FrontView REIT Inc

2. ACCOUNTING POLICIES FOR FINANCIAL STATEMENTS

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). These unaudited condensed consolidated financial statements do not include all the information and notes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements as of and for the years ended December 31, 2023 and 2022, and the Company's Prospectus filed with the SEC on October 2, 2024, which provide a more complete understanding of the Company’s accounting policies, financial position, operating results, business properties, and other matters. In the opinion of management, all adjustments of a normal recurring nature necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2024 and 2023 are not necessarily indicative of the results for the full year. All amounts expressed in these condensed consolidated financial statements are in U.S. currency and in thousands, except per unit amounts, number of units, number of properties and where indicated.

a) Principles of consolidation

The accompanying condensed consolidated financial statements include the financial position, results of operations and cash flows of the Partnership and its consolidated subsidiaries. All intercompany amounts have been eliminated.

The Partnership has concluded that the Operating LP is a variable interest entity (“VIE”) under Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 810 “Consolidation” (“ASC 810”). The Partnership was deemed to be the primary beneficiary of the Operating LP as substantially all activities of the Operating LP are conducted of behalf of the Partnership. The Partnership consolidates its interest in the Operating LP. The portion of the Operating LP not owned by the Partnership is presented as convertible non-controlling preferred interests as of September 30, 2024 and December 31, 2023.

On October 20, 2023, the Partnership acquired the remaining 50% interest in NADG NNN 50/50 LP (the “Joint Venture”) and the Partnership is deemed the primary beneficiary. As such, commencing October 20, 2023, the Partnership has consolidated its interest in the Joint Venture (see Note 2(b) and 5).

b) Investment in an unconsolidated entity

As of September 30, 2024, the Partnership has a 100% ownership interest in the Joint Venture. On August 18, 2023, the Partnership entered into an Interest Purchase Agreement with the JV Partner to acquire the remaining 50% ownership interest in the Joint Venture. This acquisition closed on October 20, 2023 (see Note 5). Post-acquisition, the Partnership accounts for its ownership in the Joint Venture through consolidation (see Note 2 (a)).

For the nine months ended September 30, 2023, the Partnership had a 50% ownership interest in the Joint Venture. The Partnership had evaluated the investment in the Joint Venture under ASC 810 and concluded that the Joint Venture is a VIE, however, the Partnership is not the primary beneficiary. The Partnership accounted for its non-controlling partnership interest in an unconsolidated joint venture using the equity method of accounting, as the Partnership exercised significant influence, but did not control this entity. Under the equity method of accounting, the net equity investment of the Partnership was reflected in the accompanying condensed consolidated balance sheets and the Partnership’s share of net income or loss from this joint venture was included in the accompanying condensed consolidated statements of operations.

The Partnership classifies distributions received from its investment in an unconsolidated entity based on the “nature of distribution method”. Under this approach, distributions are classified on the accompanying condensed consolidated statements of cash flows as either cash flows from operating activities or cash flows from investing activities depending on the nature of activities that generated the distribution.

On a periodic basis, management assesses whether there are any indicators that the value of the Partnership’s investment in an unconsolidated joint venture may be impaired. An investment is impaired only if management’s estimate of the value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other-than-temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over the estimated fair value of the investment. The estimated fair value of the investment is determined using a discounted cash flow model which is a Level III valuation under the ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”). Management of the Partnership considers a number of assumptions that are subject to economic and market uncertainties including, among others: demand for space; competition for tenants; changes in market rental rates; operating costs; capitalization rates; holding periods; and, discount rates. As these factors are difficult to predict and are subject to future events that may alter management’s assumptions, the values estimated by management in its impairment analyses may not be realized. No impairment loss with respect to the carrying value of the investment in an unconsolidated entity has been recorded for the period prior to acquisition on October 20, 2023.

c) Real estate held for investment

Real estate held for investment is stated at cost, less accumulated depreciation and impairment losses. Upon acquisition of real estate held for investment considered to be an asset acquisition, the purchase price and related acquisition costs (collectively, “the purchase price”) is capitalized as part of the cost basis. The purchase price is allocated between land, buildings and improvements, site improvements, and identifiable intangible assets and liabilities such as amounts related to in-place leases and origination costs acquired, above- and below-market leases, based upon their relative fair values. The allocation of the purchase price requires judgment and significant estimates. The fair values of the land and building assets are determined on an as-if-vacant basis.

