avatar Marcus & Millichap, Inc. Finance, Insurance, And Real Estate

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    Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2014 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission File Number 001-36155 MARCUS & MILLICHAP, INC. (Exact name of registrant as specified in its charter) Delaware 35-2478370 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23975 Park Sorrento, Suite 400 Calabasas, California, 91302 (Address of principal executive offices, including zip code) Registrant’s telephone number, including area code: (818) 212-2250 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock, par value $0.0001 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10- K. ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x The aggregate market value of the registrant’s voting stock held by non-affiliates at June 30, 2014 was approximately $204.1 million, based on the closing price per share of common stock on that date of $25.51 as reported on the New York Stock Exchange. Shares of common stock known by the registrant to be beneficially owned by directors and executive officers of the registrant and 10% stockholders are not included in the computation. The registrant, however, has made no determination that such persons are “affiliates” within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934. As of March 2, 2015, there were 37,072,155 shares of the registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement to be delivered to stockholders in connection with the annual meeting of stockholders to be held on May 5, 2015 are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the United States Securities and Exchange Commission (the “SEC”) within 120 days of the registrant’s fiscal year ended December 31, 2014.


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    Table of Contents TABLE OF CONTENTS Page PART I Item 1. Business 4 Item 1A. Risk Factors 17 Item 1B. Unresolved Staff Comments 29 Item 2. Properties 29 Item 3. Legal Proceedings 30 Item 4. Mine Safety Disclosures 30 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 31 Item 6. Selected Financial Data 33 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 52 Item 8. Financial Statements and Supplementary Data 52 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53 Item 9A. Controls and Procedures 53 Item 9B. Other Information 54 PART III Item 10. Directors, Executive Officers and Corporate Governance 55 Item 11. Executive Compensation 56 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 56 Item 13. Certain Relationships and Related Transactions, and Director Independence 57 Item 14. Principal Accounting Fees and Services 57 PART IV Item 15. Exhibits, Financial Statement Schedules 58 SIGNATURES 59 MARKET, INDUSTRY AND OTHER DATA Unless otherwise indicated, information contained in this Annual Report on Form 10-K concerning the commercial real estate industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the commercial real estate market. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe our market position, market opportunity and market size information included in this Annual Report on Form 10-K is generally reliable, such information is inherently imprecise. Unless indicated otherwise, the industry data included herein is generally based on 2013 data since 2014 data may not yet have been published. 2


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    Table of Contents SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K includes forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends affecting the financial condition of our business. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to: • market trends in the commercial real estate market or the general economy; • our ability to attract and retain qualified managers, sales and financing professionals; • the effects of increased competition on our business; • our ability to successfully enter new markets or increase our market share; • our ability to successfully expand our services and businesses and to manage any such expansions; • our ability to retain existing clients and develop new clients; • our ability to keep pace with changes in technology; • any business interruption or technology failure and any related impact on our reputation; • changes in tax laws, employment laws or other government regulation affecting our business; and • other risk factors included under “Risk Factors” in this Annual Report on Form 10-K. In addition, in this Annual Report, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “predict,” “potential” and similar expressions, as they relate to our company, our business and our management, are intended to identify forward-looking statements. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially from those anticipated or implied in the forward- looking statements. Forward-looking statements speak only as of the date of this Annual Report on Form 10-K. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. 3


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    Table of Contents PART I Unless the context requires otherwise, the words “Marcus & Millichap,” “Marcus & Millichap Real Estate Investment Services,” “MMREIS,” “we,” the “company,” “us” and “our” refer to Marcus & Millichap, Inc., Marcus & Millichap Real Estate Investment Services, Inc. and its other consolidated subsidiaries. Item 1. Business Overview Marcus & Millichap, Inc. (“MMI”), is a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top broker in the United States based on the number of investment transactions over the last 10 years. As of December 31, 2014, we had nearly 1,500 investment sales and financing professionals in 78 offices in the United States and Canada that provide investment brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to developers, lenders, owners and investors. In 2014, we closed more than 7,600 sales, financing and other transactions with total volume of approximately $33.1 billion. We divide the commercial real estate market into three major segments by investment size: • Private client segment: properties with prices under $10 million; • Hybrid segment: properties with prices equal to or greater than $10 million and less than $20 million; and • Institutional segment: properties with prices of $20 million and above. We focus primarily on the private client segment, which consistently comprises over 80% of the total number of property transactions in the commercial real estate market. We were founded in 1971 and are committed to building the leading national investment brokerage business. To achieve that goal, we underwrite, market and sell commercial real estate properties for our private clients in a manner that maximizes value for sellers and provides buyers with the largest and most diverse inventory of commercial properties. Our business model is based on several key attributes: a focus on investment brokerage services, a critical mass of sales professionals providing consistent services and exclusive client representation, a national platform based on information sharing and powered by proprietary technology, a management team with investment brokerage experience, a financing team that is integrated with our investment sales force and research and advisory services tailored for our clients. We devote our expertise and focus to the investment brokerage and financing business as opposed to other businesses, such as leasing or property management. Accordingly, our business model is unique from our national competitors, who focus primarily on the institutional real estate segment, and from our local and regional competitors, who lack a broad national platform. As the leading investment sales and financing firm in our segment, we believe we are ideally positioned to capture significant growth opportunities in our market. Our sales professionals are specialized by property type and by local market area, as we believe a focused expertise brings value to our clients. Our model and footprint provide an unparalleled level of connectivity to the marketplace. We operate 78 offices in the United States and Canada. We have 61 offices concentrated in 48 major markets consisting of metropolitan areas with a population of at least one million and 17 offices in 17 mid-market locations consisting of metropolitan areas with a population of less than one million. Our broad geographic coverage, property expertise, and significant relationships with both buyers and sellers provide connectivity and increase liquidity in the markets we serve. By closing more transactions annually than any other firm (based on data from CoStar Group, Inc. and Real Capital Analytics that includes apartment, retail, office, and industrial sales), our sales professionals are able to provide clients with a broad and deep perspective on the investment real estate market locally, regionally and nationally. 4


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    Table of Contents We generate revenues by collecting commissions upon the sale and financing of commercial properties. These fees consist of commissions collected upon the sale of an asset, based upon the sales price of the property, and fees collected by our financing subsidiary from the placement of loans. In 2014, approximately 92% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 2% from other revenues, including consulting and advisory services. Marcus & Millichap Investment Sales, Financing and Other Transactions by Property Type The following tables show the number and dollar volume (in Billions) of investment sales, financing and other transactions in 2014 compared to 2013 by property type and investor segment: 2014 2013 Change Transactions Transactions Increase (Decrease) Property Type Number Volume Number Volume Number Volume Multifamily 3,142 $ 16.1 2,892 $ 12.9 250 $ 3.2 Retail 2,948 10.3 2,396 6.3 552 4.0 Office 480 1.8 470 1.5 10 0.3 Hospitality 240 1.1 130 0.5 110 0.6 Land 173 0.5 128 0.2 45 0.3 Industrial 172 0.7 145 0.5 27 0.2 Self-Storage 160 0.7 109 0.5 51 0.2 Manufactured Housing 90 0.4 84 0.4 6 — Seniors Housing 61 0.7 73 0.6 (12) 0.1 Mixed – Use / Other 201 0.8 181 0.6 20 0.2 Total 7,667 $ 33.1 6,608 $ 24.0 1,059 $ 9.1 2014 2013 Change Transactions Transactions Increase (Decrease) Investor Segment Number Volume Number Volume Number Volume Private Client $1 to $10 Million 5,198 $ 15.6 4,312 $ 12.8 886 $ 2.8 Private Client < $1 Million 1,861 1.1 1,876 1.1 (15) — Hybrid 392 5.4 263 3.5 129 1.9 Institutional 216 11.0 157 6.6 59 4.4 Total 7,667 $ 33.1 6,608 $ 24.0 1,059 $ 9.1 Corporate Information We were formed as a sole proprietorship in 1971, incorporated in California on August 26, 1976 as G. M. Marcus & Company, and we were renamed as Marcus & Millichap, Inc. in August 1978, Marcus & Millichap Real Estate Investment Brokerage Company in September 1985, and Marcus & Millichap Real Estate Investment Services, Inc. (“MMREIS”) in February 2007. Prior to the completion of our initial public offering (“IPO”), MMREIS was majority-owned by Marcus & Millichap Company (“MMC”) and all of MMREIS’ preferred and common stock outstanding was held by MMC and its affiliates or officers and employees of MMREIS. In June 2013, in preparation for the spin-off of its real estate investment services business (the “Spin-Off”), MMC formed a holding company called Marcus & Millichap, Inc. in Delaware. Prior to the completion of our IPO, the shareholders of MMREIS contributed the shares of MMREIS to Marcus & Millichap, Inc. in exchange for common stock of Marcus & Millichap, Inc., and MMREIS became a wholly owned subsidiary of Marcus & Millichap, Inc. 5


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    Table of Contents Our principal executive offices are located at 23975 Park Sorrento, Suite 400, Calabasas, California 91302. Our telephone number at this location is (818) 212-2250. Our website address is www.marcusmillichap.com. The information on our website is not part of, and is not incorporated into, this Annual Report on Form 10-K. Competitive Strengths We believe the following strengths provide us with a competitive advantage and opportunities for success: National Platform Focused on Investment Brokerage. We are committed to building the leading national investment brokerage business. To achieve our goal, we focus on investment brokerage as opposed to other businesses such as leasing or property management. We combine proprietary technology and processes to market investment real estate with highly qualified sales professionals in 78 offices across the United States and Canada. Our commitment to specialization is also reflected in how we organize our sales professionals by property type and market area, which enhances our skills, relationships and market knowledge required for achieving the best results for our clients. Market Leader in the Private Client Segment. We are the leading commercial real estate investment broker in the United States based on the number of transactions. We focus primarily on the private client segment of the market, consisting of transactions with prices under $10 million, which accounted for over 90% of the number of our transactions in 2014. This segment represents the vast majority of the number of commercial properties in the United States and is characterized by high asset turnover rates due to personal circumstances and business reasons, such as death, divorce and changes in partnership and other personal or financial circumstances. The private client brokerage industry is highly fragmented and characterized by high barriers to entry. These barriers include the need for a large, specialized sales force prospecting private clients, the difficulty in identifying and establishing relationships with such investors and the challenge of serving their needs locally, regionally and nationally. For transactions in the $1 million to $10 million range nationally, the top 10 brokerage firms represented just 21.1% (includes apartment, retail, office, and industrial sales; list-side) of commercial property sales in 2013. We believe our core business is the least covered segment by national firms, and is significantly underserved by local and regional firms that lack a multi-market platform. Platform Built for Maximizing Investor Value. We have built our business to maximize value for real estate investors through an integrated set of services geared toward our clients’ needs. Within investment sales, we are committed to an investment brokerage specialization, providing the largest sales force in the industry, fostering a culture and policy of information sharing on each asset we represent and using proprietary technology that facilitates real-time buyer-seller matching. Our investment sales organization underwrites, positions and markets investment real estate to the largest pool of qualified buyers. We coordinate proactive marketing campaigns that access the investor relationships and resources of the entire firm, far beyond the capabilities of an individual listing agent. These efforts produce wide exposure to investors who we identify as high-probability bidders for each asset. We have one of the largest teams of financing professionals in the investment brokerage industry through Marcus & Millichap Capital Corporation (“MMCC”). MMCC provides financing expertise and access to debt capital by securing competitive loan pricing and terms for our clients. In 2014, MMCC closed more than 1,300 financings with an aggregate loan value of approximately $3.8 billion, making us a leading mortgage broker in the industry. Finally, our market research analyzes the latest local and national economic and real estate trends, enabling our clients to make informed investment and financing decisions. These integrated services enable us to facilitate transactions for our clients across different property types and markets. Management with Significant Investment Brokerage Experience. The majority of our regional managers are former senior sales professionals of the firm who now focus on management and do not compete with our sales force. As executives of the firm dedicated to hiring, training, developing and supporting our sales professionals, their investment brokerage background is extremely valuable. Our top sales professionals are 6


