FOR THE YEAR ENDED DECEMBER 31, th ANNUAL REPORT TO THE SHAREHOLDERS

Transcription

1 FOR THE YEAR ENDED DECEMBER 31, th ANNUAL REPORT TO THE SHAREHOLDERS

2 DAKOTA REIT BOARD OF TRUSTEES EXECUTIVE OFFICERS Ray Braun Kevin Christianson * Brad Fay * George Gaukler Joe Hauer * Brion Henderson * Stan Johnson * Gorman King, Jr. Brion Henderson George Gaukler Jim Knutson Brad Fay Ray Braun Chairman Vice Chairman President Executive Vice President Secretary Treasurer Gorman King, Jr. * Jim Knutson DAKOTA REIT MANAGEMENT, LLC Clarice Liechty * Roy Sheppard * Gene Smestad * * Independent Trustees FINANCE COMMITTEE George Gaukler Jim Knutson Tammy Hauck Jim Haley Mark Richman Natasha Kemmer President / Chief Executive Officer Executive Vice President Vice President / Chief Operating Officer Vice President / Chief Financial Officer Business Development Shareholder Relations Kevin Christianson George Gaukler Brion Henderson Gorman King, Jr. Gene Smestad AUDITORS Eide Bailly LLP th Ave. S. Fargo, ND LEGAL COUNSEL Fremstad Law PO Box 3143 Fargo, ND 58108

3 TABLE OF CONTENTS CHAIRMAN S REPORT ADVISOR S REPORT FINANCIAL HIGHLIGHTS DISTRIBUTIONS DECLARED SHARE VALUE ANALYSIS DIVIDEND REINVESTMENT PLAN 2013 PROPERTY ACQUISITIONS COMMERCIAL PROPERTY PORTFOLIO RESIDENTIAL PROPERTY PORTFOLIO SHARE REDEMPTION PROGRAM FEES AND COMPENSATION AUDITED CONSOLIDATED FINANCIAL STATEMENTS MISSION STATEMENT The mission of The Dakota REIT is to consistently meet shareholder investment performance expectations by investing in quality real estate that will allow for attractive dividend payments and increased long-term share value. The annual report is prepared for the general information to the shareholders in The Dakota REIT. The annual report is not intended to be used for a purchase or sale of any investments of The Dakota REIT except when accompanied by a prospectus. 1

4 Chairman s Letter to Shareholders The Dakota REIT had an excellent year in We increased our property holdings by almost 24%, ending the year with just over $200 million in assets. While getting bigger, we also got better: our FFO per Share (shorthand for cash generated by operations) grew 20%. North Dakota s robust economic climate has boosted our occupancy rates to levels exceeding the national average. Low interest rates have allowed us to lock in historically low loan rates. Property tax relief in the state of North Dakota also contributed to this stellar year. Our Advisor is to be commended for its significant contribution to this year s results: they know real estate and manage it well. Diversification of investments is recognized as sound financial planning. Conventional portfolios contain a mix of stocks for growth and bonds for income and stability. Your Dakota REIT investment, which consists of commercial and residential real estate, melds the best of these elements of growth, income and stability. CHAIRMAN S REPORT Growth: our historical record of almost 11% handily beats that of the vast majority of stocks. For example, the largest and broadest public REIT fund, the Vanguard REIT Index ETF, returned just 2.31% in Income: our dividend of over 5% exceeds that of all but the most risky of bonds. Stability: the chief drawback of bonds, at this particular time, stems from a bond s invariable relationship to interest rate movements. When interest rates rise, the value of a bond declines. In the event of higher interest rates, the value of your REIT investment will much more likely retain its value. Another benefit of a real estate investment is its low-correlation to other asset classes (read: the stock market). By remaining a private REIT, we avoid the volatility inherent in publically traded stocks. Having an investment not tied to the roller coaster of the stock market allows investors to sleep well without the temptations of trying to time getting in or out at the right times was a year for the record books for The Dakota REIT. We cannot promise to repeat this performance; but do promise to be careful stewards of your investment. Gorman King, Chairman 2

5 Dear Shareholders, Dakota REIT was formed sixteen years ago with the vision of providing investors the financial advantages of real estate ownership without the responsibility of property management. There was an understanding that real estate ownership can provide a long term stable return to an investor, and for sixteen years, Dakota REIT has delivered. A $10,000 investment in 1998, that took advantage of the dividend reinvested plan to purchase additional shares, at 90% of value, is today worth $58,725. An 11.82% compounded annual return, or a 487% increase in value. Made more significant is the fact that the return was generated during one of the worst recessions in US history. Dakota REIT is a non-traded security, which means we are not listed on an exchange that is publicly traded. It also means that we have control of our share price. Annually, the Board of Trustees reviews the value of our properties, in the same way an appraiser values property, and then sets the price of our shares we offer to the public. In this way, the share price is based upon the performance of our property portfolio and is not affected by outside influences that have nothing to do with Dakota REIT. Shareholders validate the price by purchasing shares based upon the return on investment generated by the REIT. A person can become an investor in Dakota REIT by buying shares. However, if you currently own appreciated property, we can also exchange your equity in that property for operating units of Dakota UPREIT LP, and defer your capital gains tax. The units have the same value and receive the same dividend as REIT shares. The investor not only defers the capital gain tax, they receive a return on that money, which historically has doubled every seven years, for as long as he is a Unitholder. Then if the units are held until death, the estate receives a stepped up tax basis and the deferred capital gains tax is eliminated. This past year we have provided our Shareholders an excellent investment return. Although we have property outside our state, we have continued to benefit from significant investments in North Dakota, where the economy is strong and growing. Multi-family occupancy was again strong at 96%, which accounts for 60% of our property portfolio. The remaining balance is made up of office and retail properties, where commercial occupancy was at 97% for This unusually strong occupancy translated into a solid return on investment. Significant financial benchmarks for 2013 include: 24% increase in our property portfolio to over $200,000,000 38% increase in shareholder equity to near $50,000, % increase in Funds From Operations to $.95 per share 7.7% increase in share price to $10.50 per share 8% increase in dividends to $.5400 per share 13.23% return on investment in 2013 Thank you for your continued confidence in Dakota REIT. We have an engaged Board of Trustees and a dedicated staff that works hard everyday to acquire and manage property for your benefit. I think this year s financial results speak for themselves. Best regards, George Gaukler President REPORT 3 ADVISOR S

6 FINANCIAL HIGHLIGHTS For The Years Ending Residential Investments $130,797,557 $107,745,678 $77,995,302 $71,966,483 $65,465,102 Commercial Investments $75,301,936 $58,332,890 $54,948,137 $44,233,565 $36,278,443 Mortgages Payable $141,209,761 $116,210,301 $93,437,292 $81,943,701 $73,463,907 Total Revenue $24,844,194 $18,873,294 $16,557,571 $13,800,693 $12,179,987 Funds From Operations $7,873,371 $5,356,605 $3,833,467 $2,829,133 $2,265,840 Funds From Operations (1) Per Share $0.95 $0.80 $0.68 $0.59 $0.54 Weighted Average Shares 8,247,619 6,731,794 5,651,628 4,818,909 4,212,175 $140,000,000 $120,000,000 Total Investments $1.00 Funds From Operations $100,000,000 $0.80 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $ Residential Investments Commercial Investments $0.60 $0.40 $0.20 $ Funds From Operations The Declaration of Trust provides that, subject to certain conditions, the Total Operating Expenses of the Trust shall not exceed in any fiscal year the greater of 2% of the Average Invested Assets during the fiscal year or 25% of the Trust s Net Income during such fiscal year. For the year ended December 31, 2013, the Trust s Total Operating Expenses were $806,163 or.42% which is less than one percent of the Average Invested Assets and 10.6% of the Net Income, before depreciation and amortization, therefore meeting the limitations. Footnote: (1) Funds From Operations FFO is defined as net income determined in accordance with Generally Accepted Accounting Principles (GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets. 4

7 DISTRIBUTIONS DECLARED YEAR PRICE* PER SHARE DISTRIBUTIONS PER SHARE PERCENTAGE OF DIVIDENDS TAXABLE AS ORDINARY INCOME 2003* $6.75 $ % 2004 $7.00 $ % 2005 $7.35 $0.44 7% 2006 $7.50 $0.45 0% 2007 $7.50 $0.46 0% 2008 $8.00 $0.47 0% 2009 $8.00 $0.47 0% 2010 $8.75 $ % 2011 $8.75 $ % 2012 $9.75 $ % 2013 $10.50 $ % 1 Distributions are inclusive of dividends paid to shareholders of The Dakota REIT and distributions paid to limited partners of Dakota UPREIT. 2 The Dakota REIT s Dividend Reinvestment Plan allows for the reinvestment of distributions for additional shares at a price equal to 90% of the current asking price. 3 Due to real estate depreciation, a portion of the dividends paid is not taxable to the shareholder in the year received. The non-taxable portion is treated as a return of capital or decrease in cost [basis]. Future taxable gains will be recognized if an Investor sells shares for more than the carrying cost [basis] or if the Investor s dividends received exceed original stock purchase. If dividends are reinvested, the Investor s basis does not change. [The percent taxable column is not applicable to Dakota UPREIT Limited Partners, as each Partner s income is separately determined based on the property contributed.] *A 20-for-1 stock split occurred in the second quarter of For comparison purposes, we have restated the previous figures to allow for the split. 5

