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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
Or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-52566
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
(Exact name of registrant as specified in its charter)
MARYLAND
(State or other jurisdiction of
incorporation or organization)

73-1721791
(I.R.S. Employer
Identification No.)

2 SOUTH POINTE DRIVE, LAKE FOREST, CA
(Address of principal executive offices)

92630
(Zip Code)

800-978-8136
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the 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  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer



Non-accelerated filer



(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes
As of May 11, 2015 we had 23,028,014 shares issued and outstanding.

Accelerated filer



Smaller reporting company



 No

FORM 10-Q
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I.
Item 1.

Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
SIGNATURES

FINANCIAL INFORMATION
Financial Statements:
Condensed Consolidated Balance Sheets (unaudited)
Condensed Consolidated Statements of Operations (unaudited)
Condensed Consolidated Statement of Equity (unaudited)
Condensed Consolidated Statements of Cash Flows (unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
OTHER INFORMATION
Legal Proceedings
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Other Information
Exhibits

EX-31.1
EX-31.2
EX-32

2

3
3
4
5
6
7
18
23
23
23
23
24
24
24
24
24
26

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31,
2015
ASSETS
Cash and cash equivalents
Restricted cash
Real estate properties (certain assets held in variable interest entity):
Land
Buildings and improvements, net
Furniture and fixtures, net
Real estate properties, net
Notes receivable
Deferred costs and deposits
Deferred financing costs, net
Tenant and other receivables, net
Deferred leasing commissions, net
Other assets, net
Assets of variable interest entity held for sale
Total assets

$

$

1,486,000
4,112,000
8,932,000
97,006,000
6,161,000
112,099,000
4,855,000
142,000
1,400,000
3,464,000
1,818,000
459,000
—
129,835,000

December 31,
2014

$

$

4,405,000
3,759,000
8,432,000
84,428,000
5,862,000
98,722,000
132,000
356,000
1,453,000
2,599,000
1,859,000
657,000
4,139,000
118,081,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable and accrued liabilities
Accrued salaries and benefits
Security deposits
Liabilities (certain liabilities held in variable interest entity):
Loans payable, net of debt discounts
Liabilities of variable interest entity held for sale
Total liabilities

$

2,208,000
205,000
2,325,000

$

1,995,000
342,000
2,029,000

89,154,000
—
93,892,000

77,972,000
2,700,000
85,038,000

23,000
117,226,000
(82,846,000)
34,403,000
1,540,000
35,943,000
129,835,000

23,000
117,226,000
(80,873,000)
36,376,000
(3,333,000)
33,043,000
118,081,000

Commitment, contingencies and subsequent events
Stockholders’ Equity
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31,
2015 and December 31, 2014
Common stock, $0.001 par value; 290,000,000 shares authorized; 23,028,014
shares issued and outstanding at March 31, 2015 and
December 31, 2014
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
Noncontrolling interest
Total equity
Total liabilities and stockholders’ equity

$

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

$

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31,
2015
2014
Revenues:
Rental revenues
Resident services and fee income
Tenant reimbursements and other income
Interest income from notes receivable

$

Expenses:
Property operating costs
Resident services costs
General and administrative
Asset management fees and expenses
Real estate acquisition costs
Depreciation and amortization
Reserve for excess advisor obligation

2,671,000
2,243,000
312,000
2,000
5,228,000

$

1,736,000
—
202,000
4,000
1,942,000

575,000
1,737,000
944,000
—
—
1,245,000
—
4,501,000
727,000

348,000
—
670,000
205,000
4,000
1,238,000
189,000
2,654,000
(712,000)

Other income and (expense):
Other income
Interest expense
Loss from continuing operations

2,000
(1,083,000)
(354,000)

13,000
(720,000)
(1,419,000)

Discontinued operations:
Loss from discontinued operations
Loss from discontinued operations

(1,582,000)
(1,582,000)

(165,000)
(165,000)

$

(1,936,000)
(37,000)
(1,973,000)

$

(1,584,000)
345,000
(1,239,000)

$
$
$

(0.02)
(0.07)
(0.09)

$
$
$

(0.06)
0.01
(0.05)

Operating income (loss)

Net loss
Noncontrolling interests’ share in losses
Net loss applicable to common stockholders
Basic and diluted loss per common share
Continuing operations applicable to common stockholders
Discontinued operations
Net loss applicable to common stockholders
Weighted average shares used to calculate basic
and diluted net loss per common share

23,028,014

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4

23,028,285

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
For the Three Months Ended March 31, 2015
(Unaudited)

Balance — January 1, 2015
Dividends paid to noncontrolling interests
Decrease in non-controlling interests related to disposition
of a VIE
Net loss
Balance — March 31, 2015

Number
of
Shares
23,028,014
—

Common Stock
Common
Stock
Par
Value
$
23,000
—

Additional
Paid-In
Capital
$ 117,226,000
—

Accumulated
Deficit
$ (80,873,000)
—

—
—
23,028,014

—
—
23,000

—
—
117,226,000

(1,973,000)
(82,846,000)

$

$

Total
Stockholders’
Equity
$
36,376,000
—

—
$

—
$

(1,973,000)
34,403,000

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

5

Noncontrolling
Interests
$
(3,333,000)
(42,000)

$

4,878,000
37,000
1,540,000

$

$

Total
Equity
33,043,000
(42,000)
4,878,000
(1,936,000)
35,943,000

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2015
2014
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash and cash equivalents provided by (used in) operating activities:
Amortization of deferred financing costs and debt discounts
Depreciation and amortization
Straight-line rents
Bad debt expense
Loss on disposition of VIE
Change in operating assets and liabilities:
Tenant and other receivables, net
Prepaid and other assets
Prepaid rent, security deposit and deferred revenues
Related party receivables
Accounts payable and accrued liabilities
Accrued salaries and benefits
Net cash and cash equivalents provided by (used in) operating activities

$

74,000
1,245,000
(356,000)
8,000
1,582,000

Cash flows from investing activities
Restricted cash
Deferred costs and deposits
Real estate acquisitions and capitalized costs
Real estate improvements
Payments from note receivable
Net cash and cash equivalents used in investing activities
Cash flows from financing activities:
Proceeds from issuance of loans payable
Payments of loans payable
Non-controlling interest contribution
Distributions paid to non-controlling interests
Deferred financing costs
Net cash and cash equivalents provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period (including cash of VIE)
Less cash and cash equivalents of VIE held for sale – end of period (see Note 10)
Cash and cash equivalents – end of period
NON CASH INVESTING AND FINANCING
Supplemental disclosure of cash flow information:
Cash paid for interest
Security deposit not received
Supplemental disclosure of non-cash investing activities:
In January 2015, the Company sold its interests in Sherburne Commons for a note receivable for $5.0 million due in
December 2017 (see Note 6).
In January 2015, $207,000 of deferred costs were reclassified to real estate acquisitions.