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    Table of Contents trained, developed and supported by our regional managers. Our comprehensive training and development programs rely greatly on the regional managers’ personal involvement. Their past experience as senior sales professionals plays a key role in helping our junior professionals establish technical and client service skills. Our regional managers also coach our sales professionals in setting up, developing and growing their relationships with clients. We believe this management structure has helped the firm create a competitive advantage and achieve better results for our clients. Growth Strategy We have a long track record of successful growth in our core business driven by opening new offices and by hiring, training and developing new sales and financing professionals. Since the implementation of our long-term growth plan in 1995, our revenue has increased sevenfold and we have grown from approximately 416 sales professionals in 22 offices to nearly 1,500 sales and financing professionals in 78 offices in the United States and Canada. To drive our future growth, we continually seek to expand our national footprint and optimize the size, product segmentation and specialization of our team of sales and financing professionals. The key strategies of our growth plan include: Increase Market Share in Our Core Business. Our core business is focused on the highly fragmented private client segment. The top 10 brokerage firms accounted for only 21.1% (includes apartment, retail, office, and industrial sales; list-side) of 2013 sales in the $1 million to $10 million range. Our industry leading market share of 7.4% in this segment creates significant opportunity for us to expand our market presence and bring our unique client service offerings to a larger portion of the segment. We leverage our existing platform, relationships and brand recognition among private clients to grow through expanded marketing and coverage. Our growth plan includes the following components: • Grow in Targeted Locations. Our plan targets specific markets and calls for both expansion of existing offices and opening additional offices. We have assigned key executives and managers to these markets and our recruiters have begun to hire additional experienced sales professionals. We have targeted markets based on population, employment, commercial real estate sales, inventory and competitive landscape. In addition, we have developed optimal office plans to capitalize on these factors by tailoring sales force size, coverage and composition by office and business activity. We expect this intensified focus on target markets, coupled with new marketing campaigns, reassigned geographic boundaries and team development, to result in significant growth. • Grow in Specialty Property Types. We believe that specialty property types, including hospitality, multifamily tax credit and affordable housing, student housing, manufactured housing, seniors housing and self-storage, offer significant room for growth. To take advantage of these opportunities, we are increasing our property type expertise by continuing to add regional directors who can bring added management capacity, business development and sales professional support. These executives will work with our regional and group managers to increase sales professional hiring, training, development and redeployment, and to execute various branding and marketing campaigns to expand our presence in key property types. • Increase Sales Professional Hiring. We grow our business by hiring, training and developing sales professionals. Recently, we increased our focus on hiring experienced sales professional through our recruiting department, specialty directors and regional managers. Our new sales professionals are trained in all aspects of real estate fundamentals and client service through formal training and apprenticeship programs. As these sales professionals mature, we continue to provide best practices and specialty training. When hiring more experienced sales professionals, we have focused on cultural fit. We believe this model creates a high level of teamwork, as well as operational and client service consistency. Grow Financing Services. We are focused on growing our financing services provided through MMCC. We are taking steps that we believe will substantially increase our internal loan business capture rate. We intend to 7


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    Table of Contents execute our growth strategy by expanding financing services in markets currently served by us and by increasing the capacity of financing professionals in offices we currently serve and in offices that do not have an MMCC presence or an MMCC presence is underutilized. In addition, in order to continue to increase our internal loan capture rate we are enhancing our cross-selling training, education and internal branding. We also plan to enhance MMCC’s service platform and explore expanding our revenue sources by developing other services such as mezzanine financing, HUD products, equity placement and conduit financing. Expand Our Market Share of Larger Transactions. Our extensive relationships with private clients have enabled us to capture a greater portion of commercial real estate transactions in excess of $10 million and bridge the private and institutional capital markets in recent years. Our ability to connect private capital with institutional assets plays a major role in differentiating our services. In 2011, we introduced a division dedicated to serving major investors branded as Institutional Property Advisors (“IPA”), in the multifamily sector. This strategy has met with great success and market acceptance and provides a vehicle for growth by delivering our unique service platform within the hybrid and institutional multifamily, institutional retail and office sectors. 8


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    Table of Contents Our Company We provide investment brokerage and financing services to investors of all types and sizes of commercial real estate assets. We are a leading national investment brokerage company primarily focused on private clients transacting in the under $10 million price range. This is the largest and most active market segment and comprised over 80% of total U.S. commercial property sales over the last ten years. We have nearly 1,500 sales and financing professionals in 78 offices in the United States and Canada. We have 61 offices concentrated in 48 major markets consisting of metropolitan areas with a population of at least 1 million and 17 offices in 17 mid-market locations consisting of metropolitan areas with a population of less than 1 million. We leverage our relationships with investors and use proprietary marketing tools to match properties with qualified buyers. Our financing professionals obtain competitive debt financing for buyers of our properties and owners who need to refinance or restructure their positions. The following graph shows our transactions in investment sales, financing and other from 2005 to 2014: Investment Sales, Financing and Other Transactions, 2005-2014 The real estate market is cyclical and our results are impacted by many macro and micro economic factors as discussed inItem 1A – Risk Factors. In 2007, the global credit markets began to show signs of distress resulting in a shortage of liquidity in some financing markets, including real estate. Beginning in late 2008, the credit crisis and recession greatly affected the commercial real estate industry, resulting in a dramatic decline in sales volume and revenue. Despite the severity of the market downturn, we maintained all of our offices and services, enabling us to quickly take advantage of the market recovery and resume our growth. As the real estate and financing markets recovered after 2009, our sales volume has grown significantly now exceeding pre-downturn levels both as a result of the market transaction growth and our growth initiatives which expanded our market presence. As a result our revenues have grown at a compounded annual growth rate of 29.2% from 2009 to 2014. 9


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    Table of Contents Geographic Locations. We have offices across the United States in 35 states and in Canada in three provinces, with nearly 1,500 sales and financing professionals in 61 offices in major metropolitan markets and 17 offices in mid-market locations. Below is a map reflecting the geographic location of our offices as of December 31, 2014. Our Services. We offer two primary services to our clients: commercial real estate investment brokerage and financing. Commercial Real Estate Investment Brokerage. Our primary business and source of revenue is the representation of commercial property owners as their exclusive investment broker in the sale of their properties. Commissions from investment sales accounted for approximately 92% of our revenues in 2014. Sales are generated by maintaining relationships with property owners, providing market information and trends to them during their investment or “hold” period and being selected as their representative when they decide to sell or exchange their commercial property with a similar asset. We collect commissions upon the sale of each asset based on a percentage of sales price. These commission percentages are typically inversely correlated with sales price and thus are generally higher for smaller transactions. Our sales professionals also represent buyers in fulfilling their investment real estate acquisition needs; however, the vast majority of our investment sales business is generated from our exclusive representation of sellers. 10


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    Table of Contents Our core business concentration is aligned with the largest market segment as illustrated in the charts below. These charts show the number of our transactions by investor segment in 2013 and the number of multifamily, retail, office and industrial property sales in 2013, for properties priced at $1 million or greater in the commercial real estate industry: Number of Transactions by Investor Segment* Marcus & Millichap Commercial Real Estate Industry * Includes multifamily, retail, office and industrial sales $1 million and greater. Sources: CoStar Group, Inc. and Real Capital Analytics. In 2014, we closed 5,588 investment sales transactions in a broad range of commercial property types, with a total sales volume of approximately $25.4 billion. In the last 10 years, we have closed more transactions than any other firm. We have significantly diversified our business beyond our historical focus on multifamily properties. The following table shows the various property types included in our investment sales transactions in 2014 and 2013 (volume in billions): Marcus & Millichap Investment Sales Transactions by Property Type 2014 2013 Change Transactions Transactions Increase (Decrease) Property Type Number Volume Number Volume Number Volume Retail 2,317 $ 8.6 1,899 $ 5.1 418 $ 3.5 Multifamily 2,157 11.6 1,839 9.0 318 2.6 Office 308 1.3 296 0.9 12 0.4 Hospitality 173 0.7 95 0.4 78 0.3 Land 152 0.5 111 0.2 41 0.3 Self-Storage 132 0.6 83 0.3 49 0.3 Industrial 128 0.6 105 0.3 23 0.3 Manufactured Housing 68 0.3 55 0.3 13 — Seniors Housing 53 0.7 55 0.5 (2) 0.2 Mixed – Use / Other 100 0.5 96 0.3 4 0.2 Total 5,588 $ 25.4 4,634 $ 17.3 954 $ 8.1 We are building on our track record of growth in multifamily and retail by expanding our coverage into additional property types. These include self-storage, hospitality, seniors housing, multifamily tax credit and affordable housing and manufactured housing, where we are already a leading broker but have significant room for additional growth due to market size and opportunity. We are also expanding our specialty group management and support infrastructure, specialized branding and business development customized to each of these sectors and intensifying our recruiting efforts, which we believe will result in increased business in the various property types. 11


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    Table of Contents We underwrite, value, position and market properties to reach the largest and most qualified pool of buyers. We offer our clients the industry’s largest team of investment sales professionals operating with a culture and policy of information sharing, powered by our proprietary system, MNet, which enables real-time buyer-seller matching. We use a proactive marketing campaign that leverages the investor relationships of our entire sales force, direct marketing and a suite of proprietary web-based tools that connects each asset with the right buyer pool. We strive to maximize value for the seller by generating high demand for each asset. Our approach also provides a diverse, consistently underwritten inventory of investment real estate for buyers. When a client engages one of our sales professionals, they are engaging an entire system, structure and organization committed to maximizing value for our clients. Financing. MMCC is a broker of debt financing for commercial properties in the under $10 million market segment. MMCC has 82 financing professionals in 37 offices as of December 31, 2014. We generate revenue in the form of financing fees collected from the placement of loans with banks, insurance companies, government agencies and commercial mortgage backed securities (“CMBS”), conduits. MMCC’s financing fees vary by loan amount and type. In 2014, MMCC completed more than 1,300 financing transactions with a value of $3.8 billion and accounted for approximately 6% of our revenues. MMCC’s size, market reach and sales volume enables us to establish long-term relationships and special programs with various capital sources. This in turn improves MMCC’s value proposition to borrowers seeking competitive financing rates and terms. MMCC is not limited to promoting in-house or exclusive capital sources and seeks the most competitive financing solution for each client’s specific needs and circumstances. We place loans for refinancing not involving a sale as well as acquisition financing for individual assets and portfolios. During 2014, approximately 49% of MMCC’s revenues came from refinance activities, 47% were derived from placing acquisition financing and 4% from other financing activities. MMCC is fully integrated with our investment sales force under the supervision of our regional managers, which promotes cross selling, information sharing, business referrals and better client service. By leveraging our national network of sales professionals, we are able to provide clients with the latest property and capital markets information and partner with national and regional lenders to secure loan packages that meet our clients’ financial objectives. In the future, we plan on expanding MMCC debt and equity offerings by adding internally controlled programs which may, but not necessarily include CMBS products, structured debt products (mezzanine and preferred equity), HUD and other GSE products. To accomplish this, we intend to hire experienced financing professionals and capital market teams in these areas and establish relationships with capital sources that specialize in these products. Other Services: Research, Advisory and Consulting. Our research, advisory and consulting services are designed to assist clients in forming their investment strategy and making transaction decisions. Our advisory and consulting services are coordinated with both our sales and financing professionals and are designed to provide customized analysis and increase customer loyalty and long-term relationships. We also provide a wide range of advisory and consulting services to developers, lenders, owners, real estate investment trusts, high net worth individuals, pension fund advisors and other institutions. Our advisory services include opinions of value, operating and financial performance benchmarking analysis, specific asset buy-sell strategies, market and submarket analysis and ranking, portfolio strategies by property type, market strategy, and development and redevelopment feasibility studies. Competition We compete in investment brokerage and financing within the commercial real estate industry on a national, regional and local basis. Competition is based on a number of critical factors, including the quality and expertise of our sales and financing professionals, our execution skills, agent support, brand recognition and our business 12