8 SHARE VALUE ANALYSIS Share Value Analysis of Sixteen-Year Cumulative Total Return Period Ending: December 31, 2013 Reinvested 90% of Current Share Price Investment of $10,000 in Dakota REIT in 1998 Current Share Price: $10.50 Original Purchase: Dividend 1998 Share Price Dividend 1999 Share Price Dividend 2000 Share Price Dividend 2001 Share Price Dividend 2002 Share Price Dividend 2003 Share Price Dividend 2004 Share Price Dividend 2005 Share Price Dividend 2006 Share Price Dividend 2007 Share Price Dividend 2008 Share Price Dividend 2009 Share Price Dividend 2010 Share Price Dividend 2011 Share Price Dividend 2012 Share Price Dividend 2013 Share Price Reinvested Dividend Dividend Share Price Rolling Share Compounded Shares Declared Calculation Calculation Value Price Rate of Return 2, $10, $5.00 2, $10, % 2, , $12, $6.00 2, $13, % 2, $13, $6.00 2, $14, , $14, $ % 2, , $15, , $15, $ % 2, , $16, % 2, $17, $6.25 2, , $18, % 2, , $20, $6.75 3, , $21, , $22, $ % 3, , $23, % 3, , $25, $7.35 3, , $26, % 3, $27, $7.50 3, , $29, , $29, $ % 3, , $31, , , $33, $ % 4, , $35, % 4, $35, $8.00 4, , $37, % 4, , $41, $8.75 4, , $43, % 4, $43, $8.75 5, , $46, , , $51, $ % 5, , $54, % 5, , $58, $10.50 Beginning Value $10, Dividends Paid $27, Share Price Increase $20, Ending Value $58, % Compounded Rate of Return Compounded Rate of Return: Cash Distribution: Increase over 16 years: $48, NOTE: Through 2013, 69% of the Dividends have been tax deferred. The calculation is based on an annual calculation versus a quarterly calculation. Dividends are reinvested on a quarterly basis. Quarterly reinvestment will increase the rate of return. If dividends were not reinvested, but taken in cash, the investor would have received $13,996 in dividends and $11,000 in share value increase during the same period, for a total investment of $34,996, an average rate of return of 10.84%. The informa on provided in this area is historical in nature. The statements, projec ons, and es mates presented are based on informa on available and circumstances prevalent at the me at which the examples were originally issued. These examples do not necessarily reflect current condi ons or circumstances and should not be relied upon for the purpose of investment decisions or as current fact. 6

9 DIVIDEND REINVESTMENT PLAN The Dakota REIT offers to its shareholders an opportunity to reinvest their cash dividend in shares of The Dakota REIT. Shares purchased under the Dividend Reinvestment Plan (the Plan ) are discounted from the current public offering share price by 10%. Shareholders do not pay broker fees to be part of the Plan. Nor does Dakota REIT charge a fee in administering the Plan. A shareholder may elect the Plan at any time. The initial Subscription Agreement provides the shareholder the option to 1) select the dividend paid in cash or 2) reinvest in shares at a discount of 10%. After the initial election, if a shareholder wants to change their Plan status, the change is completed by signing a Shareholder Change Form. The Shareholder Change Form may be obtained by writing to Dakota REIT Management, LLC, nd Avenue South, Fargo, ND or by calling Shareholder Relations at (701) Dividends are paid quarterly, to the Shareholders of Record, within ten (10) days after the Date of Declaration as voted on by The Board of Trustees. If the Plan is elected, the reinvestment in additional shares will also occur within the ten (10) days after the Date of Declaration. Shareholders receive a quarterly statement detailing the amount of dividends declared, the number of shares purchased, the price per share, and cumulative transactions for the year. Annually, each reportable shareholder will receive an IRS Form 1099-Div stating the year s dividend income for tax reporting. 7

10 2013 PROPERTY ACQUISITIONS COMMERCIAL AND RESIDENTIAL CALGARY APARTMENTS BISMARCK, ND CENTURY EAST APARTMENTS BISMARCK, ND CUMMINS NPOWER DEPERE, WI 8

11 CUMMINS NPOWER FARGO, ND TMI BUILDING FARGO, ND dakota ROSE APARTMENTS WILLISTON, ND URBAN MEADOWS FARGO, ND HILLVIEW APARTMENTS & TOWNHOMES SIOUX FALLS, SD WILLOW CREEK PLAZA WATERTOWN, SD 9

12 COMMERCIAL PROPERTIES ACQUIRED IN YEARS TOTAL SQUARE FEET 2013 OCCUPANCY ALCO - New Praque th Ave SE New Prague, MN ,614 SF 100% ALCO - Oakes 1420 North 7th St Oakes, ND ,614 SF 100% Amber Valley Retail Center 2501, 2551, th St S Fargo, ND ,469 sf 100% Bismarck Airport Road airport road bismarck, nd ,803 SF 98% BOOTBARN TH AVE SW MINOT, ND ,400 SF 100% century mall 109 east century ave bismarck, nd ,466 SF 100% CUMMINS NPOWER - DEPERE 939 LAWRENCE DR DEPERE, WI ,206 SF 100% CUMMINS NPOWER - FARGO TH AVE S FARGO, ND ,137 SF 100% donegal centre 4301 w 57th st sioux falls, sd ,354 SF 95% first center south 3051 & th st s fargo, nd ,860 SF 96% 10

13 hannaher s / evolution th ave sw fargo, nd ,589 SF 100% LEEVERS SUPERVALUE 424 2ND AVE NE VALLEY CITY, ND ,882 SF 100% LINDQUIST SQUARE 1933 SOUTH BROADWAY TH AVE SW MINOT, ND ,345 SF 100% LOGAN S ON 3rd 120 NORTH 3RD ST BISMARCK, ND ,035 SF 97% METRO CENTER MALL TH AVE SW MINOT, ND ,126 SF 91% MINOT MINI STORAGE 4807, 4811 & 4815 N BROADWAY MINOT, ND ,800 SF 93% PIONEER CENTER TH AVE S & 1380 & TH ST E & 1965 PRAIRIE PKWY WEST FARGO, ND & ,491 SF 94% PIZZA RANCH 1504 CENTER AVE W DILWORTH, MN ,862 SF 100% South Broadway Plaza 1809 S. BROADWAY MINOT, ND ,000 SF 94% TMI BUILDING ND AVE S FARGO, ND ,619 SF 100% TUSCANY SQUARE 107 WEST MAIN AVE BISMARCK, ND ,523 SF 100% WILLOW CREEK PLAZA 903 & TH ST SE WATERTOWN, SD ,420 SF 100% 11

14 RESIDENTIAL PROPERTIES ACQUIRED IN YEARS NUMBER OF UNITS 2013 OCCUPANCY Amber fields apartments 4884, 4936, 5024, st ave sw fargo, nd units 98% bakken heights apartments (limited partnership units) nd st nw williston, nd limited partnership CALGARY I, II, & III APARTMENTS 3310, 3420, TH ST N BISMARCK, ND units 94% CALICO APARTMENTS TH AVE SW TH AVE SW FARGO, ND units 96% CENTRAL PARK APARTMENTS 5101, 5151, 5231, 5251, 5301, 5331, 5351 AMBER VALLEY PARKWAY FARGO, ND units 96% CENTURY EAST I - V APARTMENTS 2909, 2939, 3001 OHIO ST 1715 & 1823 MAPLETON AVE BISMARCK, ND units 96% cooperative living center th ave e west fargo, nd units 98% country meadows 5001 & 5055 amber valley parkway fargo, nd units 97% DAKOTA ROSE APARTMENTS TH AVE W WILLISTON, ND limited partnership 12

15 DONEGAL POINTE APARTMENTS 4301 W 57TH ST SIOUX FALLS, SD units 95% EAGLE LAKE apartments TH ST WEST WEST FARGO ND UNITS 98% HILLVIEW APARTMENTS 24 HILLVIEW TOWNHOMES , 5005, 5021, 5033 E 26TH ST SIOUX FALLS, SD units 93% ONE OAK PLACE TH AVE S FARGO, ND LIMITED PARTNERSHIP summer s at osgood 4452, 4466, th st s 4522, 4536, th st s fargo, nd & units 97% urban meadows I - V 4610, 4630, 4640, 4668, rd ave s fargo, nd & units 90% washington heights hawken st bismarck, nd units 98% wheatland place apartments 3302, 3322, ST AVE 3501, 3511, 3521, TH AVE th st s fargo, nd units 97% wheatland & westlake townhomes st ave nd st s th st s th st s fargo, nd units 97% 13

16 SHARE REDEMPTION PROGRAM The Dakota REIT (the Trust ) shares are registered with the State of North Dakota. These shares are not listed or quoted on any of the national securities exchanges. As a shareholder, in the Trust, you have two options to sell your shares for liquidity. The first option is selling your shares through a broker. As a shareholder, you would initiate the process by contacting Dakota REIT for a list of brokers who are approved to sell secondary shares. The broker can arrange a sale to a third party buyer to purchase your shares. A second option is to sell your shares back to the Trust through the Share Redemption Program. The explanation of this program is detailed below. CASH FLOW The Trust may use available cash flow not otherwise dedicated to a particular use to meet redemption requests, including cash proceeds generated from the dividend reinvestment plan, new offerings, operating cash flow not intended for dividends, borrowing, and capital transactions. SHAREHOLDER ELIGIBILTY The following requirements provide eligibility for the shareholder to redeem shares: 1) Shareholders are required to hold their shares for one year in order to receive a benefit of limited liquidity. The Trust may waive the one year holding period in event of a shareholder death. 2) A shareholder may redeem to the Trust up to $100, of their shares every twelve months. 3) A ten percent (10%) redemption fee applies to each transaction. The redemption fee will be deducted from the total value of the transaction. The share price applied to the redemption of shares will be the current offering price or as established by resolution by the Board of Trustees. SHARE REDEMPTION PROCESS The Board of Trustees has authorized Dakota REIT Management, LLC (Advisor) to process redemption requests under the following procedures: 1) Contact your broker/custodian or Dakota REIT Management, LLC at (701) to receive a Share Redemption form. 2) Complete and present the Share Redemption form by mailing it to Dakota REIT Management, LLC. The mailing address is on the Share Redemption form. 3) Share Redemption requests will be processed on a first-come, first-served basis. 4) When the Trust approves a redemption request, it will be processed less the 10% redemption fee, and the check will be mailed to the shareholder. 5) The Board of Trustees and the Advisor have the absolute right to reject any Share Redemption request. The Advisor is required to determine sufficient cash flow to accommodate the Share Redemption request. If the shareholder s redemption request is denied, the following options apply: a. Shareholder withdraws their Share Redemption Request, or b. Shareholder asks the Advisor to honor the redemption of shares, when cash flow becomes available. 14

