and tenant origination and absorption cost. The in-place lease was measured against comparable leasing information and the present value of the difference between the contractual, in-place rent and the fair market rent was calculated using, as the discount rate, the capitalization rate utilized to compute the value of the real estate at acquisition. The intangible assets are amortized over the remaining lease terms of the respective properties, which on a weighted-average basis, was approximately 9.3 and 10.3 years as of December 31, 2018 and December 31, 2017 , respectively.
December 31,
2018
2017
In-place lease valuation (above market)
$
4,046

$
4,046

In-place lease valuation (above market), accumulated amortization
(1,123
)
(752
)
Intangible assets, net
$
2,923

$
3,294

In-place lease valuation (below market)
$
(62,070
)
$
(62,070
)
In-place lease valuation (below market) - accumulated amortization
15,841

10,775

In-place lease valuation (below market), net
$
(46,229
)
$
(51,295
)
Tenant origination and absorption cost
$
240,364

$
240,364

Tenant origination and absorption cost - accumulated amortization
(71,364
)
(47,165
)
Tenant origination and absorption cost, net
$
169,000

$
193,199


F-16



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

The amortization of the intangible assets and other leasing costs for the respective periods is as follows:
Amortization (income) expense for the year ended December 31,
2018
2017
2016
In-place lease valuation
$
(4,695
)
$
(4,573
)
$
(3,592
)
Tenant origination and absorption cost
$
24,199

$
23,756

$
16,264

The following table sets forth the estimated annual amortization (income) expense for in-place lease valuation, and tenant origination and absorption costs as of December 31, 2018 for the next five years:
Year
In-Place Lease Valuation
Tenant Origination and Absorption Costs
2019
$
(4,695
)
$
24,198

2020
$
(4,695
)
$
24,198

2021
$
(3,799
)
$
19,715

2022
$
(3,774
)
$
19,256

2023
$
(2,901
)
$
16,502

4. Debt

As of December 31, 2018 and 2017 , the Company's debt and related deferred financing costs consisted of the following:
December 31,
Contractual
Interest Rate (1)
Payment Type
Loan Maturity
Effective Interest Rate (2)
2018
2017
BofA/KeyBank Loan
$
250,000

$
—

4.32%
Interest Only
May 2028
4.42%
AIG Loan
126,970

126,970

4.15%
Interest Only (3)
November 2025
4.22%
Total Mortgage Debt
376,970

126,970

Term Loan
113,000

—

LIBOR + 1.25% (4)
Interest Only
June 2023
3.67%
Revolving Credit Facility
85

357,758

LIBOR + 1.30% (4)(5)
Interest Only
June 2023 (6)
3.89%
Total Debt
490,055

484,728

Unamortized deferred financing costs
(8,100
)
(2,880
)
Total Debt, net
$
481,955

$
481,848

(1)
The weighted average interest rate as of December 31, 2018 was approximately 4.15% for the Company's fixed-rate and variable-rate debt combined.
(2)
Includes the effect of amortization of deferred financing costs.
(3)
The AIG Loan (as defined below) requires monthly payments of interest only, at a fixed rate, for the first five years and fixed monthly payments of principal and interest thereafter.
(4)
The London Interbank Offered Rate ("LIBOR") as of December 31, 2018 was 2.35% .
(5)
As discussed below, the Company entered into an amended and restated credit agreement in June 2018. The contractual interest rate on the original
revolving credit facility was LIBOR + 1.50% as of March 31, 2018.
(6)
The Revolving Credit Facility (as defined below) has an initial term of four years , maturing on June 28, 2022, and may be extended for a one -year period if certain conditions are met and upon payment of an extension fee. See discussion below.


F-17



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

Amended and Restated Credit Agreement
On June 28, 2018, the Company, through the Operating Partnership, entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement") related to a revolving credit facility and a term loan (collectively, the "Unsecured Credit Facility") with a syndicate of lenders, under which KeyBank, National Association ("KeyBank") serves as administrative agent, and various notes related thereto. In addition, the Company entered into a guaranty agreement.
Pursuant to the Amended and Restated Credit Agreement, the Company was provided with a revolving credit facility (the "Revolving Credit Facility") in an initial commitment amount of up to $550.0 million and a term loan (the "Term Loan") in an initial commitment amount of up to $200.0 million , which commitments may be increased under certain circumstances up to a maximum total commitment of $1.25 billion . Any increase in the total commitment will be allocated to the Revolving Credit Facility and/or the Term Loan in such amounts as the Operating Partnership and KeyBank may determine.The Revolving Credit Facility may be prepaid and terminated, in whole or in part, at any time without fees or penalty.
The Revolving Credit Facility has an initial term of four years , maturing on June 28, 2022. The Revolving Credit Facility may be extended for a one -year period if certain conditions are met and the Operating Partnership pays an extension fee. Payments under the Revolving Credit Facility are interest only and are due on the first day of each quarter. Amounts borrowed under the Revolving Credit Facility may be repaid and reborrowed, subject to the terms of the Amended and Restated Credit Agreement.
The Term Loan has an initial term of five years , maturing on June 28, 2023. Payments under the Term Loan are interest only and are due on the first day of each quarter. Amounts borrowed under the Term Loan may not be repaid and reborrowed.
The Unsecured Credit Facility has an interest rate calculated based on LIBOR plus the applicable LIBOR margin, as provided in the Amended and Restated Credit Agreement, or the Base Rate plus the applicable base rate margin, as provided in the agreement. The applicable LIBOR margin and base rate margin are dependent on the consolidated leverage ratio of the Operating Partnership, the Company, and the Company's subsidiaries, as disclosed in the periodic compliance certificate provided to the administrative agent each quarter. If the Operating Partnership obtains an investment grade rating of its senior unsecured long term debt from Standard & Poor's Rating Services or Moody's Investors Service, Inc., the applicable LIBOR margin and base rate margin will be dependent on such rating.
The Amended and Restated Credit Agreement relating to the Revolving Credit Facility provides that the Operating Partnership must maintain a pool of real properties (each a "Pool Property" and collectively the "Pool Properties") that meet certain requirements contained in the Amended and Restated Credit Agreement. The agreement sets forth certain covenants relating to the Pool Properties, including, without limitation, the following:
• there must be no less than 15 Pool Properties;
• no greater than 15% of the aggregate pool value may be contributed by a single Pool Property or tenant;
• no greater than 15% of the aggregate pool value may be contributed by Pool Properties subject to ground leases;
• no greater than 20% of the aggregate pool value may be contributed by Pool Properties which are under development;
• the minimum aggregate leasing percentage of all Pool Properties must be no less than 90% ; and
• other limitations as determined by KeyBank upon further due diligence of the Pool Properties.
Borrowing availability under the Amended and Restated Credit Agreement is limited to the lesser of (i) an asset pool leverage ratio of no greater than 60% , or (ii) an asset pool debt service coverage ratio of no less than 1.35 :1.00.

As of December 31, 2018 , the remaining capacity pursuant to the Unsecured Credit Facility was $221.1 million .