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    Table of Contents reputation. We primarily compete with other brokerage and financing firms that seek investment brokerage and financing business from real estate owners and investors. To a lesser extent, we compete with in-house real estate departments, owners who may transact without using a brokerage firm, direct lenders, consulting firms and investment managers, some of which may have greater financial resources than we do. Our relative competitive position also varies across geographies, property types and services. In investment sales, our competitors on a national level include CBRE Group, Inc., Colliers International, HFF, Inc. and Jones Lang LaSalle. Our major financing competitors include HFF, Inc., CBRE Group, Inc., Jones Lang LaSalle, Walker & Dunlop, Berkadia Commercial Mortgage LLC, Grandbridge Real Estate Capital, and NorthMarq Capital, LLC. The investment sales firms mainly focus on larger sales and institutional investors and are not heavily concentrated in our main area of focus, which is the under $10 million private client market. However, there is cross over and competition between us and these firms. There are also numerous local and regional competitors in our markets, as well as competitors specializing in certain property types. Despite recent consolidation, the commercial real estate services industry remains highly fragmented and competitive. Competition to attract and retain qualified professionals is also intense in each of our markets. We offer what we believe to be competitive compensation and support programs to our professionals. Our ability to continue to compete effectively will depend on retaining, motivating and appropriately compensating our professionals. Technology We have a long-standing tradition of technological orientation, innovation and advancement. Our efforts include the development of proprietary applications designed to make the process of matching buyer and sellers faster and more efficient as well as state-of-the art communication technology, infrastructure, internet presence and electronic marketing. We have a proprietary internal marketing system, MNet, which allows our professionals to share listing information with investors across the country. MNet is an integrated tool that contains our entire national property inventory, which allows sales professionals to search for properties based on investors’ acquisition criteria. This system is an essential part of connecting buyers and sellers through our national platform. Our policies require information sharing among our sales professionals, and the MNet system automates the process of matching each property we represent to the largest pool of qualified buyers tracked by our national sales force. A part of MNet called Buyer Needs enables our sales professionals to register the investment needs of various buyers which are then matched to our available inventory on a real-time basis. We have also developed a proprietary system for automating the production of property marketing materials and launching marketing campaigns, which we call iMpact. iMpact allows our sales professionals to input data into a listing proposal or marketing package, automatically imports property information, data on comparable properties and other information, and then dynamically populates our e-marketing, print, and Internet media. This system allows sales professionals to rapidly create professionally branded and designed materials for marketing properties on behalf of our clients in an efficient and timely manner. We rebuilt our website in 2014 to enhance our interactions with buyers and sellers of properties. Our website is designed not only to bring in new clients for our sales and financing professionals, but also to make our inventory of properties available for maximum exposure for our sellers and providing buyers an opportunity to engage with our sales and financing professionals. Our website averages approximately 117,000 web users per month (based on data from Google Analytics) and also serves as a portal for delivery of online marketing materials and for deal collaboration. Marketing and Branding Our 44 years of investment brokerage specialization and concentration in the private client segment have established our brand as the leading broker of investment real estate as well as a trusted source of market 13


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    Table of Contents research and financing solutions. In recent years, the company has also garnered recognition among larger private investors and institutions due to our integrated platform and capability of linking private and institutional capital. We continue to strengthen and broaden the firm’s name recognition and credibility by executing a variety of marketing and branding strategies. Locally, our offices and sales and financing professionals engage in numerous events, direct mail campaigns, and investor symposiums and participate in real estate conferences and organizations for various market segments. Our regional managers and sales and financing professionals develop long-term client relationships and promote the firm’s brand through these avenues. Our research division produces more than 900 publications and client presentations per year and has become a leading source of information for the industry as well as the general business media. We provide research on 13 commercial property types covering: multifamily, retail, office, industrial, capital markets/financing, single-tenant net lease, seniors housing, student housing, self-storage, hospitality, medical office, manufactured housing and tax credit low income housing. This research includes analysis and forecasting of the economy, capital markets, real estate fundamentals, investment, pricing and yield trends, and is designed to assist investors in their strategy formation and decisions relating to specific assets, and help our sales professionals develop and maintain relationships with clients. Our transactional and market research expertise result in significant print, television and online media coverage including most major real estate publications such as GlobeStreet, Multi-Housing News, Commercial Property Executive and National Real Estate Investor as well as local market and major national news outlets such as The Wall Street Journal, Los Angeles Times, Chicago Tribune, Bloomberg Businessweek, Investors Business Daily and Financial Times. We frequently have featured speaking roles in key regional and national industry events, and we are regularly quoted in regional and national publications and media, and deliver content directly to the real estate investment community through print, electronic publications and video. Nationally, our specialty groups and capital markets executives actively participate in various trade organizations, many of which focus on specific property types and provide an effective vehicle for client relationship development and branding We believe all these activities create significant exposure and name recognition for our firm which fosters and builds strong, long-term client relationships. Intellectual Property We hold various trademarks and trade names, which include the “Marcus & Millichap” name. Although we believe our intellectual property plays a role in maintaining our competitive position in a number of the markets that we serve, we do not believe we would be materially, adversely affected by expiration or termination of our trademarks or trade names or the loss of any of our other intellectual property rights other than the Marcus & Millichap name. With respect to the Marcus & Millichap name, we maintain trademark registrations for these service marks. In addition to trade names, we have developed proprietary technologies for the provision of real estate investment services, such as MNet and iMpact. We also offer proprietary research to clients through our research division. While we seek to secure our rights under applicable intellectual property protection laws in these and any other proprietary assets that we use in our business, we do not believe any of these other items of intellectual property are material to our business in the aggregate. Government Regulation We are subject to various real estate regulations. The company is licensed as a mortgage broker and a real estate broker in 44 states in the United States and three provinces in Canada. We are a licensed broker in each state in which we have an office, as well as those states where we frequently do business. We are also subject to numerous other federal, state and local laws and regulations that contain general standards for, and prohibitions 14


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    Table of Contents on, the conduct of real estate brokers and sales associates, including agency duties, collection of commissions, telemarketing, advertising and consumer disclosures. Employees and Sales and Financing Professionals As of December 31, 2014, we had 1,494 sales and financing professionals of which 1,417 are exclusive independent contractors and the remainder are our employees. We had 611 employees as of December 31, 2014, consisting of 77 financing professionals, 18 in communications and marketing, 19 in research, and 497 in sales and financing management and support and general and administrative functions. We believe our employee relations are good. Most of the company’s sales professionals are classified as independent contractors under state and IRS guidelines. As such, the company generally does not pay for the professional’s expenses or benefits or withhold payroll taxes; rather they are paid from the commissions earned by the company upon the closing of a transaction, and these individuals do not earn a salary from which taxes are withheld. Almost all of the sales professionals hold applicable real estate broker licenses and execute a “Salespersons Agreement” setting out the relationship between the professional and the company. Each professional is obligated to provide brokerage services exclusively to the company, and is provided access to the company’s information technology, research and other support and business forms. Each professional generally reports on their activities to either the local regional manager, or in some cases to product specialty managers. Our sales and financing professionals are located in offices throughout the United States and Canada, each led by a regional manager with previous investment brokerage experience and an active brokerage license. We have 45 regional managers, who are responsible for hiring, developing and deploying sales professionals, managing regional and mid-market offices, and supervising MMCC originators and support staff in their region. We also have five group managers who oversee regional managers and multiple offices; group managers hire, develop, and support our regional managers and provide additional leadership and support for our sales force. Finally, our management structure includes national specialty directors who lead each property type. Our national specialty directors develop our national and local brand in each property type, develop major accounts and coordinate multi-market assignments on behalf of large clients. Traditionally, our growth has been driven by hiring, training and developing new sales and financing professionals. Our new sales and financing professionals are trained in our technical and client service standards through a comprehensive program starting with pre-training, formal training and apprenticeship programs. While continuing to improve the hiring, training and developing of new sales and financing professionals remains a major priority, we have also expanded our hiring strategy to include more experienced sales and financing professionals who fit our culture and values. Over the past several years, experienced sales and financing professionals, including some top performers previously with national competitors, have joined the firm and have become productive members of our team. As sales professionals mature, we continue with specialized training and best practices sessions by tenure, which are conducted by senior management, regional managers, leading sales professionals and our national specialty directors. The goal of this rigorous approach to training is to continually improve our team’s skill set and client services. Our sales force conducts business the same way across the country to deliver a high level of consistency, professionalism and reliability to our clients who often buy and sell investments in variety of locations and/or property types. As of December 31, 2014, approximately 29% of our sales and financing professionals have been with the company for less than one year, 28% have been with us for one to three years, 8% for three to five years, and 35% for more than five years. Our sales and financing professionals receive a percentage of the commission received by the company. As sales and financing professionals become more senior, they receive a larger percentage of the commission based on tenure and production. Depending on the aggregate gross commissions, a portion of the sales and financing professional’s commission may be deferred for three years. 15


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    Table of Contents Emerging Growth Company Status We currently are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and therefore, we are subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.” We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period. Available Information Our website address is www.marcusmillichap.com. Information on our website does not constitute part of this report and inclusions of our internet address in this Annual Report on Form 10-K are inactive textual references only. We are required to file current, annual and quarterly reports, proxy statements and other information required by the Exchange Act, with the SEC. We make available free of charge through a link provided on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large stockholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act. Such reports are available as soon as reasonably practicable after they are filed with the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding the Company that we file electronically with the SEC at www.sec.gov. We also make available on our website and will provide print copies to stockholders upon request, (i) our corporate governance guidelines, (ii) our code of ethics, and (iii) charters of the audit, compensation, corporate governance and nominating committees of our board of directors. From time to time, we may announce key information in compliance with Regulation FD by disclosing that information on our website. 16