17 FEES AND COMPENSATION PAID TO TRUSTEES AND AFFILIATES The following fees and/or compensations were paid to Board of Trustees and affiliated parties during ADVISOR S MANAGEMENT FEE Dakota Real Estate Investment Trust paid Dakota REIT Management, LLC, an entity controlled by George Gaukler, an advisory management fee of $620,500 in These fees are compensation for the daily operations of the Trust, which includes providing office space, staff to maintain trust records, prepare annual reports, shareholder statements and tax forms, prepare Board of Trustee reports, and advise the Board of Trustees on investment decisions. The fees are based on 1% of net invested assets of the Trust [total assets at cost, less cash and less total liabilities]. PROPERTY ACQUISTION FEES Dakota Real Estate Investment Trust paid Dakota REIT Management, LLC, an entity controlled by George Gaukler, property acquisition fees in the amount of $426,428, financing fees in the amount of $90,275, and UPREIT fees in the amount of $14,000. Fees are compensation for performing due diligence on properties acquired by the REIT, obtain financing for the property and process UPREIT transactions. The fees are based upon 1.5% of the purchase price of the property acquired,.25% of the mortgage obtained, up to $2, per UPREIT transaction, and is capitalized into the basis of the property. PROPERTY MANAGEMENT FEES Dakota Real Estate Investment Trust paid Valley Rental Service, Inc., an entity controlled by George Gaukler, property management fees of $502,030 in Property Resource Group, controlled by Kevin Christianson, a Trustee, was paid $135,308 for property management fees. Horizon Real Estate Group, an entity in which Jim Knutson has a controlling interest, was paid $86,707 for commercial property management fees. Dakota REIT Management, LLC an entity in which George Gaukler and Jim Knutson have a controlling interest, was paid $85,126 for commercial property management fees. Fees paid are compensation for property management, which includes collecting rent, paying bills, providing quarterly financial statements, overseeing advertising, maintenance, cleaning, and general operations of the buildings. Fees are based on 3% to 5% of rental revenue. TRUSTEE COMPENSATION The Board of Trustees received $500 per Trustee for attending each quarterly Board meeting. In 2013, the Trust paid a total of $22,250 in compensation to Board of Trustees. George Gaukler and Jim Knutson did not receive Trustee compensation, because of their affiliation with Dakota REIT Management, LLC. 15

18 16 Consolidated Financial Statements Dakota Real Estate Investment Trust

19 Table of Contents Independent Auditor s Report Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Shareholders Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Supplementary Information Consolidated Schedules of Funds from Operations 17

20 Independent Auditor s Report Board of Trustees Dakota Real Estate Investment Trust Fargo, North Dakota Report on the Financial Statements We have audited the accompanying consolidated financial statements of Dakota Real Estate Investment Trust, which comprise the consolidated balance sheets as of, and the related consolidated statements of operations, shareholders equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 18

21 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dakota Real Estate Investment Trust as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The supplementary information on page 33 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the consolidated financial statements. The information has been subjected to the auditing procedures applied in the audits of the consolidated financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the consolidated financial statements or to the consolidated financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in relation to the consolidated financial statements taken as a whole. Bismarck, North Dakota March 18,

22 Consolidated Balance Sheets Assets Real Estate Investments Property and equipment held for rent - Notes 2 and 5 $ 180,548,718 $ 144,205,618 Investments in partnerships 2,985,097 2,480,128 Total real estate investments 183,533, ,685,746 Cash 3,815,756 4,175,027 Restricted Deposits 4,782,696 3,691,661 Accounts Receivable Tenant, less allowance for doubtful accounts of $345,207 in 2013 and $200,782 in , ,016 Other 98, ,269 Due from Related Party 3,756,556 1,141,152 Notes Receivable 19,845 65,459 Prepaid Expenses 299, ,414 Financing Costs, Less Accumulated Amortization of $633,572 in 2013 and $488,159 in ,072,477 1,039,248 Liabilities $ 197,523,440 $ 157,396,992 Mortgage Notes Payable $ 141,209,761 $ 116,210,301 Special Assessments Payable 2,228,472 1,520,269 Tenant Security Deposits Payable 1,026, ,032 Accounts Payable 771, ,558 Accrued Expenses Real estate taxes 2,057,642 2,125,435 Interest 497, ,109 Other 103,055 - Total Liabilities 147,893, ,403,704 Shareholders' Equity Noncontrolling Interest in Operating Partnership 19,997,217 16,760,203 Beneficial Interest 29,632,455 19,233,085 49,629,672 35,993,288 $ 197,523,440 $ 157,396,992 See Notes to Consolidated Financial Statements 20

23 Consolidated Statements of Operations Years Ended Income From Rental Operations $ 23,888,898 $ 18,431,857 Expenses Expenses from rental operations Interest expense 6,910,266 5,675,388 Depreciation and amortization 4,481,784 3,547,117 Real estate taxes 1,684,770 1,754,340 Utilities 2,426,007 1,840,129 Maintenance and payroll 2,661,808 1,887,350 Property management fees 1,016, ,437 Advertising and marketing 160, ,345 Insurance 537, ,360 Other administrative 540, ,710 Bad debts 86,128 54,394 20,505,852 16,481,570 Administration of REIT Advisory management fees 620, ,954 Directors' fees 22,250 21,750 Administration and professional fees 149, ,326 Insurance 14,212 12, , ,809 Total Expenses 21,312,015 17,077,379 Income From Operations 2,576,883 1,354,478 Other Income (Expenses) Gain on sale of property 53,985 - Loss on sale of equity investment - (180,894) Income from equity investments 96,005 29,994 Interest income 345, ,538 Other income 59,097 74, ,829 51,510 Net Income 3,131,712 1,405,988 Net Income Attributable to the Noncontrolling Interest 1,158, ,651 Net Income Attributable to Dakota Real Estate Investment Trust $ 1,972,830 $ 830,337 See Notes to Consolidated Financial Statements 21

24 Consolidated Statements of Shareholders Equity Years Ended Total Common Shares Common Shares Amount Accumulated Syndication Beneficial Noncontrolling Class A Class B Class A Class B Deficit Costs Interest Interest Total Balance, December 31, ,321,710 69,970 $ 22,782,900 $ 612,231 $ (9,542,695) $ (1,642,376) $ 12,210,060 $ 13,878,632 $ 26,088,692 Shares of beneficial interest issued 405, ,942 3,653,495 4,519,826 8,173,321 8,173,321 Contribution of assets in exchange for the issuance of noncontrolling interest units 4,083,591 4,083,591 Repurchase of shares (122,097) (994) (1,063,389) (7,598) (1,070,987) (525,481) (1,596,468) Dividends (2,201,154) (2,201,154) (1,134,370) (3,335,524) Dividends reinvested 175,556 32,516 1,462, ,592 1,744,032 1,744,032 Syndication costs (452,524) (452,524) (117,820) (570,344) Net income 830, , ,651 1,405,988 Balance, December 31, ,780, ,434 $ 26,835,446 $ 5,406,051 $ (10,913,512) $ (2,094,900) $ 19,233,085 $ 16,760,203 $ 35,993,288 See Notes to Consolidated Financial Statements 22

25 Consolidated Statements of Shareholders Equity Years Ended Total Common Shares Common Shares Amount Accumulated Syndication Beneficial Noncontrolling Class A Class B Class A Class B Deficit Costs Interest Interest Total Balance, December 31, ,780, ,434 $ 26,835,446 $ 5,406,051 $ (10,913,512) $ (2,094,900) $ 19,233,085 $ 16,760,203 $ 35,993,288 Shares of beneficial interest issued 616, ,616 6,006,067 3,828,007 9,834,074 9,834,074 Contribution of assets in exchange for the issuance of noncontrolling interest units 3,690,184 3,690,184 Repurchase of shares/units (17,527) (5,272) (156,256) (47,952) (204,208) (253,059) (457,267) Dividends (2,827,918) (2,827,918) (1,358,993) (4,186,911) Dividends reinvested 203,475 53,565 1,784, ,766 2,254,239 2,254,239 Syndication costs (629,647) (629,647) - (629,647) Net income 1,972,830 1,972,830 1,158,882 3,131,712 Balance, December 31, ,582,292 1,055,343 $ 34,469,730 $ 9,655,872 $ (11,768,600) $ (2,724,547) $ 29,632,455 $ 19,997,217 $ 49,629,672 See Notes to Consolidated Financial Statements 23

26 Consolidated Statements of Cash Flows Years Ended Operating Activities Net income $ 3,131,712 $ 1,405,988 Charges and credits to net income not affecting cash Depreciation 4,280,711 3,387,036 Amortization 201, ,081 Gain on sale of property (53,985) - Loss on sale of equity investment - 180,894 Noncash portion of income from equity investments (96,006) (29,994) Changes in assets and liabilities Accounts receivable (177) 107,779 Due from related party (165,404) (65,617) Prepaid expenses 56,581 (119,591) Tenant security deposits (400,534) (120,326) Real estate tax and insurance escrows (83,799) (174,354) Accounts payable 437,574 (230,094) Accrued expenses 130, ,120 Tenant security deposits payable 214, ,523 Net Cash from Operating Activities 7,652,573 5,108,445 Investing Activities Purchase of property and equipment (10,881,470) (3,980,645) Sale of property and equipment 1,672,659 - Net deposits to the replacement reserve (537,756) (597,955) Withdrawal from (deposits to) trust reserve 131,054 (673) Deposits to earn out reserve (200,000) - Issuance of related party notes receivable (5,450,000) (7,000,000) Proceeds from related party notes receivable 2,000,000 7,035,106 Proceeds from non related party notes receivable 45,614 10,929 Distributions received from partnership investments 591, ,356 Net Cash used for Investing Activities (12,628,862) (4,078,882) Financing Activities Payments for financing costs (234,302) (380,787) Principal payments on special assessments payable (169,628) (106,574) Proceeds from long-term debt borrowing 6,212,000 8,230,000 Principal payments on long-term debt (8,005,540) (10,302,991) Proceeds from issuance of shares of beneficial interest 9,834,074 7,400,447 Dividends/distributions paid (1,932,672) (1,591,492) Repurchase of shares of beneficial interest (204,208) (298,113) Repurchase of noncontrolling interest units (253,059) (525,481) Payment of syndication costs (629,647) (570,344) Net Cash from Financing Activities 4,617,018 1,854,665 See Notes to Consolidated Financial Statements 24