F-18



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

Bank of America and KeyBank Loan
On April 27, 2018, the Company, through four SPEs that own the respective four properties noted below and are owned by the Company's Operating Partnership, entered into a loan agreement (the "Loan Agreement”) with Bank of America, N.A. and KeyBank (together with their successors and assigns, collectively, the "Lender") in which the Company borrowed $250.0 million (the "BofA/KeyBank Loan").
The Company utilized approximately $249.8 million of the proceeds provided by the BofA/KeyBank Loan to pay down a portion of the Company's Revolving Credit Facility. In connection with this pay down of the Company's Revolving Credit Facility, KeyBank released four of the special purpose entities owned by the Company's Operating Partnership from their obligations as guarantors under the Revolving Credit Facility. The BofA/KeyBank Loan is secured by cross-collateralized and cross-defaulted first mortgage liens on the properties with the following tenants: 3M Company, Amazon.com.dedc LLC, Southern Company Services, Inc. and IGT (each, a "Secured Property"). In connection with this transaction, the Company entered into a nonrecourse carve-out guaranty agreement.
In addition to their first mortgage lien, the Lender also has a security interest in all other property relating to the ownership, use, maintenance or operation of the improvements on each Secured Property and all rents, profits and revenues from each Secured Property.
The BofA/KeyBank Loan has a term of 10 years , maturing on May 1, 2028. The BofA/KeyBank Loan bears interest at an annual rate of 4.32% . Commencing on June 1, 2020, the BofA/KeyBank Loan may be prepaid but only if such prepayment is made in full (with certain exceptions), subject to certain conditions set forth in the Loan Agreement, including 30 days ' prior notice to the Lender and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment. Commencing on November 1, 2027, the BofA/KeyBank Loan may be prepaid in whole or in part, subject to satisfaction of certain conditions, including 30 days ' prior notice to the Lender, without payment of any prepayment premium.
As of December 31, 2018, there was approximately $250.0 million outstanding pursuant to the BofA/KeyBank Loan.
AIG Loan
On October 22, 2015, six SPEs that are wholly-owned by the Operating Partnership entered into promissory notes with The Variable Annuity Life Insurance Company, American General Life Insurance Company, and the United States Life Insurance Company (collectively, the "Lenders"), pursuant to which the Lenders provided such SPEs with a loan in the aggregate amount of approximately $127.0 million (the "AIG Loan").
The AIG Loan has a term of 10 years , maturing on November 1, 2025. The AIG Loan bears interest at a rate of 4.15% . The AIG Loan requires monthly payments of interest only for the first five years and fixed monthly payments of principal and interest thereafter. The AIG Loan is secured by cross-collateralized and cross-defaulted first lien deeds of trust and second lien deeds of trust on certain properties. Commencing October 31, 2017, each of the individual promissory notes comprising the AIG Loan may be prepaid but only if such prepayment is made in full, subject to 30 days' prior notice to the holder and payment of a prepayment premium in addition to all unpaid principal and accrued interest to the date of such prepayment.
As of December 31, 2018 , there was approximately $127.0 million outstanding pursuant to the AIG Loan.
Debt Covenant Compliance
Pursuant to the terms of the Unsecured Credit Facility, BofA/KeyBank Loan and AIG Loan, the Company is subject to certain loan compliance covenants. The Company was in compliance with all applicable covenants as of December 31, 2018 .

F-19



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

The following summarizes the future principal repayments of all loans as of December 31, 2018 per the loan terms discussed above:
December 31, 2018
2019
$
—

2020
—

2021
2,178

2022
2,270

2023
2,367

Thereafter
483,240

Total principal
490,055

Unamortized deferred loan costs
(8,100
)
Total
$
481,955

5. Interest Rate Contracts
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both business operations and economic conditions. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of debt funding and the use of derivative financial instruments. Specifically, the Company entered into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by expected cash payments principally related to borrowings and interest rates. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company does not use derivatives for trading or speculative purposes.
Derivative Instruments
The Company entered into an interest rate swap agreement to hedge the variable cash flows associated with the LIBOR-based variable-rate debt on the Company's Revolving Credit Facility. The interest rate swap was effective for the period from April 1, 2016 to December 12, 2018 with a notional amount of $100.0 million .
Effective as of November 1, 2017, the GCEAR Operating Partnership novated one of its $100.0 million swaps to the Operating Partnership, as a result of the repayment of debt. The terms of the cash flow swap are listed in the table below.
On April 30, 2018, the Company settled the $100.0 million cash flow hedge contract purchased from the GCEAR Operating Partnership, which resulted in the Company receiving a net settlement of approximately $0.1 million .
The change in the fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income ("AOCI") and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt.
As of December 31, 2018, all of the Company's interest rate swap agreements have matured.

F-20



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

The following table sets forth a summary of the interest rate swaps at December 31, 2018 and December 31, 2017 :
Fair Value (1)
Current Effective Notional Amount (2)
Derivative Instrument
Effective Date
Maturity Date/Termination
Interest Strike Rate
December 31,
December 31,
2018
2017
2018
2017
Interest Rate Swap
4/1/2016
12/12/2018
0.74%
$
—

$
967

$
—

$
100,000

Interest Rate Swap
11/1/2017
4/30/2018
1.50%
—

65

—

100,000

Total
$
—

$
1,032

$
—

$
200,000

(1)
The Company records all derivative instruments on a gross basis on the consolidated balance sheets, and accordingly, there are no offsetting amounts that net assets against liabilities. As of December 31, 2018 , all of the Company's derivatives have matured.
(2)
Represents the notional amount of swap that was effective as of the balance sheet date of December 31, 2018 and December 31, 2017 .

The following table sets forth the impact of the interest rate swaps on the consolidated financial statements for the periods presented:
Year Ended December 31,
2018
2017
Interest Rate Swaps in Cash Flow Hedging Relationship:
Amount of gain (loss) recognized in AOCI on derivatives
$
281

$
428

Amount of (gain) reclassified from AOCI into earnings under “Interest expense”
$
(1,233
)
$
(319
)
Total interest expense presented in the consolidated statement of operations in which the effects of cash flow hedges are recorded
$
20,375

$
15,519

6. Fair Value Measurements
The Company is required to disclose fair value information about all financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate fair value. The Company measures and discloses the estimated fair value of financial assets and liabilities utilizing a fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions. This hierarchy consists of three broad levels, as follows: (i) quoted prices in active markets for identical assets or liabilities; (ii) "significant other observable inputs;" and (iii) "significant unobservable inputs." "Significant other observable inputs" can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. "Significant unobservable inputs" are typically based on an entity’s own assumptions, since there is little, if any, related market activity. In instances in which the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level of input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. There were no transfers between the levels in the fair value hierarchy during the year ended December 31, 2018 .
The following tables set forth the assets/(liabilities) that the Company measures at fair value on a recurring basis by level within the fair value hierarchy as of December 31, 2018 and 2017 :
Total Fair Value
Quoted Prices in Active Markets for Identical Assets and Liabilities
Significant Other Observable Inputs
Significant Unobservable Inputs
Interest Rate Swaps at:
December 31, 2018
$
—

$
—

$
—

$
—

December 31, 2017
$
1,032

$
—

$
1,032

$
—


F-21



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

Financial instruments as of December 31, 2018 consisted of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, other accrued expenses, and borrowings. With the exception of the mortgage loan in the table below, the amounts of the financial instruments presented in the consolidated financial statements substantially approximate their fair value as of December 31, 2018 . The fair value of the mortgage loan is estimated by discounting the loan’s principal balance over the remaining term of the mortgage using current borrowing rates available to the Company for debt instruments with similar terms and maturities. The Company determined that the mortgage loan valuation in its entirety is classified in Level 2 of the fair value hierarchy, as the fair value is based on current pricing for debt with similar terms as the in-place debt, and there were no transfers into and out of fair value measurement levels during the years ended December 31, 2018 and 2017 .
December 31, 2018
December 31, 2017
Fair Value
Carrying Value (1)
Fair Value
Carrying Value (1)
AIG Loan
$
120,599

$
126,970

$
122,928

$
126,970

(1)
The carrying value of the AIG Loan does not include deferred financing costs as of December 31, 2018 and 2017 . See Note 4, Debt , for details.
7. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following as of December 31, 2018 and 2017 :
Year Ended December 31,
2018
2017
Redemptions payable
$
4,866

