Pacific Oak Strategic Opportunity REIT, Inc. - Quarter Report: 2016 September (Form 10-Q)

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Non-Accelerated Filer

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Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________________________________

FORM 10-Q

______________________________________________________

(Mark One)



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

For the quarterly period ended September 30, 2016



¨	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 000-54382

______________________________________________________

KBS STRATEGIC OPPORTUNITY REIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

______________________________________________________



Maryland		26-3842535
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
800 Newport Center Drive, Suite 700 Newport Beach, California		92660
(Address of Principal Executive Offices)		(Zip Code)

(949) 417-6500

(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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of November 4, 2016, there were 57,039,883 outstanding shares of common stock of KBS Strategic Opportunity REIT, Inc.

Table of Contents

KBS STRATEGIC OPPORTUNITY REIT, INC.

FORM 10-Q

September 30, 2016

INDEX



PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	2
		Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2016 and 2015	3
		Consolidated Statements of Equity for the Year Ended December 31, 2015 and the Nine Months Ended September 30, 2016 (unaudited)	4
		Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2016 and 2015	5
		Condensed Notes to Consolidated Financial Statements as of September 30, 2016 (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
	Item 4.	Controls and Procedures	44
PART II.	OTHER INFORMATION		45
	Item 1.	Legal Proceedings	45
	Item 1A.	Risk Factors	45
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45
	Item 3.	Defaults upon Senior Securities	46
	Item 4.	Mine Safety Disclosures	46
	Item 5.	Other Information	46
	Item 6.	Exhibits	47
SIGNATURES			48

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)



	September 30, 2016			December 31, 2015
	(unaudited)
Assets
Real estate held for investment, net	$	1,109,425		$	822,514
Real estate loan receivable, net	—			27,850
Total real estate and real estate-related investments, net	1,109,425			850,364
Cash and cash equivalents	41,596			23,058
Restricted cash	21,436			5,807
Investments in unconsolidated joint ventures	76,118			74,437
Rents and other receivables, net	28,228			24,487
Above-market leases, net	733			1,038
Prepaid expenses and other assets	28,554			25,023
Total assets	$	1,306,090		$	1,004,214
Liabilities and equity
Notes and bonds payable, net	$	936,332		$	547,323
Accounts payable and accrued liabilities	22,768			17,543
Due to affiliate	51			59
Below-market leases, net	7,606			2,735
Other liabilities	14,596			17,905
Total liabilities	981,353			585,565
Commitments and contingencies (Note 13)
Redeemable common stock	16,639			9,859
Equity
KBS Strategic Opportunity REIT, Inc. stockholders’ equity
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 57,050,299 and 58,696,115 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	571			587
Additional paid-in capital	455,378			504,303
Cumulative distributions and net losses	(149,799		)	(111,527		)
Total KBS Strategic Opportunity REIT, Inc. stockholders’ equity	306,150			393,363
Noncontrolling interests	1,948			15,427
Total equity	308,098			408,790
Total liabilities and equity	$	1,306,090		$	1,004,214

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues:
Rental income	$	29,229		$	22,337		$	76,646		$	66,315
Tenant reimbursements	5,902			4,940			15,484			13,991
Interest income from real estate loan receivable	—			—			3,655			1,968
Other operating income	1,002			881			2,580			2,495
Total revenues	36,133			28,158			98,365			84,769
Expenses:
Operating, maintenance, and management	10,932			9,930			29,755			27,855
Real estate taxes and insurance	4,516			3,940			12,419			11,439
Asset management fees to affiliate	2,639			2,112			6,932			6,242
Real estate acquisition fees to affiliate	1,690			—			2,964			—
Real estate acquisition fees and expenses	274			—			542			—
General and administrative expenses	1,337			892			4,172			2,624
Foreign currency transaction loss, net	6,639			—			4,602			—
Depreciation and amortization	14,337			11,297			37,436			33,684
Interest expense	7,992			3,524			20,354			11,292
Total expenses	50,356			31,695			119,176			93,136
Other income (loss):
Other interest income	7			7			22			21
Other income	—			195			—			5,084
Equity in (loss) income of unconsolidated joint venture	(791		)	150			(1,139		)	(186		)
Gain on sale of real estate, net	—			2,908			—			11,195
Total other (loss) income	(784		)	3,260			(1,117		)	16,114
Net (loss) income	(15,007		)	(277		)	(21,928		)	7,747
Net loss (income) attributable to noncontrolling interests	56			(185		)	124			(4,448		)
Net (loss) income attributable to common stockholders	$	(14,951	)	$	(462	)	$	(21,804	)	$	3,299
Net (loss) income per common share, basic and diluted	$	(0.25	)	$	(0.01	)	$	(0.37	)	$	0.05
Weighted-average number of common shares outstanding, basic and diluted	58,642,752			59,729,415			58,676,546			59,986,122

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF EQUITY

For the Year Ended December 31, 2015 and the Nine Months Ended September 30, 2016 (unaudited)

(dollars in thousands)



						Additional Paid-in Capital			Cumulative Distributions and Net Losses			Total Stockholders’ Equity			Noncontrolling Interests			Total Equity
	Common Stock
	Shares		Amounts
Balance, December 31, 2014	60,044,329		$	600		$	524,489		$	(91,691	)	$	433,398		$	16,738		$	450,136
Net income	—		—			—			2,444			2,444			4,688			7,132
Issuance of common stock	1,114,532		11			13,562			—			13,573			—			13,573
Transfers to redeemable common stock	—		—			(3,663		)	—			(3,663		)	—			(3,663		)
Redemptions of common stock	(2,462,746	)	(24		)	(30,076		)	—			(30,100		)	—			(30,100		)
Distributions declared	—		—			—			(22,280		)	(22,280		)	—			(22,280		)
Other offering costs	—		—			(9		)	—			(9		)	—			(9		)
Noncontrolling interests contributions	—		—			—			—			—			1,343			1,343
Distributions to noncontrolling interests	—		—			—			—			—			(7,342		)	(7,342		)
Balance, December 31, 2015	58,696,115		$	587		$	504,303		$	(111,527	)	$	393,363		$	15,427		$	408,790
Net loss	—		—			—			(21,804		)	(21,804		)	(124		)	(21,928		)
Issuance of common stock	708,327		7			9,513			—			9,520			—			9,520
Transfers to redeemable common stock	—		—			(3,065		)	—			(3,065		)	—			(3,065		)
Redemptions of common stock	(2,354,143	)	(23		)	(31,431		)	—			(31,454		)	—			(31,454		)
Distributions declared	—		—			—			(16,468		)	(16,468		)	—			(16,468		)
Acquisitions of noncontrolling interests	—		—			(23,942		)	—			(23,942		)	(14,044		)	(37,986		)
Noncontrolling interests contributions	—		—			—			—			—			769			769
Distributions to noncontrolling interests	—		—			—			—			—			(80		)	(80		)
Balance, September 30, 2016	57,050,299		$	571		$	455,378		$	(149,799	)	$	306,150		$	1,948		$	308,098

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



	Nine Months Ended September 30,
	2016			2015
Cash Flows from Operating Activities:
Net (loss) income	$	(21,928	)	$	7,747
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Loss due to property damages	2,017			2,260
Equity in loss of unconsolidated joint venture	1,139			186
Depreciation and amortization	37,436			33,684
Non-cash interest income on real estate-related investments	—			(428		)
Gain on sale of real estate, net	—			(11,195		)
Other income	—			(5,084		)
Deferred rent	(2,020		)	(3,708		)
Bad debt expense	488			323
Amortization of above- and below-market leases, net	(1,375		)	(601		)
Amortization of deferred financing costs	2,908			2,118
Amortization of discount on bonds and notes payable, net	28			18
Foreign currency transaction loss, net	4,602			—
Changes in assets and liabilities:
Restricted cash for operational expenditures	(958		)	1,508
Rents and other receivables	(2,656		)	(1,021		)
Prepaid expenses and other assets	(7,255		)	(5,957		)
Accounts payable and accrued liabilities	3,950			1,732
Due to affiliates	(8		)	1
Other liabilities	2,700			201
Net cash provided by operating activities	19,068			21,784
Cash Flows from Investing Activities:
Acquisition of real estate	(293,831		)	—
Improvements to real estate	(21,466		)	(24,209		)
Proceeds from sales of real estate, net	—			25,045
Proceeds from condemnation agreements	—			5,914
Principal proceeds from assignment of real estate loan receivable	27,850			—
Insurance proceeds received for property damages	256			294
Investment in unconsolidated joint venture	(2,820		)	(2,760		)
Restricted cash for capital expenditures	(7,752		)	—
Funding of restricted cash for development obligations	(2,575		)	(4,643		)
Net cash used in investing activities	(300,338		)	(359		)
Cash Flows from Financing Activities:
Proceeds from notes and bonds payable	462,178			51,182
Principal payments on notes and bonds payable	(74,707		)	(30,314		)
Payments of deferred financing costs	(10,641		)	(297		)
Restricted cash for debt service obligations	(5,345		)	—
Payments to redeem common stock	(31,454		)	(24,025		)
Distributions paid	(6,948		)	(6,483		)
Noncontrolling interests contributions	769			751
Distributions to noncontrolling interests	(80		)	(5,971		)
Acquisitions of noncontrolling interests	(37,986		)	—
Payments of other offering costs	(168		)	—
Other financing proceeds, net	693			—
Net cash provided by (used in) financing activities	296,311			(15,157		)
Effect of exchange rate changes on cash and cash equivalents	3,497			—
Net increase in cash and cash equivalents	18,538			6,268
Cash and cash equivalents, beginning of period	23,058			19,093
Cash and cash equivalents, end of period	$	41,596		$	25,361
Supplemental Disclosure of Cash Flow Information:
Interest paid, net of capitalized interest of $1,478 and $1,476 for the nine months ended September 30, 2016 and 2015, respectively	$	16,146		$	9,261
Supplemental Disclosure of Noncash Investing and Financing Activities:
Decrease in restricted cash in connection with development obligations	$	(2,726	)	$	—
Increase in accrued improvements to real estate	$	1,686		$	—
Increase in development obligations	$	—		$	4,643
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	9,520		$	10,269
Increase in restricted cash related to insurance proceeds	$	1,511		$	—

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)


1.	ORGANIZATION

KBS Strategic Opportunity REIT, Inc. (the “Company”) was formed on October 8, 2008 as a Maryland corporation and elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010. The Company conducts its business primarily through KBS Strategic Opportunity (BVI) Holdings, Ltd. (“KBS Strategic Opportunity BVI”), a private company limited by shares according to the British Virgin Islands Business Companies Act, 2004, which was incorporated on December 18, 2015 and is authorized to issue a maximum of 50,000 common shares with no par value. Upon incorporation, KBS Strategic Opportunity BVI issued one certificate containing 10,000 common shares with no par value to KBS Strategic Opportunity Limited Partnership (the “Operating Partnership”), a Delaware limited partnership formed on December 10, 2008. The Company is the sole general partner of, and owns a 0.1% partnership interest in the Operating Partnership. KBS Strategic Opportunity Holdings LLC (“REIT Holdings”), a Delaware limited liability company formed on December 9, 2008, owns the remaining 99.9% interest in the Operating Partnership and is its sole limited partner. The Company is the sole member and manager of REIT Holdings.

Subject to certain restrictions and limitations, the business of the Company is externally managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on October 8, 2016 (the “Advisory Agreement”). The Advisor conducts the Company’s operations and manages its portfolio of real estate. The Advisor owns 20,000 shares of the Company’s common stock.

On January 8, 2009, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public (the “Offering”), of which 100,000,000 shares were registered in a primary offering and 40,000,000 shares were registered to be sold under the Company’s dividend reinvestment plan. The SEC declared the Company’s registration statement effective on November 20, 2009. The Company ceased offering shares of common stock in its primary offering on November 14, 2012 and continues to offer shares under its dividend reinvestment plan.

The Company sold 56,584,976 shares of common stock in its primary offering for gross offering proceeds of $561.7 million. As of September 30, 2016, the Company had sold 5,804,835 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $62.3 million. Also, as of September 30, 2016, the Company had redeemed 5,635,755 shares sold in the Offering for $69.9 million. Additionally, on December 29, 2011 and October 23, 2012, the Company issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933.

On March 2, 2016, KBS Strategic Opportunity BVI filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $259.0 million as of September 30, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%. KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.

In connection with the above-referenced offering, on March 8, 2016, the Operating Partnership assigned to KBS Strategic Opportunity BVI all of its interests in the subsidiaries through which the Company indirectly owns all of its real estate and real estate-related investments. The Operating Partnership owns all of the issued and outstanding equity of KBS Strategic Opportunity BVI. As a result of these transactions, the Company now holds all of its real estate and real estate-related investments indirectly through KBS Strategic Opportunity BVI.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2015, except for the addition of accounting policies with respect to foreign currency transactions and derivative instruments. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the SEC.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements and condensed notes thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

The consolidated financial statements include the accounts of the Company, REIT Holdings, the Operating Partnership, KBS Strategic Opportunity BVI and their direct and indirect wholly owned subsidiaries, and joint ventures in which the Company has a controlling interest. All significant intercompany balances and transactions are eliminated in consolidation.

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.

Foreign Currency Transactions

The U.S. dollar is the Company’s functional currency. Transactions denominated in currency other than the Company’s functional currency are recorded upon initial recognition at the exchange rate on the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are remeasured at each reporting date into the foreign currency at the exchange rate on that date. Exchange rate differences, other than those accounted for as hedging transactions, are recognized as foreign currency transaction gain or loss included in the Company’s consolidated statements of operations.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

Derivative Instruments

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates on its variable rate notes payable and enters into derivative instruments such as cross currency swaps, forward contracts, puts or calls for risk management purposes to hedge its exposure to variability in foreign currency exchange rates of the Israeli new Shekel versus the U.S. dollar. The Company records these derivative instruments at fair value on the accompanying consolidated balance sheets. Derivative instruments 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. The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) on the accompanying consolidated statements of comprehensive income (loss) and consolidated statements of stockholders’ equity. The changes in fair value for derivative instruments that are not designated as a hedge or that do not meet the hedge accounting criteria are recorded as gain or loss on derivative instruments and included in earnings in the accompanying consolidated statements of operations.