(1,936,000) $

47,000
1,238,000
65,000
37,000
—

(319,000)
195,000
99,000
(1,000)
214,000
(136,000)
669,000

72,000
134,000
(244,000)
(123,000)
222,000
—
(136,000)

(353,000)
15,000
(14,300,000)
(70,000)
9,000
(14,699,000)

(99,000)
(1,000)
—
(2,000)
—
(102,000)

$

11,440,000
(173,000)
—
(42,000)
(114,000)
11,111,000
(2,919,000)
4,405,000
1,486,000
—
1,486,000 $

$
$

998,000
198,000

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

6

(1,584,000)

$

—
(118,000)
257,000
(18,000)
—
121,000
(117,000)
10,662,000
10,545,000
(45,000)
10,500,000

521,000
—

SUMMIT HEALTHCARE REIT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2015
(Unaudited)
1. Organization
Summit Healthcare REIT, Inc., a Maryland Corporation, was formed on October 22, 2004 under the General Corporation Law of Maryland for the purpose of
engaging in the business of investing in and owning commercial real estate. As used in this report, the “Company”, “we”, “us” and “our” refer to Summit
Healthcare REIT, Inc. and its consolidated subsidiaries (including variable interest entities) except where the context otherwise requires. Until April 1, 2014 and
subject to certain restrictions and limitations, our business was managed pursuant to an advisory agreement (the “Advisory Agreement”) with Cornerstone Realty
Advisors, LLC (“CRA”). Beginning April 1, 2014, the Company became self-managed and hired employees to directly manage its operations.
Generally we conduct substantially all of our operations through Summit Healthcare Operating Partnership, L.P. (the “Operating Partnership”), a Delaware
limited partnership, which was formed on November 30, 2004. At March 31, 2015, we own a 99.88% general partner interest in the Operating Partnership while
CRA owns a 0.12% limited partnership interest. Our financial statements and the financial statements of the Operating Partnership are consolidated in the
accompanying condensed consolidated financial statements. These financial statements include consolidation of a variable interest entity (“VIE”) that was
classified as held for sale until January 7, 2015, at which time the VIE was sold (see Note 6).
In 2012, we formed Cornerstone Healthcare Partners LLC (“CHP LLC”) with Cornerstone Healthcare Real Estate Fund, Inc. (“CHREF”), an affiliate of CRA.
We own 95% of CHP LLC, with the remaining 5% owned by CHREF. As CHP LLC’s equity holders have voting rights disproportionate to their economic
interests in the entity, CHP LLC is considered to be a VIE. We have a controlling financial interest in CHP LLC because we have the power to direct the activities
of the VIE that most significantly impact its economic performance and we have the obligation to absorb the VIE’s losses and the right to receive benefits from
the VIE. Consequently, we are deemed to be the primary beneficiary of the VIE, and therefore have consolidated the operations of the VIE.
During 2012, we acquired Sheridan Care Center, Fernhill Care Center, Farmington Square, Friendship Haven Healthcare and Rehabilitation Center (“Friendship
Haven”) and Pacific Health and Rehabilitation Center (“Pacific”) healthcare properties (collectively, the “JV Properties”) through CHP LLC. In the third quarter
of 2013, CHP LLC sold a portion of its interests in the JV Properties to third party investors. Proceeds from the sale of interests in these JV Properties were
approximately $0.9 million as of March 31, 2014, of which we received $0.9 million and CHREF received $41,000. As such, as of March 31, 2015, we owned
an 89.0% interest in the JV Properties, CHREF owned a 4.7% interest and third party investors owned 6.3%. The CHP LLC offering has been terminated.
In May 2014, we formed a taxable REIT subsidiary (“Friendswood TRS”) which became the licensed operator and tenant of Friendship Haven (see Note 4).
2. Summary of Significant Accounting Policies
For more information regarding our significant accounting policies and estimates, please refer to “Summary of Significant Accounting Policies” contained in our
Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (“SEC”) on March 20, 2015. There have
been no material changes to our policies since that filing.
The accompanying condensed consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements at that date.
We assume that users of these condensed consolidated financial statements have read or have access to the audited December 31, 2014 consolidated financial
statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the
year ended December 31, 2014 filed with the SEC on March 20, 2015 and that the adequacy of additional disclosure needed for a fair presentation, except in
regard to material contingencies, may be determined in that context. Accordingly, footnotes and other disclosures which would substantially duplicate those
contained in our most recent Annual Report on Form 10-K for the year ended December 31, 2014 have been omitted in this report.

7

Principles of Consolidation and Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, CHP LLC (of which the
Company owns 95%) and Nantucket Acquisition LLC, a variable interest entity through January 7, 2015 (see Note 6). All intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying financial information reflects all adjustments, which are, in the opinion of management, of a normal recurring nature and necessary for a fair
presentation of our financial position, results of operations and cash flows for the interim periods. Interim results of operations are not necessarily indicative of
the results to be expected for the full year. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2015.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic
835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability
be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and
measurement guidance for debt issuance costs are not affected by the amendments in this ASU.
For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods
within those fiscal years. For all other entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015,
and interim periods within fiscal years beginning after December 15, 2016.
Early adoption of the amendments is permitted for financial statements that have not been previously issued.
The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the
period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an
accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the priorperiod information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the
debt liability). The Company has evaluated the impact of this new standard and does not expect it to have a significant effect on the consolidated financial
statements, when adopted.
Reclassifications
Certain amounts in the Company’s condensed consolidated financial statements for prior year have been reclassified to conform to the current period
presentation. Based on the intended use of the restricted cash, we have classified changes in restricted cash within the statements of cash flows as investing
activities and the prior year presentation has been revised to conform to this classification. These reclassifications had no effect on total consolidated assets or net
loss.
3. Fair Value Measurements of Financial Instruments
Our condensed consolidated balance sheets include the following financial instruments: cash and cash equivalents, restricted cash, notes receivable (except as
noted below), certain other assets, deferred costs and deposits, tenant and other receivables, deferred leasing commissions, security deposits and loans payable.
With the exception of the Nantucket note receivable (see Note 6) and loans payable discussed below, we consider the carrying values to approximate fair value
for such financial instruments because of the short period of time between origination of the instruments and their expected payment.

8

As of March 31, 2015, the fair value of the Nantucket note receivable (see Note 6) was $4.9 million compared to the carrying value of $4.9 million. The fair value
of the note receivable was estimated based on cash flow analysis at an assumed market rate of interest. As the inputs to our valuation estimate are neither
observable in nor supported by market activity, our notes receivable are classified as Level 3 assets within the fair value hierarchy.
As of March 31, 2015 and December 31, 2014, the fair value of loans payable was $91.3 million and $80.1 million compared to the carrying value of $90.0
million and $78.8 million, respectively. The fair value of loans payable is estimated using lending rates available to us for financial instruments with similar terms
and maturities. To estimate fair value as of March 31, 2015, we utilized a discount rate ranging from 4.4% to 4.75% and a weighted-average of 4.63%. As the
inputs to our valuation estimate are neither observable in nor supported by market activity, our loans payable are classified as Level 3 assets within the fair value
hierarchy.
As a result of our ongoing analysis for potential impairment of our investments in real estate, we may be required to adjust the carrying value of certain assets to
their estimated fair values, or estimated fair value less selling costs, under certain circumstances (see Note 4). No impairments were recorded during the three
months ended March 31, 2015.
At March 31, 2015 and December 31, 2014, we do not have any financial assets or financial liabilities that are measured at fair value on a recurring basis in our
condensed consolidated financial statements.
4. Investments in Real Estate Properties
As of March 31, 2015 and December 31, 2014, adjusted cost and accumulated depreciation and amortization related to investments in real estate excluding assets
of variable interest entity held for sale, were as follows:
March 31, 2015
Land
Buildings and improvements
Less: accumulated depreciation
Buildings and improvements, net
Furniture and fixtures
Less: accumulated depreciation
Furniture and fixtures, net
Real estate properties, net

$

$

December 31, 2014

8,932,000 $
101,560,000
(4,554,000)
97,006,000
8,891,000
(2,730,000)
6,161,000
112,099,000 $

8,432,000
88,241,000
(3,813,000)
84,428,000
8,133,000
(2,271,000)
5,862,000
98,722,000

As of March 31, 2015, our portfolio consists of 17 properties which were 100% leased to the operators of the related facilities. The following table provides
summary information regarding our properties:

Purchase
Price

Property (1)

Location

Date Purchased

Sheridan Care Center
Fernhill Care Center
Farmington Square
Friendship Haven Healthcare and
Rehabilitation Center (2)
Pacific Health and Rehabilitation
Center
Danby House
Brookstone of Aledo
The Shelby House
The Hamlet House
The Carteret House
Sundial Assisted Living
Lamar Estates
Monte Vista Estates
Myrtle Point Care Center
Gateway Care and Retirement
Center
Applewood
Retirement Community
Loving Arms Assisted Living