$
2,181

Prepaid rent
4,709

4,304

Other liabilities
3,788

3,132

Accrued property taxes
2,955

3,490

Interest expense payable
2,805

3,013

Leasing commission payable
1,900

3,783

Total
$
21,023

$
19,903

8. Equity
Status of Offerings
On January 20, 2017, the Company closed the primary portion of the IPO; however, the Company continued to offer shares pursuant to the DRP under the IPO registration statement through May 2017.
On September 20, 2017, the Company commenced the Follow-On Offering of up to $2.2 billion of shares, consisting of up to $2.0 billion of shares in the Company's primary offering and $0.2 billion of shares pursuant to the DRP. The Company reclassified all Class T and Class I shares sold in the IPO as "Class AA" and "Class AAA" shares, respectively. The Company offered Class T shares, Class S shares, Class D shares and Class I shares in the primary portion of the Follow-On Offering and all seven of its share classes pursuant to the DRP.
On August 16, 2018, the Company’s Board approved the temporary suspension of the primary portion of the Company's Follow-On Offering, effective August 17, 2018, to allow the special committee of the board to evaluate a potential strategic alternative. On December 12, 2018, in connection with the Merger Agreement, the Board of the Company approved the temporary suspension of the DRP and SRP. Redemptions submitted for the fourth quarter of 2018 were honored in accordance with the terms of the SRP, and the SRP was officially suspended as of January 19, 2019. The DRP officially was suspended as of December 30, 2018. Beginning in January 2019, all distributions by the Company were paid in cash. The DRP and SRP shall remain suspended until such time, if any, as the Board of the Company may approve the resumption of the DRP and SRP.


F-22



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

Share Classes
Class T shares, Class S shares, Class D shares, Class I shares, Class A shares, Class AA shares and Class AAA shares vote together as a single class, and each share is entitled to one vote on each matter submitted to a vote at a meeting of the Company's stockholders; provided that with respect to any matter that would only have a material adverse effect on the rights of a particular class of common stock, only the holders of such affected class are entitled to vote .
The following table summarizes shares issued and gross proceeds received for each share class as of December 31, 2018 and outstanding shares as of December 31, 2018 and 2017 :
Class
T
S
D
I
A
AA
AAA
Total
Gross proceeds from primary portion of offerings
$
2,245

$
3

$
182

$
7,538

$
240,780

$
474,858

$
8,381

$
733,987

Gross proceeds from DRP
$
26

$
—

$
3

$
187

$
26,535

$
34,656

$
545

$
61,952

Shares issued in primary portion of offerings
224,647

264

18,921

786,573

24,199,764

47,562,870

901,225

73,694,264

DRP shares issued
2,664

15

347

19,441

2,794,547

3,650,017

57,433

6,524,464

Stock distribution shares issued
—

—

—

—

263,642

300,166

4,677

568,485

Restricted stock issued
—

—

—

—

—

—

36,000

36,000

Total redemptions
—

—

—

—

(1,528,918
)
(1,744,366
)
(23,956
)
(3,297,240
)
Total shares outstanding as of December 31, 2018
227,311

279

19,268

806,014

25,729,035

49,768,687

975,379

77,525,973

Total shares outstanding as of December 31, 2017
4,148

268

268

267,476

25,995,943

49,942,471

964,709

77,175,283

Organizational and Offering Costs
Pursuant to the Advisory Agreement, in no event will the Company be obligated to reimburse the Advisor for organizational and offering costs incurred in connection with the Follow-On Offering totaling in excess of 15.0% (including selling commissions, dealer manager fees, distribution fees and non-accountable due diligence expense allowance but excluding acquisition expenses or any fees, if ever applicable) of the gross proceeds raised in the Follow-On Offering (excluding gross proceeds from the DRP). If the organizational and offering costs exceed such limits discussed above, within 60 days after the end of the month in which the Follow-On Offering terminates or is completed, the Advisor is obligated to reimburse the Company for any excess amounts. As long as the Company is subject to the Statement of Policy Regarding Real Estate Investment Trusts published by the North American Securities Administrators Association (“NASAA REIT Guidelines”), such limitation discussed above will also apply to any future public offerings. As of December 31, 2018 , organizational and offering costs relating to the Follow-On Offering were 35.2% (approximately $3.5 million ) of gross offering proceeds ( $10.0 million ), including selling commissions, dealer manager fees and distribution fees. Therefore, if the Follow-On Offering had been terminated on December 31, 2018 , the Company would owe the Advisor $1.5 million and the Advisor would be liable for organizational and offering costs incurred by the Company of approximately $2.0 million . Approximately $0.8 million of organizational and offering costs the Advisor is liable for as of December 31, 2018 is deducted from "Due to Affiliates" and the remaining $1.2 million is included in "Due from Affiliates" on the consolidated balance sheet.
Organizational and offering costs incurred as of December 31, 2018 , including those incurred by the Company and due to the Advisor, for the Follow-On Offering are as follows:

F-23



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

December 31, 2018

Cumulative offering costs
$
2,975

Cumulative organizational costs
$
535

Organizational and offering costs advanced by the Advisor
$
2,125

Organizational and offering costs paid by the Company
1,385

Adjustment to organizational and offering costs pursuant to the limitation:
Costs in excess of limit
(2,015
)
Organizational and offering costs incurred
$
1,495

Distribution Reinvestment Plan (DRP)
The Company has adopted the DRP, which allows stockholders to have dividends and other distributions otherwise distributable to them invested in additional shares of common stock of the same class. No selling commissions, dealer manager fees or stockholder servicing fees are paid on shares sold through the DRP, but the DRP shares will be charged the applicable distribution fee payable with respect to all shares of the applicable class. The purchase price per share under DRP is equal to the NAV per share applicable to the class of shares purchased, calculated as of the distribution date. The Company may amend or terminate the DRP for any reason at any time upon 10 days ' prior written notice to stockholders, which may be provided through the Company's filings with the SEC. On December 12, 2018, in connection with the Merger Agreement, the Board of the Company approved the temporary suspension of the DRP. The DRP officially was suspended as of December 30, 2018, and shall remain suspended until such time, if any, as the Board of the Company may approve the resumption of the DRP.
IPO Share Redemption Program
The Company had a share redemption program for holders of Class A, Class AA, and Class AAA shares ("IPO Shares") who held their shares for less than four years, which enabled IPO stockholders to sell their shares back to the Company in limited circumstances ("IPO Share Redemption Program"). On June 4, 2018, the Board of the Company approved the termination of the IPO Share Redemption Program effective as of July 5, 2018. In addition, effective as of such date, the Board amended and restated the SRP in order to allow stockholders of the IPO Shares to utilize the SRP. Accordingly, beginning in July 2018, stockholders of IPO Shares are able to continue to redeem at 100% of the NAV of the applicable share class, subject to the other limitations and conditions of the amended and restated SRP, as noted below.
During the years ended December 31, 2018 and 2017 , the Company redeemed shares of its outstanding common stock under the IPO Share Redemption Program as follows:
Year Ended December 31,
Period
2018
2017
Shares of common stock redeemed
1,306,834

623,499

Weighted average price per share
$
9.36

$
9.21

During the year ended December 31, 2017 , the Company redeemed 623,499 shares of common stock under the IPO Share Redemption Program for approximately $5.7 million at a weighted average price per share of $9.21 . During the year ended December 31, 2018 , the Company redeemed 1,306,834 shares of common stock under the IPO Share Redemption Program for approximately $12.2 million at a weighted average price per share of $9.36 . Since inception, the Company has honored all redemption requests related to the IPO Share Redemption Program and has redeemed a total of 2,097,775 shares of common stock for approximately $19.6 million at a weighted average price per share of $9.34 under this program. The Company has funded all redemptions using proceeds from the sale of IPO Shares pursuant to the DRP.

