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COLE CORPORATE INCOME TRUST, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 15, 2014

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto and the other unaudited financial data included in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements and the notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013. The terms "we," "us," "our" and the "Company" refer to Cole Corporate Income Trust, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated unaudited financial statements and the notes thereto. Forward-Looking Statements Except for historical information, this section contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act, as applicable by law. Such statements include, in particular, discussion and analysis of our financial condition and our subsidiaries, our anticipated capital expenditures, amounts of anticipated cash distributions to our stockholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry. Words such as "may," "will," "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "would," "could," "should" or comparable words, variations and similar expressions are intended to identify forward-looking statements. All statements not based on historical fact are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. Investors are cautioned not to place undue reliance on forward-looking statements, which reflect our management's view only as of the date of this Quarterly Report on Form 10-Q. We make no representation or warranty (express or implied) about the accuracy of any such forward looking statements contained in this Quarterly Report on Form 10-Q. Additionally, 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. Factors that could cause actual results to differ materially from any forward-looking statements made in this Quarterly Report on Form 10-Q include, among others, changes in general economic conditions, changes in real estate conditions, construction costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks, rent relief, inability to obtain new tenants upon the expiration or termination of existing leases, inability to obtain financing or refinance existing debt and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows. The forward-looking statements should be read in light of the risk factors identified under "Item 1A - Risk Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2013. Management's discussion and analysis of financial condition and results of operations are based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management's historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Overview We were formed on April 6, 2010 to acquire and operate commercial real estate primarily consisting of single-tenant, income producing necessity corporate office and industrial properties net leased to investment grade and other creditworthy tenants located throughout the United States. We commenced our principal operations on June 28, 2011, when we issued the initial 370,727 shares of our common stock in the Offering. We have no paid employees and are externally advised and managed by CCI Advisors, our advisor. We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes. 20



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We ceased offering shares of common stock in the Offering on November 21, 2013 and continue to issue shares of common stock under the DRIP Offering. We expect that property acquisitions in 2014 and future periods, if any, will be funded by borrowings under the Credit Facility, proceeds from the DRIP Offering, proceeds from the strategic sale of properties and cash flows from operations. Our operating results and cash flows are primarily influenced by rental income from our commercial properties, interest expense on our property indebtedness, and acquisition and operating expenses. Rental and other property income accounted for 86% and 83% of total revenue for the three months ended March 31, 2014 and 2013, respectively. As 100% of our rentable square feet was under lease as of March 31, 2014, with a weighted average remaining lease term of 11.8 years, we believe our exposure to changes in commercial rental rates on our portfolio is substantially mitigated, except for vacancies caused by tenant bankruptcies or other factors. Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenants' financial results, credit rating agency reports, when available, on the tenant or guarantor, the operating history of the property with such tenant, the tenant's market share and track record within its industry segment, the general health and outlook of the tenant's industry segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant's financial condition and, if necessary, attempt to mitigate the tenant credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease. As of March 31, 2014, the debt leverage ratio of our consolidated real estate assets, which is the ratio of debt to total gross real estate assets, net of gross intangible lease liabilities, was 33%. As we acquire additional commercial real estate, we will be subject to changes in real estate prices and changes in interest rates on any new indebtedness used to acquire such properties. We may manage our risk of changes in real estate prices on future property acquisitions, when applicable, by entering into purchase agreements and loan commitments simultaneously, or through loan assumption, so that our operating yield is determinable at the time we enter into a purchase agreement, by contracting with developers for future delivery of properties or by entering into sale-leaseback transactions. We manage our interest rate risk by monitoring the interest rate environment in connection with our future property acquisitions, when applicable, or upcoming debt maturities to determine the appropriate financing or refinancing terms, which may include fixed rate loans, variable rate loans or interest rate hedges. If we are unable to acquire suitable properties or obtain suitable financing terms for future acquisitions or refinancing, our results of operations may be adversely affected. Recent Market Conditions Beginning in late 2007, domestic and international financial markets experienced significant disruptions that severely impacted the availability of credit and contributed to rising costs associated with obtaining credit. Financial conditions affecting commercial real estate have improved and continue to improve, as low treasury rates and increased lending from banks, insurance companies, and commercial mortgage backed securities ("CMBS") conduits have increased lending activity. Nevertheless, the debt market remains sensitive to the macro environment, such as Federal Reserve policy, market sentiment, or regulatory factors affecting the banking and CMBS industries. While we expect that financial conditions will remain favorable, if they were to deteriorate we may experience more stringent lending criteria, which may affect our ability to finance certain property acquisitions or refinance any debt at maturity. Additionally, for properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable. We expect to manage the current mortgage lending environment by considering multiple lending sources, including securitized debt, fixed rate loans, Credit Facility borrowings, short-term variable rate loans, assumed mortgage loans in connection with property acquisitions, interest rate lock or swap agreements, or any combination of the foregoing. Commercial real estate fundamentals continue to strengthen, as a moderate pace of job creation has supported gains in office absorption, retail sales, and warehouse distribution. Although construction activity has increased, it remains near historic lows; as a result, incremental demand growth has helped to reduce vacancy rates and support modest rental growth. Improving fundamentals have resulted in gains in property values; however, in many markets property values, occupancy and rental rates continue to be below those previously experienced before the economic downturn. As of March 31, 2014, 100% of the rentable square feet of our properties was under lease, and we expect that occupancy will remain high as the real estate recovery continues. However, if recent improvements in the economy reverse course, we may experience vacancies or be required to reduce rental rates on occupied space. If we do experience vacancies, our advisor will actively seek to lease our vacant space; nevertheless, such space may be leased at lower rental rates and for shorter lease terms than our current leases provide. 21