Sheridan, OR
Portland, OR
Medford, OR

August 3, 2012
August 3, 2012
September 14, 2012

SNF
SNF
AL/MC

Galveston County, TX

September 14, 2012

SNF

Tigard, OR
Winston-Salem, NC
Aledo, IL
Shelby, NC
Hamlet, NC
Newport, NC
Redding, CA
Lamar, CO
Monte Vista, CO
Myrtle Point, OR

December 24, 2012
January 31, 2013
July 2, 2013
October 4, 2013
October 4, 2013
October 4, 2013
December 18, 2013
September 22, 2014
September 22, 2014
October 31, 2014

Portland, OR
Salem, OR
Front Royal, VA

(2)

Type
$

4,100,000
4,500,000
8,500,000

$

Number of
Beds

5,145,000
4,514,000
6,840,000

51
63
71

15,000,000

6,374,000

150

SNF
AL/MC
AL
AL
AL
AL
AL
SNF
SNF
SNF

8,140,000
9,700,000
8,625,000
4,500,000
6,500,000
4,300,000
3,500,000
4,500,000
3,400,000
4,150,000

7,525,000
7,275,000
5,843,000
4,921,000
4,158,000
3,508,000
2,800,000
3,418,000
2,582,000
3,075,000

73
100
66
72
60
64
65
60
60
54

December 31, 2014

SNF/IL

11,250,000

8,435,000

91

December 31, 2014
January 23, 2015

IL
AL

2,900,000
14,300,000

2,165,000
11,440,000

69
84

$ 117,865,000

$ 90,018,000

1,253

Total:
(1)

Loans
Payable
as of
March 31,
2015

The above table excludes Sherburne Commons Residences, LLC (“Sherburne Commons”), a variable interest entity that on January 7, 2015 was sold
(see Note 6).
We terminated the lease with the operator of this facility on March 16, 2014 and became the licensed operator of the facility on May 1, 2014 through a
wholly-owned taxable REIT subsidiary (Friendswood TRS).

9

Friendswood TRS
Beginning in January 2014, the tenant/operator of Friendship Haven ceased paying rent payments due to us under the lease agreement. On March 16, 2014, we
terminated the lease agreement. Effective May 1, 2014, we became the licensed operator of the facility through Friendswood TRS. Upon becoming the licensed
operator of the facility, we entered into a management agreement with an affiliate of Stonegate Senior Living (“Stonegate”). We plan to operate the facility with
the Stonegate affiliate or another manager until a long-term lease agreement can be secured. We are currently seeking to secure a long term triple net lease with
an operator and plan to finalize an arrangement in 2015.
Leasing Commissions
Leasing commissions (paid to CRA prior to April 1, 2014) are capitalized at cost and amortized on a straight-line basis over the related lease term. As of March
31, 2015 and December 31, 2014, total costs incurred were $2.2 million and the unamortized balance of capitalized leasing commissions was $1.8 million and
$1.9 million, respectively. In March 2014, the amortization of Friendship Haven’s leasing commission totaling $0.4 million was accelerated due to the lease
termination on March 16, 2014. Amortization expense for the three months ended March 31, 2015 and 2014 was $40,000 and $409,000, respectively.
Acquisitions - 2015
Front Royal, Virginia
On January 23, 2015, we acquired an 84 bed assisted living facility in Front Royal, Virginia (“Loving Arms Assisted Living”) for a total purchase price of $14.3
million, which was funded through cash on hand plus a collateralized loan as described in Note 8. Loving Arms is leased to an affiliate of Meridian Senior Living,
LLC under a 15 year triple net lease.
The following sets forth the allocation of the purchase price of the property acquired in 2015 as well as the associated acquisitions costs, all of which have been
capitalized. We have accounted for the acquisition as an asset purchase under generally accepted accounting principles (“GAAP”).

Land
Buildings & improvements
Site improvements
Furniture & fixtures
Real estate acquisition and capitalized costs
Third-party acquisition costs, capitalized (included above)

$

$
$

10

Total
500,000
12,707,000
540,000
760,000
14,507,000
207,000

See Note 11, Subsequent Events for further information.
5. Concentration of Risk
Our cash is generally invested in investment-grade short-term instruments. As of March 31, 2015, we had cash and cash equivalent accounts in excess of FDICinsured limits. However, we do not believe the risk associated with this excess is significant.
As of March 31, 2015, we owned one property in California, seven properties in Oregon, four properties in North Carolina, one property in Texas, one property in
Illinois, two properties in Colorado and one property in Virginia. Accordingly, there is a geographic concentration of risk subject to economic conditions in
certain states. Additionally, as of March 31, 2015, we leased our 17 healthcare properties to six different tenants under long-term triple net leases, three of which
comprise 35%, 28% and 13% of our tenant rental revenue. As of March 31, 2014, we leased our 11 healthcare properties to five different tenants under long-term
triple net leases, two of which comprise 46% and 26% of our tenant rental revenue.
6. Notes Receivable
Servant Healthcare Investments, LLC
The Servant Healthcare Investments, LLC note was paid in full on May 2, 2014. For the three months ended March 31, 2015 and 2014, interest income related to
the note receivable was $0 and $4,000, respectively.
Fernhill Note
In September 2014, the Company loaned to the operator of the Fernhill facility approximately $140,000 for certain property improvements. The note provides for
interest at a fixed rate of 6% and is payable in monthly installments through January 2019. As of March 31, 2015 and December 31, 2014, the balance on the note
was approximately $0.1 million.
Nantucket Note - Consolidation and Sale of VIE
We held a note receivable from a participating first mortgage loan made to Nantucket Acquisition LLC (“Nantucket”), a Delaware limited liability company
owned and managed by Cornerstone Ventures Inc., an affiliate of CRA, which was collateralized by Sherburne Commons. We had not recorded interest income
on this note since October 2010 because of the doubtfulness of collection. In June 2011, as a result of our issuing a notice of default with respect to the note, we
determined that we were the primary beneficiary of the VIE. Therefore, we consolidated the operations of the VIE beginning June 30, 2011. Assets of the VIE
may only be used to settle obligations of the VIE and creditors of the VIE have no recourse to the general credit of the Company. The note receivable has been
eliminated in consolidation.
As of October 19, 2011, the Sherburne Commons property was reclassified to real estate held for sale. Consequently, the related assets and liabilities of the
property were classified as assets of variable interest entity held for sale and liabilities of variable interest entity held for sale on our condensed consolidated
balance sheets. Operating results for the property have been reclassified to discontinued operations on our condensed consolidated statements of operations for all
periods presented. On October 6, 2014, we foreclosed on the Sherburne Commons property, however we did not take possession of the property.
On January 7, 2015, through our Operating Partnership, we sold Sherburne Commons to The Residences at Sherburne Commons, Inc. (“Sherburne Buyer”), an
unaffiliated Massachusetts non-profit corporation, in exchange for $5.0 million, as evidenced by a purchase money note from Sherburne Buyer to us as the lender.
In conjunction with the sale of the property, we assigned our foreclosure bid to the Buyer.