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    Table of Contents Item 1A. Risk Factors Investing in our securities involves a high degree of risk. You should consider carefully the following risk factors and the other information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes, before making any investment decisions regarding our securities. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our securities could decline and you may lose part or all of your investment. Overview We are impacted by and manage many risk factors detailed below affecting our business including External Business Risks, Human Resource and Personnel Risks, Internal Business Risks, and Risks related to the Ownership of Our Common Stock. Many of these factors described below in External Business Risk, are outside of our control. In addition, we are a personnel and relationship intensive business rather than a capital intensive business. While all the risk factors discussed below have the potential to negatively impact our business, the most significant risks facing the company are the general economic conditions and commercial real estate market conditions risk and our ability to attract and retain qualified and experienced managers and sales and financing professionals. External Business Risks General economic conditions and commercial real estate market conditions have had and may in the future have a negative impact on our business. We may be negatively impacted by periods of economic slowdowns, recessions and disruptions in the capital markets; credit and liquidity issues in the capital markets, including international, national, regional and local markets; and corresponding declines in the demand for commercial real estate investment and related services. Historically, commercial real estate markets, and in particular the U.S. commercial real estate market, have tended to be cyclical and related to the flow of capital to the sector, the condition of the economy as a whole and to the perceptions and confidence of the market participants as to the relevant economic outlook. Cyclicality in the real estate markets may lead to cyclicality in our earnings and significant volatility in our stock price. Real estate markets may “lag” the broader economy. This means that even when underlying economic fundamentals improve in a given market, it may take additional time for these improvements to translate into strength in the real estate markets. The “lag” may be exacerbated when banks delay their resolution of commercial real estate assets whose values are less than their associated loans. Negative economic conditions, changes in interest rates, credit and liquidity issues in the capital markets, disruptions in capital markets and/or declines in the demand for commercial real estate investment and related services in international and domestic markets or in significant markets in which we do business, have had and could have in the future a material adverse effect on our business, results of operations and/or financial condition. In particular, the commercial real estate market is directly impacted by the lack of debt and/or equity for commercial real estate transactions, increased interest rates and changes in monetary policies by the Federal Reserve, changes in the perception that commercial real estate is an accepted asset class for portfolio diversification, and slowdowns in economic activity that could cause residential and commercial tenant demand to decline, which would adversely affect the operation and income of commercial real estate properties. These and other types of events could lead to a decline in transaction activity as well as a decrease in values, which would likely in turn lead to a reduction in brokerage commissions and financing fees relating to such transactions. These effects would likely cause us to realize lower revenues from our transaction service fees, including investment sales commissions, which fees usually are tied to the transaction value and are payable upon the successful completion of a particular transaction. Such declines in transaction activity and value would likely also significantly reduce our financing activities and revenues. For example, the disruptions and 17


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    Table of Contents dislocations in the global credit markets during 2008 and 2009 created significant restrictions in the availability of credit, especially on transitional assets and in the secondary and tertiary markets. In turn, the volume and pace of commercial real estate transactions were significantly reduced, as were property values, which generally peaked in 2007 and fell through 2010. Fiscal uncertainty as well as significant changes and volatility in the financial markets and business environment, and in the global political, security and competitive landscape, make it increasingly difficult for us to predict our revenue and earnings into the future. As a result, any revenue or earnings guidance or outlook which we might give may be overtaken by events or may otherwise turn out to be inaccurate. We have numerous significant competitors and potential future competitors, some of which may have greater resources than we do, and we may not be able to continue to compete effectively. We compete in investment sales and financing within the commercial real estate industry. Our investment sales focus is on the private client segment, which is highly fragmented. The fragmentation of our market makes it challenging to effectively gain market share. While we have a competitive advantage over other national firms in the private investor segment, we also face competition from local and regional service providers who have existing relationships with potential clients. Furthermore, transactions in the private investor segment are smaller than many other commercial real estate transactions. Although the brokerage commissions in this segment are generally a higher percentage of the sales price, the smaller size of the transactions requires us to close many more transactions to sustain revenues. If the commission structure or the velocity of transactions were to change, we could be disproportionately affected by changes compared to other companies that focus on larger transactions, institutional clients and other segments of the commercial real estate market. There is no assurance that we will be able to continue to compete effectively or maintain our current fee arrangements with our private clients or margin levels or we will not encounter increased competition. The services we provide to our clients are highly competitive on a national, regional and local level. Depending on the geography, property type or service, we face competition from, including, but not limited to, commercial real estate service providers, in-house real estate departments, private owners and developers, commercial mortgage servicers, institutional lenders, research and consulting firms, and investment managers, some of whom are clients and many of whom may have greater financial resources than we do. In addition, future changes in laws and regulations could lead to the entry of other competitors. Many of our competitors are local, regional or national firms. Although most are substantially smaller than we are, some of these competitors are larger on a local, regional or national basis, and we believe more national firms are exploring entry into or expansion in the under $10 million private investor segment. We may face increased competition from even stronger competitors in the future due to a trend toward acquisitions and consolidation. We are also subject to competition from other large national and multi-national firms as well as regional and local firms that have similar service competencies to ours. Our existing and future competitors may choose to undercut our fees, increase the levels of compensation they are willing to pay to their employees and sales and financing professionals, and either recruit our employees and sales and financing professionals or cause us to increase our level of compensation necessary to retain employees or sales and financing professionals, or recruit new employees or sales and financing professionals. These occurrences could cause our revenue to decrease, which could have an adverse effect on our business, financial condition and results of operations. Our brokerage operations are subject to geographic and commercial real estate market risks, which could adversely affect our revenues and profitability. Our real estate brokerage offices are located in and around large metropolitan areas as well as mid-market regions throughout the United States and Canada. Local and regional economic conditions in these locations could differ materially from prevailing conditions in other parts of the country. We have more offices and realize more of our revenues in California, the Midwest, the Northeast and the Southeast. In 2014, we earned approximately 29%, 17%, 15% and 13% in California, the Midwest, the Southeast and the Northeast, 18


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    Table of Contents respectively. In particular, we are subject to risks related to the California economy and real estate markets. In addition to economic conditions, this geographic concentration means that California-specific legislation, taxes and regional disasters such as earthquakes could disproportionately affect us. A downturn in investment real estate demand or economic conditions in these regions could result in a further decline in our total gross commission income and profitability and have a material adverse effect on us. Seasonal fluctuations in the investment real estate industry could adversely affect our business and make comparisons of our quarterly results difficult. Our revenue and profits have historically tended to be significantly higher in the fourth quarter of each year than in the first quarter. This is a result of a general focus in the real estate industry on completing or documenting transactions by calendar-year-end and because certain expenses are constant through the year. Historically, we have reported relatively lower earnings in the first quarter and then increasingly larger earnings during each of the following three quarters. The seasonality of our business makes it difficult to determine during the course of the year whether planned results will be achieved, and thus to adjust to changes in expectations. A change in the tax laws relating to like-kind exchanges could adversely affect our business and the value of our stock. Section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”), provides for tax-free exchanges of real property for other real property. Legislation has been proposed on several occasions that would repeal or restrict the application of Section 1031. If tax-free exchanges under Section 1031 were to be limited or unavailable, our clients or prospective clients may decide not to purchase or sell property that they would have otherwise purchased or sold due to the tax consequences of the transaction, thus reducing the commissions we would have otherwise received. Any repeal or significant change in the tax rules pertaining to like-kind exchanges could have a substantial adverse impact on our business and the value of our stock. The Internet could devalue our information services and lead to reduced client relationships, which could reduce the demand for our services. The dynamic nature of the Internet, which has substantially increased the availability and transparency of information relating to commercial real estate listings and transactions, could change the way commercial real estate transactions are done. This has occurred to some extent in the residential real estate market as online brokerage and/or auction companies have eroded part of the market for traditional residential real estate brokerage firms. The proliferation of large amounts of data on the Internet could also devalue the information that we gather and disseminate as part of our business model and may harm certain aspects of our investment brokerage business in the event that principals of transactions prefer to transact directly with each other. The rapid dissemination and increasing transparency of information, particularly for public companies, increases the risks to our business that could result from negative media or announcements about ethics lapses or other operational problems, which could lead clients to terminate or reduce their relationships with us. Our businesses, financial condition, results of operations and prospects could be adversely affected by new laws or regulations or by changes in existing laws or regulations or the application thereof. If we fail to comply with laws and regulations applicable to us, including in our role as a real estate broker or mortgage broker, we may incur significant financial penalties. We are subject to numerous federal, state, local and foreign regulations specific to the services we perform in our business, as well as laws of broader applicability, such as tax, securities and employment laws. In general, the brokerage of real estate transactions requires us to maintain applicable licenses where perform these services. If we fail to maintain our licenses or conduct these activities without a license, or violate any of the regulations covering our licenses, we may be required to pay fines (including treble damages in certain states) or return commissions 19


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    Table of Contents received or have our licenses suspended or revoked. We could also be subject to disciplinary or other actions in the future due to claimed noncompliance with these regulations, which could have a material adverse effect on our operations and profitability. Our business is also governed by various legislation limiting the manner in which prospective clients may be contacted, including federal and state “Do Not Call” and “Do Not Fax” regulations. We may be subject to legal claims and governmental action if we are perceived to be acting in violation of these laws and regulations. We may also be subject to claims to the extent individual employees or sales and financing professionals breach or fail to adhere to company policies and practices designed to maintain compliance with these laws and regulations. The penalties for violating this legislation can be material, and could result in changes in which we are able to contact prospective clients. As the size and scope of commercial real estate transactions have increased significantly during the past several years, both the difficulty of ensuring compliance with numerous licensing regimes and the possible loss resulting from non-compliance have increased. New or revised legislation or regulations applicable to our business, both within and outside of the United States, as well as changes in administrations or enforcement priorities may have an adverse effect on our business, including increasing the costs of compliance or preventing us from providing certain types of services in certain jurisdictions or in connection with certain transactions or clients. We are unable to predict how any of these new laws, rules, regulations and proposals will be implemented or in what form, or whether any additional or similar changes to laws or regulations, including the interpretation or implementation thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition and results of operations. Human Resource and Personnel Risks If we are unable to attract and retain qualified and experienced managers, sales and financing professionals, our growth may be limited and our business and operating results could suffer. Our most important asset is our people, and our continued success is highly dependent upon the efforts of our managers and sales and financing professionals. If these managers or sales and financing professionals leave our company, we will lose the substantial time and resources we have invested in training and developing those individuals and our business, financial condition and results of operations may suffer. Additionally, such events may have a disproportionate adverse effect on our operations if the most experienced sales and financing professionals do not remain with us or if these events occur in geographic areas where substantial amounts of our brokerage revenues are generated. Furthermore, if the commission structure changes in the market, our commission compensation may become relatively less attractive to sales professionals. In addition, our competitors may attempt to recruit our sales and financing professionals. For a variety of reasons, the exclusive independent contractor arrangements we have entered into or may enter into with sales professionals may not prevent these sales professionals from departing and competing against us. Additionally, we currently do not have employment agreements with most key employees, and there is no assurance that we will be able to retain their services. A component of our growth has also occurred through the recruiting, hiring, training and retention of key experienced sales and financing professionals. Any future growth through recruiting these types of professionals will be partially dependent upon the continued availability of qualified candidates fitting the culture of our firm at reasonable employment terms and conditions. However, individuals whom we would like to hire may not be available upon reasonable terms and conditions. In addition, the hiring of new personnel involves risks that the persons acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of persons acquired will prove incorrect. 20