Above- and below-market leases are based upon a comparison between existing leases upon acquisition and current market rents for similar real estate. The fair value of above- and below-market leases is equal to the aggregate present value of the spread between the contract and the market rate of each of the in-place leases over their remaining term. The values of the above- and below-market leases are amortized to rental revenues over the remaining term of the related leases.

The fair values of in-place leases and origination costs are determined based on the estimates of carrying costs during the expected lease-up periods and costs that would be incurred to put the existing leases in place under the same market terms and conditions.

In the event a tenant terminates its lease, the unamortized portion of the related intangible values is written off immediately.

Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the asset:

Repairs and maintenance are charged to operations as incurred; major renewals and betterments that extend the useful life or improve the operating capacity of the asset are capitalized.

d) Assets held for sale

The Partnership classifies assets held for sale when all of the following criteria are met: (1) management commits to a plan to sell the property, (2) the property is available for immediate sale in its present condition, subject only to terms that are usual and customary for sale of real estate properties, (3) an active program to locate a buyer and conduct other actions required to complete the sale has been initiated, (4) the sale of the property is probably in occurrence and is expected to qualify as a completed sale, (5) the property is actively marketed for sale at a price that is reasonable in relation to its fair value, and (6) actions required to complete the sale indicate that it is unlikely that any significant changes will be made or that the plan to sell will be withdrawn.

For properties classified as held for sale, the Partnership suspends depreciation and amortization of the real estate properties, including the related intangible lease assets and liabilities, as well as straight-line revenue recognition of the associated lease. Properties held for sale are carried as the lower of cost or fair value, less estimated selling costs. If the estimated fair value less selling costs is lower than the carrying value, the difference will be recorded as an impairment on assets held for sale in the condensed consolidated statements of operations. As of September 30, 2024, there wereno properties classified as held for sale. As of December 31, 2023, there weretwo properties classified as held for sale. No impairment loss was recorded for assets held for sale for thethree and nine months ended September 30, 2024 and September 30, 2023. The Partnership has not reclassified results of operations for properties disposed of or classified as held for sale as discontinued operations as these events are a normal part of the Partnership’s operations and do not represent strategic shifts in the Partnership’s operations.

e) Impairment of long-lived assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The net recoverable amount represents the undiscounted estimated future cash flow expected to be earned from the long-lived asset. In the case of real estate, the undiscounted estimated future cash flows are based on expected cash flows from the use and eventual disposition of the property. The review of anticipated cash flows involves subjective assumptions of estimated occupancy, rental rates and residual value. If such impairment is present, an impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value.

All investments in real estate are subject to elements of risk and are affected by, but not limited to, the general prevailing economic conditions, local real estate markets, supply and demand for leased premises, competition and governmental laws and other requirements.

During the nine months ended September 30, 2024, the Partnership recorded an impairment loss of $591 on real estate held for investment with remaining carrying value of $1,961, which declined due to the tenants' vacancy. No impairment loss was recorded for assets held for investment for the three and nine months ended September 30, 2023. The Partnership determined the fair value measurement using a range of significant unobservable inputs, including broker market information and recent comparable sales transactions.

f) Revenue recognition and accounts receivable

Leases with tenants are accounted for as operating leases. Minimum rents are recognized on a straight-line basis over the term of the respective leases and reasonably certain renewal periods. The difference between rental revenue recognized and the cash rent due under the provisions of the lease is recorded as deferred rent receivable and included as a component of other assets in the condensed consolidated balance sheets.

Variable rental amounts include rent increases that are based on changes in the Consumer Price Index (“CPI”), percentage rent or lease terminations. Variable rental amounts are not recognized until the specific events that trigger the variable payments have occurred.