F-24



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

Share Redemption Program
In connection with the Follow-On Offering, the Company’s Board adopted the SRP for the New Shares (and IPO Shares that have been held for four years or longer). As noted above, subsequently, on June 4, 2018, the Board amended and restated the SRP to allow stockholders of the IPO Shares to utilize the SRP, effective as of July 5, 2018. On December 12, 2018, in connection with the Merger Agreement, the Board of the Company approved the temporary suspension of the SRP. The SRP officially was suspended as of December 30, 2018, and shall remain suspended until such time, if any, as the Board of the Company may approve the resumption of the SRP. Under the SRP, the Company will redeem shares as of the last business day of each quarter. The redemption price will be equal to the NAV per share for the applicable class generally on the 13th of the month prior to quarter end. Redemption requests must be received by 4:00 p.m. (Eastern time) on the second to last business day of the applicable quarter. Redemption requests exceeding the quarterly cap will be filled on a pro rata basis. With respect to any pro rata treatment, redemption requests following the death or qualifying disability of a stockholder will be considered first, as a group, followed by requests where pro rata redemption would result in a stockholder owning less than the minimum balance of $2,500 of shares of the Company's common stock, which will be redeemed in full to the extent there are available funds, with any remaining available funds allocated pro rata among all other redemption requests. All unsatisfied redemption requests must be resubmitted after the start of the next quarter, or upon the recommencement of the SRP, as applicable.
There are several restrictions under the SRP. Stockholders generally have to hold their shares for one year before submitting their shares for redemption under the program; however, the Company will waive the one -year holding period in the event of the death or qualifying disability of a stockholder. Shares issued pursuant to the DRP are not subject to the one -year holding period. In addition, the SRP generally imposes a quarterly cap on aggregate redemptions of the Company's shares equal to a value of up to 5% of the aggregate NAV of the outstanding shares as of the last business day of the previous quarter. As the value on the aggregate redemptions of the Company's shares is outside the Company's control, the 5% quarterly cap is considered to be temporary equity and is presented as common stock subject to redemption on the accompanying consolidated balance sheets. As of December 31, 2018 , the quarterly cap was approximately $37.4 million and $4.9 million of common stock was reclassified from common stock to accrued expenses and other liabilities on the consolidated balance sheet as of December 31, 2018 .
During the years ended December 31, 2018 and 2017, the Company redeemed shares of its outstanding common stock under the SRP as follows:
Year Ended December 31,
Period
2018
2017
Shares of common stock redeemed
1,199,464

—

Weighted average price per share
9.62

—

Since inception, the Company has honored all redemption requests related to the SRP and has redeemed a total of 1,199,464 shares of common stock for approximately $11.5 million at a weighted average price per share of $9.62 under this program.
The Company’s Board has the right to modify or suspend the SRP upon 30 days ' notice at any time if it deems such action to be in the Company’s best interest. Any such modification or suspension will be communicated to stockholders through the Company’s filings with the SEC. On December 12, 2018, the Company’s Board temporarily suspended the SRP, effective as of January 19, 2019.
Share-Based Compensation
The Company’s Board adopted an Employee and Director Long-Term Incentive Plan (the “Plan”), which provides for the grant of awards to the Company's directors and full-time employees (should the Company ever have employees), directors and full-time employees of the Advisor and affiliate entities that provide services to the Company, and certain consultants that provide services to the Company, the Advisor, or affiliate entities. Awards granted under the Plan may consist of stock options, restricted stock, stock appreciation rights, distribution equivalent rights and other equity-based awards. The stock-based payment will be measured at fair value and recognized as compensation expense over the vesting period. The term of the Plan is ten years and the total number of shares of common stock reserved for issuance under the Plan will be equal to 10% of the

F-25



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

outstanding shares of stock at any time, not to exceed 10,000,000 shares in the aggregate. As of December 31, 2018 , approximately 7,752,597 shares were available for future issuance under the Plan.
Distributions
Earnings and profits, which determine the taxability of distributions to stockholders, may differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on debt, revenue recognition and compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation expense.
The following unaudited table summarizes the federal income tax treatment for all distributions per share for the years ended December 31, 2018 , 2017 and 2016 reported for federal tax purposes and serves as a designation of capital gain distributions, if applicable, pursuant to Section 857(b)(3)(c) of the Code and Treasury Regulation § 1.857-6(e).
Year Ended December 31,
2018
2017
2016
Ordinary income
$
0.06

10.78
%
$
0.04

7.90
%
$
0.31

57.10
%
Return of capital
0.49

89.22
%
0.51

92.10
%
0.24

42.90
%
Total distributions paid
$
0.55

100.00
%
$
0.55

100.00
%
$
0.55

100.00
%

9. Noncontrolling Interests

Noncontrolling interests represent limited partnership interests in the Operating Partnership, of which the Company is the general partner. The Operating Partnership issued 20,000 Class A limited partnership units for $10.00 per unit on February 11, 2014 to the Advisor in exchange for the initial capitalization of the Operating Partnership. On February 16, 2018, as elected by the Advisor, the Company issued 123,779 Operating Partnership units for $9.57 per unit to the Advisor for the 50.0% of the 2017 performance distribution allocation that the Advisor elected to receive in Class I limited partnership units. The remaining balance was paid in cash.
As of December 31, 2018 , noncontrolling interests were approximately 0.19% of total shares outstanding and 0.16% of weighted average shares outstanding (both measures assuming limited partnership units were converted to common stock).
The Company evaluates individual noncontrolling interests for the ability to recognize the noncontrolling interest as permanent equity on the consolidated balance sheets at the time such interests are issued and on a continual basis. Any noncontrolling interest that fails to qualify as permanent equity will be reclassified as temporary equity and adjusted to the greater of (a) the carrying amount or (b) its redemption value as of the end of the period in which the determination is made.
The limited partners of the Operating Partnership will have the right to cause the Operating Partnership to redeem their limited partnership units for cash equal to the value of an equivalent number of shares, or, at the Company’s option, the Company may purchase such limited partners' limited partnership units by issuing one share of common stock for each limited partnership unit redeemed. These rights may not be exercised under certain circumstances which could cause the Company to lose its REIT election. Furthermore, limited partners may exercise their redemption rights only after their limited partnership units have been outstanding for one year . The limited partnership units are reported on the consolidated balance sheets as noncontrolling interests.

F-26



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

The following summarizes the activity for noncontrolling interests for the years ended December 31, 2018 , 2017 and 2016 :
Year Ended December 31,
2018
2017
2016
Beginning balance
$
76

$
84

$
98

Issuance of limited partnership units
1,185

—

—

Distributions to noncontrolling interests
(70
)
(11
)
(11
)
Net (loss) income allocation
(6
)
3

(3
)
Other comprehensive loss
(3
)
—

—

Ending balance
$
1,182

$
76

$
84

10. Related Party Transactions

Summarized below are the related-party costs incurred by the Company for the years ended December 31, 2018 , 2017 and 2016 , respectively, and amounts payable as of December 31, 2018 and 2017 :
Incurred as of December 31,
Payable as of December 31,
2018
2017
2016
2018
2017
Expensed
Acquisition fees and expenses
$
—