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    Table of Contents If we lose the services of our executive officers or certain other members of our senior management team, we may not be able to execute our business strategy. Our success depends in a large part upon the continued service of our senior management team, who are important to our vision, strategic direction and culture. Our current long-term business strategy was developed in large part by our senior-level officers and depends in part on their skills and knowledge to implement, and also includes a focus on new growth and investment initiatives that may require additional management expertise to successfully execute our strategy. We may not be able to offset the impact on our business of the loss of the services of our senior management or other key officers or employees or recruit additional talent. Our business could be hurt if we are unable to retain our business philosophy and culture of information-sharing and efforts to retain our philosophy and culture could adversely affect our ability to maintain and grow our business. Our policy of information-sharing and matching properties with large pools of investors defines our business philosophy as well as the emphasis that we place on our clients, our people and our culture. Our status as a public company could adversely affect this culture. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain this culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations. The concentration of sales among our top sales and financing professionals could lead to losses if we are unable to retain them. Our most successful sales and financing professionals are responsible for a significant percentage of our revenues. They also serve as mentors and role models, as well as provide invaluable training for younger professionals, which is an integral part of our culture. This concentration of sales and value among our top sales and financing professionals can lead to greater and more concentrated risk of loss if we are unable to retain them, and have a material adverse impact on our business and financial condition. Furthermore, many of our sales and financing professionals work in teams. If a team leader or manager leaves our company, his or her team members may leave with the team leader. Most of our sales professionals are independent contractors, not employees, and if federal or state law mandates that they be employees, our business would be adversely impacted. Most of our sales professionals are retained as independent contractors, and we are subject to the Internal Revenue Service regulations and applicable state law guidelines regarding independent contractor classification. These regulations and guidelines are subject to judicial and agency interpretation, and it could be determined that the independent contractor classification is inapplicable to some or all of our sales professionals. Further, if legal standards for classification of these sales professionals as independent contractors change or appear to be changing, it may be necessary to modify our compensation structure for these sales professionals in some or all of our markets, including paying additional compensation or reimbursing expenses. If we are forced to classify these sales professionals as employees, we would also become subject to laws regarding employee classification and compensation, and to claims regarding overtime, minimum wage, and meal and rest periods. We could also incur substantial costs, penalties and damages due to future challenges by current or former sales professionals to our classification or compensation practices. Any of these outcomes could result in substantial costs to us, could significantly impair our financial condition and our ability to conduct our business as we choose, and could damage our reputation and impair our ability to attract clients and sales and financing professionals. 21


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    Table of Contents Fraud, or theft, which is difficult to detect and deter, could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm. If our employees or sales and financing professionals engage in misconduct, our business could be adversely affected. It is not always possible to deter misconduct, and the precautions we take to deter and prevent this activity may not be effective in all cases. If our employees or sales and financing professionals were to improperly use, disseminate or disclose information provided by our clients, we could be subject to regulatory sanctions and suffer serious harm to our reputation, financial position and current client relationships and our ability to attract future clients, could be significantly impaired, which could adversely affect our business, financial condition and results of operation. To the extent any loss or theft of funds substantially exceeds our insurance coverage, our business could be materially adversely affected. Internal Business Risks We may fail to successfully differentiate our brand from those of our competitors, which could adversely affect our revenues. The value of our brand and reputation is one of our most important assets. An inherent risk in maintaining our brand is we may fail to successfully differentiate the scope and quality of our service and product offerings from those of our competitors, or we may fail to sufficiently innovate or develop improved products or services that will be attractive to our clients. Additionally, given the rigors of the competitive marketplace in which we operate, there is the risk we may not be able to continue to find ways to operate more productively and more cost-effectively, including by achieving economies of scale, or we will be limited in our ability to further reduce the costs required to operate on a nationally coordinated platform. Our attempts to expand our services and businesses may not be successful and we may expend significant resources without corresponding returns. We intend to expand our specialty groups, particularly multi-tenant retail, office, industrial and hospitality, as well as various niche segments, including multifamily tax credit, affordable housing, student housing, manufactured housing, seniors housing and self-storage. We also plan to grow our financing services provided through our subsidiary, Marcus & Millichap Capital Corporation. We expect to incur expenses relating to training, and expanding our markets and services. The planned expansion of services and platforms requires significant resources, and there can be no assurance we will compete effectively, hire or train a sufficient number of professionals to support the expansion, or operate these businesses profitably. We may incur significant expenses for these plans without corresponding returns, which would harm our business, financial condition and results of operations. If we experience significant growth in the future, such growth may be difficult to sustain and may place significant demands on our administrative, operational and financial resources. If we experience significant growth in the future, such growth could place additional demands on our resources and increase our expenses, as we will have to commit additional management, operational and financial resources to maintain appropriate operational and financial systems to adequately support expansion. There can be no assurance we will be able to manage our expanding operations effectively or we will be able to maintain or accelerate our growth, and any failure to do so could adversely affect our ability to generate revenue and control our expenses, which could adversely affect our business, financial condition and results of operations. Moreover, we may have to delay, alter or eliminate the implementation of certain aspects of our growth strategy due to events beyond our control, including, but not limited to, changes in general economic conditions and commercial real estate market conditions. Such delays or changes to our growth strategy may adversely affect our business. 22


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    Table of Contents If we are unable to retain existing clients and develop new clients, our financial condition may be adversely affected. We are substantially dependent on long-term client relationships and on revenue received for services provided for them. Our listing agreements generally expire within six months and depend on the cooperation of the client during the pendency of the agreement, as is typical in the industry. In this competitive market, if we are unable to maintain these relationships or are otherwise unable to retain existing clients and develop new clients, our business, results of operations and/or financial condition may be materially adversely affected. Historically, a global economic downturn and weaknesses in the markets in which our clients and potential clients compete have led to a lower volume of transactions and fewer real estate clients generally, which makes it more difficult to maintain existing and establish new client relationships. These effects have moderated, but they could increase again in the wake of the continuing political and economic uncertainties in the United States and in other countries. If we do not respond to technological changes or upgrade our technology systems, our growth prospects and results of operations could be adversely affected. To remain competitive, we must continue to enhance and improve the functionality, features and security of our technology infrastructure. Although we currently do not have specific plans for any infrastructure upgrades that would require significant capital investment outside of the normal course of business, in the future we will need to improve and upgrade our technology, database systems and network infrastructure in order to allow our business to grow in both size and scope. Without such improvements, our operations might suffer from unanticipated system disruptions, slow performance or unreliable service levels, any of which could negatively affect our ability to provide rapid customer service. We may face significant delays in introducing new services, sales professional tools and enhancements. If competitors introduce new products and services using new technologies, our proprietary technology and systems may become less competitive, and our business may be harmed. In addition, the expansion and improvement of our systems and infrastructure may require us to commit substantial financial, operational and technical resources, with no assurance that our business will improve. Interruption or failure of our information technology, communications systems or data services could hurt our ability to effectively provide our services, which could damage our reputation and harm our operating results. Our business requires the continued operation of information technology and communication systems and network infrastructure. Our ability to conduct our national business may be adversely impacted by disruptions to these systems or infrastructure. Our information technology and communications systems are vulnerable to damage or disruption from fire, power loss, telecommunications failure, system malfunctions, computer viruses, third-party misconduct and criminal acts, natural disasters such as hurricanes, earthquakes and floods, acts of war or terrorism, or other events which are beyond our control. In addition, the operation and maintenance of these systems and networks is, in some cases, dependent on third-party technologies, systems and service providers for which there is no certainty of uninterrupted availability. Any of these events could cause system interruption, delays, and loss of critical data or intellectual property (such as our client lists and information, business methods and research) and may also disrupt our ability to provide services to or interact with our clients, and we may not be able to successfully implement contingency plans that depend on communication or travel. We have disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, but our disaster recovery planning may not be sufficient and cannot account for all eventualities. A catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected. Our business relies significantly on the use of commercial real estate data. We produce much of this data internally, but a significant portion is purchased from third-party providers for which there is no certainty of uninterrupted availability. A disruption of our ability to provide data to our professionals and/or clients could damage our reputation, and our operating results could be adversely affected. 23


  • Page 24

    Table of Contents Failure to maintain the security of our information and technology networks, including personally identifiable and client information could adversely affect us. Security breaches and other disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer. In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and intellectual property, and that of our clients and personally identifiable information of our employees and contractors, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A significant actual or potential theft, loss, fraudulent use or misuse of client, employee or other personally identifiable data, whether by third parties or as a result of employee malfeasance or otherwise, non-compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could result in significant costs, fines, litigation or regulatory actions against us. Such an event could additionally disrupt our operations and the services we provide to clients, damage our reputation, and cause a loss of confidence in our services, which could adversely affect our business, revenues and competitive position. Additionally, we increasingly rely on third-party data storage providers, including cloud storage solution providers, resulting in less direct control over our data. Such third parties may also be vulnerable to security breaches and compromised security systems, which could adversely affect our reputation. In addition, we rely on the collection and use of personally identifiable information from clients to conduct our business. We disclose our information collection and dissemination practices in a published privacy statement on our websites, which we may modify from time to time. We may be subject to legal claims, government action, including under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and damage to our reputation if we act or are perceived to be acting inconsistently with the terms of our privacy statement, client expectations or the law. In the event we or the vendors with which we contract to provide services on behalf of our clients were to suffer a breach of personally identifiable information, our customers could terminate their business with us. Further, we may be subject to claims to the extent individual employees or sales and financing professionals breach or fail to adhere to company policies and practices and such actions jeopardize any personally identifiable information. In addition, concern among potential buyers or sellers about our privacy practices could keep them from using our services or require us to incur significant expense to alter our business practices or educate them about how we use personally identifiable information. Failure to appropriately deal with actual or perceived conflicts of interest could adversely affect our businesses. Outside of our employees and sales and financing professionals, our reputation is one of our most important assets. As we have expanded the scope of our services, we increasingly have to address potential, actual or perceived conflicts of interest relating to the services we provide to our existing and potential clients. For example, conflicts may arise between our position as an advisor to both the buyer and seller in commercial real estate sales transactions or in instances when a potential buyer requests that we represent it in securing the necessary capital to acquire an asset we are selling for another client or when a capital source takes an adverse action against an owner client that we are advising in another matter. From time to time, we also advise or represent entities and parties affiliated with us in commercial real estate transactions which also involve clients unaffiliated with us. In this context, we may be subject to complaints or claims of a conflict of interest. While we believe we have attempted to adopt various policies, controls and procedures to address or limit actual or perceived conflicts, these policies and procedures may not be adequate or carry attendant costs and may not be adhered to by our employees. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged and cause us to lose existing clients or fail to gain new clients if we fail, or appear to fail, to deal appropriately with conflicts of interest, which could have an adverse effect on our business, financial condition and results of operations. 24


  • Page 25

    Table of Contents If we acquire companies or significant groups of personnel in the future, we may experience high transaction and integration costs, the integration process may be disruptive to our business and the acquired businesses and/or personnel may not perform as we expect. Our growth strategy may include future acquisitions of companies and/or people and may involve significant transaction-related expenses. Transaction-related expenditures include severance costs, lease termination costs, transaction costs, deferred financing costs, possible regulatory costs and merger-related costs, among others. We may also experience difficulties in integrating operations and accounting systems acquired from other companies. These challenges include the diversion of management’s attention from the regular operations of our business and the potential loss of our key clients, our key associates or those of the acquired operations, each of which could harm our financial condition and results of operation. We believe some acquisitions could initially have an adverse impact on revenues, expenses, operating income and net income. Acquisitions also frequently involve significant costs related to integrating people, information technology, accounting, reporting and management services and rationalizing personnel levels. If we are unable to fully integrate the accounting, reporting and other systems of the businesses we acquire, we may not be able to effectively manage them and our financial results may be materially affected. Moreover, the integration process itself may be disruptive to our business as it requires coordination of culture, people and geographically diverse organizations and implementation of new accounting and information technology systems. In addition, acquisitions of businesses involve risks that the businesses acquired will not perform in accordance with expectations, that the expected synergies associated with acquisitions will not be achieved and that business judgments concerning the value, strengths and weaknesses of the people and the businesses acquired will prove incorrect, which could have an adverse effect on our business, financial condition and results of operations. Significant fluctuations in our revenues and net income may make it difficult for us to achieve steady earnings growth on a quarterly or an annual basis, which may make the comparison between periods difficult and may cause the price of our common stock to decline. We have experienced and may continue to experience fluctuations in revenues and net income as a result of many factors, including, but not limited to, economic conditions, capital market disruptions, the timing of transactions, revenue mix and the timing of additional selling, general and administrative expenses to support growth initiatives. We provide many of our services pursuant to contracts that typically expire within six months and that are dependent on the client’s cooperation. Consequently, many of our clients can terminate or significantly reduce their relationships with us on very short notice for any reason. We plan our capital and operating expenditures based on our expectations of future revenues and, if revenues are below expectations in any given quarter or year, we may be unable to adjust capital or operating expenditures in a timely manner to compensate for any unexpected revenue shortfall, which could have an immediate material adverse effect on our business, financial condition and results of operation. We may face significant liabilities and/or damage to our professional reputation as a result of litigation allegations and negative publicity. As a licensed real estate broker, we and our licensed professionals and brokers are subject to regulatory due diligence, disclosure and standard-of-care obligations. The actual or perceived failure to fulfill these obligations could subject us or our professionals and brokers to litigation from parties who attempted to or in fact financed, purchased or sold properties that we or they brokered, managed or had some other involvement. We could become subject to claims by those who either wished to participate or did participate in real estate transactions alleging that we did not fulfill our regulatory, contractual or other legal obligations. We also face conflicts of interest claims when we represent both the buyer and the seller in a transaction. 25