11

The $5.0 million purchase money note is secured by the Sherburne Commons property, bears an annual interest rate of 3.5% and matures on December 31, 2017.
At Sherburne Buyer’s election, interest may accrue and not be payable through December 31, 2015 with all accrued but unpaid interest being payable in full on
January 1, 2016. Outstanding and unpaid principal and interest due shall be paid from the net proceeds payable to Sherburne Buyer from the sale of the residential
cottages in Sherburne Commons. We may also participate in additional interest of up to $1 million from 50% of the net proceeds of cottage sales through
December 31, 2018.
The sale of the property is being accounted for under the installment method and as such, the $5.0 million note has been reduced by approximately $0.2 million
related to a deferred gain on the sale, which will be subsequently recognized as principal payments are received on the note. Interest payments on the note will
also be recorded as payments are received. Additionally, as part of the transaction, the note was reduced by approximately $0.1 million for certain related
adjustments. As of March 31, 2015, we have not collected any funds related to the principal or interest on the note and the balance on the note receivable was $4.7
million.
As we are no longer the primary beneficiary of the VIE, it is no longer being consolidated as of March 31, 2015. As of December 31, 2014, the VIE was classified
as assets of variable interest entity held for sale and liabilities of variable interest entity held for sale and for the period ended March 31, 2014, the results of
operations for the variable interest entity held for sale was presented in discontinued operations on the condensed consolidated statements of operations. As of
March 31, 2015, we recorded a loss on disposition of $1.6 million for this VIE, which is included in discontinued operations on the condensed consolidated
statements of operations.
7. Related Party Transactions with CRA
Related party transactions relate to fees paid and costs reimbursed to CRA for services rendered to us through March 31, 2014, prior to the termination of the
Advisory Agreement on April 1, 2014.
Specific fees described in the Advisory Agreement which would have been owed to CRA are described below. We do not believe that we owe CRA any amounts
due under the Advisory Agreement. The fees and expense reimbursements payable to CRA under the Advisory Agreement are described in more detail in our
Annual Report filed on Form 10-K for the year ended December 31, 2014.
Organizational and Offering Costs - The Advisory Agreement provided for reimbursement by CRA for organizational and offering costs in excess of 3.5% of the
gross proceeds from our primary offering and follow-on offering. Under the Advisory Agreement, within 60 days after the end of the month in which our followon offering terminates, CRA was obligated to reimburse us to the extent that the organization and offering expenses related to our follow-on offering borne by us
exceeded 3.5% of the gross proceeds of the follow-on Offering.

12

As of June 10, 2012, the date that our follow-on offering terminated, we had reimbursed CRA a total of $1.1 million in organizational and offering costs related to
our follow-on offering, of which $1.0 million was in excess of the contractual limit. Consequently, in the second quarter of 2012, we recorded a receivable from
CRA for $1.0 million reflecting the excess reimbursement. However, based on our evaluation of various factors related to collectability of this receivable, we
reserved the full amount of the receivable.
As of March 31, 2015 and December 31, 2014, the gross balance of this receivable was $0.7 million. CRA has not made any payments in 2014 or 2015. The
balance of this receivable has been fully reserved for as of March 31, 2015 and December 31, 2014.
Acquisition Fees and Expenses – No acquisition fees were earned during the three months ended March 31, 2015 and 2014.
Management Fees and Expenses - For the three months ended March 31, 2015 and 2014, CRA earned $0 and $0.2 million of asset management fees, respectively.
These costs are included in asset management fees and expenses in our condensed consolidated statements of operations.
In addition, the Advisory Agreement provided for our reimbursement to CRA for the direct and indirect costs and expenses incurred by CRA in providing asset
management services to us, including related personnel and employment costs. For the three months ended March 31, 2015 and 2014, CRA was reimbursed $0
and $36,000, respectively, of such direct and indirect costs and expenses. These costs are included in asset management fees in our condensed consolidated
statements of operations.
As of March 31, 2014, we overpaid CRA $32,000 for asset management fees. We have recorded this amount as receivable from related party in our condensed
consolidated balance sheets and reserved for the entire amount due to the uncertainty of collectability.
Operating Expenses - For the three months ended March 31, 2015 and 2014, $0 and $0.2 million of operating expenses incurred on our behalf were reimbursed to
CRA, respectively. These costs are included in general and administrative expenses on our condensed consolidated statements of operations. We paid $189,000 in
excess operating expense reimbursements to CRA in prior periods. Accordingly, we have recorded this receivable due from CRA and reserved for the entire
amount due to the uncertainty of collectability.
Pursuant to provisions contained in our terminated Advisory Agreement, our board of directors had the responsibility of limiting our total operating expenses for
each trailing four consecutive quarters to amounts that do not exceed the greater of 2% of our average invested assets or 25% of our net income, calculated in the
manner set forth in our charter, unless a majority of the directors (including a majority of the independent directors) made a finding that a higher level of expenses
was justified (the “2%/25% Test”). In the event that a majority of the directors had not determined that such excess expenses were justified, CRA was required to
reimburse to us the amount of the excess expenses paid or incurred (the “Excess Amount”).
For each four-fiscal-quarter period prior to March 31, 2014, our board of directors determined that the Excess Amount was justified and had consequently waived
such Excess Amount. For the four-fiscal-quarter period ended March 31, 2014, our total operating expenses exceeded the greater of 2% of our average invested
assets and 25% of our net income. We incurred operating expenses of approximately $3.7 million and incurred an Excess Amount of approximately $1.7 million
during this period. Our board of directors did not waive this Excess Amount and therefore such Excess Amount is due to the Company from CRA. Accordingly,
we have recorded this receivable and reserved for the entire amount due to the uncertainty of collectability.
Property Management and Leasing Fees and Expenses - For the three months ended March 31, 2015 and 2014, CRA earned approximately $0 and
$42,000, respectively, of property management fees. CRA did not earn any leasing fees for the three months ended March 31, 2015 and 2014. These costs are
included in property operating and maintenance expenses in our condensed consolidated statements of operations.
Disposition Fee – No disposition fees were earned during the three months ended March 31, 2015 and 2014.

13

Subordinated Participation Provisions – No subordinated participation fees were earned during the three months ended March 31, 2015 and 2014.
8. Loans Payable
As of March 31, 2015 and December 31, 2014, loans payable consisted of the following:
March 31, 2015

December 31, 2014

Loans payable to GE Capital Corporation in monthly installments of approximately $123,000, including interest
at LIBOR (floor of .50%) plus 4.5% (5.0% at March 31, 2015 and December 31, 2014, respectively), due in
September 2017 through July 2018, collateralized by Friendship Haven, Brookstone of Aledo, Redding, Gateway
$
and Applewood.

25,617,000

Loans payable to The PrivateBank and Trust Company in monthly installments of approximately $96,000,
including interest at LIBOR (floor of up to 1.0%) plus 4% (4.50% to 5.0% and 5.0% at March 31, 2015 and
December 31, 2014, respectively), due in January 2016 through September 2017, collateralized by Danby House,
Myrtle Point, Lamar Estates, Monte Vista Estates and Loving Arms.

27,790,000

16,350,000

36,611,000
90,018,000
(864,000)
89,154,000 $

36,785,000
78,752,000
(780,000)
77,972,000

Loans payable to Lancaster Pollard Mortgage Company, LLC (insured by HUD) in monthly installments of
approximately $193,000, including interest ranging from a fixed rate of 3.75% to 3.78%, plus 0.65% for
mortgage insurance, due in September 2039 through December 2049, collateralized by Sheridan, Fernhill,
Tigard, Medford, Shelby, Hamlet and Carteret.
Less debt discount
Total loans payable

$

$

25,617,000

We have total debt obligations of approximately $90.0 million that will mature between 2016 and 2049. See Note 4 for loans payable balance for each property.
In connection with our loans payable, we incurred debt discounts and financing costs. The unamortized balance of the deferred financing costs totals $1.4 million
and $1.5 million, as of March 31, 2015 and December 31, 2014, respectively. The capitalized financing costs and debt discounts are being amortized over the life
of their respective financing agreements using the straight-line basis which approximates the effective interest rate method. For the three months ended March 31,
2015 and 2014, $74,000 and $47,000, respectively, of deferred financing costs and debt discounts were amortized and included in interest expense in our
condensed consolidated statements of operations.
The principal payments due on the loans payable (excluding debt discount) for the period from April 1, 2015 to December 31, 2015 and for each of the four
following years and thereafter ending December 31 are as follows:
Principal
Amount