$
—

$
6,324

$
—

$
—

Corporate operating expenses
3,011

2,336

1,622

63

658

Other operating expenses (1)
215

—

—

215

—

Asset management fees (2)
—

8,027

6,413

—

—

Property management fees
1,832

1,799

1,052

157

158

Performance distributions
7,783

2,394

—

7,807

2,394

Advisory Fees
9,316

2,550

—

781

762

Capitalized/Offering
Acquisition fees and expenses (3)
—

1,099

7,606

—

—

Organization and offering expense
1,120

192

—

1,312

(7)
192

Other costs advanced by the Advisor
1,233

662

304

367

285

Selling commissions (4)
66

1,128

11,397

—

—

Dealer manager fees
11

393

3,949

—

—

Stockholder servicing fee (5)
175

660

17,449

8,302

12,377

Distribution fee
10

—

—

—

—

Advisor Advances: (6)
Organization and offering expenses
45

179

2,634

44

8

Dealer manager fees
—

853

8,069

—

62

Total
$
24,817

$
22,272

$
66,819

$
19,048

$
16,896

(1)
Other operating expenses include costs incurred by the Company's former sponsor, GCC, related to acquisition transactions that failed to close.
(2)
As part of the Follow-On Offering, the Company's new management compensation structure no longer includes asset management fees.
(3)
Effective September 20, 2017, the Advisor is not entitled to acquisition fees, disposition fees or financing fees.
(4)
On September 18, 2017, the Company and the Dealer Manager entered into a dealer manager agreement for the Follow-On Offering. See the " Dealer Manager Agreement " section below for details regarding selling commissions and dealer manager fees.
(5)
The Dealer Manager continues to receive a stockholder servicing fee with respect to Class AA shares as detailed in the Company's IPO prospectus. The stockholder servicing fee is paid quarterly and accrues daily in an amount equal to 1/365th of 1% of the NAV per share of the Class AA shares, up to an aggregate of 4% of the gross proceeds of Class AA shares sold. The Company will cease paying the stockholder servicing fee with respect to the Class AA shares at the earlier of: (i) the date at which the aggregate underwriting compensation from all sources equals 10% of the gross proceeds from the sale of shares in the Company's IPO (excluding proceeds from sales pursuant to the related DRP); (ii) the fourth anniversary of the last day of the fiscal quarter in which the Company's IPO terminated; (iii) the date that such Class AA share is redeemed or is no longer outstanding; and (iv) the occurrence of a merger, listing on a national securities exchange, or an extraordinary transaction.
(6)
Pursuant to the original advisory agreement, commencing November 2, 2015, the Company remained obligated to reimburse the Advisor for organizational and offering costs incurred after such date. Terms of the organizational and offering costs are included in the Company's 2016 Annual Report on Form 10-K filed on March 15, 2017.

F-27



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

(7)
Excludes amounts in excess of the 15% organization and offering costs limitation. See Note 8, Equity , for additional details.

On September 20, 2017, an affiliated entity of the Company purchased 264 Class T shares, 264 Class S shares, 264 Class D shares, and 263,200 Class I shares in the Follow-On Offering for $2.5 million . As of December 31, 2018 , the total outstanding shares owned by affiliates (including DRP) was 279 Class T shares, 279 Class S shares, 282 Class D shares, 281,789 Class I shares, and 286,192 Class A shares.

Advisory Agreement
In connection with the Follow-On Offering, on September 20, 2017, the Company entered into the Advisory Agreement with the Advisor and the Operating Partnership. The Advisory Agreement is substantially similar to the Original Advisory Agreement, except that the Company will not pay the Advisor any acquisition, financing or other similar fees from proceeds raised in the Follow-On Offering in connection with making investments and will instead pay the Advisor an advisory fee that will be payable in arrears on a monthly basis and accrues daily in an amount equal to 1/365th of 1.25% of the NAV for each class of common stock for each day.
Performance Distribution
So long as the Advisory Agreement has not been terminated (including by means of non-renewal), the Advisor will hold a special limited partnership interest in the Operating Partnership that entitles it to receive a distribution from the Operating Partnership equal to 12.5% of the total return, subject to a 5.5% hurdle amount and a high water mark, with a catch-up (terms of the performance distribution allocation are included in the Company's 2017 Annual Report on Form 10-K filed on March 9, 2018). Such distribution will be made annually and accrue daily. On February 16, 2018, the Company paid in cash approximately $1.2 million and issued approximately $1.2 million in Class I limited partnership units to the Advisor. The Advisor elected to receive 50% in cash and the remaining in Class I limited partnership units.
Operating Expenses
The Advisor and its affiliates are entitled to reimbursement for certain expenses incurred on behalf of the Company in connection with providing administrative services, including related personnel costs; provided, however, the Advisor must reimburse the Company for the amount, if any, by which total operating expenses (as defined), including advisory fees, paid during the previous 12 months then ended exceeded the greater of: (i) 2% of the Company’s average invested assets for that 12 months then ended; or (ii) 25% of the Company’s net income, before any additions to reserves for depreciation, bad debts or other expenses connected with the acquisition and disposition of real estate interests and before any gain from the sale of the Company’s assets, for that fiscal year, unless the Company’s Board has determined that such excess expenses were justified based on unusual and non-recurring factors. The Advisor may waive or defer all or a portion of these reimbursements or elect to receive Class I shares or Class I units of the Operating Partnership in lieu of these reimbursements at any time and from time to time, in its sole discretion. For the years ended December 31, 2018 and 2017 , the Company’s total operating expenses did not exceed the 2%/25% guideline.
The Company reimbursed the Advisor and its affiliates a portion of the compensation paid by the Advisor and its affiliates for the Company's principal financial officer, Javier F. Bitar, executive vice president, David C. Rupert, and vice president and secretary, Howard S. Hirsch of approximately $0.8 million and $0.7 million , which is partially included in offering costs with the remaining amount included in corporate operating expenses to affiliates for the years ended December 31, 2018 and 2017 , respectively, for services provided to the Company, for which the Company does not pay the Advisor a fee.
In addition, the Company incurred approximately $0.1 million and $0.2 million in reimbursable expenses to the Advisor for services provided to the Company by certain of its other executive officers for the years ended December 31, 2018 and 2017 , respectively. The reimbursable expenses include components of salaries, bonuses, benefits and other overhead charges and are based on the percentage of time each executive officer spends on the Company's affairs.

F-28



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

Dealer Manager Agreement
The Company entered into a dealer manager agreement and associated form of participating dealer agreement (the "Dealer Manager Agreement") with the Dealer Manager. Pursuant to the Dealer Manager Agreement, the Company will pay to the Dealer Manager selling commissions of up to 3.0% of the total purchase price for each sale of Class T shares and selling commissions of up to 3.5% of the total purchase price for each sale of Class S shares. The Company will not pay to the Dealer Manager any selling commissions in respect of the purchase of any Class D shares, Class I shares or DRP shares. The Company also will pay to the Dealer Manager dealer manager fees of up to 0.5% of the total purchase price for each sale of Class T shares. The Company will not pay to the Dealer Manager any dealer manager fees in respect of the purchase of any Class S shares, Class D shares, Class I shares or DRP shares. Substantially all of the selling commissions and dealer manager fees may be reallowed by the Dealer Manager to the participating broker-dealers who sold the shares giving rise to such selling commissions and dealer manager fees.
Distribution Fees
Subject to Financial Industry Regulatory Authority, Inc.'s limitations on underwriting compensation, under the Dealer Manager Agreement the Company will pay the Dealer Manager a distribution fee for ongoing services rendered to stockholders by participating broker-dealers or broker-dealers servicing investors’ accounts, referred to as servicing broker-dealers. The fee accrues daily and is paid monthly in arrears and is calculated based on the average daily NAV for the applicable month (the “Average NAV”).  The distribution fees for the different share classes are as follows: (i) with respect to the outstanding Class T shares equal to 1/365th of 1.0% of the Average NAV of the outstanding Class T shares for each day, consisting of an advisor distribution fee of 1/365th of 0.75% and a dealer distribution fee of 1/365th of 0.25% of the Average NAV of the Class T shares for each day; (ii) with respect to the outstanding Class S shares equal to 1/365th of 1.0% of the Average NAV of the outstanding Class S shares for each day; and (iii) with respect to the outstanding Class D shares equal to 1/365th of 0.25% of the Average NAV of the outstanding Class D shares for each day. The Company will not pay a distribution fee with respect to the outstanding Class I shares.
The distribution fees will accrue daily and be paid monthly in arrears. The Dealer Manager will reallow the distribution fees to participating broker-dealers and servicing broker-dealers for ongoing services performed by such broker-dealers, and will retain any such distribution fees to the extent a broker-dealer is not eligible to receive them for failure to provide such services. The Dealer Manager will waive the distribution fees for any purchases by affiliates of the Company.
The Company will cease paying the distribution fee with respect to any Class T share, Class S share or Class D share held in a stockholder's account at the end of the month in which the Dealer Manager in conjunction with the transfer agent determines that total selling commissions, dealer manager fees and distribution fees paid with respect to all shares from the Follow-On Offering held by such stockholder within such account would exceed, in the aggregate, 9.0% (or a lower limit as set forth in any applicable agreement between the Dealer Manager and a participating broker-dealer) of the gross proceeds from the sale of such shares (including the gross proceeds of any shares issued under the DRP with respect thereto). At the end of such month, such Class T share, Class S share or Class D share (and any shares issued under the DRP with respect thereto) will convert into a number of Class I shares (including any fractional shares) with an equivalent NAV as such share.
In addition, the Company will cease paying the distribution fee on the Class T shares, Class S shares and Class D shares on the earlier to occur of the following: (i) a listing of the Company's shares; (ii) a merger or consolidation with or into another entity, or the sale or other disposition of all or substantially all of the Company's assets, including any liquidation of the Company; or (iii) the date following the completion of the primary portion of the Follow-On Offering on which, in the aggregate, underwriting compensation from all sources in connection with the Follow-On Offering, including selling commissions, dealer manager fees, the distribution fee and other underwriting compensation, is equal to 9.0% of the gross proceeds from the Company's primary offering.
Property Management Agreement
In the event that the Company contracts directly with non-affiliated third party property managers with respect to its individual properties, the Company pays the Property Manager an oversight fee equal to 1.0% of the gross revenues of the property managed, plus reimbursable costs as applicable. Reimbursable costs and expenses include wages and salaries and other expenses of employees engaged in operating, managing and maintaining the Company's properties, as well as certain