  • Page 26

    Table of Contents We depend on our business relationships and our reputation for integrity and high-caliber professional services to attract and retain clients across our overall business. As a result, allegations by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us or our investment activities, whether or not valid, may harm our reputation and damage our business prospects. In addition, if any lawsuits were brought against us and resulted in a finding of substantial legal liability, it could materially, adversely affect our business, financial condition or results of operations or cause significant reputational harm to us, which could materially impact our business. Some of these litigation risks may be mitigated by the commercial insurance we maintain in amounts we believe are appropriate. However, in the event of a substantial loss, our commercial insurance coverage and/or self-insurance reserve levels might not be sufficient to pay the full damages, or the scope of available coverage may not cover certain types of claims. Further, the value of otherwise valid claims we hold under insurance policies could become uncollectible in the event of the covering insurance company’s insolvency, although we seek to limit this risk by placing our commercial insurance only with highly-rated companies. Any of these events could negatively impact our business, financial condition or results of operations. We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors. We are an “emerging growth company,” as defined in the JOBS Act, and for as long as we continue to be an “emerging growth company,” we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, but not limited to, (i) not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, which may increase the risk that weaknesses or deficiencies in the internal control over financial reporting go undetected, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, which may make it more difficult for investors and securities analysts to evaluate the company, and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could remain an “emerging growth company” for up to five years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile. We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and therefore, we are subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.” As a result of becoming a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. These internal controls will not be subject to auditor attestation, which may adversely affect investor confidence in our company and, as a result, the value of our common stock. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the fiscal year beginning January 1, 2014. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. 26


  • Page 27

    Table of Contents We are required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future. In addition, to comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Our investments in marketable securities are subject to certain risks which could affect our overall financial conditions results of operations or cash flows. We invest a portion of our available cash and cash equivalent balances by purchasing marketable securities with maturities in excess of three months in a managed portfolio in a variety of fixed and variable rate securities, including U.S. government and federal agency securities, corporate debt securities, and money market funds. The primary objective of our investment activity is to maintain the safety of principal, provide for future liquidity requirements while maximizing yields without significantly increasing risk. Should any of our investments or marketable securities lose value or have their liquidity impaired, it could affect the company’s overall financial. Additionally, should we choose to sell these securities in the future, our consolidated operating results or cash flows may be affected. Risks related to the Ownership of Our Common Stock Our Co-Chairman and founder controls a significant interest in our stock, and the concentrated ownership of our common stock will prevent other stockholders from influencing significant decisions. Mr. Marcus, our Co-Chairman and founder beneficially owns approximately 68% of our outstanding common stock as of December 31, 2014. Because Mr. Marcus controls a majority of the voting power of our outstanding common stock, he is able to determine the outcome of corporate actions requiring stockholder approval, including the election and removal of directors, so long as he controls a significant portion of our common stock. If our Co-Chairman sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third party. Our Co-Chairman and controlling stockholder has the ability, should he choose to do so, to sell some or all of the shares of our common stock that he controls in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company. The ability of our Co-Chairman and controlling stockholder to privately sell the shares of our common stock that he controls, with no requirement for a concurrent offer to be made to acquire all of our common stock that will be publicly traded hereafter, could prevent shareholders from realizing any change-of-control premium on shares of our common stock that may otherwise accrue to entities controlled by our Co-Chairman on a private sale of our common stock. If entities controlled by our Co-Chairman privately sell a significant equity interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. Furthermore, if our Co-Chairman sells a controlling interest in our company to a third party, our commercial agreements and relationships could be impacted, all of which may adversely affect our ability to run our business as described herein and may have a material adverse effect on our operating results and financial condition. 27


  • Page 28

    Table of Contents Two of our directors may have actual or potential conflicts of interest because of their positions with MMC. George M. Marcus and William A. Millichap serve as co-chairmen of our board of directors and are also directors of MMC. In addition, Messrs. Marcus and Millichap may own MMC stock, options to purchase MMC stock or other MMC equity awards. Their position at MMC and the ownership of any MMC equity or equity awards creates, or may create the appearance of, conflicts of interest when these directors are faced with decisions that could have different implications for MMC than the decisions have for us. To preserve the tax-free treatment of the Spin-Off to MMC and/or its shareholders, we may not be able to engage in certain transactions. To preserve the tax-free treatment of the Spin-Off to MMC and/or its shareholders, under a tax matters agreement, we are restricted from taking any action that could reasonably be expected to adversely affect such tax-free status for U.S. federal, state and local income tax purposes. During the time period ending two years after the date of the distribution of shares of October 31, 2013, there are specific restrictions on our undertaking of certain transactions which would, among other things, cause us to undergo a 50% or greater change in our stock ownership for purposes of Section 355(e) of the Code. These restrictions may limit our ability to pursue strategic transactions or engage in other transactions, to use our common stock to make acquisitions and to raise equity capital, all of which transactions might increase the value of our business. We incur incremental costs as a stand-alone public company that will affect our financial results. We have or are replicating or replacing certain functions, systems and infrastructure previously provided by MMC to which we will no longer have the same access. We may also need to make additional investments or hire additional employees to operate without the same access to MMC’s existing operational and administrative infrastructure. These initiatives may be costly to implement, and the amount of total costs could be materially higher than we anticipate. MMC performed or supported many important corporate functions for our company. Our consolidated financial statements continue to reflect charges for certain of these services on an allocation basis. These continuing services are governed by our transition services agreement with MMC. Under the transition services agreement we are able to use these MMC services for a fixed term established on a service-by service basis. However, we generally have the right to terminate a service earlier if we give notice to MMC. In addition, either party will be able to terminate the agreement due to a material breach of the other party, upon prior written notice, subject to limited cure periods. We may not be able to replace these remaining services or enter into appropriate third-party agreements on terms and conditions, including cost, comparable to those that we will receive from MMC under our transition services agreement. Additionally, after the agreement terminates, we may be unable to sustain the services at the same levels or obtain the same benefits as when we were receiving such services and benefits from MMC. When we begin to operate these functions separately, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at comparable costs, and our profitability may decline. If securities analysts do not publish research or reports about our business or if they downgrade our company or our sector, the price of our common stock could decline. The trading market for our common stock will depend in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts, nor can we assure that any analysts will continue to follow us and issue research reports. Furthermore, if one or more of the analysts who do cover us downgrades our company or our industry, or the stock of any of our competitors, the price of our common stock could decline. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause the price of our common stock to decline. 28


  • Page 29

    Table of Contents Future sales or the perception of future sales of a substantial amount of our common stock may depress the price of shares of our common stock. As of December 31, 2014, there were approximately 28.6 million shares of our common stock outstanding which could be registered and sold in a private or public sale. The majority of these shares are beneficially owned by Mr. Marcus our Co-Chairman. On February 6, 2015, we filed a Registration Statement on Form S-3, registering for future sale 4,600,000 shares of our common stock owned by entities controlled by Mr. Marcus. Future sales, the lifting of common stock resale restrictions that will expire over the next four years, issuances of shares under our 2013 Omnibus Equity Incentive Plan and 2013 Employee Stock Purchase Plan or the availability of a substantial amount of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through the future sales of equity securities. We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments. We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. The price of our common stock may fluctuate significantly and you could lose all or part of your investment. Volatility in the market price of our common stock may prevent shareholders from being able to sell shares of our common stock at or above the price shareholders paid for them. The market price for our common stock could fluctuate significantly for various reasons, including quarterly and annual variations in our results and those of our competitors; changes to the competitive landscape; estimates and projections by the investment community; the arrival or departure of key personnel, especially the retirement or departure of key senior sales and financing professionals and management; the introduction of new services by us or our competitors; acquisitions, strategic alliances or joint ventures involving us or our competitors; and general global and domestic economic, credit and liquidity issues, market or political conditions. As a result of these factors, investors in our common stock may not be able to resell their shares at or above the price paid to acquire the stock or may not be able to resell them at all. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low. Item 1B. Unresolved Staff Comments Not applicable. Item 2. Properties Our principal executive offices are located at 23975 Park Sorrento, Suite 400, Calabasas, California 91302 where our telephone number is (818) 212-2250. We lease approximately 15,164 square feet under a lease that expires in February 2019 for our executive offices in Calabasas, California. We also lease all of our 78 brokerage offices (typically less than 12,000 square feet) and other support facilities in United States and Canada aggregating 507,315 square feet, primarily for our sales and financing professionals and support personnel. We 29


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    Table of Contents believe that our current facilities are adequate to meet our needs through the end of 2015; however, as we continue to expand in various midmarket locations and grow our market share in existing metropolitan areas, we may need to lease additional space. Item 3. Legal Proceedings We are involved in claims and legal actions arising in the ordinary course of our business some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by insurance which contain deductibles, exclusions, claim limits and aggregate policy limits. Such litigation and other proceedings may include, but are not limited to, actions relating to commercial relationships, standard brokerage disputes like the alleged failure to disclose physical or environmental defects or property expenses or contracts, the alleged inadequate disclosure of matters relating to the transaction like the relationships among the parties to the transaction, potential claims or losses pertaining to the asset, vicarious liability based upon conduct of individuals or entities outside of our control, general fraud claims, conflicts of interest claims, employment law claims, including claims challenging the classification of our sales professionals as independent contractors, claims alleging violations of state consumer fraud statutes and intellectual property. While the ultimate liability for these legal proceeding cannot be determined, the Company reviews the need for its accrual for loss contingencies quarterly and records an accrual for litigation related losses where the likelihood of loss is both probable and estimable. We do not believe, based on information currently available to us, that the final outcome of these proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows. For information on our legal proceedings, see Note 14 – “Commitments and Contingencies” of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. Item 4. Mine Safety Disclosures Not applicable. 30