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Results of Operations Our results of operations are influenced by the timing of acquisitions and the operating performance of our real estate assets, including the Consolidated Joint Venture. The following table shows the property statistics of our real estate assets as of March 31, 2014 and 2013: March 31, 2014 2013 Number of properties 82 21



Approximate rentable square feet 16.0 million 3.7 million Percentage of rentable square feet leased 100 %

100 %



The following table summarizes our real estate investment activity during the three months ended March 31, 2014 and 2013:

Three Months Ended March 31, 2014 2013 Properties acquired 5 8 Approximate purchase price of acquired properties $ 97.2 million$ 84.1 million Approximate rentable square feet 444,000 514,000 Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 Revenue. Revenue increased $46.0 million to $53.5 million for the three months ended March 31, 2014, compared to $7.5 million for the three months ended March 31, 2013. Our revenue consisted primarily of rental and other property income, which accounted for 86% and 83% of total revenue during the three months ended March 31, 2014 and 2013, respectively. We also paid certain operating expenses subject to reimbursement by the tenant, which resulted in $7.7 million and $1.2 million of tenant reimbursement income during the three months ended March 31, 2014 and 2013, respectively. The increases were due to owning 77 income producing properties for the entire three months ended March 31, 2014 and purchasing five additional properties during such period, compared to owning 13 properties during the three months ended March 31, 2013 and purchasing 8 additional properties during such period. General and administrative expenses. General and administrative expenses increased $876,000 to $1.5 million for the three months ended March 31, 2014, compared to $663,000 for the three months ended March 31, 2013. The increase was primarily due to an increase in escrow and trustee fees and expenses, unused fees on the Credit Facility, and corporate insurance incurred during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. Property operating expenses. Property operating expenses increased $7.2 million to $8.5 million for the three months ended March 31, 2014, compared to $1.3 million for the three months ended March 31, 2013. The increase was primarily related to owning 77 properties for the entire three months ended March 31, 2014 and purchasing five additional properties during such period, compared to owning 13 properties during the three months ended March 31, 2013 and purchasing 8 additional properties during such period. The primary property operating expenses were repairs and maintenance and property taxes. Advisory expenses. Pursuant to the advisory agreement with CCI Advisors and based upon the amount of our current invested assets, we are required to pay to CCI Advisors a monthly advisory fee equal to one-twelfth of 0.75% of the average invested assets up to $2.0 billion and 0.70% between $2.0 billion to $4.0 billion. Additionally, we may be required to reimburse certain expenses incurred by CCI Advisors in providing such advisory services, subject to limitations as set forth in the advisory agreement. Advisory fees and expenses increased $4.1 million to $4.7 million for the three months ended March 31, 2014, compared to $680,000 for the three months ended March 31, 2013. 22