F-29



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

allocations of office, administrative, and supply costs. The Property Manager may waive or defer all or a portion of these reimbursements or elect to receive Class I shares or Class I units of the Operating Partnership in lieu of these reimbursements at any time and from time to time, in its sole discretion. In the event that the Company contracts directly with the Property Manager with respect to a particular property, the Company pays the Property Manager aggregate property management fees of up to 3.0% , or greater if the lease so allows, of gross revenues received for management of the Company's properties, plus reimbursable costs as applicable. These property management fees may be paid or re-allowed to third party property managers if the Property Manager contracts with a third party. In no event will the Company pay both a property management fee to the Property Manager and an oversight fee to the Property Manager with respect to a particular property.
In addition, the Company may pay the Property Manager or its designees a leasing fee in an amount equal to the fee customarily charged by others rendering similar services in the same geographic area. The Company may also pay the Property Manager or its designees a construction management fee for planning and coordinating the construction of any tenant directed improvements for which the Company is responsible to perform pursuant to lease concessions, including tenant-paid finish-out or improvements. The Property Manager shall also be entitled to a construction management fee of 5.0% of the cost of improvements. In the event that the Property Manager assists with the development or redevelopment of a property, the Company may pay a separate market-based fee for such services.
Conflicts of Interest
The Sponsor, Advisor, Property Manager and their officers and certain of their key personnel and their respective affiliates currently serve as key personnel, advisors and managers to GCEAR. Certain of the Company's officers are also officers to some or all of 12 other programs affiliated with the Company's former sponsor, including, Griffin-American Healthcare REIT III, Inc. ("GAHR III"), Phillips Edison Grocery Center REIT III, Inc. ("PECO III"), and Griffin-American Healthcare REIT IV, Inc. ("GAHR IV"), all of which are publicly-registered, non-traded real estate investment trusts, and Griffin Institutional Access Real Estate Fund ("GIA Real Estate Fund"), and Griffin Institutional Access Credit Fund ("GIA Credit Fund"), both of which are non-diversified, closed-end management investment companies that are operated as interval funds under the Investment Company Act of 1940, as amended (the "1940 Act"). Because these persons have competing demands on their time and resources, they may have conflicts of interest in allocating their time between the Company’s business and these other activities.
Some of the material conflicts that the Advisor or its affiliates will face are: (1) competing demand for time of the Advisor’s executive officers and other key personnel from the Sponsor and other affiliated entities; (2) determining if certain investment opportunities should be recommended to the Company or GCEAR; and (3) influence of the fee structure under the Advisory Agreement and distribution structure of the operating partnership agreement that could result in actions not necessarily in the long-term best interest of the Company's stockholders. The Board has adopted the Sponsor’s acquisition allocation policy as to the allocation of acquisition opportunities among GCEAR and the Company, which is as follows:
The Sponsor will allocate potential investment opportunities to the Company and GCEAR based on the following factors:
•
the investment objectives of each program;
•
the amount of funds available to each program;
•
the financial impact of the acquisition on each program, including each program’s earnings and distribution ratios;
•
various strategic considerations that may impact the value of the investment to each program;
•
the effect of the acquisition on concentration/diversification of each program’s investments; and
•
the income tax effects of the investment to each program.
In the event all acquisition allocation factors have been exhausted and an investment opportunity remains equally suitable for the Company and GCEAR, the Sponsor will offer the investment opportunity to the REIT that has had the longest period of time elapse since it was offered an investment opportunity.

F-30



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

Economic Dependency
The Company will be dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company's shares of common stock available for issue, the identification, evaluation, negotiation, purchase and disposition of properties and other investments, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other resources.
11. Commitments and Contingencies

Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company is not a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company’s business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Proposed Merger with GCEAR
On December 14, 2018, the Company, the Operating Partnership, Merger Sub, GCEAR, and the GCEAR Operating Partnership, entered into the Merger Agreement.
Subject to the terms and conditions of the Merger Agreement, (i) GCEAR will merge with and into Merger Sub, with Merger Sub surviving as a direct, wholly owned subsidiary of the Company (the “Company Merger”) and (ii) the Operating Partnership will merge with and into the GCEAR Operating Partnership (the “Partnership Merger” and, together with the Company Merger, the “Mergers”), with the GCEAR Operating Partnership surviving the Partnership Merger. At such time, (x) in accordance with the applicable provisions of the MGCL, the separate existence of GCEAR shall cease and (y) in accordance with the Delaware Revised Uniform Limited Partnership Act, the separate existence of the Operating Partnership shall cease.
At the effective time of the Company Merger, each issued and outstanding share of GCEAR’s common stock (or fraction thereof), $0.001 par value per share (the “GCEAR Common Stock”), will be converted into the right to receive 1.04807 shares of the Company’s newly created Class E common stock, $0.001 par value per share (the “Class E Common Stock”), and each issued and outstanding share of GCEAR’s Series A cumulative perpetual convertible preferred stock will be converted into the right to receive one share of the Company’s newly created Series A cumulative perpetual convertible preferred stock.
At the effective time of the Partnership Merger, each GCEAR Operating Partnership unit (“OP Units”) outstanding immediately prior to the effective time of the Partnership Merger will convert into the right to receive 1.04807 Class E OP Units in the surviving partnership and each Operating Partnership unit outstanding immediately prior to the effective time of the Partnership Merger will convert into the right to receive one OP Unit of like class in the surviving partnership. The special limited partnership interest of the Operating Partnership will be automatically redeemed, canceled and retired as described in the Merger Agreement.
The Merger Agreement provides certain termination rights for the Company and GCEAR. In connection with the termination of the Merger Agreement, under certain specified circumstances, GCEAR may be required to pay the Company a termination fee of $52.2 million and the Company may be required to pay GCEAR a termination fee of $52.2 million .
The Mergers will be accounted for by using the business combination accounting rules, which requires the application of a screen test to evaluate if substantially all the fair value of the acquired properties is concentrated in a single identifiable asset or group of similar identifiable assets to determine whether a transaction is accounted for as an asset acquisition or business combination. In addition, the rules require the identification of the acquirer, the determination of the acquisition date, and the recognition and measurement, at fair value, of the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the consolidated subsidiaries of the acquiree. After consideration of all applicable factors pursuant to the business combination accounting rules, the Mergers are expected to be treated as an asset acquisition under GAAP. As of December 31, 2018, the Company has incurred expenses (as the Company is the acquiree) of $1.9 million in costs related to the Mergers.