Reclassifications

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of the prior period.

Segments

The Company has invested in non-performing loans, opportunistic real estate and other real estate-related assets. In general, the Company intends to hold its investments in non-performing loans, opportunistic real estate and other real estate-related assets for capital appreciation. Traditional performance metrics of non-performing loans, opportunistic real estate and other real estate-related assets may not be meaningful as these investments are generally non-stabilized and do not provide a consistent stream of interest income or rental revenue. These investments exhibit similar long-term financial performance and have similar economic characteristics. These investments typically involve a higher degree of risk and do not provide a constant stream of ongoing cash flows. As a result, the Company’s management views non-performing loans, opportunistic real estate and other real estate-related assets as similar investments. Substantially all of its revenue and net income (loss) is from non-performing loans, opportunistic real estate and other real estate-related assets, and therefore, the Company currently aggregates its operating segments into one reportable business segment.

Per Share Data

Basic net income (loss) per share of common stock is calculated by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three and nine months ended September 30, 2016 and 2015.

Distributions declared per share were $0.094 and $0.280 during the three and nine months ended September 30, 2016 and $0.095 and $0.280 during the three and nine months ended September 30, 2015, respectively.

Square Footage, Occupancy and Other Measures

Any references to square footage, occupancy or annualized base rent are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the Company’s financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

Recently Issued Accounting Standards Updates

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 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 was to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU No. 2015-14”), which defers the effective date of ASU No. 2014-09 by one year. Early adoption is permitted but not before the original effective date. The Company is still evaluating the impact of adopting ASU No. 2014-09 on its financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”). The amendments in ASU No. 2014-15 require management to evaluate, for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued when applicable) and, if so, provide related disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect the adoption of ASU No. 2014-15 to have a significant impact on its financial statements.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU No. 2015-02”), which amended the existing accounting standards for consolidation under both the variable interest model and the voting model. ASU No. 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU No. 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments in ASU No. 2015-02 using: (a) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (b) by applying the amendments retrospectively. On January 1, 2016, the Company adopted ASU No. 2015-02 and re-evaluated its consolidation analysis of its joint ventures, concluding that such adoption did not result in (a) the classification of any entities as VIEs, (b) a consolidation of entities not previously consolidated or (c) a deconsolidation of entities previously consolidated.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU No. 2016-01”). The amendments in ASU No. 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments. ASU No. 2016-01 primarily affects accounting for equity investments and financial liabilities where the fair value option has been elected. ASU No. 2016-01 also requires entities to present financial assets and financial liabilities separately, grouped by measurement category and form of financial asset in the balance sheet or in the accompanying notes to the financial statements. ASU No. 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU No. 2016-01 to have a significant impact on its financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”). The amendments in ASU No. 2016-02 change 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 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU No. 2016-02 is permitted. The new leases standard 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. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU No. 2016-13”). ASU No. 2016-13 affects entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments in ASU No. 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. ASU No. 2016-13 also amends the impairment model for available-for-sale securities. An entity will recognize an allowance for credit losses on available-for-sale debt securities as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment, as is currently required. ASU No. 2016-13 also requires new disclosures. For financial assets measured at amortized cost, an entity will be required to disclose information about how it developed its allowance for credit losses, including changes in the factors that influenced management’s estimate of expected credit losses and the reasons for those changes. For financing receivables and net investments in leases measured at amortized cost, an entity will be required to further disaggregate the information it currently discloses about the credit quality of these assets by year of the asset’s origination for as many as five annual periods. For available for sale securities, an entity will be required to provide a roll-forward of the allowance for credit losses and an aging analysis for securities that are past due. ASU No. 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impact of adopting ASU No. 2016-13 on its financial statements, but does not expect the adoption of ASU No. 2016-13 to have a material impact on its financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments (“ASU No. 2016-15”). ASU No. 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The amendments in ASU No. 2016-15 provide guidance on eight specific cash flow issues, including the following that are or may be relevant to the Company: (a) Cash payments for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities; (b) Cash payments relating to contingent consideration made soon after an acquisition’s consummation date (i.e., approximately three months or less) should be classified as cash outflows for investing activities. Payments made thereafter should be classified as cash outflows for financing activities up to the amount of the original contingent consideration liability. Payments made in excess of the amount of the original contingent consideration liability should be classified as cash outflows for operating activities; (c) Cash payments received from the settlement of insurance claims should be classified on the basis of the nature of the loss (or each component loss, if an entity receives a lump-sum settlement); (d) Relating to distributions received from equity method investments, ASU No. 2016-15 provides an accounting policy election for classifying distributions received from equity method investments. Such amounts can be classified using a (1) cumulative earnings approach, or (2) nature of distribution approach. Under the cumulative earnings approach, an investor would compare the distributions received to its cumulative equity method earnings since inception. Any distributions received up to the amount of cumulative equity earnings would be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return of investment and classified in investing activities. Alternatively, an investor can choose to classify the distributions based on the nature of activities of the investee that generated the distribution. If the necessary information is subsequently not available for an investee to determine the nature of the activities, the entity should use the cumulative earnings approach for that investee and report a change in accounting principle on a retrospective basis; (e) In the absence of specific guidance, an entity should classify each separately identifiable cash source and use on the basis of the nature of the underlying cash flows. For cash flows with aspects of more than one class that cannot be separated, the classification should be based on the activity that is likely to be the predominant source or use of cash flow. ASU No. 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is still evaluating the impact of adopting ASU No. 2016-15 on its financial statements, but does not expect the adoption of ASU No. 2016-15 to have a material impact on its financial statements.


3.	REAL ESTATE HELD FOR INVESTMENT

As of September 30, 2016, the Company owned 11 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one office/flex/industrial portfolio consisting of 21 buildings and one retail property encompassing, in the aggregate, approximately 5.5 million rentable square feet. As of September 30, 2016, these properties were 87% occupied. In addition, the Company owned two apartment properties, containing 383 units and encompassing approximately 0.3 million rentable square feet, which were 90% occupied. The Company also owned two investments in undeveloped land encompassing an aggregate of 1,670 acres. The following table summarizes the Company’s real estate held for investment as of September 30, 2016 and December 31, 2015, respectively (in thousands):



	September 30, 2016			December 31, 2015
Land	$	321,226		$	223,201
Buildings and improvements	849,496			646,979
Tenant origination and absorption costs	52,297			43,894
Total real estate, cost	1,223,019			914,074
Accumulated depreciation and amortization	(113,594		)	(91,560		)
Total real estate, net	$	1,109,425		$	822,514

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

The following table provides summary information regarding the Company’s real estate held for investment as of September 30, 2016 (in thousands):



Property	Date Acquired or Foreclosed on	City	State	Property Type	Land		Building and Improvements		Tenant Origination and Absorption Costs		Total Real Estate at Cost		Accumulated Depreciation and Amortization			Total Real Estate, Net		Ownership %
Northridge Center I & II	03/25/2011	Atlanta	GA	Office	$	2,234	$	7,477	$	—	$	9,711	$	(2,309	)	$	7,402	100.0	%
Iron Point Business Park	06/21/2011	Folsom	CA	Office	2,671		19,629		—		22,300		(4,707		)	17,593		100.0	%
Richardson Portfolio:
Palisades Central I	11/23/2011	Richardson	TX	Office	1,037		10,268		657		11,962		(2,463		)	9,499		90.0	%
Palisades Central II	11/23/2011	Richardson	TX	Office	810		18,066		749		19,625		(4,806		)	14,819		90.0	%
Greenway I	11/23/2011	Richardson	TX	Office	561		2,287		—		2,848		(631		)	2,217		90.0	%
Greenway III	11/23/2011	Richardson	TX	Office	702		3,698		559		4,959		(1,399		)	3,560		90.0	%
Undeveloped Land	11/23/2011	Richardson	TX	Undeveloped Land	3,134		—		—		3,134		—			3,134		90.0	%
Total Richardson Portfolio					6,244		34,319		1,965		42,528		(9,299		)	33,229
Park Highlands ⁽¹⁾	12/30/2011	North Las Vegas	NV	Undeveloped Land	33,284		—		—		33,284		—			33,284		⁽¹⁾
Bellevue Technology Center	07/31/2012	Bellevue	WA	Office	25,506		56,647		3,813		85,966		(10,480		)	75,486		100.0	%
Powers Ferry Landing East	09/24/2012	Atlanta	GA	Office	1,643		8,016		99		9,758		(2,185		)	7,573		100.0	%
1800 West Loop	12/04/2012	Houston	TX	Office	8,360		60,546		5,079		73,985		(12,623		)	61,362		100.0	%
West Loop I & II	12/07/2012	Houston	TX	Office	7,300		31,535		1,864		40,699		(5,439		)	35,260		100.0	%
Burbank Collection	12/12/2012	Burbank	CA	Retail	4,175		10,229		725		15,129		(1,591		)	13,538		90.0	%
Austin Suburban Portfolio	03/28/2013	Austin	TX	Office	8,288		68,990		2,709		79,987		(11,239		)	68,748		100.0	%
Westmoor Center	06/12/2013	Westminster	CO	Office	10,058		65,240		5,671		80,969		(11,881		)	69,088		100.0	%
Central Building	07/10/2013	Seattle	WA	Office	7,015		26,942		1,914		35,871		(4,141		)	31,730		100.0	%
50 Congress Street	07/11/2013	Boston	MA	Office	9,876		41,090		2,439		53,405		(6,255		)	47,150		100.0	%
1180 Raymond	08/20/2013	Newark	NJ	Apartment	8,292		37,445		136		45,873		(3,730		)	42,143		100.0	%
Park Highlands II ⁽²⁾	12/10/2013	North Las Vegas	NV	Undeveloped Land	23,065		—		—		23,065		—			23,065		100.0	%
Maitland Promenade II	12/18/2013	Orlando	FL	Office	3,434		24,995		3,757		32,186		(4,585		)	27,601		100.0	%
Plaza Buildings	01/14/2014	Bellevue	WA	Office	53,040		138,468		7,523		199,031		(17,065		)	181,966		100.0	%
424 Bedford	01/31/2014	Brooklyn	NY	Apartment	8,860		25,408		—		34,268		(1,862		)	32,406		90.0	%
Richardson Land II	09/04/2014	Richardson	TX	Undeveloped Land	3,422		—		—		3,422		—			3,422		90.0	%
Westpark Portfolio	05/10/2016	Redmond	WA	Office/Flex/Industrial	36,085		82,355		8,913		127,353		(2,805		)	124,548		100.0	%
353 Sacramento	07/11/2016	San Francisco	CA	Office	58,374		110,165		5,690		174,229		(1,398		)	172,831		100.0	%
					$	321,226	$	849,496	$	52,297	$	1,223,019	$	(113,594	)	$	1,109,425

_____________________

⁽¹⁾On March 18, 2016, the Company increased its membership interest in the Park Highlands joint venture from 50.1% to 51.58% by acquiring an additional 1.48% membership interest from one of the joint venture partners. On June 6, 2016, the Company increased its membership interest in the Park Highlands joint venture from 51.58% to 97.62% by acquiring an additional 46.04% membership interest from one of the joint venture partners. On June 25, 2016, the Company increased its membership interest in the Park Highlands joint venture from 97.62% to 100% by acquiring the remaining 2.38% membership interest from the remaining joint venture partner. On September 7, 2016, a subsidiary of the Company that owns a portion of Park Highlands, sold 820 units of 10% Class A non-voting preferred membership units for $0.8 million to accredited investors. The amount of the Class A non-voting preferred membership units raised, net of offering costs, is included in other liabilities on the accompanying consolidated balance sheets.

⁽²⁾ On March 18, 2016, the Company increased its membership interest in the Park Highlands II joint venture from 99.5% to 100% by acquiring the remaining 0.5% membership interest from its joint venture partner.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

Operating Leases

Certain of the Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of September 30, 2016, the leases, excluding options to extend and apartment leases, which have terms that are generally one year or less, had remaining terms of up to 11.5 years with a weighted-average remaining term of 3.6 years. Some of the leases have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires a security deposit from tenants in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash and assumed in real estate acquisitions or foreclosures related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $7.2 million and $5.3 million as of September 30, 2016 and December 31, 2015, respectively.

During the nine months ended September 30, 2016 and 2015, the Company recognized deferred rent from tenants of $2.0 million and $3.7 million, respectively, net of lease incentive amortization. As of September 30, 2016 and December 31, 2015, the cumulative deferred rent receivable balance, including unamortized lease incentive receivables, was $25.7 million and $22.8 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $3.3 million and $2.8 million of unamortized lease incentives as of September 30, 2016 and December 31, 2015, respectively. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.

As of September 30, 2016, the future minimum rental income from the Company’s properties, excluding apartment leases, under non-cancelable operating leases was as follows (in thousands):



October 1, 2016 through December 31, 2016	$	24,511
2017	97,632
2018	82,183
2019	66,784
2020	51,453
Thereafter	114,798
	$	437,361

As of September 30, 2016, the Company’s commercial real estate properties were leased to approximately 600 tenants over a diverse range of industries and geographic areas. The Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:



Industry	Number of Tenants	Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Computer System Design & Programming	56	$	11,502	11.0	%
Finance	55	11,236		10.7	%
		$	22,738	21.7	%

_____________________

⁽¹⁾Annualized base rent represents annualized contractual base rental income as of September 30, 2016, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

Geographic Concentration Risk

As of September 30, 2016, the Company’s real estate investments in Washington, California and Texas represented 31.7%, 15.6% and 15.5% of the Company’s total assets, respectively. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Washington, California and Texas real estate markets. Any adverse economic or real estate developments in these markets, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results and its ability to make distributions to stockholders.