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Acquisition related expenses. Acquisition related expenses decreased $1.4 million to $2.4 million for the three months ended March 31, 2014, compared to $3.8 million in acquisition expenses incurred for the three months ended March 31, 2013. The decrease primarily related to a one time transfer tax of $1.5 million incurred on a property purchased during the three months ended March 31, 2013. Depreciation and amortization expenses. Depreciation and amortization expenses increased $17.2 million to $19.9 million for the three months ended March 31, 2014, compared to $2.7 million for the three months ended March 31, 2013. The increase was primarily the result of incurring depreciation and amortization expense related to 82 properties owned or acquired during the three months ended March 31, 2014, compared to depreciation and amortization incurred on 21 properties owned or acquired during the three months ended March 31, 2013. Interest expense. Interest expense increased $4.8 million to $6.5 million for the three months ended March 31, 2014, compared to $1.7 million for the three months ended March 31, 2013. The increase was primarily related to an increase in the average amount outstanding under the Credit Facility and notes payable to $774.6 million during the three months ended March 31, 2014, compared to $154.5 million for the three months ended March 31, 2013, partially offset by a decrease in the weighted average interest rate to 2.9% as of March 31, 2014, compared to 4.2% as of March 31, 2013. Distributions Our board of directors authorized a daily distribution, based on 365 days in the calendar year, of $0.001780821 per share (which equates to approximately 6.50% on an annualized basis calculated at the current rate, assuming a $10.00 per share purchase price) for stockholders of record as of the close of business on each day of the period, commencing on January 1, 2014 and ending on June 30, 2014. During the three months ended March 31, 2014, we paid distributions of $31.0 million, including $18.7 million through the issuance of shares pursuant to the DRIP. During the three months ended March 31, 2013, we paid distributions of $3.0 million, including $1.6 million through the issuance of shares pursuant to the DRIP. Net cash provided by operating activities for the three months ended March 31, 2014 was $20.5 million and reflected a reduction for real estate acquisition related expenses incurred of $2.4 million, in accordance with GAAP. Net cash used in operating activities for the three months ended March 31, 2013 was $858,000 and reflected a reduction for real estate acquisition related expenses incurred of $3.8 million, in accordance with GAAP. We treat our real estate acquisition related expenses as funded by proceeds from the Offerings, including proceeds from the DRIP. Therefore, for consistency, proceeds from the issuance of common stock for the three months ended March 31, 2014 are considered a source of our distributions to the extent that real estate acquisition related expenses have reduced net cash flows used in operating activities. As such, our 2014 distributions were funded by net cash provided by operating activities of $20.5 million, or 66.0%, and proceeds from the issuance of common stock, including excess proceeds from the Offering from prior periods, of $10.5 million, or 34.0%. The distributions paid during the three months ended March 31, 2013 were funded by the issuance of common stock of $3.0 million, or 100.0%. Share Redemptions Our share redemption program permits our stockholders to sell their shares back to us after they have held them for at least one year, subject to significant conditions and limitations. The share redemption program provides that we will redeem shares of our common stock from requesting stockholders, subject to the terms and conditions of the share redemption program. We will not redeem in excess of 5% of the weighted average number of shares outstanding during the trailing 12 months prior to the end of the fiscal quarter for which the redemptions are being paid. Funding for the redemption of shares will be limited to the net proceeds we receive from the sale of shares under our DRIP Offering. In addition, we will redeem shares on a quarterly basis, at the rate of approximately 1.25% of the weighted average number of shares outstanding during the trailing 12 month period ending on the last day of the fiscal quarter for which the redemptions are being paid. During the three months ended March 31, 2014, we redeemed 96,286 shares under our share redemption program for $948,000 at an average redemption price of $9.85 per share. As of March 31, 2014, the Company had received valid redemption requests for an additional 2,900 shares, which were redeemed in full subsequent to March 31, 2014 for $29,000 at an average redemption price of $10.00 per share. A valid redemption request is one that complies with the applicable requirements and guidelines of our current share redemption program. We have funded and intend to continue funding share redemptions with proceeds from the DRIP. Liquidity and Capital Resources General Our principal demands for funds will be for real estate and real estate related investments, for the payment of acquisition related costs, operating expenses, distributions and redemptions to stockholders and principal and interest on any current and any future indebtedness. Generally, cash needs for items other than acquisitions and acquisition related expenses will be generated from operations of our current and future investments. As the Offering has closed, we expect to meet cash needs for 23