Year
April 1, 2015 to December 31, 2015
2016
2017
2018
2019 and thereafter

$

$

14

1,210,000
8,578,000
40,131,000
6,326,000
33,773,000
90,018,000

General Electric Capital Corporation (“GE”)
As of March 31, 2015 and December 31, 2014, we had net borrowings of $25.6 million under the GE loan agreements. See table above for further information.
During the three months ended March 31, 2015 and 2014, we incurred approximately $0.3 million and $0.4 million, respectively, of interest expense related to the
GE loans.
The PrivateBank and Trust Company (“PrivateBank”)
In January 2015, in conjunction with the acquisition of Loving Arms (see Note 4), we entered into a first priority mortgage loan collateralized by the Loving
Arms property and cross-collateralized with three of our other properties, Lamar Estates, Monte Vista Estates and Myrtle Point. On January 23, 2015, we
amended an existing loan agreement with PrivateBank to increase the principal amount available under that existing loan by $11.4 million for a total principal
availability of $20.5 million collateralized by a first priority security interest in the four properties noted above. All availability under this loan is outstanding. The
loan, which bears interest at the One Month LIBOR (London Interbank Rate), with a floor of 25 basis points, plus a spread of 4.50%, has a 25 year amortization
schedule and matures on September 21, 2017. The loan may be prepaid with no penalty if the four properties are refinanced through HUD (see below).
As of March 31, 2015 and December 31, 2014, we had net borrowings of $27.8 million and $16.4 million under the PrivateBank loans. See table above for further
information. During the three months ended March 31, 2015 and 2014, we incurred approximately $0.3 million and $0.2 million of interest expense,
respectively, related to the PrivateBank loans.
Lancaster Pollard Mortgage Company, LLC
In September 2014 and November 2014, we refinanced certain properties with Housing and Urban Development (“HUD”) insured loans from the Lancaster
Pollard Mortgage Company, LLC (“Lancaster Pollard”). See table above for further information.
HUD requires that our lender hold certain reserves for property tax, insurance, and capital expenditures. These reserves are included in restricted cash on the
Company’s condensed consolidated balance sheets.
As of March 31, 2015 and December 31, 2014, we had net borrowings of $36.6 million and $36.8 million under the HUD loans. During the three months ended
March 31, 2015, we incurred approximately $0.4 million of interest expense related to the HUD loans.
9. Commitments and Contingencies
We inspect our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist,
we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our consolidated financial condition,
results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an
environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
Our commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of
management, these matters are not expected to have a material impact on our consolidated financial condition, results of operations and cash flows. We are also
subject to contingent losses resulting from litigation against the Company.
On April 1, 2014 CRA and Cornerstone Ventures, Inc. filed a complaint in the Superior Court of California for the County of Orange-Central Justice Center, Case
No. 30-2014-00714004-CU-BT-CJC, naming the Company, its directors and two of its officers as defendants, seeking declaratory and injunctive relief and
compensatory and punitive damages. On April 17, 2014, Judge Nakamura denied in its entirety plaintiffs’ ex parte application for a temporary restraining order to
show cause why a preliminary injunction against the defendants should not issue. On May 19, 2014, the Company filed a counter claim against plaintiffs and
certain individuals affiliated with CRA and affiliated entities. The Company continues to believe that all of plaintiffs’ claims are without merit and will continue
to vigorously defend itself. Plaintiffs and defendants are conducting discovery.

15

In connection with our becoming the licensed operator of Friendship Haven through a wholly-owned taxable REIT subsidiary, we have entered into a
management agreement with an affiliate of Stonegate. The management agreement calls for us to pay to Stonegate a termination fee if we terminate the agreement
before May 1, 2015. The termination fee is equal to three times the highest monthly management fee paid to Stonegate prior to the termination. As of March 31,
2015, the termination fee would have been approximately $110,000 however, as the agreement with them was not terminated before May 1, 2015, no fee will be
due.
Purchase Option
As of March 31, 2015, we own one property with a book value of approximately $7.8 million that is subject to a purchase option that became exercisable on
September 14, 2014. The option provides the option holder with the right to purchase the property at increasing exercise price intervals based on elapsed time,
starting at $10.8 million. The option expires August 13, 2022. As of March 31, 2015, the option holder has not provided notice or exercised their option.
Purchase Agreement
In November 2013, a limited liability company in which we hold a minority interest entered into a build-to-suit purchase agreement whereby the entity agreed to
purchase a 70 unit assisted living facility in Athens, Georgia for approximately $12.4 million upon certificate of occupancy received for the facility. In the event
the entity defaults on the purchase of the building as provided for in the purchase agreement, the entity would be required to lease the facility from the seller for a
ten year term at an annual rent amount equal to 8% of the cost of the facility. The Company executed a guarantee for the payments associated with that lease. In
the event that the lease is executed, the lease payment will equal approximately $1.0 million per year.
Indemnification Agreements
The Company has entered into indemnification agreements with certain officers of the Company against all judgments, penalties, fines and amounts paid in
settlement and all expenses actually and reasonably incurred by him or her in connection with any proceeding.
10. Discontinued Operations
Divestitures
In accordance with ASC 360, Property, Plant & Equipment, we report results of operations from real estate assets that meet the definition of a component of an
entity that have been sold, or meet the criteria to be classified as held for sale, as discontinued operations.
Real Estate Held for Sale and Disposed
As of December 31, 2014, the Sherburne Commons property had been classified as real estate held for sale and the results of operations for the variable interest
entity held for sale have been presented in discontinued operations in the Company’s condensed consolidated statements of operations for all periods presented.
On January 7, 2015, we sold the Sherburne Commons property. See Note 6 for further information.
The following is a summary of the components of loss from discontinued operations for the three months ended March 31, 2015 and 2014:
Three Months Ended
March 31,
2015
2014
Rental revenues, tenant reimbursements and other income
Operating expenses and real estate taxes
Loss on disposition of VIE
Loss from discontinued operations

$

$

16

- $
(1,582,000)
(1,582,000) $

554,000
(719,000)
(165,000)

The following table presents balance sheet information for the properties classified as held for sale as of March 31, 2015 and December 31, 2014. FASB ASC 360
requires that assets classified as held for sale be carried at the lesser of their carrying amount or estimated fair value, less estimated selling costs.
March 31,
2015
Assets of variable interest entity held for sale:
Cash and cash equivalents
Investments in real estate, net
Accounts receivable, inventory and other assets
Total assets

$

$

Liabilities of variable interest entity held for sale:
Note payable
Loans payable
Accounts payable and accrued liabilities
Intangible lease liabilities, net
Interest payable
Liabilities of variable interest entity held for sale