Property Damage

During the nine months ended September 30, 2016, 1800 West Loop suffered physical damages due to floods. The Company’s insurance policy provides coverage for property damage and business interruption subject to a deductible of up to $100,000 per incident. Based on management’s estimates, the Company recognized an estimated aggregate loss due to damages of $1.6 million during the nine months ended September 30, 2016, which was reduced by $1.5 million of estimated insurance recoveries related to such damages, which the Company determined were probable of collection. The aggregate net loss due to damages of $0.1 million during the nine months ended September 30, 2016 was classified as operating, maintenance and management expenses on the accompanying consolidated statements of operations and relates to the Company’s insurance deductible.

Recent Acquisitions

On May 10, 2016, the Company, through an indirect wholly owned subsidiary (the “Westpark Portfolio Buyer”), acquired a portfolio of 21 office/flex/industrial buildings containing a total of 778,472 rentable square feet located on approximately 41 acres of land in Redmond, Washington (the “Westpark Portfolio”). The purchase price (net of closing credits) of the Westpark Portfolio was $125.8 million plus closing costs. The seller is not affiliated with the Company or the Advisor. The Company recorded $36.1 million to land, $81.2 million to building and improvements, $9.0 million to tenant origination and absorption costs, $0.1 million to above-market lease assets and $0.6 million to below-market lease liabilities during the nine months ended September 30, 2016. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 4.4 years for tenant origination and absorption costs, 2.7 years for above-market lease assets and 3.5 years for below-market lease liabilities.

On July 11, 2016, the Company, through an indirect wholly owned subsidiary, acquired an office building containing 284,751 rentable square feet located on approximately 0.35 acres of land in San Francisco, California (“353 Sacramento”). The purchase price (net of closing credits) of 353 Sacramento was $168.0 million plus closing costs. The seller is not affiliated with the Company or the Advisor. The Company recorded $58.4 million to land, $110.0 million to building and improvements, $5.7 million to tenant origination and absorption costs and $6.1 million to below-market lease liabilities during the nine months ended September 30, 2016. The intangible assets and liabilities acquired in connection with this acquisition have weighted-average amortization periods as of the date of acquisition of 3.3 years for tenant origination and absorption costs and 2.6 years for below-market lease liabilities.

The Company recorded these acquisitions as business combinations and expensed $3.5 million of acquisition costs related to the Westpark Portfolio and 353 Sacramento for the nine months ended September 30, 2016. During the nine months ended September 30, 2016, the Company recognized $8.0 million of total revenues and $3.3 million of operating expenses from these properties.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)


4.	TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES

As of September 30, 2016 and December 31, 2015, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	September 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015
Cost	$	52,297		$	43,894		$	2,302		$	2,399		$	(11,463	)	$	(5,826	)
Accumulated Amortization	(24,236		)	(22,749		)	(1,569		)	(1,361		)	3,857			3,091
Net Amount	$	28,061		$	21,145		$	733		$	1,038		$	(7,606	)	$	(2,735	)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	For the Three Months Ended September 30,						For the Three Months Ended September 30,						For the Three Months Ended September 30,
	2016			2015			2016			2015			2016		2015
Amortization	$	(3,068	)	$	(2,617	)	$	(119	)	$	(189	)	$	1,045	$	382



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015			2016		2015
Amortization	$	(7,765	)	$	(8,256	)	$	(359	)	$	(720	)	$	1,734	$	1,321

Additionally, as of September 30, 2016 and December 31, 2015, the Company had recorded unamortized tax abatement intangible assets, which are included in prepaid expenses and other assets in the accompanying balance sheets, of $6.5 million and $7.2 million, respectively. During the three and nine months ended September 30, 2016, the Company recorded amortization expense of $0.2 million and $0.7 million related to tax abatement intangible assets, respectively. During the three and nine months ended September 30, 2015, the Company recorded amortization expense of $0.2 million and $0.7 million related to tax abatement intangible assets, respectively.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)


5.	REAL ESTATE LOAN RECEIVABLE

As of December 31, 2015, the Company owned one real estate loan receivable, which was repaid during the nine months ended September 30, 2016. The information for that real estate loan receivable as of September 30, 2016 and December 31, 2015 is set forth below (in thousands):

Loan Name

Location of Related Property or Collateral

Date Originated

Property Type

Loan Type

Outstanding Principal Balance as of September 30, 2016

Book Value as of

September 30, 2016

Book Value as of

December 31, 2015 ⁽¹⁾

Contractual Interest Rate

Annualized Effective Interest Rate

Maturity Date

University House First Mortgage

New York, New York

3/20/2013

Student Housing

Mortgage

—

27,850

⁽²⁾

_____________________

⁽¹⁾ Book value of the real estate loan receivable represents outstanding principal balance adjusted for unamortized acquisition discounts, origination fees and direct origination and acquisition costs and additional interest accretion.

⁽²⁾ See below for additional discussion of the University House First Mortgage.

On June 30, 2015, the University House First Mortgage matured without repayment. As a result, on July 1, 2015, the Company provided notice to the borrower of default. As of July 1, 2015, the Company had determined the University House Mortgage to be impaired and began recognizing income on a cash basis. The Company did not record a provision for loan loss reserves during the nine months ended September 30, 2016 or 2015 as the Company believed the entire principal balance of $27.9 million related to the University House First Mortgage to be fully recoverable.

On April 21, 2016, the Company, through an indirect wholly owned subsidiary, entered into an assignment of mortgage to assign the University House First Mortgage to an assignee unaffiliated with the Company or the Advisor. On April 22, 2016, the Company received $31.6 million in connection with the assignment of the University House First Mortgage. The proceeds received from the assignment reflect the entire principal balance and interest due, including any default interest, as of April 21, 2016, plus any legal costs incurred by the Company in connection with the assignment.

For the three and nine months ended September 30, 2016 and 2015, interest income from the real estate loan receivable consisted of the following (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Contractual interest income	$	—	$	—	$	3,655	$	1,540
Accretion of closing costs, origination fees and extension fees, net	—		—		—		428
Interest income from real estate loan receivable	$	—	$	—	$	3,655	$	1,968

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)


6.	REAL ESTATE SALES

In accordance with ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”), results of operations from properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations. Results of operations from properties that were classified as held for sale in financial statements issued prior to January 1, 2014 will remain in discontinued operations on the Company’s consolidated statements of operations. Prior to the adoption of ASU 2014-08, the operations of properties held for sale or to be disposed of and the aggregate net gains recognized upon their disposition were presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented.

During the year ended December 31, 2015, the Company sold two office properties. The results of operations of these properties and gain on sale are included in continuing operations on the accompanying statements of operations. During the nine months ended September 30, 2016, the Company did not have any dispositions and no properties were classified as held for sale as of September 30, 2016. The following table summarizes certain revenue and expenses related to these properties for the three and nine months ended September 30, 2016, and 2015 (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016		2015
Total revenues	$	—		$	—	$	—	$	216

Total expenses	(2		)	71		15		636

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)


7.	NOTES AND BONDS PAYABLE

As of September 30, 2016 and December 31, 2015, the Company’s notes and bonds payable consisted of the following (dollars in thousands):



	Book Value as of September 30, 2016			Book Value as of December 31, 2015			Contractual Interest Rate as of September 30, 2016 ⁽¹⁾	Effective Interest Rate at September 30, 2016 ⁽¹⁾	Payment Type	Maturity Date ⁽²⁾
Richardson Portfolio Mortgage Loan	$	40,746		$	41,177		One-Month LIBOR + 2.10%	2.62%	Principal & Interest	05/01/2017
Bellevue Technology Center Mortgage Loan	59,580			52,960			One-Month LIBOR + 2.25%	2.77%	Principal & Interest	03/01/2017
Portfolio Revolving Loan Facility ⁽³⁾	75,541			47,087			One-Month LIBOR + 2.25%	2.77%	Principal & Interest	05/01/2017
Portfolio Mortgage Loan	106,847			100,032			One-Month LIBOR + 2.25%	2.77%	Principal & Interest	07/01/2017
Burbank Collection Mortgage Loan	9,208			9,098			One-Month LIBOR + 2.35%	2.91%	Interest Only ⁽⁴⁾	09/30/2017
50 Congress Mortgage Loan	31,589			28,075			One-Month LIBOR + 1.90%	2.42%	Interest Only ⁽⁴⁾	10/01/2017
1180 Raymond Bond Payable	6,675			6,795			6.50%	6.50%	Principal & Interest	09/01/2036
Central Building Mortgage Loan	27,600			24,896			One-Month LIBOR + 1.75%	2.27%	Interest Only	11/13/2018
Maitland Promenade II Mortgage Loan ⁽⁵⁾	19,922			20,182			One-Month LIBOR + 2.90%	3.42%	Principal & Interest	01/01/2017
Westmoor Center Mortgage Loan	62,000			56,036			One-Month LIBOR + 2.25%	2.77%	Interest Only ⁽⁴⁾	02/01/2018
Plaza Buildings Senior Loan	110,182			111,000			One-Month LIBOR + 1.90%	2.42%	Principal & Interest	01/14/2017
424 Bedford Mortgage Loan	24,966			25,358			3.91%	3.91%	Principal & Interest	10/01/2022
1180 Raymond Mortgage Loan	31,000			28,100			One-Month LIBOR + 2.25%	2.77%	Interest Only	12/01/2017
KBS SOR (BVI) Holdings, Ltd. Series A Debentures ⁽⁶⁾	258,976			—			4.25%	4.25%	⁽⁶⁾	03/01/2023
Westpark Portfolio Mortgage Loan ⁽⁷⁾	83,200			—			One-Month LIBOR + 2.50%	3.02%	Interest Only ⁽⁴⁾	07/01/2020
Total Notes and Bonds Payable principal outstanding	948,032			550,796
Net Premium/Discount on Notes and Bonds Payable ⁽⁸⁾	78			50
Deferred financing costs, net	(11,778		)	(3,523		)
Total Notes and Bonds Payable, net	$	936,332		$	547,323

_____________________

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of September 30, 2016. Effective interest rate is calculated as the actual interest rate in effect as of September 30, 2016 (consisting of the contractual interest rate and contractual floor rates), using interest rate indices at September 30, 2016, where applicable.

⁽²⁾ Represents the initial maturity date or the maturity date as extended as of September 30, 2016; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

⁽³⁾The Portfolio Revolving Loan Facility is secured by the 1800 West Loop Building and the Iron Point Business Park. The Portfolio Revolving Loan Facility is comprised of $63.5 million of revolving debt and $12.6 million of non-revolving debt available to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. As of September 30, 2016, $63.5 million of revolving debt and $12.0 million of non-revolving debt had been disbursed to the Company and $0.6 million of non-revolving debt is available for future disbursements, subject to certain conditions contained in the loan documents.

⁽⁴⁾Represents the payment type required under the loan as of September 30, 2016. Certain future monthly payments due under this loan also include amortizing principal payments. For more information of the Company’s contractual obligations under its notes and bonds payable, see five-year maturity table below.

⁽⁵⁾Interest on the Maitland Promenade II Mortgage Loan is calculated at a variable annual rate of 290 basis points over one-month LIBOR, but at no point shall the interest rate be less than 3.25%.

⁽⁶⁾See “– Recent Financing Transactions – Israeli Bond Financing” below.

⁽⁷⁾See “– Recent Financing Transactions – Westpark Portfolio Mortgage Loan” below.

⁽⁸⁾Represents the unamortized premium/discount on notes and bonds payable due to the above- and below-market interest rates when the debt was assumed. The discount/premium is amortized over the remaining life of the notes and bonds payable.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

During the three and nine months ended September 30, 2016, the Company incurred $8.0 million and $20.4 million of interest expense, respectively. Included in interest expense for the three and nine months ended September 30, 2016 was $1.1 million and $2.9 million of amortization of deferred financing costs, respectively. Additionally, during the three and nine months ended September 30, 2016, the Company capitalized $0.5 million and $1.5 million of interest to its investments in undeveloped land, respectively. During the three and nine months ended September 30, 2015, the Company incurred $3.5 million and $11.3 million of interest expense, respectively. Included in interest expense for the three and nine months ended September 30, 2015 was $0.6 million and $2.1 million of amortization of deferred financing costs, respectively. Additionally, during the three and nine months ended September 30, 2015, the Company capitalized $0.5 million and $1.5 million of interest to its investments in undeveloped land, respectively. As of September 30, 2016, the Company’s deferred financing costs were $12.2 million, net of amortization, of which $11.8 million is included in notes and bonds payable, net and $0.4 million is included in prepaid expenses and other assets on the accompanying consolidated balance sheets. As of December 31, 2015, the Company’s deferred financing costs were $4.7 million, net of amortization, of which $3.5 million is included in notes and bonds payable, net and $1.2 million is included in prepaid expenses and other assets on the accompanying consolidated balance sheets. As of September 30, 2016 and December 31, 2015, the Company’s interest payable was $2.5 million and $1.2 million, respectively.

The following is a schedule of maturities, including principal amortization payments, for all notes and bonds payable outstanding as of September 30, 2016 (in thousands):



October 1, 2016 through December 31, 2016	$	1,598
2017	484,509
2018	90,244
2019	53,686
2020	134,311
Thereafter	183,684
	$	948,032

The Company’s notes payable contain financial debt covenants. As of September 30, 2016, the Company was in compliance with all of these debt covenants.