  • Page 31

    Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our common stock has traded on the New York Stock Exchange (“NYSE”) under the symbol “MMI” since October 31, 2013. Prior to that time, there was no public market for our stock. The following table sets forth for the indicated period the high and low intra-day sales prices per share for our common stock on the NYSE. High Low 2013 Fourth quarter (from October 31, 2013) $15.70 $13.09 2014 First quarter $18.51 $13.56 Second quarter $26.64 $15.61 Third quarter $31.32 $22.30 Fourth quarter $34.00 $25.16 As of March 2, 2015, there were 21 stockholders of record, and the closing price of our common stock was $37.86 per share as reported on the NYSE. Dividends We do not pay a regular dividend. We will evaluate our dividend policy in the future. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of the board of directors and will depend on many factors, including our financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our board of directors deems relevant. Stock Performance Graph The performance graph shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Marcus and Millichap, Inc. under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act. The following graph shows a comparison from October 31, 2013 (the date our common stock commenced trading on the NYSE) through December 31, 2014 of the cumulative total return for our common stock, the Standard & Poor’s 500 Stock Index (“S&P 500 Index”) and an industry peer group for this period. The industry peer group is comprised of the following publicly-traded real estate services companies: CBRE Group, Inc., Jones Lang LaSalle Incorporated and HFF, Inc. (collectively “Peer Group”). These three companies represent our primary competitors that are publicly traded with business lines reasonably comparable to ours. The graph assumes that $100 was invested at the market close on October 31, 2013 in the common stock of Marcus and Millichap Inc., the S&P 500 Index and the Peer Group assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance. 31


  • Page 32

    Table of Contents 10/13 11/13 12/13 1/14 2/14 3/14 4/14 5/14 6/14 7/14 8/14 9/14 10/14 11/14 12/14 Marcus & Millichap, Inc. 100.00 102.24 111.03 124.22 124.96 132.94 123.17 151.64 190.09 183.08 225.93 225.48 231.45 231.22 247.76 S&P 500 100.00 103.05 105.66 102.00 106.67 107.57 108.36 110.90 113.20 111.63 116.10 114.47 117.27 120.42 120.12 Peer Group 100.00 103.87 111.20 117.29 124.73 122.25 119.40 129.18 138.10 133.10 137.82 129.69 139.39 148.52 151.75 Recent Sales of Unregistered Securities None Use of Proceeds On October 30, 2013, our registration statement on Form S-1 (File No. 333-191316) was declared effective by the SEC for our IPO. On November 5, 2013, we completed our IPO pursuant to which we sold an aggregate of 4,173,413 shares of our common stock at a price to the public of $12.00 per share, including 900,000 shares of common stock pursuant to the exercise of the underwriters’ option to purchase additional shares. Certain selling stockholders in the IPO sold an aggregate of 2,726,587 shares at the same price to the public. We did not receive any proceeds from the sale of the shares by the selling stockholders. Citigroup Global Markets Inc. and Goldman, Sachs & Co. acted as joint book-running managers. As a result of the IPO, including the underwriters’ option to purchase additional shares, we received net proceeds of $42.3 million, after deducting total expenses of $7.8 million, consisting of $3.5 million of underwriters’ discounts and commissions and offering related expenses of $4.3 million. None of these expenses consisted of direct or indirect payments to any of our directors of officers or their associates, to persons owning 10% or more of our common stock, or to any of our affiliates. All of the proceeds have been used for general corporate purposes. 32


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    Table of Contents Item 6. Selected Financial Data The following selected consolidated financial and other data should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the related notes included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K. The following table presents the consolidated statements of income data for the years ended December 31, 2014, 2013 and 2012, and the consolidated balance sheet data at December 31, 2014 and 2013. Such financial data are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The table also presents the consolidated statement of income data for the years ended December 31, 2011 and 2010 and the consolidated balance sheet data at December 31, 2012, 2011 and 2010, which are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results in any future period. Year Ended December 31, 2014 2013 2012 2011 2010 (in thousands except per share, sales and financing professional and sales volume amounts) Statements of Income Data: Total Revenues $ 572,188 $ 435,895 $ 385,716 $ 274,705 $ 217,935 Cost of services 350,102 264,637 230,248 162,478 124,272 Stock-based and other compensation in connection with IPO (1) — 31,268 — — — Operating income 84,606 21,286 49,008 23,455 13,892 Provision for income taxes (2) 33,452 13,735 21,507 10,355 6,460 Net income $ 49,531 $ 8,206 $ 27,934 $ 13,450 $ 8,391 Less: Net (loss) income attributable to Marcus & Millichap Real Estate Investment Services, Inc. prior to initial public offering on October 31, 2013 — (1,045) 27,934 13,450 8,391 Net income attributable to Marcus & Millichap, Inc. subsequent to initial public offering $ 49,531 $ 9,251 $ — $ — $ — Earnings per share (3) Basic $ 1.27 $ 0.24 Diluted $ 1.27 $ 0.24 Weighted average common shares outstanding (3) Basic 38,851 38,787 Diluted 38,978 38,815 Balance Sheet Data: Cash and cash equivalents $ 149,159 $ 100,952 $ 3,107 $ 3,158 $ 4,932 Total assets 233,604 167,309 89,733 64,296 64,572 Long-term liabilities (4) 49,591 48,052 13,650 13,312 10,152 Total liabilities (4) 116,795 104,812 68,103 44,139 42,873 Total stockholders’ equity 116,809 62,497 21,630 20,157 21,698 Other Data: Adjusted EBITDA (5) $ 92,824 $ 61,286 $ 59,708 $ 29,486 $ 18,743 Sales & financing professionals 1,494 1,313 1,066 1,033 1,066 Sales volume ($ millions) $ 33,139 $ 23,975 $ 22,014 $ 17,474 $ 13,547 33


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    Table of Contents (1) Consists of non-cash stock based compensation and other compensation charges incurred in connection with our IPO. See Note 10 – “Stock-Based Compensation Plans” of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K. (2) Prior to the IPO in October, 2013, we were subject to a tax-sharing agreement whereby we provided for income taxes using an effective tax rate of 43.5%. As part of the IPO, the tax-sharing agreement with MMC was terminated. See Note 11 – “Income Taxes” of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K. (3) Earnings per share information has not been presented for periods prior to the IPO as amounts were not meaningful. See Note 13 – “Earnings Per Share” of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K for additional information on earnings per share. (4) 2014 and 2013 includes Stock Appreciation Rights (“SARs”) liability and notes payable to formers stockholders incurred in connection with the IPO. See Note 4 – “Selected Balance Sheet Data” and Note 6 – “Notes Payable to Former Stockholders” of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K. (5) Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measure. 34


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    Table of Contents ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes thereto included elsewhere herein. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A – “Risk Factors” of this Annual Report on Form 10-K. Overview Our Business We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions over the last 10 years, based on data from CoStar and Real Capital Analytics. As of December 31, 2014, we had nearly 1,500 investment sales and financing professionals in 78 offices who provide investment brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to our clients. During the year ended December 31, 2014, we closed more than 7,600 sales, financing and other transactions with total volume of approximately $33.1 billion, an increase from more than 6,600 sales, financing and other transactions with total volume of approximately $24.0 billion in 2013. We generate revenues by collecting real estate brokerage commissions upon the sale and fees upon the financing of commercial properties and, in addition, by providing consulting and advisory services. Real estate brokerage commissions are typically based upon the value of the property, and financing fees are typically based upon the size of the loan. During the year ended December 31, 2014, approximately 92% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 2% from other fees, including consulting and advisory services. During the year ended December 31, 2013, approximately 90% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 4% from other fees, including consulting and advisory services. Initial Public Offering On November 5, 2013, we completed our IPO of 6,900,000 shares of common stock at a price to the public of $12.00 per share of which we sold 4,173,413 shares. See Note 9 – “Stockholders’ Equity” of our Notes to Consolidated Financial Statements for additional information on our IPO. Factors Affecting Our Business Our business and our operating results, financial condition and liquidity are significantly affected by the number and size of commercial real estate sales and financing transactions. The number and size of these transactions is affected by our ability to recruit and retain sales and financing professionals and by the general trends in the economy and real estate industry, including: • Economic and commercial real estate market conditions. Our business is dependent on economic conditions and the demand for commercial real estate and related services in the markets in which we operate. Changes in the economy on a national, regional or local basis can have a positive or negative impact on our business. Fluctuations in acquisition and disposition activity, as well as general commercial real estate investment activity, can impact commissions for arranging such transactions, as well as impacting fees for arranging financing for acquirers and property owners that are seeking to recapitalize their existing properties. 35


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    Table of Contents • Credit and liquidity in the financial markets. Since real estate purchases are often financed with debt, credit and liquidity issues in the financial markets have a direct impact on flow of capital to the commercial real estate markets as well as transaction activity and prices. • Demand for investment in commercial real estate. The willingness of private investors to invest in or sell commercial real estate is affected by factors beyond our control, including the performance of real estate assets when compared with the performance of other investments. • Fluctuations in interest rates. Changes in interest rates as well as steady and protracted movements of interest rates in one direction (increases or decreases) could adversely or positively affect the operation and income of commercial real estate properties, as well as the demand from investors for commercial real estate investments. In particular, increased interest rates may cause prices to decrease due to the increased costs of obtaining financing and could lead to decreases in purchase and sale activities, thereby reducing the amounts of investment sales and loan originations. In contrast, decreased interest rates will generally decrease the costs of obtaining financing which could lead to increases in purchase and sales activities. Seasonality Our real estate brokerage commissions and financing fees are seasonal, which can affect an investor’s ability to compare our financial condition and results of operation on a quarter-by-quarter basis. Historically, this seasonality has caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first half of the year and higher in the second half of the year, particularly in the fourth quarter. The concentration of earnings and cash flows in the last six months of the year, particularly in the fourth quarter, is due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. In addition, our gross margins are typically lower during the second half of each year due to our commission structure for some of our senior sales and financing professionals. These senior sales and financing professionals are on a graduated commission schedule that resets annually in which higher commissions are paid for higher sales volumes. Operating Segments We follow the guidance for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses whose separate financial information is available and is evaluated regularly by the Chief Operating Decision Maker (“CODM”) or decision making group, to perform resource allocations and performance assessments. The CODMs are the Chief Executive Officer and Chief Financial Officer. The CODM review financial information presented on an office-by-office basis for purposes of making operating decisions, assessing financial performance and allocating resources. Based on the evaluation of our financial information, management believes that the company’s offices represent individual operating segments with similar economic characteristics that meet the criteria for aggregation into a single reportable segment for financial reporting purposes. Our financing operations also represent an individual operating segment, which does not meet the thresholds to be presented as a separate reportable segment. Key Financial Measures and Indicators Revenues Our revenues are primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenues from financing fees and from other revenues, which are primarily comprised of consulting and advisory fees. • Real estate brokerage commissions. We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenues from real estate brokerage commissions are typically recognized at the close of escrow. 36