F-31



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

12. Declaration of Distributions
The Company paid cash distributions in the amount of $0.00150684932 per day, before adjustments of class-specific expenses, per Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share and Class AAA share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period from October 1, 2018 through December 31, 2018 . Such distributions payable to each stockholder of record were paid on such date after the end of each month during the period as determined by the Company's Chief Executive Officer.
On December 12, 2018, the Company’s Board declared cash distributions in the amount of $0.00150684932 per day, subject to adjustments for class-specific expenses, per Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share, and Class AAA share on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period January 1, 2019 through the earlier of March 31, 2019 or the date of consummation of the Company Merger. Such distributions payable to each stockholder of record will be paid on such date after the end of each month during the period as determined by the Company's Chief Executive Officer.
13. Selected Quarterly Financial Data (Unaudited)
Presented below is a summary of the unaudited quarterly financial information for the years ended December 31, 2018 and 2017 :
2018
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total revenue
$
26,789

$
26,297

$
26,713

$
26,595

Net income (loss)
$
804

$
(478
)
$
(757
)
$
(2,856
)
Net income (loss) attributable to common stockholders
$
803

$
(477
)
$
(756
)
$
(2,851
)
Net income (loss) per share (1)
$
0.01

$
(0.01
)
$
(0.01
)
$
(0.03
)
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total revenue
$
25,972

$
26,546

$
27,349

$
27,514

Net income
$
3,124

$
3,365

$
3,099

$
1,531

Net income attributable to common stockholders
$
3,123

$
3,364

$
3,098

$
1,531

Net income per share (1)
$
0.04

$
0.04

$
0.04

$
0.03

(1)
Amounts were retroactively adjusted to reflect stock dividends. (See Note 2, Basis of Presentation and Summary of Significant Accounting Policies, for additional detail).
14. Subsequent Events

Status of the Offering
As of March 11, 2019 , the Company had issued 6,689,813 and 1,030,404 shares of the Company’s common stock pursuant to the DRP and Follow-On Offering, respectively, for approximately $63.5 million and $10.0 million , respectively.
Declaration of Distributions

On March 13, 2019, the Company’s Board declared cash distributions in the amount of $0.00150684932 per day, subject to adjustments for class-specific expenses, per Class T share, Class S share, Class D share, Class I share, Class A share, Class AA share, and Class AAA on the outstanding shares of common stock payable to stockholders of record at the close of business on each day during the period commencing on April 1, 2019 and ending on the earlier of (a) June 30, 2019 or (b) the date of the closing of the mergers. Such distributions payable to each stockholder of record will be paid on such date after the end of each month during the period as determined by the Company's Chief Executive Officer.

F-32



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
(Dollars in thousands unless otherwise noted and excluding per share amounts)

DRP
On February 15, 2019, the Company's board of directors determined it was in the best interests of the Company to reinstate the DRP effective with the February distribution paid on or around March 1, 2019.
Issuance of Directors Stock
On March 14, 2019, the Company issued 7,000 shares of restricted stock to each of the Company's independent directors upon each of their respective re-elections to the Company’s board of directors. Half of the restricted shares vested upon issuance, and the remaining half will vest upon the first anniversary of the grant date, subject to the independent director’s continued service as a director during such vesting period.











F-33



GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
(Dollars in thousands unless otherwise noted)


Initial Cost to Company
Cost Capitalized Subsequent to Acquisition
Gross Carrying Amount at
December 31, 2018
Life on
which
depreciation
in latest
income
statement is
computed
Property
Property
Type
ST
Encumbrances
Land
Building and
Improvements (1)
Building and
Improvements
Land
Building and
Improvements (1)
Total
Accumulated
Depreciation and Amortization
Date of
Construction
Date of
Acquisition
Owens Corning
Industrial
NC
$
3,300

$
575

$
5,167

$
—

$
575

$
5,167

$
5,742

$
657

N/A
3/9/2015
5-40 years
Westgate II
Office
TX
34,200

3,732

55,101

—

3,732

55,101

58,833

8,842

N/A
4/1/2015
5-40 years
Administrative Office of Pennsylvania Courts
Office
PA
6,070

1,207

8,936

—

1,207

8,936

10,143

1,362

N/A
4/22/2015
5-40 years
American Express Center
Data Center/Office
AZ
54,900

5,750

113,670

—

5,750

113,670

119,420

24,395

N/A
5/11/2015
5-40 years
MGM Corporate Center
Office
NV
18,180

4,260

28,705

536

4,260

29,241

33,501

4,729

N/A
5/27/2015
5-40 years
American Showa
Industrial
OH
10,320

1,453

15,747

—

1,453

15,747

17,200

2,042

N/A
5/28/2015
5-40 years
Huntington Ingalls
Industrial
VA
—

5,415

29,836

18

5,415

29,854

35,269

3,881

N/A
6/26/2015
5-40 years
Wyndham
Office
NJ
—

5,696

76,532

—

5,696

76,532

82,228

9,219

N/A
6/26/2015
5-40 years
Exel
Distribution Center
OH
—

1,988

13,958

—

1,988

13,958

15,946

2,043

N/A
6/30/2015
5-40 years
Rapiscan Systems
Office
MA
—

2,350

9,482

—

2,350

9,482

11,832

1,584

N/A
7/1/2015
5-40 years
FedEx Freight
Industrial
OH
—

2,774

25,913

—

2,774

25,913

28,687

3,283

N/A
7/22/2015
5-40 years
Aetna
Office
AZ
—

1,853

20,481

—

1,853

20,481

22,334

1,755

N/A
7/29/2015
5-40 years
Bank of America I
Office
CA
—

5,491

23,514

216

5,491

23,730

29,221

5,294

N/A
8/14/2015
5-40 years
Bank of America II
Office
CA
—

9,206

20,204

14

9,206

20,218

29,424

5,214

N/A
8/14/2015
5-40 years
Atlas Copco
Office
MI
—

1,480

16,490

—

1,480

16,490

17,970

2,347

N/A
10/1/2015
5-40 years
Toshiba TEC
Office
NC
—

4,130

36,821

—

4,130

36,821

40,951

4,072

N/A
1/21/2016
5-40 years
NETGEAR
Office
CA
—

20,726

25,887

43

20,726

25,930

46,656

3,470

N/A
5/17/2016
5-40 years
Nike
Office
OR
—

5,988

42,397

81

5,988

42,478

48,466

7,583

N/A
6/16/2016
5-40 years
Zebra Technologies
Office
IL
—

5,238

56,526

—

5,238

56,526

61,764

6,759

N/A
8/1/2016
5-40 years
WABCO
Industrial
SC
—

1,302

12,598

—

1,302

12,598

13,900

1,208

N/A
9/14/2016
5-40 years
IGT
Office
NV
45,300

6,325

64,441

40

6,325

64,481

70,806

4,837

N/A
9/27/2016
5-40 years
3M
Industrial
IL
43,600

5,320

62,247

—

5,320

62,247

67,567

4,561

N/A
10/25/2016
5-40 years
Amazon
Industrial
OH
61,500

5,331

85,770

—

5,331

85,770

91,101

5,493

N/A
11/18/2016
5-40 years
Zoetis
Office
NJ
—

3,375

42,265

—

3,375

42,265

45,640

3,425

N/A
12/16/2016
5-40 years
Southern Company
Office
AL
99,600

6,605

125,602

48

6,605

125,650

132,255

6,902

N/A
12/22/2016
5-40 years
Allstate
Office
CO
—

1,808

14,090

342

1,808

14,432

16,240

1,428

N/A
1/31/2017
5-40 years
MISO
Office
IN
—

3,104

26,014

—

3,104

26,014

29,118

2,185

N/A
5/15/2017
5-40 years
Total (2)
$
376,970

$
122,482

$
1,058,394

$
1,338

$
122,482

$
1,059,732

$
1,182,214

$
128,570


S-1

GRIFFIN CAPITAL ESSENTIAL ASSET REIT II, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION AND AMORTIZATION
(Dollars in thousands unless otherwise noted)


(1)
Building and improvements include tenant origination and absorption costs.
(2)
As of December 31, 2018 , the aggregate cost of real estate the Company and consolidated subsidiaries own for federal income tax purposes was approximately $1.1 billion (unaudited).