Recent Financing Transactions

Israeli Bond Financing

On March 2, 2016, KBS Strategic Opportunity BVI, a wholly owned subsidiary of the Company, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $259.0 million as of September 30, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%. KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

As of September 30, 2016, the Company incurred legal, rating and underwriting fees of approximately $9.8 million in connection with the offering. In addition, the Company funded interest reserves of 20.8 million Israeli new Shekels (approximately $5.5 million as of September 30, 2016) and 1.0 million Israeli new Shekels (approximately $0.3 million as of September 30, 2016) of expense reserve required by the Debenture documents.

The deed of trust that governs the terms of the Debentures contains various financial covenants. As of September 30, 2016, the Company was in compliance with all of these financial debt covenants.

Westpark Portfolio Mortgage Loan

On July 8, 2016, the Westpark Portfolio Buyer, entered into a four-year mortgage loan with an unaffiliated lender, for borrowings of up to $85.2 million secured by the Westpark Portfolio (the “Westpark Portfolio Mortgage Loan”). At closing, $83.2 million of the loan was funded and the remaining $2.0 million was available for future disbursements to be used for tenant improvement costs and leasing commissions, subject to certain terms and conditions contained in the loan documents.

The Westpark Portfolio Mortgage Loan matures on July 1, 2020, with a one-year extension option, subject to certain terms and conditions contained in the loan documents. The Westpark Portfolio Mortgage Loan bears interest at a floating rate of 250 basis points over one-month LIBOR. The Westpark Portfolio Buyer has the right to prepay the loan in whole at any time, or in part from time to time.

KBS SOR Properties LLC (“KBS SOR Properties”), the Company’s indirect wholly owned subsidiary, provided a limited guaranty of the Westpark Portfolio Mortgage Loan with respect to certain potential fees, costs, expenses, losses or damages incurred or suffered by the lender as a result of certain intentional actions committed by the Westpark Portfolio Buyer in violation of the loan documents. KBS SOR Properties also provided a guaranty of the principal balance and any interest or other sums outstanding under the Westpark Portfolio Mortgage Loan in the event of certain bankruptcy or insolvency proceedings involving the Westpark Portfolio Buyer.


8.	DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates and foreign currency exchange rate movements. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into derivatives for speculative purposes. On October 14, 2016, the Company entered into an interest rate cap. See Note 14, “Subsequent Events — Financing Subsequent to September 30, 2016 — 353 Sacramento Mortgage Loan.”

The Company enters into foreign currency collars to mitigate its exposure to foreign currency exchange rate movements on its bonds payable outstanding denominated in Israeli new Shekels. The foreign currency collar consists of a purchased call option to buy and a sold put option to sell the Israeli new Shekels. A foreign currency collar guarantees that the exchange rate of the currency will not fluctuate beyond the range of the options’ strike prices.

The following table summarizes the notional amount and other information related to the Company’s foreign currency collars as of September 30, 2016. The notional amount is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (currency in thousands):



Derivative Instruments	Notional Amount		Strike Price	Trade Date	Maturity Date
Derivative instruments not designated as hedging instruments
Foreign currency collar	$	100,000	3.72 - 3.83 ILS-USD	08/08/2016	08/08/2017
Foreign currency collar	50,000		3.67 - 3.77 ILS-USD	08/16/2016	08/16/2017
Foreign currency collar	50,000		3.68 - 3.78 ILS-USD	08/16/2016	08/16/2017
Foreign currency collar	50,000		3.67 - 3.77 ILS-USD	08/22/2016	08/22/2017
	$	250,000

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of September 30, 2016 (dollars in thousands):



		September 30, 2016
Derivative Instruments	Balance Sheet Location	Number of Instruments	Fair Value
Derivative instruments not designated as hedging instruments
Foreign currency collars	Prepaid expenses and other assets	4	$	1,527

The change in fair value of foreign currency collars that are not designated as cash flow hedges are recorded as foreign currency transaction gains or losses in the accompanying consolidated statements of operations. During both the three and nine months ended September 30, 2016, the Company recognized a $1.5 million gain related to the foreign currency collars, which is shown net against $8.2 million and $6.1 million of foreign currency transaction losses in the accompanying consolidated statements of operations as foreign currency transaction loss, net, respectively.


9.	FAIR VALUE DISCLOSURES

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other non-financial and financial assets at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:


•	Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;


•	Level 2: quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

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

Cash and cash equivalents, rent and other receivables and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.

Real estate loan receivable: The Company’s real estate loan receivable is presented in the accompanying consolidated balance sheets at its amortized cost net of recorded loan loss reserves and not at fair value. The fair value of real estate loan receivable was estimated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral dependent loans) and estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. The Company classifies these inputs as Level 3 inputs.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

Notes and bonds payable: The fair values of the Company’s notes and bonds payable are estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach. The Company classifies these inputs as Level 3 inputs. The Company’s bonds issued in Israel are publicly traded on the Tel-Aviv Stock Exchange. The Company used the quoted price as of September 30, 2016 for the fair value of its bonds issued in Israel. The Company classifies this input as a Level 1 input.

Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs.

The following were the face values, carrying amounts and fair values of the Company’s financial instruments as of September 30, 2016 and December 31, 2015, which carrying amounts do not approximate the fair values (in thousands):



	September 30, 2016						December 31, 2015
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial assets:
Real estate loan receivable	$	—	$	—	$	—	$	27,850	$	27,850	$	27,850
Financial liabilities:
Notes and bonds payable	$	689,056	$	686,169	$	691,413	$	550,796	$	547,323	$	554,007
KBS SOR (BVI) Holdings, Ltd. Series A Debentures	$	258,976	$	250,163	$	250,222	$	—	$	—	$	—

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. This has made the estimation of fair values difficult and, therefore, both the actual results and the Company’s estimate of value at a future date could be materially different.

As of September 30, 2016, the Company measured the following assets at fair value (in thousands):



			Fair Value Measurements Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring Basis:
Asset derivatives - foreign currency collars	$	1,527	$	—	$	1,527	$	—

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)


10.	RELATED PARTY TRANSACTIONS

The Advisory Agreement entitles the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate and real estate-related investments and the disposition of real estate and real estate-related investments (including the discounted payoff of non-performing loans) among other services, as well as reimbursement of certain costs incurred by the Advisor in providing services to the Company. The Advisory Agreement may also entitle the Advisor to certain back-end cash flow participation fees. The Company also entered into a fee reimbursement agreement (the “AIP Reimbursement Agreement”) with KBS Capital Markets Group LLC, the dealer manager for the Company’s initial public offering (the “Dealer Manager”), pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the Depository Trust & Clearing Corporation Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc. (“KBS REIT I”), KBS Real Estate Investment Trust II, Inc. (“KBS REIT II”), KBS Real Estate Investment Trust III, Inc. (“KBS REIT III”), KBS Legacy Partners Apartment REIT, Inc. (“KBS Legacy Partners Apartment REIT”), KBS Strategic Opportunity REIT II, Inc. (“KBS Strategic Opportunity REIT II”) and KBS Growth & Income REIT, Inc. (“KBS Growth & Income REIT”).

On January 6, 2014, the Company, together with KBS REIT I, KBS REIT II, KBS REIT III, KBS Legacy Partners Apartment REIT, KBS Strategic Opportunity REIT II, the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the plan, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance. In June 2015, KBS Growth & Income REIT was added to the insurance program at terms similar to those described above. The insurance program was renewed and is effective through June 30, 2017.

During the three and nine months ended September 30, 2016 and 2015, no other business transactions occurred between the Company and these other KBS-sponsored programs.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three and nine months ended September 30, 2016 and 2015, respectively, and any related amounts payable as of September 30, 2016 and December 31, 2015 (in thousands):



	Incurred								Payable as of
	Three Months Ended September 30,				Nine Months Ended September 30,				September 30,		December 31,
	2016		2015		2016		2015		2016		2015
Expensed
Asset management fees	$	2,639	$	2,112	$	6,932	$	6,242	$	—	$	—
Real estate acquisition fees	1,690		—		2,964		—		—		—
Reimbursable operating expenses ⁽¹⁾	57		39		170		116		51		59
Disposition fees⁽²⁾	—		78		279		180		—		—
	$	4,386	$	2,229	$	10,345	$	6,538	$	51	$	59

_____________________

⁽¹⁾ The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. The Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These amounts totaled $30,000 and $36,000 for the three months ended September 30, 2016 and 2015, respectively and $114,000 and $98,000 for the nine months ended September 30, 2016 and 2015, respectively, and were the only employee costs reimbursed under the Advisory Agreement during these periods. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers. In addition to the amounts above, the Company reimburses the Advisor for certain of the Company’s direct costs incurred from third parties that were initially paid by the Advisor on behalf of the Company.

⁽²⁾ Disposition fees with respect to real estate sold are included in the gain on sale of real estate in the accompanying consolidated statements of operations. Disposition fees with respect to the assignment of the Company's real estate loan receivable are included in general and administrative expenses in the accompanying consolidated statements of operations.

During the nine months ended September 30, 2016, the Advisor reimbursed the Company $66,000 for property insurance rebates and $69,000 for legal and professional fees.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)


11.	INVESTMENT IN UNCONSOLIDATED JOINT VENTURES

As of September 30, 2016 and December 31, 2015, the Company’s investments in unconsolidated joint ventures were composed of the following (dollars in thousands):



				Investment Balance at
Joint Venture	Number of Properties	Location	Ownership %	September 30, 2016		December 31, 2015
NIP Joint Venture	21	Various	Less than 5.0%	$	5,305	$	5,305
110 William Joint Venture	1	New York, New York	60.0%	70,813		69,132
				$	76,118	$	74,437

Investment in National Industrial Portfolio Joint Venture

On May 18, 2012, the Company, through an indirect wholly owned subsidiary, entered into a joint venture (the “NIP Joint Venture”) with OCM NIP JV Holdings, L.P. and HC KBS NIP JV, LLC (“HC-KBS”). The NIP Joint Venture owns 21 industrial properties and a master lease with respect to another industrial property encompassing 10.8 million square feet. The Company made an initial capital contribution of $8.0 million which represents less than a 5.0% ownership interest in the NIP Joint Venture as of September 30, 2016. The Company has virtually no influence over the NIP Joint Venture’s operations, financial policies or decision making. Accordingly, the Company has accounted for its investment in the NIP Joint Venture under the cost method of accounting. Income, losses and distributions from the NIP Joint Venture are generally allocated among the members based on their respective equity interests.

KBS REIT I, an affiliate of the Advisor, is a member of HC-KBS and has a participation interest in certain future potential profits generated by the NIP Joint Venture. However, KBS REIT I does not have any equity interest in the NIP Joint Venture. None of the other joint venture partners are affiliated with the Company or the Advisor.

As of September 30, 2016 and December 31, 2015, the book value of the Company’s investment in the NIP Joint Venture was $5.3 million. During the three and nine months ended September 30, 2016 and 2015, the Company did not receive any distributions related to its investment in the NIP Joint Venture.

Investment in 110 William Joint Venture

On December 23, 2013, the Company, through an indirect wholly owned subsidiary, entered into an agreement with SREF III 110 William JV, LLC (the “110 William JV Partner”) to form a joint venture (the “110 William Joint Venture”). On May 2, 2014, the 110 William Joint Venture acquired an office property containing 928,157 rentable square feet located on approximately 0.8 acres of land in New York, New York (“110 William Street”). Each of the Company and the 110 William JV Partner hold a 60% and 40% ownership interest in the 110 William Joint Venture, respectively. The Company exercises significant influence over the operations, financial policies and decision making with respect to the 110 William Joint Venture but significant decisions require approval from both members. Accordingly, the Company has accounted for its investment in the 110 William Joint Venture under the equity method of accounting. Income, losses, contributions and distributions are generally allocated based on the members’ respective equity interests.

As of September 30, 2016 and December 31, 2015, the book value of the Company’s investment in the 110 William Joint Venture was $70.8 million and $69.1 million, respectively, which includes $1.5 million of unamortized acquisition fees and expenses incurred directly by the Company.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

Summarized financial information for the 110 William Joint Venture follows (in thousands):



	September 30, 2016		December 31, 2015
Assets:
Real estate assets, net of accumulated depreciation and amortization	$	264,342	$	269,664
Other assets	23,251		18,973
Total assets	$	287,593	$	288,637
Liabilities and Equity:
Notes payable, net⁽¹⁾	$	158,845	$	162,395
Other liabilities	13,269		13,617
Partners’ capital	115,479		112,625
Total Liabilities and Equity	$	287,593	$	288,637

_____________________

⁽¹⁾ Includes (i) a first mortgage loan with an outstanding principal balance of $136.9 million and $138.6 million as of September 30, 2016 and December 31, 2015, respectively, bearing interest at a fixed rate of 4.8% per annum and maturing on July 6, 2017 and (ii) a mezzanine loan with an outstanding principal balance of $20.0 million as of September 30, 2016 and December 31, 2015 bearing interest at a fixed rate of 9.5% per annum and maturing on July 6, 2017. The amount presented includes a premium on notes payable of $2.3 million and $4.5 million as of September 30, 2016 and December 31, 2015, respectively and deferred financing costs, net of $0.3 million and $0.7 million as of September 30, 2016 and December 31, 2015, respectively.