The Partnership evaluates the collectability of its accounts receivable related to base rents and expense reimbursements. The Partnership analyzes accounts receivable, individual tenant credit worthiness and current economic conditions and trends when evaluating the adequacy of the allowance for credit losses. Management has evaluated the collectability of accounts receivable and determined thatno allowance for credit losses is required as of September 30, 2024 and an allowance for credit losses in the amount of $328 is required as of December 31, 2023.

g) Cash, cash equivalents and restricted cash

Cash and cash equivalents comprise amounts held in operating bank and money market accounts.

Restricted cash includes cash proceeds from sale of assets included in the asset backed securitization in anticipation of replacement properties and a maintenance reserve required as part of the asset backed securitization. The Partnership had $1,123 and $5,532 of restricted cash as of September 30, 2024 and December 31 2023, respectively.

h) Financing transaction and discount costs

Financing transaction costs incurred in connection with obtaining debt are deferred and amortized over the term of the related debt. For any debt acquired at a discount, where the fair value of debt is less than the carrying amount, the fair value discount is amortized over the term of the related debt using the effective interest method. The amortization of financing transaction costs and fair value discount is charged to interest expense on the accompanying condensed consolidated statements of operations, and the unamortized balance of deferred financing transaction costs and fair value discount is shown as a reduction of debt on the accompanying condensed consolidated balance sheets.

i) Concentration of credit risk

Credit risk arises from the potential that a counterparty will fail to perform its obligations. The Partnership is not exposed to significant credit risk as the Partnership maintains a number of diverse tenants which mitigates the credit risk.

j) Use of estimates

The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of these condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. The most significant assumptions and estimates relate to the valuation of real estate and related intangible assets and liabilities upon acquisition, including the assessment of impairments, as well as depreciable lives, and the collectability of trade receivables. On an on-going basis, the management of the Partnership reviews its estimates and assumptions. These estimates are based on historical experience and various other assumptions that the management of the Partnership believes to be reasonable under the circumstances. Actual results could differ from those estimates.

k) Income taxes

The Partnership has elected to be treated as a real estate investment trust (“REIT”) under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and expects to continue to qualify as a REIT. To qualify as a REIT, the Partnership is subject to various requirements including that it must distribute at least 90% of its taxable income to its shareholders as dividends. As a REIT, the Partnership will be subject to federal income tax on its undistributed REIT taxable income and net capital gain and to a 4% non-deductible excise tax on any amount by which distributions it pays with respect to any calendar year are less than the sum of (1)85% of its ordinary income, (2)95% of its capital gain net income and (3)100% of its undistributed taxable income from prior years. The Partnership intends to operate in such a manner so as to qualify as a REIT, but no assurance can be given that the Partnership will operate in a manner so as to qualify as a REIT. If the Partnership fails to meet these requirements, it could be subject to federal income tax on all of the Partnership’s taxable income at regular corporate rates for that year. The Partnership would not be able to deduct distributions paid to shareholders in any year in which it fails to qualify as a REIT. Additionally, the Partnership will also be disqualified from electing to be taxed as a REIT for the four taxable years following the year during which qualification was lost unless the Partnership is entitled to relief under specific statutory provisions. As of September 30, 2024, the Partnership believes it is in compliance with all applicable REIT requirements.

For the nine months ended September 30, 2024 and 2023, the Partnership has distributed 100% of its taxable income and, therefore, is not required to pay any federal income tax in its own right.

The Partnership is subject to state and local income or franchise taxes in certain jurisdictions in which some of its properties are located and records these within income taxes in the accompanying condensed consolidated statements of operations.

Taxable income from certain non-REIT activities is managed through a taxable REIT subsidiary (“TRS”) and is subject to applicable federal, state, and local income and margin taxes. The Partnership had no significant taxes associated with its TRS for the nine months ended September 30, 2024 and 2023.

The Partnership is required to file income tax returns with federal and state taxing authorities. As of September 30, 2024, the Partnership’s U.S. federal and state income tax returns remain subject to examination by the respective taxing authorities for 2021 through 2023 tax years.

l) Fair value measurement

ASC 820 defines fair values as the 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 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. In instances, where the determination of the fair value measurement is based on inputs from more than one level of the fair value hierarchy, the entire fair value measurement is classified based on the lowest-level input.