27 Consolidated Statements of Cash Flows Years Ended Net Change in Cash (359,271) 2,884,228 Cash at Beginning of Period 4,175,027 1,290,799 Cash at End of Period $ 3,815,756 $ 4,175,027 Supplemental Disclosure of Cash Flow Information Cash payments for interest $ 6,814,841 $ 5,596,153 Supplemental Schedule of Noncash Financing and Investing Activities Acquisition of assets in exchange for the issuance of noncontrolling interest shares in UPREIT $ 3,690,184 $ 4,083,591 Class A shares converted into Class B shares $ - $ 772,874 Acquisition of assets in exchange for assumption of long-term debt and issuance of related party payable $ 26,793,000 $ 24,846,000 Proceeds of note receivable converted into an equity investment $ 1,000,000 $ - Increase in land improvements due to increase in special assessments payable $ 877,831 $ 225,114 Dividends declared $ 2,827,918 $ 2,201,154 Dividends reinvested (2,254,239) (1,744,032) Dividends paid to shareholders 573, ,122 Distributions paid to noncontrolling interest in UPREIT 1,358,993 1,134,370 Total Dividends/Distributions Paid $ 1,932,672 $ 1,591,492 See Notes to Consolidated Financial Statements 25

28 Notes to Consolidated Financial Statements Note 1 - Organization Dakota Real Estate Investment Trust (the Trust) is organized as a real estate investment trust (REIT) incorporated under the laws of North Dakota. Internal Revenue Code Section 856 requires that 75 percent of the assets of a real estate investment trust must consist of real estate assets and that 75 percent of its gross income must be derived from real estate. The net income of the REIT is allocated in accordance with the stock ownership in the same fashion as a regular corporation. Dakota Real Estate Investment Trust is the general partner in Dakota UPREIT, a North Dakota limited partnership, with ownership of approximately 63% and 60% as of, respectively. Dakota UPREIT is the 100% owner of DPC Apartments, LLC, CalAm 2, LLC, WPA 2, LLC, First Center South of North Dakota, LLC, Central Park, LLC, Apartments at Eagle Lake, LLC, and Amber Valley, LLC. Note 2 - Principal Activity and Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Dakota REIT, and its operating partnership, Dakota UPREIT. The consolidated financial statements also include the accounts of DPC Apartments, LLC, CalAm 2, LLC, WPA 2, LLC, First Center South of North Dakota, LLC, Central Park, LLC, Apartments at Eagle Lake, LLC, and Amber Valley, LLC, wholly-owned subsidiaries of Dakota UPREIT. All significant intercompany transactions and balances have been eliminated in consolidation. Principal Business Activity Dakota REIT has a general partner interest in Dakota UPREIT, which owns and operates 840 apartment units, 71 townhome units, and 586,477 of commercial square feet in Fargo, West Fargo, Bismarck, Minot, Oakes, and Valley City, North Dakota and in New Prague and Dilworth, Minnesota. Dakota UPREIT is also the 100% owner of DPC Apartments, LLC, which owns and operates 191 apartment units and 17,354 of commercial square feet, CalAm 2, LLC, which owns and operates 192 apartment units, WPA 2, LLC, which owns 18 townhome units and 96 apartment units, First Center South of North Dakota, LLC, which owns a 103,860 square foot retail strip center, Central Park, LLC, which owns a 265 unit apartment complex, Apartments at Eagle Lake, LLC, which owns a 162 unit apartment complex, and Amber Valley, LLC, which owns a 56,469 square foot retail strip center. In total, the Trust owns 1,746 apartment units, 89 townhome units, and 764,160 of commercial square feet. In addition Dakota UPREIT owns the following limited partnership interests: Thirteen and one half (13.5) limited partner units of South Washington Real Estate Investment Limited Partnership (SWREILP). SWREILP owns an interest in the Richard P. Stadter Psychiatric Hospital in Grand Forks, ND. Under the terms of the partnership agreement, the Trust is allocated approximately 47% of the net gains and losses. 26

29 Notes to Consolidated Financial Statements Fifty (50) limited partnership shares in the One Oak II Limited Liability Limited Partnership, which represents a 46% share in the Limited Liability Limited Partnership. The One Oak II Limited Liability Limited Partnership is the limited partner in One Oak Limited Liability Limited Partnership, which is constructing One Oak Place in Fargo, North Dakota. Under the terms of the partnership agreement, the Trust is allocated approximately 46% of the net gains and losses of One Oak II Limited Liability Limited Partnership. 34.2% limited partner interest in the Bakken Heights V Limited Liability Limited Partnership. The Limited Liability Limited Partnership owns a 36 unit apartment building in Williston, North Dakota. Under the terms of the partnership agreement, the Trust is allocated approximately 34% of the net gains and losses. 40% total limited partner interest in the Bakken Heights VIII & X Limited Liability Limited Partnership. The Limited Liability Limited Partnership owns two 36 unit apartment buildings in Williston, North Dakota. Under the terms of the partnership agreement, the Trust is allocated approximately 40% of the net gains and losses. As general partner of Dakota UPREIT, Dakota REIT has full and exclusive management responsibility for the properties held by the UPREIT. Concentration of Credit Risk The Trust's cash balances are maintained in various bank deposit accounts. The deposit accounts may exceed federally insured limits at various times throughout the year. The Trust s property and limited partnership investments consist of residential and commercial property located primarily in the eastern part of North Dakota. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Property and Equipment Held For Rent Acquisitions of property and equipment held for rent purchased prior to January 1, 2009, are stated at cost less accumulated depreciation. Effective January 1, 2009, the Trust adopted guidance that requires property acquisitions to be recognized at their fair value as of the acquisition date and as such, property acquired by the Trust after January 1, 2009 is stated at the fair value as of the acquisition date less accumulated depreciation. The Trust accounts for its property acquisitions by allocating the purchase price of a property to the property s assets based on management s estimates of their fair value. Techniques used to estimate fair value include an appraisal of the property by a certified independent appraiser at the time of acquisition. 27

30 Notes to Consolidated Financial Statements Equipment, furniture, and fixtures purchased by the Trust are stated at cost less accumulated depreciation. All costs associated with the development and construction of real estate investments, including acquisition fees and interest, are capitalized as a cost of the property. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for routine maintenance and repairs, which do not add to the value or extend useful lives, are charged to expense as incurred. Depreciation is computed using the straight-line and declining-balance methods over the following estimated useful lives: Land improvements Building and improvements Furniture and fixtures 20 years years 7-12 years Investments in Partnerships Investments consist of limited partnership interests in entities owning real estate. Investments in limited partnership interests of more than 20 percent are accounted for under the equity method. Investments are stated at cost, plus the company s equity in net earnings since acquisition, less any distributions received. Noncontrolling Interest Interests in the operating partnership held by limited partners are represented by operating partnership units. The operating partnerships income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, syndication costs, and profits and losses are allocated to noncontrolling interests in accordance with the terms of the operating partnership agreement. Financing Costs Financing costs incurred in connection with financing have been capitalized and are being amortized over the life of the financing using the straight-line method. Syndication Costs Syndication costs consist of costs paid to attorneys, accountants, and selling agents, related to the raising of capital. Syndication costs are recorded as a reduction to equity. Income Taxes Dakota REIT is organized as a real estate investment trust (REIT), which calculates taxable income similar to other domestic corporations, with the major difference being that a REIT is entitled to a deduction for dividends paid. A REIT is generally required to distribute each year at least 90 percent of its taxable income. If it chooses to retain the remaining 10 percent of taxable income, it may do so, but it will be subject to a corporate tax on such income. REIT shareholders are taxed on REIT distributions of ordinary income in the same manner as they are taxed on other corporate distributions. 28

31 Notes to Consolidated Financial Statements For the years ended, distributions have been determined to be treated as the following for income taxes: Tax Status of Distributions Ordinary income 77.85% 42.34% Return of capital 22.15% 57.66% % % The Trust intends to continue to qualify as a real estate investment trust as defined by the Internal Revenue Code and, as such, will not be taxed on the portion of the income that is distributed to the shareholders. In addition, the Trust intends to distribute all of its taxable income, therefore, no provision or liability for income taxes have been recorded in the financial statements. Dakota UPREIT is organized as a limited partnership. Income or loss of the UPREIT is allocated to the partners in accordance with the provisions of the Internal Revenue Code 704(c). UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for partnership interest. The conversion of partnership interest to shares of beneficial interest in the REIT will be a taxable event to the limited partner. Dakota REIT has adopted the provisions of FASB Accounting Standards Codification Topic ASC As of, the unrecognized tax benefit accrual was zero. The Trust will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. The Trust is no longer subject to Federal and State tax examinations by tax authorities for years before Revenue Recognition Housing units are rented under operating lease agreements with terms of one year or less. Commercial space is rented under long-term operating lease agreements and rent income related to commercial space is recorded on a straight-line basis. Rent income from tenants is recognized in the month in which it is earned rather than received. Advertising and Marketing Costs incurred for advertising and marketing are expensed as incurred. Advertising and marketing expense totaled $160,793 and $209,345 for the years ended, respectively. Financial Instruments and Fair Value Measurements The Trust has determined the fair value of certain assets and liabilities in accordance with the provisions of FASB ASC Topic (previously FASB Statement No. 157, Fair Value Measurements), which provides a framework for measuring fair value under generally accepted accounting principles. 29