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016			2015
Revenues	$	8,461		$	9,214	$	25,100		$	25,911
Expenses:
Operating, maintenance, and management	3,162			2,569		8,120			8,056
Real estate taxes and insurance	1,535			1,642		4,502			4,329
Depreciation and amortization	3,563			3,194		9,831			9,476
Interest expense	1,517			1,552		4,541			4,627
Total expenses	9,777			8,957		26,994			26,488
Other income	16			11		48			319
Net (loss) income	$	(1,300	)	$	268	$	(1,846	)	$	(258	)
Company’s equity in (loss) income of unconsolidated joint venture	$	(791	)	$	150	$	(1,139	)	$	(186	)

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)

12. UNAUDITED PRO FORMA FINANCIAL INFORMATION

The Company acquired one office portfolio and one office property during the nine months ended September 30, 2016, which were accounted for as business combinations. The following unaudited pro forma information for the three and nine months ended September 30, 2016 and 2015 has been prepared to give effect to the acquisition of the Westpark Portfolio and 353 Sacramento as if the acquisitions occurred on January 1, 2015. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had the acquisitions occurred on this date, nor does it purport to predict the results of operations for future periods (in thousands).



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues	$	36,478		$	33,779		$	108,795		$	101,632
Depreciation and amortization	$	14,472		$	13,582		$	41,989		$	40,539
Net (loss) income	$	(12,990	)	$	(119	)	$	(18,101	)	$	8,221

The unaudited pro forma information for the three and nine months ended September 30, 2016 was adjusted to exclude $2.0 million and $3.5 million of acquisition costs related to the Westpark Portfolio and 353 Sacramento incurred by the Company in 2016, respectively.


13.	COMMITMENTS AND CONTINGENCIES

Economic Dependency

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company’s investment portfolio; and other general and administrative responsibilities. In the event that the Advisor is unable to provide these services, the Company will be required to obtain such services from other sources.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Although there can be no assurance, the Company is not aware of any environmental liability that could have a material adverse effect on its financial condition or results of operations as of September 30, 2016. However, changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Company’s properties, the activities of its tenants and other environmental conditions of which the Company is unaware with respect to the properties could result in future environmental liabilities.

Legal Matters

From time to time, the Company is a party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on the Company’s results of operations or financial condition, which would require accrual or disclosure of the contingency and the possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS STRATEGIC OPPORTUNITY REIT, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

September 30, 2016

(unaudited)


14.	SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the consolidated financial statements are issued.

Real Estate Related Investment Subsequent to September 30, 2016

Battery Point Series B Preferred Units

On October 28, 2016, the Company, through an indirect wholly owned subsidiary, entered into a purchase agreement to purchase up to an aggregate of 25,000 units of Series B Preferred Units (the “Preferred Units”) of Battery Point Trust LLC (“Battery Point”), over a six-month period at a per-unit price of $1,000, resulting in an aggregate investment of $25.0 million. On October 28, 2016, the Company purchased an initial 5,000 Preferred Units, net of an equity commitment fee of $0.6 million, for a net payment of $4.4 million. The Preferred Units are entitled to the payment of quarterly distributions at the following annual rates: 7.0% for the period commencing October 28, 2016 through April 28, 2017; 9.0% for the period commencing April 29, 2017 through April 28, 2018; and 12.0% for the period commencing April 29, 2018 through October 28, 2019. The Company may be required to purchase additional Preferred Units no more frequently than once a month during the period beginning in November 2016 and ending in April 2017. Each minimum required additional purchase of Preferred Units is 5,000 units. Battery Point may redeem the Preferred Units at any time, subject to payment to the Company of an exit fee in the amount of 1.0% of the redemption price if Battery Point redeems the Preferred Units after April 28, 2017.

Financing Subsequent to September 30, 2016

353 Sacramento Mortgage Loan

On October 14, 2016, the Company, through an indirect wholly owned subsidiary, entered into a two-year secured mortgage loan with an unaffiliated lender, for borrowings of up to $115.5 million secured by 353 Sacramento (the “353 Sacramento Mortgage Loan”). As of October 14, 2016, $85.5 million had been disbursed to the Company with the remaining $30.0 million available for future disbursements to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. The 353 Sacramento Mortgage Loan matures on October 14, 2018 with three one-year extension options, subject to certain conditions contained in the loan documents and the payment of an extension fee of 0.25% of the outstanding principal balance with respect to the second and third extension options. The 353 Sacramento Mortgage Loan bears interest at a floating rate of 275 basis points over one-month LIBOR. The borrower entered into an interest rate cap that effectively limits one-month LIBOR on $115.5 million of the outstanding loan balance at 3.0% effective October 14, 2016 through October 14, 2018. Monthly payments are interest-only with the entire unpaid principal balance and all outstanding interest and fees due at maturity. The Company has the right to prepay the loan in whole at any time or in part from time to time to the extent necessary, subject to the payment of certain expenses potentially incurred by the lender as a result of the prepayment, the payment of a prepayment premium and certain other conditions contained in the loan documents.

KBS SOR Properties provided a limited guaranty of the 353 Sacramento Mortgage Loan with respect to certain potential deficiencies, losses or damages suffered by the lender resulting from certain intentional acts committed by the borrower or KBS SOR Properties in violation of the loan documents, or in the event of certain bankruptcy or insolvency proceedings involving the borrower or KBS SOR Properties.

As a condition to the 353 Sacramento Mortgage Loan, the borrowing subsidiary amended its operating agreement to appoint two independent managers. The independent managers have consent rights with respect to (i) the consolidation or merger of the borrower into another entity if the 353 Sacramento Mortgage Loan will not be paid off in connection with such merger or consolidation, (ii) the sale of the borrower’s assets if the 353 Sacramento Mortgage Loan will not be paid off in connection with such a sale and (iii) the institution of voluntary (or the consent to involuntary) bankruptcy or similar creditor-protection proceedings. Such consent rights will only apply as long as the 353 Sacramento Mortgage Loan remains outstanding.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

The following discussion and analysis should be read in conjunction with the accompanying financial statements of KBS Strategic Opportunity REIT, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to KBS Strategic Opportunity REIT, Inc., a Maryland corporation, and, as required by context, KBS Strategic Opportunity Limited Partnership, a Delaware limited partnership, which we refer to as the “Operating Partnership,” and to their subsidiaries.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of KBS Strategic Opportunity REIT, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

•

We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our property investments could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, limiting our ability to pay distributions to our stockholders.

•

We have paid distributions from financings and in the future we may not pay distributions solely from our cash flow from operations or gains from asset sales. To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have less funds available for investment in loans, properties and other assets, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

•

All of our executive officers and some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, our dealer manager and other KBS-affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other KBS-advised programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions. Fees paid to our advisor in connection with transactions involving the origination, acquisition and management of our investments are based on the cost of the investment, not on the quality of the investment or services rendered to us. This arrangement could influence our advisor to recommend riskier transactions to us.


•	We pay substantial fees to and expenses of our advisor and its affiliates and, in connection with our initial public offering, we paid substantial fees to our dealer manager and participating broker-dealers. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase our stockholders’ risk of loss.

•

We cannot predict with any certainty how much, if any, of our dividend reinvestment plan proceeds will be available for general corporate purposes, including, but not limited to, the redemption of shares under our share redemption program, future funding obligations under any real estate loans receivable we acquire, the funding of capital expenditures on our real estate investments or the repayment of debt. If such funds are not available from the dividend reinvestment plan offering, then we may have to use a greater proportion of our cash flow from operations to meet these cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program.


•	Our opportunistic investment strategy involves a higher risk of loss than would a strategy of investing in performing real estate and real estate related assets.

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, 2015 filed with the Securities and Exchange Commission (the “SEC”).

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Overview

We were formed on October 8, 2008 as a Maryland corporation, elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2010 and intend to operate in such manner. KBS Capital Advisors LLC (“KBS Capital Advisors”) is our advisor. As our advisor, KBS Capital Advisors manages our day-to-day operations and our portfolio of investments. KBS Capital Advisors also has the authority to make all of the decisions regarding our investments, subject to the limitations in our charter and the direction and oversight of our board of directors. KBS Capital Advisors will also provide asset-management, marketing, investor-relations and other administrative services on our behalf.

On January 8, 2009, we filed a registration statement on Form S-11 with the SEC to offer a minimum of 250,000 shares and a maximum of 140,000,000 shares of common stock for sale to the public, of which 100,000,000 shares were registered in our primary offering and 40,000,000 shares were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering on November 14, 2012. We sold 56,584,976 shares of common stock in the primary offering for gross offering proceeds of $561.7 million. We continue to offer shares of common stock under the dividend reinvestment plan. As of September 30, 2016, we had sold 5,804,835 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $62.3 million. Also as of September 30, 2016, we had redeemed 5,635,755 of the shares sold in our offering for $69.9 million. Additionally, on December 29, 2011 and October 23, 2012, we issued 220,994 shares and 55,249 shares of common stock, respectively, for $2.0 million and $0.5 million, respectively, in private transactions exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On March 2, 2016, KBS Strategic Opportunity (BVI) Holdings, Ltd. (“KBS Strategic Opportunity BVI”), our wholly owned subsidiary, filed a final prospectus with the Israel Securities Authority for a proposed offering of up to 1,000,000,000 Israeli new Shekels of Series A debentures (the “Debentures”) at an annual interest rate not to exceed 4.25%. On March 1, 2016, KBS Strategic Opportunity BVI commenced the institutional tender of the Debentures and accepted application for 842.5 million Israeli new Shekels. On March 7, 2016, KBS Strategic Opportunity BVI commenced the public tender of the Debentures and accepted 127.7 million Israeli new Shekels. In the aggregate, KBS Strategic Opportunity BVI accepted 970.2 million Israeli new Shekels (approximately $259.0 million as of September 30, 2016) in both the institutional and public tenders at an annual interest rate of 4.25%. KBS Strategic Opportunity BVI issued the Debentures on March 8, 2016. The terms of the Debentures require principal installment payments equal to 20% of the face value of the Debentures on March 1st of each year from 2019 to 2023.

Market Outlook – Real Estate and Real Estate Finance Markets

The following discussion is based on management’s beliefs, observations and expectations with respect to the real estate and real estate finance markets.

Current conditions in the global capital markets remain volatile as we near the end of 2016. Current economic data and financial market developments suggest that the global economy is improving, although at a slow incremental rate. Growth in most advanced economies remains lackluster, with low potential growth expectations now extending into 2017. In this economic environment the central banks of the world’s major economies hold sway over perceived investment opportunities. Quantitative easing in Japan and the Eurozone has carried over into global capital markets and has increased demand for higher risk investments.

The initial reaction to the U.K. vote to leave the European Union has been somewhat muted, with the exception being the continued downward pressure on the Great Britain Pound (“GBP”). As of mid-October 2016, the GBP had weakened in excess of 20 percent, year-to-date. The new prime minister of the U.K. remains committed to carrying out the decoupling of the U.K. from the European Union. The details of this process remain unclear, and the uncertainty has weighed on both the U.K. and European markets. The European Central Bank has continued to pursue a policy of quantitative easing (QE).

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

In the United States, real GDP growth accelerated in the third quarter of 2016 to a 2.9% annual rate. This is a marked improvement over the second quarter growth rate of 1.4%. The strong third quarter number is tempered by the fact that a large portion of gross domestic product growth was seen in increased inventories, not through consumer demand. Consumer confidence is currently at a three year low. Corporate earnings are also an area of concern, as third quarter reported earnings growth showed a clear sign of slowing. Federal Reserve Board communications have been signaling the increased likelihood of some firming of monetary policy. Many economists expect an increase in rates to occur in early December. The US government bond yield curve has seen a steady increase in yields and is currently no longer sitting at near record lows.

Europe and Japan continue to engage in unconventional monetary policy. Asset purchases and stimulus programs in both regions have driven interest rates and investment yields to new lows. Both regions now have historically low interest rates, with some government and corporate bonds trading with negative yields. While the intent of these policies is to spur economic growth, the size of these programs is unprecedented, and the ultimate impact on those economies and the broader global financial system remains unclear.

The U.S. commercial real estate market continues to benefit from inflows of foreign capital, albeit at a slowing rate. With the backdrop global political conflict, and weaker international economic conditions, the U.S. dollar has remained a safe haven currency. Lenders, however, have continued to cool to the market. For balance sheet lenders, such as banks and insurance companies, underwriting standards for commercial real estate have been tightened. This has resulted in lower loan-to-value and higher debt coverage ratios. CMBS originations also have been limited as lenders are trying to adjust to the new securitization rules which require issuers to maintain an ongoing equity stake in pooled transactions. These trends have led to increased uncertainty in the level and cost of debt for commercial properties, and in turn has injected some volatility into commercial real estate markets.

Liquidity and Capital Resources

Our principal demand for funds during the short and long-term is and will be for the acquisition of real estate and real estate-related investments; payment of operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; and payments of distributions to stockholders. To date, we have had six primary sources of capital for meeting our cash requirements:


•	Proceeds from the primary portion of our initial public offering;


•	Proceeds from our dividend reinvestment plan;


•	Debt financing;


•	Proceeds from our public bond offering in Israel;


•	Proceeds from the sale of real estate and the repayment of real estate-related investments; and


•	Cash flow generated by our real estate and real estate-related investments.

We sold 56,584,976 shares of common stock in the primary portion of our initial public offering for gross offering proceeds of $561.7 million. We ceased offering shares in the primary portion of our initial public offering on November 14, 2012. We continue to offer shares of common stock under the dividend reinvestment plan. As of September 30, 2016, we had sold 5,804,835 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $62.3 million. To date, we have invested all of the net proceeds from our initial public offering in real estate and real estate-related investments. We intend to use our cash on hand, proceeds from debt financing, proceeds from the issuance of our 4.25% bonds in Israel, cash flow generated by our real estate operations and proceeds from our dividend reinvestment plan as our primary sources of immediate and long-term liquidity.

Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures and corporate general and administrative expenses. Cash flow from operations from our real estate investments is primarily dependent upon the occupancy levels of our properties, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of September 30, 2016, our office, retail and industrial properties were collectively 87% occupied and our apartment properties were collectively 90% occupied.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Investments in real estate-related loans generate cash flow in the form of interest income, which are reduced by loan service fees, asset management fees and corporate general and administrative expenses. On June 30, 2015, the University House First Mortgage Loan matured without repayment. On April 21, 2016, the University House First Mortgage Loan lender entered into an assignment of mortgage to assign the University House First Mortgage Loan to an assignee unaffiliated with us or our advisor. On April 22, 2016, we received $31.6 million in connection with the assignment of the University House First Mortgage Loan. The proceeds received from the assignment reflects the entire principal balance and interest due, including any default interest, as of April 21, 2016, plus any legal costs incurred by us in connection with the assignment.

As of September 30, 2016, we had outstanding debt obligations in the aggregate principal amount of $948.0 million, with a weighted average remaining term of 2.8 years.

Under our charter, we are required to limit our total operating expenses to the greater of 2% of our average invested assets or 25% of our net income for the four most recently completed fiscal quarters, as these terms are defined in our charter, unless the Conflicts Committee of our board of directors has determined that such excess expenses were justified based on unusual and non-recurring factors. Operating expense reimbursements for the four fiscal quarters ended September 30, 2016 did not exceed the charter imposed limitation.

For the nine months ended September 30, 2016, our cash needs for capital expenditures, redemptions of common stock and debt servicing were met with proceeds from debt financing, proceeds from our dividend reinvestment plan and cash on hand. Operating cash needs during the same period were met through cash flow generated by our real estate and real estate-related investments and cash on hand. As of September 30, 2016, we had a total of $423.5 million of debt obligations scheduled to mature within 12 months of that date. We plan to exercise our extension options available under our loan agreements or pay down or refinance the related notes payable prior to their maturity dates.

Cash Flows from Operating Activities

As of September 30, 2016, we owned 11 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres and two investments in unconsolidated joint ventures. During the nine months ended September 30, 2016, net cash provided by operating activities was $19.1 million. We expect that our cash flows from operating activities will increase in future periods as a result of leasing additional space that is currently unoccupied and anticipated future acquisitions of real estate and real estate-related investments. However, our cash flows from operating activities may decrease to the extent that we dispose of assets.

Cash Flows from Investing Activities

Net cash used in investing activities was $300.3 million for the nine months ended September 30, 2016 and primarily consisted of the following:


•	Acquisition of an office/flex/industrial portfolio consisting of 21 buildings and an office property for $293.8 million;


•	Principal proceeds received from the assignment of University House in the amount of $27.9 million;


•	Improvements to real estate of $21.5 million;


•	Restricted cash for capital expenditures of $7.8 million;


•	Additional investment in an unconsolidated joint venture of $2.8 million;


•	Funding of restricted cash for development obligations of $2.6 million; and


•	Proceeds from insurance claims of $0.3 million.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Cash Flows from Financing Activities

Net cash provided by financing activities was $296.3 million for the nine months ended September 30, 2016 and consisted primarily of the following:


•	$371.6 million of net cash provided by debt and other financings as a result of proceeds from notes and bonds payable of $462.2 million, partially offset by principal payments on notes payable of $74.7 million, payments of deferred financing costs of $10.6 million and restricted cash for debt service obligations of $5.3 million;


•	$38.0 million of acquisitions of noncontrolling interests;


•	$31.5 million of payments made to redeem shares of common stock;


•	$6.9 million of net cash distributions to stockholders, after giving effect to distributions reinvested by stockholders of $9.5 million;


•	$0.8 million of contributions from noncontrolling interests;


•	$0.7 million of net cash provided by the issuance of $0.8 million of preferred membership units of our subsidiary, partially offset by sale commissions and other costs of $0.1 million; and


•	$0.2 million of payments made in connection with a potential offering.

In order to execute our investment strategy, we utilize secured debt and we may, to the extent available, utilize unsecured debt to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinancing and interest risks, are properly balanced with the benefit of using leverage. There is no limitation on the amount we may borrow for any single investment. Our charter limits our total liabilities such that our total liabilities may not exceed 75% of the cost of our tangible assets; however, we may exceed that limit if a majority of the Conflicts Committee approves each borrowing in excess of our charter limitation and we disclose such borrowing to our common stockholders in our next quarterly report with an explanation from the Conflicts Committee of the justification for the excess borrowing. As of September 30, 2016, our borrowings and other liabilities were approximately 70% of the cost (before depreciation or other noncash reserves) and book value (before depreciation) of our tangible assets.

In addition to making investments in accordance with our investment objectives, we use or have used our capital resources to make certain payments to our advisor and our dealer manager. During our offering stage, these payments included payments to our dealer manager for selling commissions and dealer manager fees related to sales in our primary offering and payments to our dealer manager and our advisor for reimbursement of certain organization and other offering expenses related both to the primary offering and the dividend reinvestment plan. During our acquisition and development stage, we expect to continue to make payments to our advisor in connection with the selection and origination or purchase of investments, the management of our assets and costs incurred by our advisor in providing services to us as well as for any dispositions of assets (including the discounted payoff of non-performing loans). In addition, an affiliate of our advisor, KBS Management Group, was recently formed to provide property management services with respect to certain properties owned by KBS-advised companies. In the future, we may engage KBS Management Group with respect to one or more of our properties to provide property management services. With respect to any such properties, we would expect to pay KBS Management Group a monthly fee equal to a percentage of the rent (to be determined on a property by property basis, consistent with current market rates).

The advisory agreement has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent of our advisor and our Conflicts Committee.

Among the fees payable to our advisor is an asset management fee. With respect to investments in loans and any investments other than real property, the asset management fee is a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount actually paid or allocated to acquire or fund the loan or other investment, inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire or fund such investment and (ii) the outstanding principal amount of such loan or other investment, plus the fees and expenses related to the acquisition or funding of such investment, as of the time of calculation. With respect to investments in real property, the asset management fee is a monthly fee equal to one-twelfth of 0.75% of the sum of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property, and inclusive of fees and expenses related thereto and the amount of any debt associated with or used to acquire such investment. In the case of investments made through joint ventures, the asset management fee will be determined based on our proportionate share of the underlying investment, inclusive of our proportionate share of any fees and expenses related thereto.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of September 30, 2016 (in thousands):



			Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2016		2017-2018		2019-2020		Thereafter
Outstanding debt obligations ⁽¹⁾	$	948,032	$	1,598	$	574,753	$	187,997	$	183,684
Interest payments on outstanding debt obligations ⁽²⁾	79,802		7,625		37,058		22,447		12,672

_____________________

⁽¹⁾ Amounts include principal payments only.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts, maturity dates, foreign currency rate and interest rates in effect at September 30, 2016. We incurred interest expense of $18.9 million, excluding amortization of deferred financing costs of $2.9 million and including interest capitalized of $1.5 million, for the nine months ended September 30, 2016.

Results of Operations

Overview

As of September 30, 2015, we owned 10 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 37 acres of undeveloped land, one office portfolio consisting of three office properties, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, one first mortgage loan and two investments in unconsolidated joint ventures. As of September 30, 2016, we owned 11 office properties, one office campus consisting of nine office buildings, one office portfolio consisting of four office buildings and 25 acres of undeveloped land, one office portfolio consisting of three office properties, one office/flex/industrial portfolio consisting of 21 buildings, one retail property, two apartment properties, two investments in undeveloped land encompassing an aggregate of 1,670 acres, one first mortgage loan and two investments in unconsolidated joint ventures. Our results of operations for the three and nine months ended September 30, 2016 may not be indicative of those in future periods as the occupancy in our properties has not been stabilized. As of September 30, 2016, our office, retail and industrial properties were collectively 87% occupied and our apartment properties were collectively 90% occupied. However, due to the short outstanding weighted-average lease term in the portfolio of less than four years, we do not put significant emphasis on quarterly changes in occupancy (positive or negative) in the short run. Our underwriting and valuations are generally more sensitive to “terminal values” that may be realized upon the disposition of the assets in the portfolio and less sensitive to ongoing cash flows generated by the portfolio in the years leading up to an eventual sale. There are no guarantees that occupancies of our assets will increase, or that we will recognize a gain on the sale of our assets. We funded the acquisitions of these investments with proceeds from our initial public offering and debt financing. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of leasing additional space and acquiring additional assets but decrease due to disposition activity.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the three months ended September 30, 2016 versus the three months ended September 30, 2015

The following table provides summary information about our results of operations for the three months ended September 30, 2016 and 2015 (dollar amounts in thousands):



	Three Months Ended September 30,				Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions/ Dispositions ⁽¹⁾			$ Change Due to Investments Held Throughout Both Periods ⁽²⁾
	2016		2015		Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions/ Dispositions ⁽¹⁾
Rental income	$	29,229	$	22,337	$	6,892		31	%	$	5,431		$	1,461
Tenant reimbursements	5,902		4,940		962			19	%	866			96
Other operating income	1,002		881		121			14	%	(2		)	123
Operating, maintenance, and management costs	10,932		9,930		1,002			10	%	1,347			(345		)
Real estate taxes and insurance	4,516		3,940		576			15	%	762			(186		)
Asset management fees to affiliate	2,639		2,112		527			25	%	470			57
Real estate acquisition fees to affiliate	1,690		—		1,690			n/a		1,690			—
Real estate acquisition fees and expenses	274		—		274			n/a		274			—
General and administrative expenses	1,337		892		445			50	%	n/a			n/a
Foreign currency transaction loss, net	6,639		—		6,639			n/a		n/a			n/a
Depreciation and amortization	14,337		11,297		3,040			27	%	3,352			(312		)
Interest expense	7,992		3,524		4,468			127	%	n/a			n/a
Gain on sale of real estate, net	—		2,908		(2,908		)	n/a		(2,908		)	n/a

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 related to real estate and real estate-related investments acquired, repaid or disposed on or after July 1, 2015.

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 with respect to real estate and real estate-related investments owned by us during the entire periods presented.

Rental income and tenant reimbursements increased from $22.3 million and $4.9 million, respectively, for the three months ended September 30, 2015 to $29.2 million and $5.9 million, respectively, for the three months ended September 30, 2016, primarily as a result of the growth in our real estate portfolio and as a result of an increase in occupancy from 84% as of September 30, 2015 to 88% as of September 30, 2016 related to properties (excluding apartments) held throughout both periods. In addition, annualized base rent per square foot increased from $21.16 as of September 30, 2015 to $21.92 as of September 30, 2016 related to properties (excluding apartments) held throughout both periods. We expect rental income and tenant reimbursements to increase in future periods as a result of owning real estate acquired in 2016 for an entire period, anticipated future acquisitions of real estate and leasing additional space but to decrease to the extent we dispose of properties.

Property operating costs and real estate taxes and insurance increased from $9.9 million and $3.9 million, respectively, for the three months ended September 30, 2015 to $10.9 million and $4.5 million, respectively, for the three months ended September 30, 2016, primarily as a result of the growth in our real estate portfolio. We expect property operating costs and real estate taxes and insurance to increase in future periods as a result of owning real estate acquired in 2016 for an entire period, anticipated future acquisitions of real estate, increasing occupancy of our real estate assets and inflation but to decrease to the extent we dispose of properties.

Asset management fees increased from $2.1 million for the three months ended September 30, 2015 to $2.6 million for the three months ended September 30, 2016, primarily as a result of the growth in our real estate portfolio. We expect asset management fees to increase in future periods as a result of owning real estate acquired in 2016 for an entire period, anticipated future acquisitions of real estate and capital expenditures but to decrease to the extent we dispose of properties. All asset management fees incurred as of September 30, 2016 have been paid.

Real estate acquisition fees and expenses to affiliates and non-affiliates were $2.0 million for the three months ended September 30, 2016. We did not acquire any real estate for the three months ended September 30, 2015 and, therefore, did not incur any acquisition fees or expenses during the period. During the three months ended September 30, 2016, we acquired one real estate property for $168.0 million. We expect real estate acquisition fees and expenses to vary in future periods based upon acquisition activity.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

General and administrative expenses increased from $0.9 million for the three months ended September 30, 2015 to $1.3 million for the three months ended September 30, 2016, primarily due to increased legal and auditor costs as a result of our ongoing Israeli securities law compliance requirements related to our outstanding bonds. We expect general and administrative expenses to fluctuate based on our legal expenses and investment and disposition activity.

We recognized $6.6 million of foreign currency transaction loss for the three months ended September 30, 2016 related to the issuance of Series A debentures in Israel, consisting of $8.1 million of foreign currency transaction loss, partially offset by $1.5 million foreign currency transaction gain as a result of our foreign currency collars. These debentures are denominated in Israeli new Shekels and we expect to recognize foreign transaction gains and losses to the extent that we do not enter into a foreign currency collar or hedge. We did not recognize any foreign currency transaction gain or loss during the three months ended September 30, 2015.

Depreciation and amortization increased from $11.3 million for the three months ended September 30, 2015 to $14.3 million for the three months ended September 30, 2016, primarily as a result of the growth in our real estate portfolio. We expect depreciation and amortization to increase in future periods as a result of owning real estate acquired in 2016 and anticipated future acquisitions of real estate for an entire period but to decrease as a result of amortization of tenant origination costs related to lease expirations and the disposition of properties.

Interest expense increased from $3.5 million for the three months ended September 30, 2015 to $8.0 million for the three months ended September 30, 2016, primarily due to increased borrowings as a result of our bond offering and additional mortgage financing. Excluded from interest expense was $0.5 million of interest capitalized to our investments in undeveloped land during the three months ended September 30, 2016 and 2015. Our interest expense in future periods will vary based on interest rate fluctuations, the amount of interest capitalized and our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.

During the three months ended September 30, 2016, we had no dispositions. During the three months ended September 30, 2015, we sold one office property and 14.5 acres of undeveloped land that resulted in a gain on sale of $2.9 million.