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acquisitions from borrowings under the Credit Facility, proceeds from the DRIP Offering, proceeds from the strategic sale of properties and cash flows from operations. The sources of our operating cash flows will primarily be provided by the rental income received from current and future leased properties. As of March 31, 2014, we had raised $1.9 billion of gross proceeds from the Offering before offering costs and selling commissions of $194.4 million. As of March 31, 2014, we had cash and cash equivalents of $18.0 million and available borrowings of $401.0 million under the Credit Facility. Additionally, as of March 31, 2014, we had unencumbered properties with a gross book value of $505.4 million, which may be used as collateral to secure additional financing in future periods or as additional collateral to facilitate the refinancing of current mortgage debt as it becomes due. Short-term Liquidity and Capital Resources On a short-term basis, our principal demands for funds will be for operating expenses, distributions, and interest and principal on current and any future debt financings. We expect to meet our short-term liquidity requirements through net cash flows provided by operations and proceeds from the DRIP Offering, as well as secured or unsecured borrowings from banks and other lenders to finance our expected future acquisitions. We expect our operating cash flows to increase as we acquire additional properties. CCI Advisors paid the organizational and other offering costs associated with the sale of our common stock, which we reimbursed in an amount up to 1.5% of the gross proceeds of the Offering. As of March 31, 2014, CCI Advisors had paid offering and organization costs in excess of such 1.5% limit in connection with the Offering. These excess costs were not included in our financial statements because such costs were not a liability to us as they exceeded 1.5% of gross proceeds from the Offering. Long-term Liquidity and Capital Resources On a long-term basis, our principal demands for funds will be for the acquisition of real estate and real estate related investments and the payment of tenant improvements, acquisition related expenses, operating expenses, distributions and redemptions to stockholders and interest and principal on any current and future indebtedness. We expect to meet our long-term liquidity requirements through proceeds from the cash flow from operations, proceeds from secured or unsecured borrowings from banks and other lenders, and proceeds raised pursuant to the DRIP Offering. We expect that substantially all cash flows from operations will be used to pay distributions to our stockholders after certain capital expenditures, including tenant improvements and leasing commissions, are paid; however, we may use other sources to fund distributions, as necessary, including proceeds from the Offerings, borrowings on the Credit Facility and/or future borrowings on unencumbered assets. To the extent that cash flows from operations are lower due to fewer properties being acquired or lower than expected returns on the properties, distributions paid to our stockholders may be lower. We expect that substantially all net cash flows from the DRIP Offering or debt financings will be used to fund acquisitions, certain capital expenditures identified at acquisition, repayments of outstanding debt or distributions to our stockholders in excess of cash flows from operations. As of March 31, 2014, we and the Consolidated Joint Venture had $796.6 million of debt outstanding, with a weighted average interest rate of 2.93%. Our contractual obligations as of March 31, 2014 were as follows (in thousands): Payments due by period (1) (2) Less Than 1 More Than 5 Total Year 1-3 Years 3-5 Years Years Principal payments - fixed rate debt (3) $ 257,510 $ 75 $ 18,434$ 978$ 238,023 Interest payments - fixed rate debt 74,711 10,220 19,798 18,662 26,031 Principal payments - variable rate debt (4) 40,233 - 40,233 - - Interest payments - variable rate debt 2,396 660 1,736 - - Principal payments - credit facility 499,000 - - 499,000 - Interest payments - credit facility (5) 67,878 13,201 31,047 23,630 - Total $ 941,728$ 24,156$ 111,248$ 542,270$ 264,054



(1) The table does not include amounts due to CCI Advisors or its affiliates

pursuant to our advisory agreement because such amounts are not fixed and

determinable. (2) As of March 31, 2014, we had $41.0 million of variable rate debt



effectively fixed through the use of an interest rate swap agreement. We

used the effective interest rate fixed under our swap agreement to calculate the debt payment obligations in future periods. 24



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(3) Principal payment amounts reflect actual payments based on the face amount

of notes payable secured by our wholly-owned properties and the

Consolidated Joint Venture. As of March 31, 2014, the fair value

adjustment, net of amortization, of mortgage notes assumed was $127,000.

(4) A rate of 1.59% was used to calculate the variable debt payment

obligations in future periods. This was the rate effective as of March 31,

2014. (5) Payment obligations for the Term Loan outstanding under the Credit



Facility are based on the interest rate of 3.03% as of March 31, 2014,

which was the rate fixed under the executed swap agreement that had the

effect of fixing the variable interest rate per annum through the maturity

date of October 2018.