$

$

December 31,
2014
—
—
—
—

$

—
—
—
—
—
—

$

$

$

36,000
3,905,000
198,000
4,139,000

1,332,000
117,000
466,000
145,000
640,000
2,700,000

No real estate investments were disposed of in 2014.
11. Subsequent Events
On April 29 2015, Summit Healthcare REIT, Inc., through our Operating Partnership, entered into a joint venture (“Joint Venture”) and limited liability company
agreement (“LLC Agreement”) with Best Years, LLC (“Best Years”), a U.S. based affiliate of Union Life Insurance Co, Ltd. (“Union Life”).
In conjunction with the Joint Venture, the Operating Partnership contributed all of its limited liability company interest in each of six limited liability companies
that collectively own Lamar Estates, Monte Vista Estates, Myrtle Point Care Center, Gateway Care and Retirement Center, Applewood Retirement Community
and Loving Arms Assisted Living (collectively, the “JV 2 Properties”) to the Joint Venture entity, resulting in the Joint Venture owning each of the JV 2
Properties. Best Years, in conjunction with the Joint Venture, contributed cash in the amount of approximately $9.9 million to the Joint Venture. At the close of
the Joint Venture transaction, the Operating Partnership received approximately net $9.2 million in cash from the Joint Venture, as concurrent with the
transaction, the principal amount of The PrivateBank loan cross-collateralized by four of the JV 2 Properties reduced the Front Royal Loan by $715,000. Under
the LLC Agreement, as a result of these contributions and cash distributions, the Operating Partnership and Best Years own a 10% and 90% equity interest in the
Joint Venture, respectively.
Under the LLC Agreement, net operating cash flow of the Joint Venture will be distributed quarterly first to the Operating Partnership and Best Years pari passu
up to a 10% annual return, and thereafter to Best Years 75% and the Operating Partnership 25%. All capital proceeds (from the sale of the JV 2 Properties,
refinancing, or other capital event) will be paid first to the Operating Partnership and Best Years pari passu until each has received an amount equal to its accrued
but unpaid 10% return plus its total contribution, and thereafter to Best Years 75% and the Operating Partnership 25%.
As part of the Joint Venture, we formed Summit Healthcare Asset Management, LLC (the “Management Company”) as a wholly-owned taxable REIT subsidiary
(TRS). Under the LLC Agreement, Best Years paid the Management Company a one-time acquisition fee equal to 1% of the original purchase price paid for the
JV 2 Properties, and the Joint Venture will pay the Management Company annual asset management fees equal to .25% of the original purchase price paid for the
JV 2 Properties.
As a result of the Joint Venture, the JV 2 Properties will no longer be consolidated in the Company’s consolidated financial results, commencing April 30, 2015.
The Joint Venture will be accounted for under the equity method in the Company’s consolidated financial statements. As the JV 2 properties do not quality as
held for sale, they will continue to be recorded as held and used until April 30, 2015 and not be reported as discontinued operations for the period ended March
31, 2015.
For additional information on the Joint Venture, see the Company’s Form 8-K filed on May 1, 2015.

17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with our unaudited
consolidated financial statements and notes thereto contained elsewhere in this report. This section contains forward-looking statements, including estimates,
projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based.
These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations
and assumptions that are subject to numerous risks and uncertainties which may cause actual results to differ materially from the forward-looking statements.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements should be read in light of the
risks identified in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2014 filed with the U.S. Securities and Exchange
Commission (the “SEC”) on March 20, 2015.
Overview
We were founded in October 2004 to invest and own commercial real estate. As of November 23, 2010 after raising $167.1 million of gross proceeds from the
sale of 20.9 million shares of our common stock, we stopped selling shares of our common stock.
We believe that becoming self-managed as of April 1, 2014 has provided us numerous intermediate and long term benefits, despite certain non-recurring
transition costs, and will allow us to realize increased funds from operations (“FFO”) and net asset value (“NAV”) in a shorter period of time than if we had
remained externally managed.
Our revenues, which are comprised largely of rental income, including rents reported on a straight-line basis over the initial term of each lease, and fees earned
for resident care from Friendship Haven (see Note 4 to the accompanying Notes to Condensed Consolidated Financial Statements). Our growth depends, in part,
on our ability to acquire new healthcare properties at attractive prices, increase rental income from leases by increasing rental rates and by controlling our
expenses. Our operations are impacted by property-specific, market-specific, general economic and other conditions.
Strategic Repositioning - In 2013, we completed phase one of our transition strategy by disposing of our industrial real estate. The second phase of our transition
strategy is to acquire healthcare real estate assets, which commenced mid-2012 and will continue going forward. The third phase of our transition strategy will be
to grow our Company primarily by attracting and securing third party equity. Investing in healthcare real estate assets, more specifically senior housing facilities,
is believed to be accretive to earnings and potentially stockholder value. Senior housing facilities include independent living facilities (“IL”), skilled-nursing
facilities (“SNF”), assisted living facilities (“AL”), memory care (“MC”) and continuing care retirement communities (“CCRC”). Each of these caters to different
segments of the senior population. The Company’s repositioning strategy includes purchasing SNF, AL, IL and MC facilities.
We may acquire additional properties through joint venture investments in the future, or sell a percentage of our existing properties to a joint venture partner,
which may result in the deconsolidation of properties we already own. We anticipate acquiring properties through joint ventures in order to diversify our portfolio
of properties in terms of geographic region, facility type and operator, among other reasons. Joint ventures typically also allow us to acquire an interest in a
property without requiring that we fund the entire equity portion of the purchase price. In addition, certain properties may be available to us only through joint
ventures. In determining whether to recommend a particular joint venture, management will evaluate the structure of the joint venture, the real property that such
joint venture owns or is being formed to own under the same criteria. We may form additional entities in conjunction with joint ventures. These entities may
employ debt financing consistent with our borrowing policies. Our joint ventures may take the form of equity joint ventures with one or more large institutional
partners. They may also include ventures with developers who contribute land, development services and expertise rather than cash.

18

Portfolio
At March 31, 2015, we own 17 healthcare facilities, located in seven states. The following tables summarize our investments in real estate as of March 31, 2015:
Real Estate Properties:
Properties
SNF or SNF/IL
AL or AL/MC
IL
Total Real Estate Properties

Property
Sheridan Care Center
Fern Hill Care Center
Farmington Square
Friendship Haven Healthcare and
Rehabilitation Center
Pacific Health and Rehabilitation Center
Danby House
Brookstone of Aledo
The Shelby House
The Hamlet House
The Carteret House
Sundial Assisted Living
Lamar Estates
Monte Vista Estates
Myrtle Point Care Center
Gateway Care and Retirement Center
Applewood Retirement Community
Loving Arms Assisted Living
Total

Square
Footage

Beds
8
8
1
17

602
582
69
1,253

Type

202,428
268,887
45,563
516,878

Location

Date Purchased

Sheridan, OR
Portland, OR
Medford, OR
Galveston
County TX
Tigard, OR
Winston-Salem, NC
Aledo, IL
Shelby, NC
Hamlet, NC
Newport, NC
Redding, CA
Lamar, CO
Monte Vista CO
Myrtle Point, OR
Portland, OR
Salem, OR
Front Royal, VA

August 3, 2012
August 3, 2012
September 14, 2012

SNF
SNF
AL/MC

51
63
71

September 14, 2012
December 24, 2012
January 31, 2013
July 2, 2013
October 4, 2013
October 4, 2013
October 4, 2013
December 18, 2013
September 22, 2014
September 22, 2014
October 31, 2014
December 31, 2014
December 31, 2014
January 23, 2015

SNF
SNF
AL/MC
AL
AL
AL
AL
AL
SNF
SNF
SNF
SNF/IL
IL
AL

150
73
100
66
72
60
64
65
60
60
54
91
69
84
1,253

Purchase
Price
$

$

Q1 2015
Revenue1

Beds

1

Represents Q1 2015 revenue based on in-place leases.

2

Represents Q1 2015 rent due under a lease between the Company and a wholly-owned taxable REIT subsidiary (“Friendswood TRS”).

55,040,000
59,925,000
2,900,000
117,865,000

$

108,000
115,000
202,000
180,0002
213,000
226,000
166,000
98,000
141,000
93,000
81,000
113,000
85,000
104,000
281,000
47,000
223,000

Critical Accounting Policies
There have been no material changes to our critical accounting policies as previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2014 as filed with the SEC on March 20, 2015.