32 Notes to Consolidated Financial Statements ASC Topic defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic also establishes a fair value hierarchy, which prioritizes the valuation inputs into three broad levels. Level 1 inputs consist of quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the related asset or liability. Level 3 inputs are unobservable inputs related to the asset or liability. The Trust s financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The fair market value of these financial instruments approximates or is equal to the book value. Note 3 - Fair Value Measurements Fair Value Measurements on a Recurring Basis The Trust had no assets or liabilities recorded at fair value on a recurring basis as of December 31, 2013 and Fair Value Measurements on a Nonrecurring Basis The Trust had no assets or liabilities recorded at fair value on a nonrecurring basis as of December 31, 2013 and 2012 The following methods and assumptions were used to estimate the fair value of each class of financial assets and liabilities. The fair values of financial instruments approximate their carrying amount in the consolidated financial statements. Cash and cash equivalents The carrying amount approximates fair value due to the short maturity. Mortgage note payables The carrying amount approximates fair value due to the estimated discounted future cash flows using the current rates at which similar loans would be made. 30

33 Notes to Consolidated Financial Statements The estimated fair values of the Trust s financial instruments as of are as follows: 2013 Carrying Amount Fair Value Assets Cash and cash equivalents $ 3,815,756 $ 3,815,756 Liabilities Mortgage note payables $ 141,209,761 $ 141,209, Carrying Amount Fair Value Assets Cash and cash equivalents $ 4,175,027 $ 4,175,027 Liabilities Mortgage note payables $ 116,210,301 $ 116,210,301 Note 4 - Restricted Deposits Tenant security deposits $ 1,054,496 $ 653,962 Real estate tax and insurance escrows 1,408,202 1,324,403 Replacement reserves 1,915,785 1,378,029 Trust reserves 204, ,267 Earn out reserve 200,000 - Tenant Security Deposits $ 4,782,696 $ 3,691,661 Pursuant to management policy, the Trust has set aside funds to repay tenant security deposits after lease termination in accordance with requirements established by the state where the property is located. Real Estate Tax and Insurance Escrows Pursuant to the terms of certain mortgages and management policy, the Trust established and maintains a real estate tax escrow and insurance escrow to pay real estate taxes and insurance. The Trust is to contribute to the account monthly an amount equal to 1/12 of the estimated real estate taxes and insurance premiums. Replacement Reserves Pursuant to the terms of certain mortgages and Board policy, the Trust established and maintains several replacement reserve accounts. The Trust makes monthly deposits into the replacement reserve accounts to be used for repairs and replacements on the property. Certain replacement reserve accounts require authorization from the mortgage company for withdrawals. 31

34 Notes to Consolidated Financial Statements Trust Reserves Pursuant to the terms of the mortgage on the Pioneer Tech Building, a trust reserve in the amount of $203,000 was established to be used for fit up costs of future tenants in the building. The funds are held in an interest bearing account by the mortgage holder. During 2013, funds were withdrawn from this trust reserve to complete fit up costs in the building. The balance of the trust reserve was $73,080 as of December 31, Pursuant to the terms of the mortgage on the AAA Storage Units, a trust reserve in the amount of $131,000 was established to be used for the construction of two additional storage buildings. The funds are held in an interest bearing account by the mortgage holder. The balance of the trust reserve was $131,133 as of December 31, Earn Out Reserves Pursuant to the terms of the purchase of the Harmony and Riverwood properties, $200,000 of an earn out reserve was established prior to the closing of the purchase. Subsequent to year-end, the purchase of these properties closed and the total funds from the earn out reserve were disbursed. Note 5 - Property and Equipment Held for Rent Property and equipment held for rent as of December 31, 2013 is as follows: Residential Commercial Total Land and land improvements $ 16,984,536 $ 15,383,069 $ 32,367,605 Building 109,362,856 59,565, ,927,991 Furniture and fixtures 4,450, ,732 4,803, ,797,557 75,301, ,099,493 Less accumulated depreciation (18,660,164) (6,890,611) (25,550,775) Property and equipment held for rent as of December 31, 2012 is as follows: $ 112,137,393 $ 68,411,325 $ 180,548,718 Residential Commercial Total Land and land improvements $ 12,707,883 $ 13,118,399 $ 25,826,282 Building 90,199,272 45,109, ,308,751 Furniture and fixtures 4,838, ,012 4,943, ,745,678 58,332, ,078,568 Less accumulated depreciation (16,338,796) (5,534,154) (21,872,950) $ 91,406,882 $ 52,798,736 $ 144,205,618 The Trust expensed $449,155 and $373,350 of transaction costs related to property acquisitions for the years ended, respectively. The Trust recognized $333,539 and $350,000 of income related to property acquisitions for the years ended, respectively. 32

35 Notes to Consolidated Financial Statements Note 6 - Investments in Partnerships The Trust s investments in partnerships as of consist of the following: Investment accounted for under the equity method (Note 2) South Washington Real Estate Investment Limited Partnership (SWREILP) $ 126,067 $ 414,200 One Oak II Limited Liability Limited Partnership 1,565,135 1,721,283 Bakken Heights V Limited Liability Limited Partnership 344, ,645 Bakken Heights VIII and X Limited Liability Limited Partnership 949,881 - Total investments $ 2,985,097 $ 2,480,128 Condensed unaudited financial information for the Trust s investments in partnerships accounted for under the equity method as of December 31, 2013 is as follows: One Oak II Bakken Heights Bakken Heights SWREILP LLLP V LLLP VIII & X LLLP Total Total assets $ 397,516 $ 3,397,834 $ 3,711,770 $ 4,526,364 $ 12,033,484 Total liabilities 200 9,692 2,727,729 3,190,654 5,928,275 Partnership Equity $ 397,316 $ 3,388,142 $ 984,041 $ 1,335,710 $ 6,105,209 Income $ 291,518 $ - $ 776,367 $ 535,466 $ 1,603,351 Expenses 3,117 96, , ,506 1,127,349 Net Income (Loss) $ 288,401 $ (96,476) $ 142,117 $ 141,960 $ 476,002 Condensed unaudited financial information for the Trust s investments in partnerships accounted for under the equity method as of December 31, 2012 is as follows: One Oak II Bakken Heights SWREILP LLLP V LLLP Total Total assets $ 751,215 $ 3,683,683 $ 3,816,735 $ 8,251,633 Total liabilities 10,300 7,717 2,809,311 2,827,328 Partnership Equity $ 740,915 $ 3,675,966 $ 1,007,424 $ 5,424,305 Income $ 89,947 $ - $ 735,223 $ 825,170 Expenses 3, , , ,798 Net Income (Loss) $ 86,837 $ (102,847) $ 106,382 $ 90,372 33

36 Notes to Consolidated Financial Statements Note 7 - Short-Term Notes Payable The Trust has an $850,000 variable line of credit through First International Bank & Trust at December 31, The line has a variable interest rate (6.0% at December 31, 2013), interest payments are due monthly, unpaid principal and interest is due January 2014, and the line is secured by a mortgage on property. The Trust did not have an outstanding balance due on the line of credit at. Subsequent to year-end, the terms of the line of credit were modified. See Note 17. During 2013, the Trust obtained a $1,000,000 line of credit through American Bank Center. The line has an interest rate of 5.51%, interest payments are due monthly, unpaid principal and interest is due August 2014, and the line is unsecured. The Trust did not have an outstanding balance due on the line of credit at December 31, During 2013, the Trust obtained a $1,000,000 line of credit through Choice Financial Group. The line has an interest rate of 4.75%, interest payments are due monthly, unpaid principal and interest is due August 2014, and the line is secured by a mortgage on property and personal guaranty by George Gaukler. The Trust did not have an outstanding balance due on the line of credit at December 31, During 2013, the Trust obtained a $2,000,000 line of credit through Western State Bank. The line has an interest rate of 4.75%, interest payments are due monthly, unpaid principal and interest is due July 2014, and the line is secured by a mortgage on property and personal guaranty by George Gaukler. The Trust did not have an outstanding balance due on the line of credit at December 31, Note 8 - Special Assessments Payable At, special assessments payable totaled $2,228,472 and $1,520,269, respectively. Future principal payments related to special assessments payable over the next five years are as follows: Years ending December 31, Amount 2014 $ 122, , , , ,069 Thereafter 1,693,027 $ 2,228,472 34

37 Notes to Consolidated Financial Statements Note 9 - Mortgage Notes Payable Mortgage notes payable consists of: % mortgage note payable, due in monthly installments of $30,845, unpaid principal balance and interest due April 2024, secured by a mortgage on property and equipment and personal limited guaranty of George Gaukler $ 2,705,195 $ 2,876, % mortgage note payable (nonrecourse loan to the REIT), due in monthly installments of $40,584, unpaid principal and interest due May 2014, secured by a mortgage on property and equipment, an assignment of rents and leases, and a limited recourse obligations guaranty of George Gaukler 5,943,423 6,083, % mortgage note payable (nonrecourse loan to the REIT), due in monthly installments of $74,756, unpaid principal and interest due August 2016, secured by a mortgage on property and equipment, an assignment of rents and leases, and a limited recourse obligations guaranty of George Gaukler 11,495,175 11,720, % mortgage note payable (nonrecourse loan to the REIT), due in monthly installments of $48,237, unpaid principal and interest due October 2016, secured by a mortgage on property and equipment, an assignment of rents and leases, and a limited recourse obligations guaranty of George Gaukler 7,524,256 7,657, % mortgage note payable (nonrecourse loan to the REIT), due in monthly installments of $36,951, unpaid principal and interest due June 2017, secured by a mortgage on property and equipment, and a limited recourse obligations guaranty of George Gaukler 5,968,415 6,045,004 4% mortgage note payable, due in monthly installments of $37,500, unpaid principal and interest due June 2018, secured by a mortgage on property and equipment and an assignment of rents - (a) 6,109,025 3,983, % mortgage note payable, due in monthly installments of $29,764, unpaid principal and interest due December 2018, secured by a mortgage on property and equipment and an assignment of rents 4,524,417 4,605,090 35