We expect to incur additional borrowings in the future to acquire additional properties and make other real estate related investments. There is no limitation on the amount we may borrow against any single improved property. Our future borrowings will not exceed 300% of our net assets as of the date of any borrowing, which is the maximum level of indebtedness permitted under the North American Securities Administrators Association REIT Guidelines; however, we may exceed that limit if approved by a majority of our independent directors. Our board of directors has adopted a policy to further limit our borrowings to 60% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets, unless the excess borrowing is approved by a majority of our independent directors and disclosed to our stockholders in the next quarterly report along with the justification for such excess borrowing. Our advisor has set a target leverage ratio of 40% to 50% of the greater of cost (before deducting depreciation or other non-cash reserves) or fair market value of our gross assets. As of March 31, 2014, our ratio of debt to total gross real estate assets, net of gross intangible lease liabilities, was 33%. Cash Flow Analysis Operating Activities. Net cash provided by operating activities increased $21.3 million to $20.5 million during the three months ended March 31, 2014, compared to net cash used in operating activities of $858,000 for the three months ended March 31, 2013. The increase was primarily due to an increase in net income (loss) of $13.2 million and an increase in depreciation and amortization of $17.1 million, partially offset by an increase in working capital accounts of $9.0 million. See "- Results of Operations" for a more complete discussion of the factors impacting our operating performance. Investing Activities. Net cash used in investing activities was $97.2 million for the three months ended March 31, 2014, compared to $86.4 million for the three months ended March 31, 2013. The increase was primarily due to an increase in investment in real estate assets of $14.0 million. Financing Activities. Net cash provided by financing activities decreased $62.5 million to $30.6 million for the three months ended March 31, 2014, compared to $93.1 million for the three months ended March 31, 2013. The decrease was primarily due to a decrease in net proceeds from the issuance of common stock under the Offering of $112.1 million, and an increase in distributions to investors of $11.0 million, partially offset by an increase in proceeds from the Credit Facility and notes payable, net of repayments, of $60.1 million. Election as a REIT We are taxed as a REIT under the Internal Revenue Code. To maintain our qualification as a REIT, we must continue to meet certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we, among other things, distribute at least 90% of our annual taxable income (computed without regard to the dividends paid deduction and excluding net capital gains). If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to maintain our qualification as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated unaudited financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated unaudited financial statements. Critical Accounting Policies and Estimates Our accounting policies have been established to conform to GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. 25



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These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We consider our critical accounting policies to be the following: • Investment in and Valuation of Real Estate Assets;



• Allocation of Purchase Price of Real Estate Assets;

• Derivative Instruments and Hedging Activities;

• Revenue Recognition; and

• Income Taxes.

Except as set forth below, a complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2013. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2013, and related notes thereto. Commitments and Contingencies We may be subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 7 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanations. Related-Party Transactions and Agreements We have entered into agreements with CCI Advisors and its affiliates whereby we have paid, and will continue to pay, certain fees to, or reimburse certain expenses of, CCI Advisors or its affiliates, such as acquisition and advisory fees and expenses, organization and offering costs, sales commissions, dealer manager fees and expenses, leasing fees and reimbursement of certain operating costs. See Note 8 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for a further explanation of the various related-party transactions, agreements and fees. Subsequent Events Certain events occurred subsequent to March 31, 2014 through the filing date of this Quarterly Report on Form 10-Q. Refer to Note 10 to our condensed consolidated unaudited financial statements in this Quarterly Report on Form 10-Q for further explanation. Recent Accounting Pronouncements Refer to Note 2 to our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for further explanation. There have been no accounting pronouncements issued, but not yet applied by us, that will significantly impact our financial statements. Off-Balance Sheet Arrangements As of March 31, 2014 and December 31, 2013, we had no material off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity or capital resources. Item 3. Quantitative and Qualitative Disclosures About Market Risk We have obtained variable rate debt financing to fund certain property acquisitions, and therefore we are exposed to changes in LIBOR. We intend to manage our interest rate risk by limiting the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We have entered and may continue to enter into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk. We have not entered, and do not intend to enter, into derivative or interest rate transactions for speculative purposes. We may also enter into rate lock arrangements to lock interest rates on future borrowings. We may be exposed to credit and market risks including, but not limited to, the failure of any counterparty to perform under the terms of the derivative contract or the adverse effect on the value of the financial instrument resulting from a change in interest rates. 26



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As of March 31, 2014, we and the Consolidated Joint Venture had $239.2 million of variable rate debt, including the Revolving Loans, and therefore we are exposed to interest rate changes in LIBOR. As of March 31, 2014, a change of 50 basis points in interest rates would result in a change in interest expense of $1.2 million per year, assuming all of our derivatives remain effective hedges. As of March 31, 2014, we had two interest rate swap agreements outstanding, which mature between October 2018 and August 2020, with an aggregate notional amount under the swap agreements of $341.0 million and an aggregate net fair value of $2.1 million. The fair value of these interest rate swap agreements is dependent upon existing market interest rates and swap spreads. As of March 31, 2014, an increase of 50 basis points in interest rates would result in an increase to the fair value of the derivative asset of $1.7 million. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of March 31, 2014, were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures. Changes in Internal Control Over Financial Reporting No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 27



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