Comparison of the nine months ended September 30, 2016 versus the nine months ended September 30, 2015

The following table provides summary information about our results of operations for the nine months ended September 30, 2016 and 2015 (dollar amounts in thousands):



	Nine Months Ended September 30,				Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions/ Dispositions ⁽¹⁾			$ Change Due to Investments Held Throughout Both Periods ⁽²⁾
	2016		2015		Increase (Decrease)			Percentage Change		$ Change Due to Acquisitions/ Dispositions ⁽¹⁾
Rental income	$	76,646	$	66,315	$	10,331		16	%	$	6,569		$	3,762
Tenant reimbursements	15,484		13,991		1,493			11	%	1,211			282
Interest income from real estate loan receivable	3,655		1,968		1,687			86	%	1,687			—
Other operating income	2,580		2,495		85			3	%	(37		)	122
Operating, maintenance, and management costs	29,755		27,855		1,900			7	%	1,424			476
Real estate taxes and insurance	12,419		11,439		980			9	%	874			106
Asset management fees to affiliate	6,932		6,242		690			11	%	541			149
Real estate acquisition fees to affiliate	2,964		—		2,964			n/a		2,964			—
Real estate acquisition fees and expenses	542		—		542			n/a		542			—
General and administrative expenses	4,172		2,624		1,548			59	%	n/a			n/a
Foreign currency transaction loss, net	4,602		—		4,602			n/a		n/a			n/a
Depreciation and amortization	37,436		33,684		3,752			11	%	4,213			(461		)
Interest expense	20,354		11,292		9,062			80	%	n/a			n/a
Other income	—		5,084		(5,084		)	n/a		n/a			n/a
Gain on sale of real estate, net	—		11,195		(11,195		)	n/a		(11,195		)	n/a

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 related to real estate and real estate-related investments acquired, repaid or disposed on or after January 1, 2015.

⁽²⁾ Represents the dollar amount increase (decrease) for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 with respect to real estate and real estate-related investments owned by us during the entire periods presented.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Rental income and tenant reimbursements increased from $66.3 million and $14.0 million, respectively, for the nine months ended September 30, 2015 to $76.6 million and $15.5 million, respectively, for the nine months ended September 30, 2016, primarily as a result of the growth in our real estate portfolio and as a result of an increase in occupancy from 84% as of September 30, 2015 to 88% as of September 30, 2016 related to properties (excluding apartments) held throughout both periods. In addition, annualized base rent per square foot increased from $21.16 as of September 30, 2015 to $21.92 as of September 30, 2016 related to properties (excluding apartments) held throughout both periods. We expect rental income and tenant reimbursements to increase in future periods as a result of owning real estate acquired in 2016 for an entire period, anticipated future acquisitions of real estate and leasing additional space but to decrease to the extent we dispose of properties.

Interest income from our real estate loan receivable, recognized using the interest method, increased from $2.0 million for the nine months ended September 30, 2015 to $3.7 million for the nine months ended September 30, 2016, primarily as a result of our recognition and collection of default interest during the nine months ended September 30, 2016. On June 30, 2015, the University House First Mortgage Loan matured without repayment. On July 1, 2015, we provided notice to the borrower of default. We determined the real estate loan receivable to be impaired and recognized interest income from our real estate loan receivable on a cash basis. On April 21, 2016, we entered into an assignment of mortgage to assign the University House First Mortgage Loan to an assignee unaffiliated with the us or our advisor. On April 22, 2016, we received $31.6 million in connection with the assignment of the University House First Mortgage Loan. The proceeds received from the assignment reflects the entire principal balance and interest due, including any default interest, as of April 21, 2016, plus any legal costs incurred by us in connection with the assignment.

Property operating costs and real estate taxes and insurance increased from $27.9 million and $11.4 million, respectively, for the nine months ended September 30, 2015 to $29.8 million and $12.4 million, respectively, for the nine months ended September 30, 2016, primarily as a result of the growth in our real estate portfolio. We expect property operating costs and real estate taxes and insurance to increase in future periods as a result of owning real estate acquired in 2016 for an entire period, anticipated future acquisitions of real estate, increasing occupancy of our real estate assets and inflation but to decrease to the extent we dispose of properties.

Asset management fees increased from $6.2 million for the nine months ended September 30, 2015 to $6.9 million for the nine months ended September 30, 2016, primarily as a result of the growth in our real estate portfolio. We expect asset management fees to increase in future periods as a result of owning real estate acquired in 2016 for an entire period and capital expenditures but to decrease to the extent we dispose of properties. All asset management fees incurred as of September 30, 2016 have been paid.

Real estate acquisition fees and expenses to affiliate and non-affiliates were $3.5 million for the nine months ended September 30, 2016. We did not acquire any real estate for the nine months ended September 30, 2015. During the nine months ended September 30, 2016, we acquired one office portfolio and one office property for $293.8 million. We expect real estate acquisition fees and expenses to vary in future periods based upon acquisition activity.

General and administrative expenses increased from $2.6 million for the nine months ended September 30, 2015 to $4.2 million for the nine months ended September 30, 2016, primarily due to increased legal and auditor costs as a result of our ongoing Israeli securities law compliance requirements related to our outstanding bonds. We expect general and administrative expenses to fluctuate based on our legal expenses and investment and disposition activity.

We recognized $4.6 million of foreign currency transaction loss, net for the nine months ended September 30, 2016 related to the issuance of Series A debentures in Israel, consisting of $6.1 million of foreign currency transaction loss, partially offset by $1.5 million foreign currency transaction gain as a result of our foreign currency collars. These debentures are denominated in Israeli new Shekels and we expect to recognize foreign transaction gains and losses to the extent that we do not enter into a foreign currency collar or hedge. We did not recognize any foreign currency transaction gain or loss during the nine months ended September 30, 2015.

Depreciation and amortization increased from $33.7 million for the nine months ended September 30, 2015 to $37.4 million for the nine months ended September 30, 2016, primarily as a result of the growth in our real estate portfolio. We expect depreciation and amortization to increase in future periods as a result of owning real estate acquired in 2016 for an entire period but to decrease as a result of amortization of tenant origination costs related to lease expirations and the disposition of properties.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Interest expense increased from $11.3 million for the nine months ended September 30, 2015 to $20.4 million for the nine months ended September 30, 2016, primarily due to increased borrowings as a result of our bond offering and additional mortgage financing. Excluded from interest expense was $1.5 million of interest capitalized to our investments in undeveloped land during the nine months ended September 30, 2016 and 2015. Our interest expense in future periods will vary based on interest rate fluctuations, the amount of interest capitalized and our level of future borrowings, which will depend on the availability and cost of debt financing and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.

During the nine months ended September 30, 2015, we received $5.9 million in proceeds from condemnation agreements. The carrying value of the condemned land was $0.8 million, resulting in a gain of $5.1 million, which is included in other income in the accompanying consolidated statements of operations.

During the nine months ended September 30, 2016, we had no dispositions. During the nine months ended September 30, 2015, we sold two office properties and 14.5 acres of undeveloped land that resulted in a gain on sale of $11.2 million.

Funds from Operations, Modified Funds from Operations and Adjusted Modified Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding 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), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do. Our management believes that historical cost accounting for real estate assets in accordance with U.S. generally accepted accounting principles (“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 by themselves. 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 provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. Items such as acquisition fees and expenses, which had previously been capitalized prior to 2009, are currently expensed and accounted for as operating expenses. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses; adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above- and below-market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the Investment Program Association (“IPA”) in November 2010 as interpreted by management. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

In addition, our management uses an adjusted MFFO (“Adjusted MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. Adjusted MFFO provides adjustments to reduce MFFO related to operating expenses that are capitalized with respect to certain of our investments in undeveloped land.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

We believe that MFFO and Adjusted MFFO are helpful as measures of ongoing operating performance because they exclude costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition costs from MFFO and Adjusted MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage. MFFO and Adjusted MFFO also exclude non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO and Adjusted MFFO provide investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.

FFO, MFFO and Adjusted MFFO are non-GAAP financial measures and do not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO, MFFO and Adjusted MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO, MFFO and Adjusted MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO, MFFO and Adjusted MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO, MFFO and Adjusted MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.

Although MFFO includes other adjustments, the exclusion of straight-line rent amortization of above- and below-market leases, acquisition fees and expenses and mark-to-market foreign currency transaction adjustments, are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:

•

Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, while also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we expect to receive in a future period or rent that was received in a prior period;

•

Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate;

•

Acquisition fees and expenses. Acquisition fees and expenses related to the acquisition of real estate are expensed. Although these amounts reduce net income, we exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis. Additionally, acquisition costs have been funded from the proceeds from our now terminated initial public offering and debt financings, including our Israeli bond offering, and not from our operations. We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of our operating performance; and

•

Mark-to-market foreign currency transaction adjustments. The U.S. dollar is our functional currency. Transactions denominated in currency other than our functional currency are recorded upon initial recognition at the exchange rate on the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are remeasured at each reporting date into the foreign currency at the exchange rate on that date. In addition, we have entered into foreign currency collars that results in a foreign currency transaction adjustment. These amounts can increase or reduce net income. We exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis.

Adjusted MFFO includes adjustments to reduce MFFO related to real estate taxes, property insurance and financing costs which are capitalized with respect to certain of our investments in undeveloped land. We have included adjustments for the costs incurred necessary to bring these investments to their intended use, as these costs are recurring operating costs that are capitalized in accordance with GAAP and not reflected in our net income (loss), FFO and MFFO.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculations of MFFO and Adjusted MFFO, for the three and nine months ended September 30, 2016 and 2015 (in thousands). No conclusions or comparisons should be made from the presentation of these periods.



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2015			2016			2015
Net (loss) income attributable to common stockholders	$	(14,951	)	$	(462	)	$	(21,804	)	$	3,299
Depreciation of real estate assets	8,047			6,207			21,512			17,802
Amortization of lease-related costs	6,290			5,090			15,924			15,882
Gain on sale of real estate, net	—			(2,908		)	—			(11,195		)
Adjustments for noncontrolling interests - consolidated entity ⁽¹⁾	(121		)	104			(371		)	3,054
Adjustments for investment in unconsolidated entity⁽²⁾	2,148			1,927			5,930			5,717
FFO attributable to common stockholders	1,413			9,958			21,191			34,559
Straight-line rent and amortization of above- and below-market leases	(1,971		)	(1,167		)	(3,395		)	(4,309		)
Amortization of discounts and closing costs	—			—			—			(428		)
Real estate acquisition fees to affiliate	1,690			—			2,964			—
Real estate acquisition fees and expenses	274			—			542			—
Amortization of net premium/discount on bond and notes payable	11			7			28			18
Prepayment fees related to the extinguishment of debt	—			—			—			250
Mark-to-market foreign currency transaction loss, net	6,639			—			4,602			—
Adjustments for noncontrolling interests - consolidated entity ⁽¹⁾	(2		)	(11		)	(11		)	(35		)
Adjustments for investment in unconsolidated entity ⁽²⁾	(1,042		)	(1,482		)	(3,381		)	(3,706		)
MFFO attributable to common stockholders	7,012			7,305			22,540			26,349
Other capitalized operating expenses ⁽³⁾	(610		)	(678		)	(1,787		)	(2,149		)
Adjustments for noncontrolling interests - consolidated entity ⁽¹⁾	—			65			61			203
Adjusted MFFO attributable to common stockholders	$	6,402		$	6,692		$	20,814		$	24,403

_____________________

⁽¹⁾ Reflects adjustments to eliminate the noncontrolling interest holders’ share of the adjustments to convert our net (loss) income attributable to common stockholders to FFO, MFFO and Adjusted MFFO.

⁽²⁾ Reflects adjustments to add back our noncontrolling interest share of the adjustments to convert our net (loss) income attributable to common stockholders to FFO, MFFO and Adjusted MFFO for our equity investment in an unconsolidated joint venture.

⁽³⁾Reflects real estate taxes, property insurance and financing costs that are capitalized with respect to certain of our investments in undeveloped land. During the time in which we are incurring costs necessary to bring these investments to their intended use, certain normal recurring operating costs are capitalized in accordance with GAAP and not reflected in our net (loss) income, FFO and MFFO.

FFO, MFFO and Adjusted MFFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO, MFFO and Adjusted MFFO, such as tenant improvements, building improvements and deferred leasing costs. We expect FFO, MFFO and Adjusted MFFO to improve in future periods to the extent that we continue to lease up vacant space and acquire additional assets. We expect FFO, MFFO and Adjusted MFFO to decrease as a result of dispositions.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Distributions

Distributions declared, distributions paid and cash flows used in operations were as follows for the first, second and third quarters of 2016 (in thousands, except per share amounts):



	Distribution Declared		Distributions Declared Per Share		Distributions Paid						Cash Flows Provided by Operations
Period	Distribution Declared		Distributions Declared Per Share		Cash		Reinvested		Total		Cash Flows Provided by Operations
First Quarter 2016	$	5,472	$	0.093	$	2,271	$	3,201	$	5,472	$	1,139
Second Quarter 2016	5,469		0.093		2,309		3,160		5,469		11,429
Third Quarter 2016	5,527		0.094		2,368		3,159		5,527		6,500
	$	16,468	$	0.280	$	6,948	$	9,520	$	16,468	$	19,068

On March 9, 2016, our board of directors authorized a distribution in the amount of $0.09323770 per share of common stock to stockholders of record as of the close of business on March 22, 2016. We paid this distribution on March 29, 2016 and this was the only distribution declared and paid during the first quarter of 2016.

On June 17, 2016, our board of directors authorized a distribution in the amount of $0.09323770 per share of common stock to stockholders of record as of the close of business on June 17, 2016. We paid this distribution on June 22, 2016 and this was the only distribution declared and paid during the second quarter of 2016.