38 Notes to Consolidated Financial Statements % mortgage note payable, due in monthly installments of $11,994, unpaid principal and interest due September 2014, secured by a mortgage on property and equipment, an assignment of rents and personal guaranty of George Gaukler 1,431,854 1,483,303 Variable rate mortgage note payable, (5.125% at December 31, 2013) due in monthly installments of $6,798, unpaid principal and interest due May 2034, secured by a mortgage on property and equipment, an assignment of rents and personal guaranty of George Gaukler 1,025,940 1,053, % mortgage note payable, due in monthly installments of $11,411, unpaid principal and interest due January 2015, secured by a mortgage on property and equipment 1,381,677 1,430, % mortgage note payable, due in monthly installments of $32,723, unpaid principal and interest due June 2021, secured by a mortgage on property and equipment and limited personal guaranty of George Gaukler 5,516,475 5,593,554 5% mortgage note payable, due in monthly installments of $6,028, unpaid principal and interest due November 2016, secured by a mortgage on property and equipment, an assignment of rents, and personal guaranty of George Gaukler 850, ,079 Variable rate mortgage note payable, (6.5% at December 31, 2013) due in monthly installments of $11,457, unpaid principal and interest due March 2030, secured by a mortgage on property and equipment, an assignment of rents and personal guaranty of George Gaukler 1,368,867 1,414, % mortgage note payable, due in monthly installments of $5,849, unpaid principal and interest due September 2015, secured by a mortgage on property and equipment 733, , % mortgage note payable, due in monthly installments of $6,965, unpaid principal and interest due January 2016, secured by a mortgage on property and equipment 906, , % mortgage note payable, due in monthly installments of $12,165, unpaid principal and interest due January 2016, secured by a mortgage on property and equipment 1,583,886 1,637, % mortgage note payable, due in monthly installments of $9,598, unpaid principal and interest due January 2016, secured by a mortgage on property and equipment 1,249,714 1,292,056 36

39 Notes to Consolidated Financial Statements % mortgage note payable, due in monthly installments of $24,620, unpaid principal and interest due March 2016, secured by a mortgage on property and equipment 2,957,909 3,084, % mortgage note payable, due in monthly installments of $52,593, unpaid principal and interest due April 2021, secured by a mortgage on property and equipment and limited personal guaranty of George Gaukler 8,699,600 8,818, % mortgage note payable, due in monthly installments of $5,068, unpaid principal and interest due June 2016, secured by a mortgage on property and equipment and an assignment of rents 662, , % mortgage note payable, due in monthly installments of $8,518, unpaid principal and interest due January 2017, secured by a mortgage on property and equipment and an assignment of rents 1,194,502 1,233, % mortgage note payable, due in monthly installments of $8,255, unpaid principal and interest due April 2016, secured by a mortgage on property and equipment and an assignment of rents - 1,123, % mortgage note payable, due in monthly installments of $16,536, unpaid principal and interest due April 2016, secured by a mortgage on property and equipment and an assignment of rents 2,118,764 2,186, % mortgage note payable, due in monthly installments of $13,618, unpaid principal and interest due November 2014, secured by a mortgage on property and equipment and an assignment of rents 1,715,706 1,764, % mortgage note payable, due in monthly installments of $37,412, unpaid principal and interest due June 2018, secured by a mortgage on property and equipment and an assignment of rents 4,870,219 5,024, % mortgage note payable, due in monthly installments of $22,592, unpaid principal and interest due March 2017, secured by a mortgage on property and equipment and 3,934,557 4,028,886 an assignment of rents 37

40 Notes to Consolidated Financial Statements % mortgage note payable, due in monthly installments of $4,264, unpaid principal and interest due March 2017, secured by a mortgage on property and equipment 620, , % mortgage note payable, due in monthly installments of $9,722, unpaid principal and interest due June 2017, secured by a mortgage on property and equipment and an assignment of rents 1,462,147 1,513, % mortgage note payable, due in monthly installments of $90,870, unpaid principal and interest due October 2032, secured by a mortgage on property and equipment and an assignment of rents 16,967,558 17,218, % mortgage note payable, due in monthly installments of $5,493, unpaid principal and interest due October 2017, secured by a mortgage on property and equipment 866, , % mortgage note payable, due in monthly installments of $28,020, unpaid principal and interest due December 2017, secured by a mortgage on property and equipment, an assignment of rents, and a limited personal guaranty of George Gaukler 4,357,060 4,500,000 Variable rate mortgage note payable, (4.45% at December 31, 2013) due in monthly installments of $12,647, unpaid principal and interest due April 2032, secured by a mortgage on property and equipment 1,889,382 1,954, % mortgage note payable, due in monthly installments of $12,961, unpaid principal and interest due May 2017, secured by a mortgage on property and equipment 2,015,432 2,087, % mortgage note payable, due in monthly installments of $8,619, unpaid principal and interest due August 2023, secured by a mortgage on property and equipment and an assignment of rents 1,589, % mortgage note payable, due in monthly installments of $33,729, unpaid principal and interest due October 2023, secured by a mortgage on property and equipment and an assignment of rents 6,068,428-38

41 Notes to Consolidated Financial Statements % mortgage note payable, due in monthly installments of $22,605, unpaid principal and interest due July 2018, secured by a mortgage on property and equipment and an assignment of rents 3,582, % mortgage note payable, due in monthly installments of $13,121, unpaid principal and interest due April 2018, secured by a mortgage on property and equipment and an assignment of rents 2,030, % mortgage note payable, due in monthly installments of $28,689, unpaid principal and interest due September 2018, secured by a mortgage on property and equipment and an assignment of rents 5,226, % mortgage note payable, due in monthly installments of $6,591, unpaid principal and interest due April 2018, secured by a mortgage on property and equipment 1,014,244-4% mortgage note payable, due in monthly installments of $13,090, unpaid principal and interest due May 2020, secured by a mortgage on property and equipment and an assignment of rents 2,446, % mortgage note payable, due in monthly installments of $12,596, unpaid principal and interest due September 2018, secured by a mortgage on property and equipment and an assignment of rents 2,302,382 - Variable rate mortgage note payable, (4.5% at December 31, 2013) due in monthly installments of $14,709, unpaid principal and interest due October 2018, secured by a mortgage on property and equipment and an assignment of rents 2,299,147 - $ 141,209,761 $ 116,210,301 (a) Mortgage note payable was refinanced in

42 Notes to Consolidated Financial Statements Long-term debt maturities are as follows: Years ending December 31, Amount 2014 $ 14,159, ,165, ,550, ,931, ,739,576 Thereafter 40,663,058 $ 141,209,761 The Trust has loan agreements containing certain covenants related to, among other matters, the maintenance of debt coverage ratios. As of December 31, 2013, the Trust was in compliance with the covenants. Note 10 - Related Party Transactions Due from Related Party Due from related party as of is as follows: Valley Rental Service, Inc. $ 306,556 $ 141,152 George Gaukler - Notes Receivable 3,450,000 1,000,000 $ 3,756,556 $ 1,141,152 Valley Rental Service, Inc., an entity controlled by George Gaukler, President and Trustee of the Trust, is a management company hired by the Trust. Rental payments collected from tenants are deposited in bank accounts in Valley Rental Service, Inc. s name and are subsequently transferred to the Trust throughout the year. Valley Rental Service, Inc. held funds totaling $306,556 and $141,152 that were due to the Trust as of December 31, 2013 and 2012, respectively. Advisory Management Fee The Trust incurred advisory management fees of $620,500 and $445,954 in 2013 and 2012, respectively, to Dakota REIT Management, LLC. Dakota REIT Management, LLC is owned by George Gaukler, President and Trustee of the Trust, and Jim Knutson, Executive Vice President and Trustee of the Trust. 40

43 Notes to Consolidated Financial Statements Acquisition Fees During 2013 and 2012, the Trust incurred $426,428 and $359,600, respectively, to Dakota REIT Management, LLC for acquisition fees relating to the purchase of new properties. Financing Fees During 2013 and 2012, the Trust incurred $90,275 and $61,190, respectively, to Dakota REIT Management, LLC for financing fees related to the financing of mortgage notes payable. UPREIT Fees During 2013 and 2012, the Trust incurred $14,000 and $19,000, respectively, to Dakota REIT Management, LLC for UPREIT fees related to the UPREIT transactions on property acquisitions. Land Lease / Notes Receivable During 2013, the Trust loaned $1,700,000 to Bakken Heights I and II Limited Partnership, an entity partially owned by George Gaukler, for the construction of a commercial building in Williston, North Dakota. The note receivable has an interest rate of 13% and will be converted to equity when the Trust is approved as a Limited Partner. During 2013, the Trust earned interest on the note receivable in the amount of $135,325. During 2013, the Trust loaned $1,000,000 to One Oak Limited Liability Partnership, an entity that is constructing One Oak Place in Fargo, North Dakota. The building is being constructed by Valley Realty, Inc., which George Gaukler holds a majority ownership. The note receivable has an interest rate of 7%. During 2013, the Trust earned interest on the note receivable in the amount of $42,943. During 2013, the Trust loaned $750,000 to Dakota Roseland Apartments #1, LLLP, an entity partially owned by George Gaukler, for the construction of a residential building in Williston, North Dakota. The note receivable has an interest rate of 9% and will be converted to equity when the Partnership is formed. During 2013, the Trust earned interest on the note receivable in the amount of $66,766. Subsequent to year-end, the Partnership was formed and this note receivable was converted to equity. See Note 17. During 2013, the Trust loaned $2,000,000 to KT Properties, an entity partially owned by Kevin Christianson, for the construction of a commercial building in Fargo, North Dakota. The note receivable had an interest rate of 7% and was paid at the closing of the TMI building purchase. During 2013, the Trust earned interest on the note receivable in the amount of $66,356. During 2012, the Trust loaned $6,000,000 to Valley Realty for the construction of an apartment complex in Fargo, North Dakota. The note receivable had an interest rate of 4.5% and was due on demand. The $6,000,000 loan was paid in full during 2012 and the Trust purchased the complex, Urban Meadows, during During 2012, the Trust earned interest on the note receivable in the amount of $55,973. During 2012, the Trust loaned $1,000,000 to Bakken Heights VIII and X Limited Partnership, an entity partially owned by George Gaukler, for the construction of a commercial building in Williston, North Dakota. The note receivable had an interest rate of 9% and was converted to equity when the Partnership was formed in During 2013 and 2012, the Trust earned interest on the note receivable in the amounts of $22,500 and $60,824, respectively. 41