19

Results of Operations
Our results of operations for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 were significantly impacted as
described below:
Three Months Ended
March 31,
2015
2014
Rental revenues, tenant
reimbursements & other income
Resident services and fee income
Total revenues
Less expenses:
Property operating costs
Resident services costs
Net operating income (1)
Interest income from notes receivable
General and administrative
Asset management fees and expenses
Real estate acquisition costs
Depreciation and amortization
Reserve for excess advisor obligation
Interest and other expense and income
Loss from continuing operations
Loss from discontinued operations
Net loss
Noncontrolling interests’ share in losses
Net loss applicable to common stockholders

$

$

2,983,000
2,243,000
5,226,000

$

(575,000)
(1,737,000)
2,914,000
2,000
(944,000)
—
—
(1,245,000)
—
(1,081,000)
(354,000)
(1,582,000)
(1,936,000)
(37,000)
(1,973,000) $

1,938,000
—
1,938,000

$ Change
$

(348,000)
—
1,590,000
4,000
(670,000)
(205,000)
(4,000)
(1,238,000)
(189,000)
(707,000)
(1,419,000)
(165,000)
(1,584,000)
345,000
(1,239,000) $

1,045,000
2,243,000
3,288,000
(227,000)
(1,737,000)
1,324,000
(2,000)
(274,000)
205,000
4,000
(7,000)
189,000
(374,000)
1,065,000
(1,417,000)
(352,000)
(382,000)
(734,000)

(1) Net operating income (“NOI”) is a non-GAAP supplemental measure used to evaluate the operating performance of real estate properties. We define
NOI as total rental revenues, resident service and fee income, tenant reimbursements and other income less property operating and resident services
costs. NOI excludes interest income from notes receivable, general and administrative expense, asset management fees and expenses, real estate
acquisition costs, depreciation and amortization, interest income, interest expense, and income from discontinued operations. We believe NOI provides
investors relevant and useful information because it measures the operating performance of the REIT’s real estate at the property level on an unleveraged
basis. We use NOI to make decisions about resource allocations and to assess and compare property-level performance. We believe that net income
(loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net
income (loss) as defined by GAAP since it does not reflect the aforementioned excluded items. Additionally, NOI as we define it may not be comparable
to NOI as defined by other REITs or companies, as they may use different methodologies for calculating NOI.
Total rental revenue for our healthcare properties includes rental revenues and tenant paid and/or reimbursements for property taxes and insurance. Property
operating expenses include insurance, property taxes and other operating expenses. Resident services and fee income and resident services costs are generated
from Friendswood TRS, which began operations on May 1, 2014. Net operating income increased to approximately $2.9 million for the three month ended
March 31, 2015 from $1.6 million for the three months ended March 31, 2014, an increase of approximately $1.3 million. Approximately $1.0 million of the
increase is due to the revenue derived from our 2015 healthcare acquisition and owning the 2014 acquisitions purchased in the third and fourth quarters of 2014
and for the full period in 2015.
General and administrative expense was $0.9 million for the three months ended March 31, 2015 and $0.7 million for the three months ended March 31, 2014.
The increase was primarily due to increases in employee payroll expenses of $0.4 million, offset by lower advisor fees of $0.2 million due to the termination of
the Advisory Agreement in April 2014.

20

There were no asset management fees for the three months ended March 31, 2015 and $0.2 million for the three months ended March 31, 2014. Asset
management fee and expense decreases are due to the termination of the Advisory Agreement in April 2014.
Depreciation and amortization increased by approximately $0.4 million for the first quarter of 2015 due to the timing of our 2014 property acquisitions. We
owned 17 healthcare properties for the first quarter of 2015 as opposed to 11 properties in the first quarter of 2014. Additionally, in the first quarter of 2014, we
recorded approximately $0.4 million in amortization expense for Friendship Haven’s leasing commission that was accelerated due to the lease termination on
March 16, 2014, and as such the total increase in depreciation and amortization was $7,000.
Reserve for excess advisor obligation represents organizational and offering costs incurred in excess of the 3.5% limitation of the gross proceeds from our followon offering which terminated on June 10, 2012 (see Note 7 to the accompanying Notes to Condensed Consolidated Financial Statements). The Advisory
Agreement provided that CRA would reimburse any excess costs that were paid by us. In 2012, we recorded a receivable for the excess of $1.0 million which we
fully reserved for based on our evaluation of CRA’s ability to repay at that time. In March 2014, we increased our reserve by $0.2 million for additional excess
operating expenses paid to CRA in prior periods.
Interest, other expense and income increases in 2015 are primarily due to the increase in interest expense on our new loans payable for properties acquired at the
end of 2014 and for Front Royal acquired in the first quarter of 2015.
The loss from discontinued operations represents the Sherburne Commons activities in 2014. On January 7, 2015, we sold Sherburne Commons (see Note 10 to
the accompanying Notes to Condensed Consolidated Financial Statements) and recorded a loss on disposition of $1.6 million.
Liquidity and Capital Resources
As of March 31, 2015, we had approximately $1.5 million in cash and cash equivalents on hand and as of May 12, 2015, we had approximately $10.9 million in
cash and cash equivalents on hand. Based on current conditions and the $9.2 million proceeds from the Joint Venture with Best Years received in April 2015 (see
Note 11 to the accompanying Notes to Condensed Consolidated Financial Statements), we believe that we have sufficient capital resources for the next twelve
months.
Going forward, we expect our primary sources of cash to be rental revenues, tenant reimbursements, joint venture equity, asset management fees, and refinancing
of existing debt. In addition, we may increase cash through the sale of additional properties, which may result in the deconsolidation of properties we already
own, or borrowing against currently-owned properties. For the foreseeable future, we expect our primary uses of cash to be for the repayment of principal on
loans payable, funding future acquisitions, operating expenses, and interest expense on outstanding indebtedness. We may also incur expenditures for renovations
of our existing properties, such as increasing the size of the properties by developing additional rentable square feet and/or making the space more appealing.
We continue to pursue options for repaying and/or refinancing debt obligations with long-term, fixed rate HUD-insured loans. We believe that conditions may be
acceptable to continue to raise capital through additional joint venture arrangements with either our existing joint venture partner or new partners, although there
can be no assurances that any such transactions will have terms acceptable to us or will be consummated.
Our Funds from Operations (“FFO”) have increased considerably over the past year primarily due to increased rental revenue from our acquisitions and reduced
expenses resulting from the termination of the Advisory Agreement and transition to self-management. FFO for the three months ended March 31, 2015 and 2014
were $878,000 and ($45,000), respectively.
Our liquidity will increase if cash from operations exceeds expenses, we receive net proceeds from the sale of whole or partial interest in a property or properties
or if refinancing results in excess loan proceeds, or decrease as proceeds are expended in connection with the acquisitions and operation of properties. Our ability
to repay or refinance debt could be adversely affected by an inability to secure financing at reasonable terms, if at all.
Credit Facilities and Loan Agreements
As of March 31, 2015, we had debt obligations of approximately $90.0 million. The outstanding balance by lender is as follows:
•
•
•
•

The PrivateBank and Trust Company – approximately $27.8 million maturing January 2016 through September 2017,
GE Capital – approximately $25.6 million maturing September 2017 through July 2018,
Lancaster Pollard (HUD) – approximately $24.0 million maturing from September 2039 through September 2049 and
Lancaster Pollard (HUD) – approximately $12.6 million maturing December 2049