Activity for the year ended December 31,
2018
2017
2016
Real estate facilities
Balance at beginning of year
$
1,178,866

$
1,133,055

$
516,965

Acquisitions
2,923

45,016

615,972

Improvements
580

576

38

Construction-in-progress, net
(155
)
219

80

Balance at end of year
$
1,182,214

$
1,178,866

$
1,133,055

Accumulated depreciation
Balance at beginning of year
$
83,905

$
39,955

$
12,061

Depreciation and amortization expense
44,665

43,950

27,894

Balance at end of year
$
128,570

$
83,905

$
39,955

Real estate facilities, net
$
1,053,644

$
1,094,961

$
1,093,100


S-2

TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k Summary

Exhibits

1.1 Dealer Manager Agreement and Participating Dealer Agreement dated September 18, 2017, incorporated by reference to Exhibit 1.1 to Pre-Effective Amendment No. 3 to the Registrants Registration Statement on Form S-11, filed on September 18, 2017, SEC File No. 333-217223 2.1 Agreement and Plan of Merger, dated as of December 14, 2018, by and among Griffin Capital Essential Asset REIT II, Inc., Griffin Capital Essential Asset Operating Partnership II, L.P., Globe Merger Sub, LLC, Griffin Capital Essential Asset REIT, Inc. and Griffin Capital Essential Asset Operating Partnership, L.P., incorporated by reference to Exhibit 2.1 to the Registrant's current report on Form 8-K, filed on December 20, 2018, Commission File No. 000-55605 3.1 First Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 4 to the Registrants Registration Statement on Form S-11, filed on July 30, 2014, SEC File No. 333-194280 3.2 Bylaws of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.2 to the Registrants Registration Statement on Form S-11, filed on March 3, 2014, SEC File No. 333-194280 3.3 Articles Supplementary to First Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K, filed on April 29, 2016, SEC File No. 000-55605 3.4 Articles of Amendment to First Articles of Amendment and Restatement of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.4 to Pre-Effective Amendment No. 3 to the Registrants Registration Statement on Form S-11, filed on September 18, 2017, SEC File No. 333-217223 3.5 Articles Supplementary of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 3.5 to Pre-Effective Amendment No. 3 to the Registrants Registration Statement on Form S-11, filed on September 18, 2017, SEC File No. 333-217223 4.5 Amended and Restated Share Redemption Program effective as of July 5, 2018, incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K, filed on June 5, 2018, SEC File No. 000-55605 10.1 Amended and Restated Advisory Agreement dated September 20, 2017, incorporated by reference to Exhibit 10.7 to Pre-Effective Amendment No. 3 to the Registrants Registration Statement on Form S-11, filed on September 18, 2017, SEC File No. 333-217223 10.2+ Employee and Director Long-Term Incentive Plan, incorporated by reference to Exhibit 10.6 to the Registrants Quarterly Report on Form 10-Q, filed on August 21, 2014, SEC File No. 333-194280 10.3+ Griffin Capital Essential Asset REIT II, Inc.s Employee and Director Long-Term Incentive Plan Form of Restricted Stock Agreement for Directors, incorporated by reference to Exhibit 10.3 to the Registrants Annual Report on Form 10-K, filed on March 15, 2017, Commission File No. 000-55605 10.4+ Director Compensation Plan, incorporated by reference to Exhibit 10.4 to the Registrants Annual Report on Form 10-K, filed on March 15, 2017, Commission File No. 000-55605 10.5 Master Property Management, Leasing, and Construction Management Agreement, dated March 17, 2015, incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed on March 23, 2015, SEC File No. 333-194280 10.6 Third Amended and Restated Limited Partnership Agreement of Griffin Capital Essential Asset Operating Partnership II, L.P. dated September 20, 2017, incorporated by reference to Exhibit 10.11 to Pre-Effective Amendment No. 3 to the Registrants Registration Statement on Form S-11, filed on September 18, 2017, SEC File No. 333-217223 10.7 VALIC Note for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280 10.8 AGL Note for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280 10.9 USL Note for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280 10.10 First Deed of Trust for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280 10.11 Second Deed of Trust for Owens Corning Sales, LLC Property, incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280 10.12 Recourse Carve-Out Guaranty Agreement, incorporated by reference to Exhibit 10.6 to the Registrants Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280 10.13 Schedule of Omitted Documents, incorporated by reference to Exhibit 10.7 to the Registrants Current Report on Form 8-K, filed on October 28, 2015, SEC File No. 333-194280 10.14 Purchase and Sale Agreement for 3535 Colonnade Parkway, Birmingham, Alabama dated December 22, 2016, incorporated by reference to Exhibit 99.1 to the Registrants Current Report on Form 8-K, filed on December 29, 2016, SEC File No. 000-55605 10.15 Loan Agreement with Bank of America, N.A. and KeyBank N.A. dated April 27, 2018, incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605 10.16 Guaranty Agreement dated April 27, 2018, incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605 10.17 Promissory Note A-1-1 dated April 27, 2018, incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605 10.18 Mortgage, Assignment of Leases and Rents, Security Agreement, and Fixture Filing for the Southern Company Services, Inc. Property dated April 27, 2018, incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605 10.19 Schedule of Omitted Documents, incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K, filed on May 3, 2018, SEC File No. 000-55605 10.20 Amended and Restated Credit Agreement dated June 28, 2018, incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K, filed on July 5, 2018, SEC File No. 000-55605 10.21 Amended and Restated Guaranty dated June 28, 2018, incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K, filed on July 5, 2018, SEC File No. 000-55605 10.22 Amended and Restated Revolver Note payable to KeyBank, National Association dated June 28, 2018, incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K, filed on July 5, 2018, SEC File No. 000-55605 10.23 Amended and Restated Term Note payable to KeyBank, National Association dated June 28, 2018, incorporated by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K, filed on July 5, 2018, SEC File No. 000-55605 10.24 Schedule of Omitted Documents dated June 28, 2018, incorporated by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K, filed on July 5, 2018, SEC File No. 000-55605 10.25 First Amendment to Amended and Restated Credit Agreement dated December 5, 2018, incorporated by reference to Exhibit 99.3 to the Registrants Current Report on Form 8-K, filed on December 20, 2018, SEC File No. 000-55605 21.1 Subsidiaries of Griffin Capital Essential Asset REIT II, Inc., incorporated by reference to Exhibit 21.1 to the Registrants Registration Statement on Form S-11, filed on March 3, 2014, SEC File No. 333-194280 23.1* Consent of Ernst & Young, LLP, Independent Registered Accounting Firm 31.1* Certification of Principal Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1** Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 32.2** Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002