44 Notes to Consolidated Financial Statements The Trust loaned $250,000 to Valley Realty, an entity partially owned by George Gaukler, for the construction of a commercial building in Minot, North Dakota. The note receivable had an interest rate of 8% and was due at the completion of the construction. The note receivable was repaid to the Trust during During 2012, the Trust earned interest on the note receivable in the amount of $6,667. As part of the agreement, the Trust had the first option to purchase the building once it is operational and stabilized. The Trust purchased the building, RCC Building, during As of December 31, 2011, the Trust had a loan and interest receivable of $785,106 and $87,177, respectively, to Aurora Medical Park No. 2, LLC, an entity partially owned by Kevin Christianson, Trustee of the Trust. The loan and interest receivable were repaid to the Trust in Investments During 2013, the Trust purchased a 40% limited partner interest in Bakken Heights VIII and X Limited Liability Limited Partnerships, an entity partially owned by George Gaukler, for $1,000,000. During 2013, Bakken Heights VIII and X Limited Liability Limited Partnerships disbursed $45,000 to the Trust for return on the investment. During 2013, the Trust acquired the TMI commercial building for a purchase price of $8,325,000 from KT Properties. The property was appraised at $8,390,000 by a certified independent appraiser. During 2013, the Trust acquired the Hillview apartment complex for a purchase price of $2,000,000 from Hillview Limited Partnership, an entity partially owned by George Gaukler. The property was appraised at $2,000,000 by a certified independent appraiser. During 2013, the Trust acquired the Fargo and DePere Cummins commercial buildings for a purchase price of $2,575,000 and $1,595,000, respectively. A 1031 exchange was made into the Trust by an entity partially owned by George Gaukler. The properties were appraised at $2,574,035 and $1,650,000, respectively, by a certified independent appraiser. During 2013, the Trust acquired the Urban Meadows 3 apartment complex for a purchase price of $3,100,000 from Valley Realty, Inc. The property was appraised at $3,102,000 by a certified independent appraiser. During 2013, the Trust acquired the Urban Meadows 4 apartment complex for a purchase price of $3,100,000 from Valley Realty, Inc. The property was appraised at $3,102,000 by a certified independent appraiser. During 2013, the Trust acquired the Urban Meadows 5 apartment complex for a purchase price of $3,100,000 from Valley Realty, Inc. The property was appraised at $3,102,000 by a certified independent appraiser. During 2013, the Trust acquired the Century East 1 apartment complex for a purchase price of $1,380,000 from R.S., Inc., an entity partially owned by George Gaukler. The property was appraised at $1,424,000 by a certified independent appraiser. During 2013, the Trust acquired the Century East 2 apartment complex for a purchase price of $1,380,000 from R.S., Inc., an entity partially owned by George Gaukler. The property was appraised at $1,408,000 by a certified independent appraiser. 42

45 Notes to Consolidated Financial Statements During 2013, the Trust acquired the Century East 3 apartment complex for a purchase price of $1,380,000 from Prairie West Inc., an entity partially owned by George Gaukler. The property was appraised at $1,420,000 by a certified independent appraiser. During 2013, the Trust acquired the Century East 4 apartment complex for a purchase price of $1,400,000 from Prairie West Inc., an entity partially owned by George Gaukler. The property was appraised at $1,440,000 by a certified independent appraiser. During 2013, the Trust acquired the Century East 5 apartment complex for a purchase price of $1,400,000 from R.S., Inc., an entity partially owned by George Gaukler. The property was appraised at $1,440,000 by a certified independent appraiser. During 2013, the Trust acquired the Calgory 1 apartment complex for a purchase price of $1,400,000 from Prairie West Inc., an entity partially owned by George Gaukler. The property was appraised at $1,400,000 by a certified independent appraiser. During 2013, the Trust acquired the Calgory 2 apartment complex for a purchase price of $1,400,000 from R.S., Inc., an entity partially owned by George Gaukler. The property was appraised at $1,400,000 by a certified independent appraiser. During 2013, the Trust acquired the Calgory 3 apartment complex for a purchase price of $1,400,000 from Prairie West Inc., an entity partially owned by George Gaukler. The property was appraised at $1,390,000 by a certified independent appraiser. The Trust holds a 34.2% limited partner interest in Bakken Heights V Limited Liability Limited Partnership, an entity partially owned by George Gaukler, with an original investment of $325,000. During 2013 and 2012, Bakken Heights V Limited Liability Limited Partnership disbursed $49,250 and $29,250, respectively, to the Trust for return on the investment. The Trust holds a 46% limited partner interest in One Oak II Limited Liability Partnership with an original investment of $2,500,000. The One Oak II Limited Liability Partnership is the Limited Partner in One Oak LLLP, which is constructing One Oak Place in Fargo, North Dakota. The building is being constructed by Valley Realty, Inc., which George Gaukler holds a majority ownership. In addition, George Gaukler, Gorman King, and Stan Johnson, Trustees of the Trust, are majority shareholders in Old Oak Partners, LLC, which has a 50% ownership of One Oak Place, LLP, the General Partner of One Oak, LLLP. George Gaukler owns 50% of Oak Legacy, LLP, which owns 50% of One Oak Place, LLP, the General Partner of One Oak, LLLP. During 2013 and 2012, One Oak II Limited Liability Limited Partnership disbursed $200,000 to the Trust for return on the investment. During 2012, all of Dakota UPREIT s 40 shares (8% interest) in Aurora Medical Park No. 2 LLC were liquidated due to the sale of Aurora Medical Park. The Trust received a final distribution in the amount of $1,097,389 from Aurora Medical Park No. 2 LLC. Of this amount, $785,106 was applied to the outstanding loan receivable owed to the Trust from Aurora Medical Park No. 2, LLC and $87,177 was applied to the outstanding interest receivable. The remaining $225,106 was applied to the Trust s $406,000 investment in the LLC and the Trust recognized an $180,894 loss on investment in 2012 for the remainder of the investment that was not recovered. 43

46 Notes to Consolidated Financial Statements During 2012, the Trust acquired the Urban Meadows 1 and 2 apartment complex for a purchase price of $6,000,000 from Valley Realty, Inc. The property was appraised at $6,204,000 by a certified independent appraiser. During 2012, the Trust acquired the RCC commercial building for a purchase price of $1,800,000 from Valley Realty. The property was appraised at $1,812,000 by a certified independent appraiser. During 2012, the Trust acquired the Washington Heights I apartment complex for a purchase price of $1,260,000 from an entity partially owned by Ray Braun, Trustee of the Trust. The property was appraised at $1,394,000 by a certified independent appraiser. During 2012, the Trust acquired the Pizza Ranch commercial building for a purchase price of $820,000 from an entity partially owned by Kevin Christianson, Trustee of the Trust. The property was appraised at $820,000 by a certified independent appraiser. Property Management Fees During 2013 and 2012, the Trust incurred property management fees of 3 to 5 percent of rents, depending on the property, to Valley Rental Service, an entity controlled by George Gaukler. For the years ended December 31, 2013 and 2012, the Trust paid management fees of $502,030 and $395,723, respectively, to Valley Rental Service. During 2013 and 2012, the Trust incurred property management fees of 1 to 5 percent of rents, depending on the property, to Property Resources Group, an entity in which Kevin Christianson is a principal. The Trust paid management fees of $135,308 and $132,082, respectively, to Property Resources Group for the years ended. During 2013 and 2012, the Trust incurred property management fees of 5 percent of rents to Horizon Real Estate. George Gaukler and Jim Knutson are partial owners of Horizon Real Estate. The Trust paid management fees of $86,707 and $82,201, respectively, to Horizon Real Estate for the years ended. During 2013 and 2012, the Trust incurred property management fees of 2 to 5 percent of rents, depending on the property, to Dakota REIT Management, LLC, an entity in which George Gaukler and Jim Knutson hold an ownership interest. The Trust paid management fees of $85,126 and $66,350, respectively, to Dakota REIT Management, LLC, for the years ended. Note 11 - Noncontrolling Interest of Unitholders in Operating Partnerships As of, noncontrolling limited partnership units totaled 3,327,889 and 2,987,103, respectively. During 2013 and 2012, the Trust paid distributions of $1,358,993 and $1,134,370 respectively, to noncontrolling interest limited partners, which were $0.54 and $0.50, respectively, per unit. 44

47 Notes to Consolidated Financial Statements Note 12 - Beneficial Interest The Trust is authorized to issue 15,000,000 Class A common shares and 5,000,000 Class B common shares with $1 par values, which collectively represent the beneficial interest of the Trust. Holders of Class A shares have the right to vote regarding amendments to the Declaration of Trust, changes to the Bylaws, election of Trustees, liquidation, roll-up transactions, sale of the Trust, and the term of the Trust. Class A shareholders also have the right to demand a special meeting of shareholders. The primary distinction between Class A and Class B shares is that Class B shares do not have the voting rights which Class A shares have. As of, there were 4,582,292 and 3,780,337, respectively, shares of Class A common shares outstanding. As of, there were 1,055,343 and 614,434, respectively, shares of Class B common shares outstanding. Distributions paid to holders of beneficial interest were $0.54 and $0.50, respectively, per unit for the years ending. Note 13 - Commercial Rental Income Commercial space is rented under long-term operating lease agreements. Minimum future rentals on noncancelable operating leases as of December 31 are as follows: Years ending December 31, Amount 2014 $ 7,404, ,141, ,912, ,645, ,444,821 Thereafter 7,943,853 $ 32,493,053 Note 14 - Guarantee of Debt In connection with one of the Trust s investments (Note 6), the Trust had guaranteed the debt of the investment limited to the sum of $2,340,000. The total outstanding debt related to this guarantee was approximately $16,280,000 at December 31, 2012 and the loan was current at December 31, The investment was sold during 2012, therefore, relieving the Trust of its guarantee. Note 15 - Business Combinations The Trust continued to implement its strategy of acquiring properties in desired markets. It is impractical for the Trust to obtain historical financial information on acquired properties and accordingly, proforma statements have not been presented. 45