The hierarchy is measured in three levels based on the reliability of inputs:

Level 1 – Quoted prices that are available in active markets for identical assets or liabilities.

Level 2 – Pricing inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Partnership has financial instruments which include cash and cash equivalents, restricted cash, other assets, accounts payable and accrued liabilities, which are carried at amortized cost and approximate their fair value unless otherwise noted.

Non-recurring fair value measurements

The fair value of the Partnership’s debt was estimated using recent secondary markets, recent financing transactions, estimates of the fair value of the property that serves as collateral for such debt, historical risk premiums for loans of comparable quality, current SOFR and discounted estimated future cash payments to be made on such debt. The discount rates estimated reflect the Partnership’s judgment as to the approximate current lending rates for loans with similar maturities and assumes that the debt is outstanding through maturity.

The following table summarizes the fair value of the Partnership’s aggregate debt:

The Partnership estimates fair value for real estate using inputs such as operating income, estimated capitalization rates or multiples, information obtained from third parties and estimated or negotiated selling price. Based on these inputs, the Partnership determined that its valuations of impaired real estate may fall within Level 2 and Level 3 of the fair value hierarchy under ASC Topic 820. The Partnership determines the valuation of impaired assets using generally accepted valuation techniques including discounted cash flow analysis, income capitalization, analysis of recent comparable sales transactions and negotiated offers received from third parties.

The Partnership's non-recurring fair value measurements at September 30, 2024 and September 30, 2023 also consisted of fair value of impaired assets (see Note 2(e)) that were determined using Level 3 inputs.

m) Segment reporting

The Partnership currently operates in a single reportable segment, which includes the acquisition, leasing and ownership of net leased properties. Management assesses, measures, and reviews the operating and financial results at the consolidated level for the entire portfolio, and therefore, each property or property type is not considered an individual operating segment. The Partnership does not evaluate the results of operations based on geography, size, or property type.

n) Subsequent events

The Partnership evaluates subsequent events for disclosure in these condensed consolidated financial statements through the date of which these condensed consolidated financial statements were available to be issued.

o) Recent adopted accounting pronouncements

In September 2016, FASB issued an Accounting Standards Update ("ASU") 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including Accounts Receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 was effective for the Partnership beginning January 1, 2023. The adoption of ASU 2016-13 did not have a material impact on the Partnership’s financial position, results of operations and cash flows.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting”, which provides temporary, optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. Further, in January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848) – Scope”, to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting or contract price alignment that is modified as a result of the reference rate reform. On December 31, 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848) – Deferral of the Sunset Date of Topic 848”, which extends the sunset (or expiration) date of Topic 848 from December 31, 2022 to December 31, 2024. The Partnership modified its debt, cap and floor agreements from LIBOR to SOFR during 2023 and has elected to use the optional expedient for contract modifications. The Partnership has concluded that the amendments should be treated as non-substantial modifications of the existing contracts, resulting in no impact to the Partnership's condensed consolidated financial statements.

p) Recent accounting pronouncements issued but not yet adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 is intended to improve reportable segment disclosures by requiring disclosure of incremental segment information on an annual and interim basis such as, annual and interim disclosure of significant segment expenses that are regularly provided to the chief operating decision maker, interim disclosure of a reportable segment’s profit or loss and assets, and the requirement that a public entity that has a single reportable segment provide all the disclosures required by ASU 2023-07 and all existing segment disclosures in Topic 280. The amendments in ASU 2023-07 do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The disclosures are applied retrospectively to all periods presented and early adoption is permitted. The Partnership has one reportable segment and continues to evaluate additional disclosures that may be required for entities with a single reportable segment.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires annual disclosure of specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold within the rate reconciliation. In addition, the amendments require annual disclosure of income taxes paid disaggregated by federal, state and foreign jurisdictions as well as individual jurisdictions in which income taxes paid is equal to or greater than 5 percent of total income taxes paid. ASU 2023-09 is effective for annual periods beginning after December 15, 2024 on a prospective basis, however early adoption and retrospective application is permitted. The Partnership continues to evaluate the potential impact of the guidance and potential additional disclosures required.