21

Distributions
None during the three months ended March 31, 2015.
Funds from Operations
FFO is a non-GAAP supplemental financial measure that is widely recognized as a measure of REIT operating performance. We compute FFO in accordance
with the definition outlined by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss), computed in
accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains or losses from sales of property, plus depreciation, amortization and
impairments on real estate assets, and after adjustments for unconsolidated partnerships, joint ventures, noncontrolling interests and subsidiaries.
Our FFO may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret
the current NAREIT definition differently than we do. We believe that FFO is helpful to investors and our management as a measure of operating performance
because it excludes depreciation and amortization, gains and losses from property dispositions, and extraordinary items, and as a result, when compared period to
period, reflects the impact on operations from trends in occupancy rates, rental rates, operating costs, development activities, general and administrative expenses,
and interest costs, which is not immediately apparent from net income. Historical cost accounting for real estate assets in accordance with GAAP implicitly
assumes that the value of real estate 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 alone to be
insufficient. As a result, our management believes that the use of FFO, together with the required GAAP presentations, provide a more complete understanding of
our performance. Factors that impact FFO include start-up costs, fixed costs, delays in buying assets, lower yields on cash held in accounts pending investment,
income from portfolio properties and other portfolio assets, interest rates on acquisition financing and operating expenses. FFO should not be considered as an
alternative to net income (loss), as an indication of our performance, nor is it indicative of funds available to fund our cash needs, including our ability to make
distributions.
The following is reconciliation from net loss applicable to common shares, the most direct comparable financial measure calculated and presented with GAAP, to
FFO for the three months ended March 31, 2015 and 2014:
Three months ended
March 31,
2015
2014
Net loss applicable to common stockholders (GAAP)
Adjustments:
Depreciation and amortization of real estate assets:
Continuing operations
Loss on disposition of VIE
Noncontrolling interests’ share in losses
Noncontrolling interests’ share in FFO
Funds provided by (used in) operations (FFO) applicable to common shares
Weighted-average number of common shares
outstanding - basic and diluted
FFO per weighted average common shares

22

$

$

$

(1,973,000) $
1,245,000
1,582,000
37,000
(13,000)
878,000
23,028,014
0.04

(1,239,000)
1,238,000
(345,000)
301,000
(45,000)

$

23,028,285
(0.00)

Subsequent Events
See Note 11 to the accompanying Notes to Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) that are designed to
ensure that information required to be disclosed in the reports we file or submit under the Securities and Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our
senior management, including our President (Principal Executive Officer) and our Chief Financial Officer (Principal Financial Officer), to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Our President (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) evaluated the effectiveness of our
disclosure controls and procedures and concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
There have been no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
On April 1, 2014, CRA and Cornerstone Ventures, Inc. filed a complaint in the Superior Court of California for the County of Orange-Central Justice Center,
Case No. 30-2014-00714004-CU-BT-CJC, naming the Company, its directors and two of its officers as defendants, seeking declaratory and injunctive relief and
compensatory and punitive damages. On April 17, 2014, Judge Nakamura denied in its entirety plaintiffs’ ex parte application for a temporary restraining order to
show cause why a preliminary injunction against the defendants should not issue. On May 19, 2014, the Company filed a counter claim against plaintiffs and
certain individuals affiliated with CRA and affiliated entities. The Company continues to believe that all of plaintiffs’ claims are without merit and will continue
to vigorously defend itself. Plaintiffs and defendants are conducting discovery.
Item 1A. Risk Factors
Not applicable.

23

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) We did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, during the periods covered by this Form 10-Q.
(b) Not applicable.
(c) During the three months ended March 31, 2015, we redeemed no shares pursuant to our stock repurchase program.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
Ex.

Description

3.1

Amendment and Restatement of Articles of Incorporation (incorporated by reference to Exhibit 3.2 to the Registrant’s Annual Report on Form
10-K filed on March 24, 2006).

3.2

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 1 to the Registration Statement on
Form S-11 (No. 333-121238) filed on December 23, 2005).

3.3

Articles of Amendment of Cornerstone Core Properties REIT, Inc. dated October 16, 2013 (incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed on October 22, 2013).

3.4

Second Articles of Amendment and Restatement of Articles of Incorporation of Cornerstone Core Properties REIT, Inc. dated June 30, 2010
(incorporated by reference to Exhibit 3.4 to the Registrant’s Annual Report on Form 10-K filed on March 20, 2015).

4.1

Subscription Agreement (incorporated by reference to Appendix A to the prospectus included on Post-Effective Amendment No. 2 to the
Registration Statement on Form S-11 (No. 333-155640) filed on April 16, 2010 (“Post-Effective Amendment No. 2”)).

4.2

Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and
without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to the Registration Statement on
Form S-11 (No. 333-121238) filed on December 14, 2004).

4.3

Amended and Restated Distribution Reinvestment Plan (incorporated by reference to Appendix B to the prospectus dated April 16, 2010
included on Post-Effective Amendment No. 2).

10.1

Purchase and Sale Agreement among Summit Healthcare REIT, Inc. and Applewood Holding Company, LLC and Bremerton Assisted Living,
LLC dated as of October 20, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 7,
2015).

24

10.2

Loan Agreement by and among General Electric Capital Corporation and HP Redding, LLC, Summit Salem, LLC, and Summit Portland, LLC
dated as of December 31, 2014 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on January 7,
2015).

10.3

Purchase and Sale Agreement between Cornerstone Operating Partnership, L.P. and The Residences at Sherburne Commons, Inc. dated as of
November 4, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 13, 2015).

10.4

Assignment of Bid and Assumption from Cornerstone Operating Partnership, L.P. to The Residences at Sherburne Commons, Inc. dated as of
December 15, 2014 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on January 13, 2015).

10.5

Promissory Note (with Incentive Participation) with The Residences at Sherburne Commons, Inc. as issuer to Cornerstone Operating
Partnership, L.P. dated as of December 31, 2014 (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed
on January 13, 2015).

10.6

Second Amendment to the Loan Agreement among The PrivateBank and Trust Company and Summit Monte Vista, LLC, Summit Lamar, LLC,
Summit Myrtle Point, LLC and Summit Front Royal, LLC dated January 23, 2015 (incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed on January 29, 2015).

10.7

Limited Liability Company Agreement of Summit Union Life Holdings, LLC between Summit Healthcare Operating Partnership, LP and Best
Years, LLC dated as of April 7, 2015. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 1,
2015).

10.8

Assignment and Assumption of Limited Liability Company Membership Interests made by Summit Healthcare Operating Partnership, LP and
Summit Union Life Holdings, LLC dated as of April 28, 2015 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K filed on May 1, 2015).

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

Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of
the Sarbanes-Oxley Act of 2002.

101.1

The following information from the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2015, formatted in XBRL
(eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Operations;
(iii) Condensed Consolidated Statements of Cash Flows.

25

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed
on its behalf by the undersigned, thereunto duly authorized this 14th day of May 2015.
SUMMIT HEALTHCARE REIT, INC.
By:/s/ Kent Eikanas
Kent Eikanas
President
(Principal Executive Officer)
By:/s/ Elizabeth A. Pagliarini
Elizabeth A. Pagliarini
Chief Financial Officer
(Principal Financial Officer )

26

Exhibit 31.1
CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER
I, Kent Eikanas, certify that:
1.

I have reviewed this quarterly report on Form 10-Q of Summit Healthcare REIT, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:

5.

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)

all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.

Date: May 14, 2015

/S/ Kent Eikanas
Kent Eikanas
President
(Principal Executive Officer)

Exhibit 31.2
CERTIFICATIONS OF PRINCIPAL FINANCIAL OFFICER
I, Elizabeth A. Pagliarini, certify that:
1.

I have reviewed this quarterly report on Form 10-Q of Summit Healthcare REIT, Inc.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:

5.

(a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)

all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.

Date: May 14, 2015

/s/ Elizabeth A. Pagliarini
Elizabeth A. Pagliarini
Chief Financial Officer
(Principal Financial Officer)

Exhibit 32
CERTIFICATIONS PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Kent Eikanas and Elizabeth A. Pagliarini, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of their knowledge, the Quarterly Report of Summit Healthcare REIT, Inc. on Form 10-Q for the three-month period ended March
31, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q
fairly presents in all material respects the financial condition and results of operations of Summit Healthcare REIT, Inc.

Date: May 14, 2015

Kent Eikanas
Kent Eikanas
President
(Principal Executive Officer)

Date: May 14, 2015

/s/ Elizabeth A. Pagliarini
Elizabeth A. Pagliarini
Chief Financial Officer
(Principal Financial Officer)



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