48 Notes to Consolidated Financial Statements Purchases During 2013, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,400,000. During 2013, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,400,000. During 2013, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,400,000. During 2013, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,3800,000. During 2013, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,380,000. During 2013, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,380,000. During 2013, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,400,000. During 2013, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,400,000. During 2013, the Trust purchased a 27,770 square foot commercial building in Fargo, North Dakota. The approximate purchase price of the building was $2,575,000. During 2013, the Trust purchased a 23,203 square foot commercial building in DePere, Wisconsin. The approximate purchase price of the building was $1,595,000. During 2013, the Trust purchased a 42 unit apartment building in Sioux Falls, South Dakota. The approximate purchase price of the building was $2,000,000. During 2013, the Trust purchased a 55,619 square foot commercial building in Fargo, North Dakota. The approximate purchase price of the building was $8,325,000. During 2013, the Trust purchased a 36 unit apartment building in Fargo, North Dakota. The approximate purchase price of the building was $3,100,000. During 2013, the Trust purchased a 36 unit apartment building in Fargo, North Dakota. The approximate purchase price of the building was $3,100,000. During 2013, the Trust purchased a 36 unit apartment building in Fargo, North Dakota. The approximate purchase price of the building was $3,100,

49 Notes to Consolidated Financial Statements During 2013, the Trust purchased a 29,433 square foot commercial building in Watertown, South Dakota. The approximate purchase price of the building was $4,793,500. The following table summarizes the property and equipment acquired and liabilities assumed during the year ended December 31, 2013: Purchase Price Mortgages Consideration Fair Value of Property Assumed Given Calgory I $ 1,400,000 $ 1,400,000 $ (1,050,000) * $ 350,000 Calgory II 1,400,000 1,400,000 (1,050,000) * 350,000 Calgory III 1,390,000 1,400,000 (1,050,000) * 350,000 Century East I 1,424,000 1,380,000 (1,035,000) 345,000 Century East II 1,408,000 1,380,000 (1,035,000) * 345,000 Century East III 1,420,000 1,380,000 (1,035,000) * 345,000 Century East IV 1,440,000 1,400,000 (1,050,000) * 350,000 Century East V 1,440,000 1,400,000 (1,050,000) * 350,000 DePere Cummins 1,650,000 1,595,000-1,595,000 Fargo Cummins 2,574,035 2,575,000-2,575,000 Hillview 2,000,000 2,000,000 (1,600,000) 400,000 TMI 8,390,000 8,325,000 (6,075,000) 2,250,000 Urban Meadows III 3,102,000 3,100,000 (2,480,000) 620,000 Urban Meadows IV 3,102,000 3,100,000 (2,325,000) 775,000 Urban Meadows V 3,102,000 3,100,000 (2,325,000) 775,000 Willow Creek 4,843,500 4,793,500 (3,633,000) 1,160,500 $ 40,085,535 $ 39,728,500 $ (26,793,000) $ 12,935,500 *The Century East II and III apartments are assumed under one mortgage in the amount of $2,170,000. The Century East IV and V and Calgory I, II, and III are assumed under one mortgage in the amount of $5,250,000. During 2012, the Trust purchased a 191 unit apartment building and 17,354 square foot commercial building in Sioux Falls, South Dakota. The approximate purchase price of the buildings was $21,550,000. During 2012, the Trust purchased an 8,400 square foot commercial building in Dilworth, Minnesota. The approximate purchase price of the building was $820,000. During 2012, the Trust purchased a 15,400 square foot commercial building in Minot, North Dakota. The approximate purchase price of the building was $1,800,000. During 2012, the Trust purchased a 72 unit apartment complex in Fargo, North Dakota. The approximate purchase price of the building was $6,000,000. During 2012, the Trust purchased a 24 unit apartment building in Bismarck, North Dakota. The approximate purchase price of the building was $1,260,

50 Notes to Consolidated Financial Statements The following table summarizes the property and equipment acquired and liabilities assumed during the year ended December 31, 2012: Purchase Price Mortgages Consideration Fair Value of Property Assumed Given Donegal $ 21,550,000 $ 21,550,000 $ (17,240,000) $ 4,310,000 Pizza Ranch 820, ,000 (656,000) 164,000 RCC Building- Minot Metro 1,812,000 1,800,000 (1,550,000) 250,000 Urban Meadows 6,204,000 6,000,000 (4,500,000) 1,500,000 Washington Heights I 1,394,000 1,260,000 (900,000) 360,000 $ 31,780,000 $ 31,430,000 $ (24,846,000) $ 6,584,000 Note 16 - Commitments and Contingencies Environmental Matters Federal law (and the laws of some states in which the Trust may acquire properties) imposes liability on a landowner for the presence on the premises of hazardous substances or wastes (as defined by present and future federal and state laws and regulations). This liability is without regard to fault or knowledge of the presence of such substances and may be imposed jointly and severally upon all succeeding landowners. If such hazardous substance is discovered on a property acquired by the Trust, the Trust could incur liability for the removal of the substances and the cleanup of the property. There can be no assurance that the Trust would have effective remedies against prior owners of the property. In addition, the Trust may be liable to tenants and may find it difficult or impossible to sell the property either prior to or following such a cleanup. Risk of Uninsured Property Losses The Trust maintains property damage, fire loss, and liability insurance. However, there are certain types of losses (generally of a catastrophic nature), which may be either uninsurable or not economically insurable. Such excluded risks may include war, earthquakes, tornados, certain environmental hazards, and floods. Should such events occur, (i) the Trust might suffer a loss of capital invested, (ii) tenants may suffer losses and may be unable to pay rent for the spaces, and (iii) the Trust may suffer a loss of profits which might be anticipated from one or more properties. Note 17 - Subsequent Event Subsequent to year-end, the Trust declared a dividend to be paid at $ per share for shareholders of record on December 31, Subsequent to year-end, the $750,000 Dakota Roseland Apartments #1, LLLP note receivable held by the Trust was converted into equity of this limited partnership in Williston, North Dakota. The limited partnership is an entity partially owned by George Gaukler and Jim Knutson. 48

51 Notes to Consolidated Financial Statements Subsequent to year-end, the Trust entered into a purchase agreement to purchase three, 24 unit residential apartment buildings in West Fargo, North Dakota for a purchase price of $3,150,000 from an entity partially owned by George Gaukler. Subsequent to year-end, the Trust entered into a purchase agreement to purchase two, 36 unit residential apartment buildings in Fargo, North Dakota for a purchase price of $6,400,000 from Valley Realty Inc. Subsequent to year-end, the Trust entered into a purchase agreement to purchase a 29,120 square foot commercial building in Sioux Falls, South Dakota for a purchase price of $7,700,000. Subsequent to year-end, the Trust entered into a purchase agreement to purchase a 46,000 square foot commercial building in Sioux Falls, South Dakota for a purchase price of $4,550,000. Subsequent to year-end, the Trust entered into a debt modification agreement to extend the terms of its $850,000 variable line of credit (Note 7). The modifications extended the maturity date from January 2014 to April

52 50 Supplementary Information Dakota Real Estate Investment Trust

53 Consolidated Schedules of Funds from Operations Years Ended Funds from Operations * Net income before noncontrolling interest $ 3,131,712 $ 1,405,988 Plus depreciation and amortization 4,481,784 3,547,117 Plus distributions from investment partnerships 294, ,250 Plus loss on sale of investment - 180,894 Less gain on sale of property (53,985) - Less noncash portion of income from equity investments (96,006) (29,994) Plus net loss (less net gain) on acquisitions 115,616 23,350 Funds from Operations (FFO) $ 7,873,371 $ 5,356,605 FFO per UPREIT share (on annual basis) $ 0.95 $ 0.80 Share Price ($9.75 for 2013 and $8.75 for 1/1/2012-6/30/2012, $9.75 for 7/1/ /31/2012) FFO Ratio (on annual basis) $ 9.69 $ Weighted Average Shares 8,247,619 6,731,794 * Funds from operations (FFO) is a supplemental non-gaap financial measurement used as a standard in the real estate industry to measure and compare the operating performance of real estate companies. The Price/FFO Ratio is similar to the Price-Earnings (P-E) ratio. 51

54 MISSION STATEMENT The mission of The Dakota REIT is to consistently meet shareholder investment performance expectations by investing in quality real estate that will allow for attractive dividend payments and increased long-term share value. Goals Investment in a diversified real estate portfolio of approximately 51% or greater in multifamily residential and the balance being commercial retail, office, and warehouse space. Maximize return on investment potential by leveraging up to 75% loan to value of overall investments. Underwrite properties with allowances for vacancy, replacement reserves and professional management that are appropriate for the types of property being purchased. Invest in properties that provided cash flow adequate to pay dividends and allow for long-term capital investment gains through principal payback and property appreciation. Pay dividends that return a rate greater than a five-year certificate of deposit. 52

55 Copyright 1997 by Dakota Real Estate Investment Trust nd Avenue South Fargo, ND Phone Fax This material constitutes neither an offer to sell nor solicitation of an offer to buy the securities described herein. Shares can only be purchased after receiving and reviewing the Prospectus.