On September 15, 2016, our board of directors authorized a distribution in the amount of $0.09426230 per share of common stock to stockholders of record as of the close of business on September 16, 2016. We paid this distribution on September 22, 2016 and this was the only distribution declared and paid during the third quarter of 2016.

Our net loss attributable to common stockholders for the nine months ended September 30, 2016 was $21.8 million and our cash flows provided by operations were $19.1 million. Our cumulative distributions paid and net loss attributable to common stockholders from inception through September 30, 2016 were $99.4 million and $50.4 million, respectively. We funded the March 29, 2016 distribution with current and prior period cash provided by operations surplus. We funded the June 22, 2016 distribution and the September 22, 2016 distribution with current cash provided by operations. We have funded our cumulative distributions, which includes net cash distributions and distributions reinvested by stockholders, with proceeds from debt financing of $18.7 million, proceeds from the dispositions of property of $13.7 million and cash provided by operations of $67.0 million. To the extent that we pay distributions from sources other than our cash flow from operations or gains from asset sales, we will have fewer funds available for investment in real estate-related loans, opportunistic real estate, real estate-related debt securities and other real estate-related investments, the overall return to our stockholders may be reduced and subsequent investors may experience dilution.

Critical Accounting Policies

Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC. There have been no significant changes to our policies during 2016, except for the addition of an accounting policy with respect to foreign currency transactions.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)

Foreign currency transactions

The U.S. dollar is our functional currency. Transactions denominated in currency other than our functional currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are remeasured at each reporting date into the functional currency at the exchange rate at that date. Exchange rate differences, other than those accounted for as hedging transactions, are recognized as foreign currency transaction gain or loss included in general and administrative expenses in our consolidated statements of operations.

Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued.

Real Estate Related Investment Subsequent to September 30, 2016

Battery Point Series B Preferred Units

On October 28, 2016, we, through an indirect wholly owned subsidiary, entered into a purchase agreement to purchase up to an aggregate of 25,000 units of Series B Preferred Units (the “Preferred Units”) of Battery Point Trust LLC (“Battery Point”), over a six-month period at a per-unit price of $1,000, resulting in an aggregate investment of $25.0 million. On October 28, 2016, we purchased an initial 5,000 Preferred Units, net of an equity commitment fee of $0.6 million, for a net payment of $4.4 million. The Preferred Units are entitled to the payment of quarterly distributions at the following annual rates: 7.0% for the period commencing October 28, 2016 through April 28, 2017; 9.0% for the period commencing April 29, 2017 through April 28, 2018; and 12.0% for the period commencing April 29, 2018 through October 28, 2019. We may be required to purchase additional Preferred Units no more frequently than once a month during the period beginning in November 2016 and ending in April 2017. Each minimum required additional purchase of Preferred Units is 5,000 units. Battery Point may redeem the Preferred Units at any time, subject to payment to us of an exit fee in the amount of 1.0% of the redemption price if Battery Point redeems the Preferred Units after April 28, 2017.

Financing Subsequent to September 30, 2016

353 Sacramento Mortgage Loan

On October 14, 2016, we, through an indirect wholly owned subsidiary, entered into a two-year secured mortgage loan with an unaffiliated lender, for borrowings of up to $115.5 million secured by 353 Sacramento (the “353 Sacramento Mortgage Loan”). As of October 14 2016, $85.5 million had been disbursed to us with the remaining $30.0 million available for future disbursements to be used for tenant improvements, leasing commissions and capital improvements, subject to certain terms and conditions contained in the loan documents. The 353 Sacramento Mortgage Loan matures on October 14, 2018 with three one-year extension options, subject to certain conditions contained in the loan documents and the payment of an extension fee of 0.25% of the outstanding principal balance with respect to the second and third extension options. The 353 Sacramento Mortgage Loan bears interest at a floating rate of 275 basis points over one-month LIBOR. The borrower entered into an interest rate cap that effectively limits one-month LIBOR on $115.5 million of the outstanding loan balance at 3.00% effective October 14, 2016 through October 14, 2018. Monthly payments are interest-only with the entire unpaid principal balance and all outstanding interest and fees due at maturity. We have the right to prepay the loan in whole at any time or in part from time to time to the extent necessary, subject to the payment of certain expenses potentially incurred by the lender as a result of the prepayment, the payment of a prepayment premium and certain other conditions contained in the loan documents.

KBS SOR Properties, LLC, our separate wholly owned subsidiary through which we indirectly owns all of our real estate assets (“KBS SOR Properties”), provided a limited guaranty of the 353 Sacramento Mortgage Loan with respect to certain potential deficiencies, losses or damages suffered by the lender resulting from certain intentional acts committed by the borrower or KBS SOR Properties in violation of the loan documents, or in the event of certain bankruptcy or insolvency proceedings involving the borrower or KBS SOR Properties.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity, fund distributions and to fund the refinancing of our real estate investment portfolio and operations. We may also be exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans and the acquisition of real estate securities. We are also exposed to the effects of foreign currency changes in Israel with respect to the 4.25% bonds issued to Israeli investors in March 2016. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes and foreign currency changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We may manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. In order to limit the effects of changes in foreign currency on our operations, we may utilize a variety of foreign currency hedging strategies such as cross currency swaps, forward contracts, puts or calls. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments. Additionally, certain of these strategies may cause us to fund a margin account periodically to offset changes in foreign currency rates which may also reduce the funds available for payments to holders of our common stock. As of September 30, 2016, we had entered into four foreign currency collars to hedge against a change in the exchange rate of the Israeli new Shekel versus the U.S. Dollar. The foreign currency collars expire in August 2017 and have an aggregate U.S. Dollar notional amount of $250.0 million. The foreign currency collars consist of purchased call options to buy Israeli new Shekels ranging from 3.6686 to 3.7245 and sold put options to sell the Israeli new Shekels ranging from 3.7695 to 3.826. The foreign currency collars are intended to permit us to exchange, on the settlement date of the collars and net of the effect of the collars, $250.0 million for an amount of Israeli new Shekels ranging from 923.1 million to 948.4 million.

As of September 30, 2016, we held 0.3 million Israeli new Shekels and 21.8 million Israeli new Shekels in cash and restricted cash, respectively. In addition, as of September 30, 2016, we had bonds outstanding and the related interest payable in the amounts of 970.2 million Israeli new Shekels and 3.4 million Israeli new Shekels, respectively. Foreign currency exchange rate risk is the possibility that our financial results could be better or worse than planned because of changes in foreign currency exchange rates. Based solely on the remeasurement for the nine months ended September 30, 2016, if foreign currency exchange rates were to increase or decrease by 10%, our net income would increase or decrease by approximately $23.0 million and $28.1 million for the same period, respectively. The foreign currency transaction income or loss as a result of the change in foreign currency exchange rates does not take into account any gains or losses on our foreign currency collars as a result of such change, which would reduce our foreign currency exposure.

We borrow funds at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. As of September 30, 2016, the fair value of our KBS SOR (BVI) Holdings, Ltd. Series A Debentures was $250.2 million and the outstanding principal balance was $259.0 million. As of September 30, 2016, excluding the KBS SOR (BVI) Holdings, Ltd. Series A Debentures, the fair value of our fixed rate debt was $34.4 million and the outstanding principal balance of our fixed rate debt was $31.6 million. The fair value estimate of our KBS SOR (BVI) Holdings, Ltd. Series A Debentures was calculated using the quoted bond price as of September 30, 2016 on the Tel Aviv Stock Exchange of 96.62 Israeli new Shekels. The fair value estimate of our fixed rate debt was calculated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated as of September 30, 2016. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting changes in fair value of our fixed rate instruments, would have a significant impact on our operations.

Conversely, movements in interest rates on variable rate debt and loans receivable would change our future earnings and cash flows, but would not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. As of September 30, 2016, we were exposed to market risks related to fluctuations in interest rates on $657.4 million of variable rate debt outstanding. Based on interest rates as of September 30, 2016, if interest rates were 100 basis points higher during the 12 months ending September 30, 2017, interest expense on our variable rate debt would increase by $6.6 million. As of September 30, 2016, one-month LIBOR was 0.53111% and if the LIBOR index was reduced to 0% during the 12 months ending September 30, 2017, interest expense on our variable rate debt would decrease by $3.4 million.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 3. Quantitative and Qualitative Disclosures about Market Risk (continued)

The weighted-average interest rates of our fixed rate debt and variable rate debt as of September 30, 2016 were 4.3% and 2.7%, respectively. The annual effective interest rate represents the effective interest rate as of September 30, 2016, using the interest method that we use to recognize interest income on our real estate loan receivable.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our principal executive officer and principal 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 principal executive officer and principal 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 Securities Exchange Act of 1934, as amended (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 principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

Please see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

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


a)	During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.


b)	Not applicable.


c)	We have adopted a share redemption program that may enable stockholders to sell their shares to us in limited circumstances.

Pursuant to the share redemption program there are several limitations on our ability to redeem shares:


•	Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), we may not redeem shares until the stockholder has held the shares for one year.


•	During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.


•	We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

•

During 2016, we may not redeem more than $3.0 million of shares in a given quarter (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”). To the extent that we redeem less than $3.0 million of shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) in a given fiscal quarter, any remaining excess capacity to redeem shares in such fiscal quarter will be added to our capacity to otherwise redeem shares (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”) during the succeeding fiscal quarter. We may increase or decrease this limit upon ten business days' notice to stockholders. Our board of directors may approve an increase in this limit to the extent that we have received proceeds from asset sales or the refinancing of debt or for any other reason deemed appropriate by the board of directors. On September 15, 2016, our board of directors approved an additional $25.0 million of funds available for the redemption of shares for the third quarter of 2016. Any excess capacity to redeem shares during the third quarter of 2016 will be added to our capacity to otherwise redeem shares during subsequent periods.

Upon a transfer of shares any pending redemption requests with respect to such transferred shares will be canceled as of the date we accept the transfer. Stockholders wishing to continue to have a redemption request related to any transferred shares considered by us must resubmit their redemption request.

We may amend, suspend or terminate the program upon 30 days’ notice to our stockholders. We may provide this notice by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders.

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PART II. OTHER INFORMATION (CONTINUED)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)

During the nine months ended September 30, 2016, we fulfilled redemption requests and redeemed shares pursuant to the share redemption program as follows:



Month	Total Number of Shares Redeemed	Average Price Paid Per Share⁽¹⁾		Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2016	2,722	$	13.44	⁽²⁾
February 2016	500	$	13.44	⁽²⁾
March 2016	252,839	$	13.32	⁽²⁾
April 2016	10,475	$	13.44	⁽²⁾
May 2016	10,012	$	13.44	⁽²⁾
June 2016	248,137	$	13.35	⁽²⁾
July 2016	—	$	—	⁽²⁾
August 2016	15,566	$	13.44	⁽²⁾
September 2016	1,813,892	$	13.37	⁽²⁾
Total	2,354,143

_____________________

⁽¹⁾On December 8, 2015, our board of directors adopted an eighth amended and restated share redemption program (the “Eighth Amended Share Redemption Program”). Pursuant to the Eighth Amended Share Redemption Program, except for redemptions made upon a stockholder’s death, “qualifying disability” or “determination of incompetence,” the prices at which we will redeem shares are as follows: (i) 97.5% of our most recent estimated value per share as of the applicable redemption date for those shares held for at least one year but less than four years; and (ii) 100% of the Company’s most recent estimated value per share as of the applicable redemption date for those shares held for at least four years. The Eighth Amended Share Redemption Program limits redemptions to $3.0 million of shares in a given quarter (excluding shares redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence”). However, on September 15, 2016, our board of directors approved an additional $25 million of funds available for the redemption of shares for the third quarter of 2016 and subsequent periods to the extent that we redeemed less than the number of shares that we could purchase in the third quarter of 2016. The Eighth Amended Share Redemption Program was effective on January 9, 2016.

Upon the death, “qualifying disability” or “determination of incompetence” of a stockholder, the redemption price is our estimated value per share. On December 8, 2015, our board of directors approved an estimated value per share of our common stock of $13.44, based on the estimated value of our assets less the estimated value of our liabilities, or net asset value, divided by the number of shares outstanding as of September 30, 2015. The change in the redemption price became effective for the December 2015 redemption date and is effective until the estimated value per share is updated. We expect to engage KBS Capital Advisors and/or an independent valuation firm to update our estimated value per share in December 2016.

⁽²⁾We limit the dollar value of shares that may be redeemed under the program as described above. During the nine months ended September 30, 2016, we redeemed $31.5 million of common stock, which represented all redemption requests received in good order and eligible for redemption through the September 2016 redemption date. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2015 and additional funds made available by our board of directors, we have $7.1 million available for redemptions during the remainder of 2016, subject to the limitations described above.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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PART II. OTHER INFORMATION (CONTINUED)

Item 6. Exhibits



Ex.		Description

3.1		Second Articles of Amendment and Restatement, incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed February 4, 2010

3.2		Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11, Commission File No. 333-156633

4.1		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 Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, Commission File No. 333-156633

4.2		Fifth Amended and Restated Dividend Reinvestment Plan, incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed May 14, 2015

10.1		Advisory Agreement, by and between the Company and KBS Capital Advisors LLC, dated October 8, 2016.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

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

99.1		Eighth Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed December 10, 2015

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

Pursuant to the requirements 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.




		KBS STRATEGIC OPPORTUNITY REIT, INC.

Date:	November 10, 2016	By:	/S/ KEITH D. HALL
			Keith D. Hall
			Chief Executive Officer and Director
			(principal executive officer)

Date:	November 10, 2016	By:	/S/ JEFFREY K. WALDVOGEL
			Jeffrey K. Waldvogel
			Chief Financial Officer, Treasurer and Secretary
			(principal financial officer)