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    Table of Contents • Financing fees. We earn financing fees by securing financing on purchase transactions as well as by refinancing our clients’ existing mortgage debt. We recognize financing fee revenues at the time the loan closes and we have no remaining significant obligations for performance in connection with the transaction. To a lesser extent, we also earn ancillary fees associated with financings activities. • Other revenues. Other revenues include fees generated from consulting and advisory services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed. Substantially all of our transactions are success based. A small percentage of our transactions include retainer fees and/or breakage fees. Retainer fees are credited against a success-based fee upon the closing of a transaction or a breakage fee. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee we would have received had the transaction closed. The amount and timing of all of the fees paid vary by the type of transaction and are generally negotiated on a transaction-by-transaction basis. Operating Expenses Our operating expenses consist of cost of services, selling, general and administrative expenses, depreciation and amortization and in 2013, stock-based and other compensation in connection with our IPO. The significant components of our expenses are further described below. • Cost of services. The majority of our cost of services expense is commission expense. Commission expenses are directly attributable to providing services to our clients for investment sales and financing services. Most of our transaction professionals are independent contractors and are paid commissions; however, there are some who are initially paid a salary and certain of our financing professionals are employees and as such, these expenses also include employee-related compensation, employer taxes and benefits for those employees. In addition, some of our most senior investment sales professionals have the ability to earn additional commissions after meeting certain annual revenue thresholds. These additional commissions are recognized as cost of services in the period in which they are earned. Payment of a portion of these additional commissions are generally deferred for a period of three years, at the Company’s election and paid at the beginning of the fourth calendar year. Cost of services also includes referral fees paid to other real estate brokers. • Selling, general & administrative expenses. The largest expense component within selling, general and administrative expenses is personnel expenses for our management team and sales and support staff. In addition, these costs include facilities costs (excluding depreciation and amortization), staff related expenses, sales, marketing, legal, telecommunication, network, data sources and other administrative expenses. Also included in selling, general and administrative are expenses for non-IPO related stock-based compensation to employees and independent contractors (i.e. sales and financing professionals) under the 2013 Omnibus Equity Incentive Plan (“2013 Plan”). Subsequent to our IPO, our costs for such items as insurance, accounting and legal advice increased relative to our historical costs for such services. We also incurred costs which we have not previously incurred for directors fees, increased directors and officers insurance, investor relations fees, expenses for compliance with the Sarbanes-Oxley Act of 2002 and new rules implemented by the SEC and the NYSE, and various other costs of a public company. • Depreciation and amortization expense. Depreciation and amortization expense consists of depreciation and amortization recorded on our computer software and hardware equipment and furniture, fixture, and equipment. Depreciation and amortization are provided over estimated useful lives ranging from three to seven years for owned assets or over the lesser of the asset estimated useful lives or the related lease term for leased assets. 37


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    Table of Contents • Stock-based and other compensation in connection with IPO.In 2013, stock-based and other compensation in connection with the IPO consists of non-cash stock based compensation and other compensation charges incurred in conjunction with our IPO related to the acceleration of vesting of restricted stock and SARs, modifications to remove the formula settlement value of the restricted stock and SARs awards, grants of replacement awards in the form of DSUs to MMREIS’s managing directors, a DSU grant to Mr. Millichap and grant of other stock-based compensation awards pursuant to the 2013 Plan and other compensation charges incurred in connection with IPO. Other Income (Expense), Net Other income (expense), net primarily consists of net gains or losses on our deferred compensation plan assets, interest income on our investments in marketable securities, foreign currency gains and losses and other non-operating gains or losses. Interest Expense Interest expense consists of interest expense associated with SARs liability, notes payable to former stockholders and the Credit Agreement. See Notes to Condensed Consolidated Financial Statements for additional information. Provision for Income Taxes We are subject to U.S. and Canadian federal taxes. We are also subject to individual state and local taxes based on the income generated in the jurisdictions in which we operate. Our effective tax rate fluctuates as a result of the change in the mix of our activities in the jurisdictions we operate due to differing tax rates in those jurisdictions. Our provision for income taxes excludes the windfall benefit from shares issued in connection with our 2013 Plan and 2013 Employee Stock Purchase Plan (“2013 ESPP Plan”). Prior to the IPO in 2013, our provision for income tax was based on a tax-sharing agreement between us and MMC. As specified by the tax-sharing agreement, our effective tax rate was 43.5% for the pre-IPO period. Results of Operations Following is a discussion of our results of operations for the years ended December 31, 2014, 2013 and 2012. The tables included in the period comparisons below provide summaries of our results of operations. The period-to-period comparisons of financial results are not necessarily indicative of future results. 38


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    Table of Contents Key Operating Metrics We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. During the years ended December 31, 2014 and 2013, we closed more than 7,600 and 6,600 sales, financing and other transactions with total volume of approximately $33.1 billion and $24.0 billion, respectively. Such key metrics for Real Estate Brokerage and Financing activities are as follows: Year Ended December 31, Real Estate Brokerage 2014 2013 2012 Average Number of Sales Professionals 1,297 1,125 982 Average Number of Transactions per Sales Professional 4.3 4.1 4.3 Average Commission per Transaction $ 93,943 $ 84,852 $ 83,075 Average Transaction Size $ 4,536,654 $ 3,736,044 $ 3,760,741 Total Number of Transactions 5,588 4,634 4,230 Total Sales Volume (in millions) $ 25,351 $ 17,313 $ 15,908 Year Ended December 31, Financing 2014 2013 2012 Average Number of Financing Professionals 79 69 58 Average Number of Transactions per Financing Professional 16.9 16.9 15.7 Average Fee per Transaction $ 25,436 $ 22,250 $ 23,170 Average Transaction Size $ 2,837,004 $ 2,297,117 $ 2,417,763 Total Number of Transactions 1,332 1,165 912 Total Dollar Volume (in millions) $ 3,779 $ 2,676 $ 2,205 39


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    Table of Contents Comparison of Year Ended December 31, 2014 and 2013 Year Year Ended Percentage Ended Percentage Total Total December 31, of December 31, of Dollar Percentage 2014 Revenue 2013 Revenue Change Change (in thousands) Revenues: Real estate brokerage commissions $ 524,951 91.7% $ 393,203 90.3% $131,748 33.5% Financing fees 33,881 6.0 25,921 5.9 7,960 30.7 Other revenues 13,356 2.3 16,771 3.8 (3,415) (20.4) Total revenues 572,188 100.0 435,895 100.0 136,293 31.3 Operating expenses: Cost of services 350,102 61.2 264,637 60.7 85,465 32.3 Selling, general, and administrative expense 134,274 23.5 115,661 26.5 18,613 16.1 Depreciation and amortization expense 3,206 0.5 3,043 0.7 163 5.4 Stock-based and other compensation in connection with IPO — — 31,268 7.2 (31,268) — Total operating expenses 487,582 85.2 414,609 95.1 72,973 17.6 Operating income 84,606 14.8 21,286 4.9 63,320 297.5 Other income (expense), net 28 — 760 0.2 (732) (96.3) Interest expense (1,651) (0.3) (105) — (1,546) nm Income before provision for income taxes 82,983 14.5 21,941 5.1 61,042 278.2 Provision for income taxes 33,452 5.8 13,735 3.2 19,717 143.6 Net income $ 49,531 8.7% $ 8,206 1.9% $ 41,325 503.6% Adjusted EBITDA (1) $ 92,824 16.2% $ 61,286 14.1% $ 31,538 51.5% (1) Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non- GAAP Financial Measure.” Revenues Our total revenues were $572.2 million in 2014 compared to $435.9 million in 2013, an increase of $136.3 million, or 31.3%. Total revenues increased primarily as a result of increases in real estate brokerage commissions of $131.7 million, which contributed 96.7% of the total increase and an increase in financing fees of $8.0 million, offset by a decrease in other revenues of $3.4 million. • Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $525.0 million in 2014 from $393.2 million in 2013, an increase of $131.7 million or 33.5%. The increase was driven by an increase in the number of investment sales transactions (20.6%) and an increase in the average commission size (10.7%), partially offset by a decrease in average commission rates during 2014 as compared to 2013. The average commission rate was impacted by certain large transactions during 2014 for which the commission rates were lower than our typical transactions as larger transactions generally earn a lower commission rate. • Financing fees. Revenues from financing fees increased to $33.9 million in 2014 from $25.9 million in 2013, an increase of $8.0 million or 30.7%. The increase during 2014 as compared to 2013 was primarily driven by an increase in the number of loan transactions (14.3%) primarily due to an increase 40


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    Table of Contents in the number of financing professionals and an increase in average loan fees (14.3%), partially offset by a decrease in average financing fee rates due in part to an increase in the proportion of fees from larger loan transactions, which generally earn a lower fee percentage. • Other revenues. Other revenues decreased to $13.4 million in 2014 from $16.8 million in 2013, a decrease of $3.4 million or 20.4%. The decrease was primarily driven by a decrease in referral fees generated from other real estate brokers and a decrease in consulting and advisory services fees during 2014 as compared to 2013. Total operating expenses. Our total operating expenses were $487.6 million in 2014 compared to $414.6 million in 2013, an increase of $73.0 million, or 17.6%. Operating expenses increased due to $85.5 million increase in cost of services and $18.6 million increase in selling, general and administrative costs, partially offset by a $31.3 million of non-cash stock-based and other compensation charges in connection with the IPO during 2013 with no such similar costs in 2014. • Cost of services. Cost of services, which are primarily commissions paid to our investment sales professionals and compensation-related costs in connection with our financing activities in 2014 increased approximately $85.5 million, or 32.3% to $350.1 million from $264.6 million in 2013. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above and an increase in the proportion of transactions closed by our more senior investment sales professionals who are compensated generally at higher commission rates. • Selling, general and administrative expense. Selling, general and administrative expense in 2014 increased $18.6 million, or 16.1%, to $134.3 million from $115.7 million in 2013. The increase was primarily due to (i) an $8.6 million increase in management performance compensation driven by the increase in operating results during 2014 as compared to the same period in 2013, (ii) a $3.4 million increase in staff salaries, wages and related benefits expenses driven by an increase in our average headcount in areas of sales force support and corporate in connection with our growth and with being a public company, (iii) a $2.7 million increase in sales and marketing expenses incurred to support increased sales activity, (iv) a $1.0 million increase in third party service fees primarily driven by operating as a public company, (v) a $0.4 million increase in legal costs, and (vi) a $2.5 million net increase in other expense categories primarily driven by our expansion and business growth. • Depreciation and amortization expense. There were no significant changes in depreciation and amortization expenses in 2014 as compared to 2013. • Stock-based and other compensation in connection with IPO. Stock-based compensation charges in connection with IPO in 2013 were $30.9 million and related to the acceleration of vesting of restricted stock and SARs, modifications to remove the formula settlement value of the restricted stock and SARs awards, grants of replacement awards in the form of DSUs to MMREIS’s managing directors, a DSU grant to Mr. Millichap and grants of other stock-based compensation awards pursuant to the 2013 Plan. Additionally, there were other compensation expenses of $0.4 million pertaining to the IPO. There were no similar costs for 2014. Stock- based compensation expense for periods subsequent to the IPO is recorded in selling, general and administrative expense. See Note 10 – “Stock-Based Compensation Plans” of our Notes to Consolidated Financial Statements. Other income (expense), net Other (expense) income, net decreased to $28,000 in 2014 from $0.8 million for the same period in 2013. The decrease was primarily impacted by the net change in the carrying value of the investment assets held in the rabbi trust, offset by foreign currency losses and other non-operating items. 41


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    Table of Contents Interest expense. Interest expense increased to $1.7 million in 2014 from $0.1 million for the same period in 2013. The increase was related to interest expense associated with the SARs liability and commitment and other fees related to our credit facility in 2014 with no such interest expense in 2013. Interest expense for notes payable to former stockholders also increased. See Note 4 – “Selected Balance Sheet Data”, Note 6 – “Notes Payable to Former Stockholders” and Note 14 – “Commitments and Contingencies” of our Notes to Consolidated Financial Statements for additional information. Provision for income taxes. Income tax expense totaled $33.5 million for 2014 as compared to $13.7 million in 2013, an increase of $19.7 million or 143.6%. Our effective tax rate was 40.3% for 2014 as compared to 62.6% in 2013. The decrease was attributable to no longer being subject to a tax-sharing agreement with MMC, which was terminated effective October 31, 2013, as well as due to unfavorable permanent book/tax differences associated with a portion of IPO related stock-based compensation in 2013. Prior to the IPO in 2013, our provision for income tax was based on a tax-sharing agreement between us and MMC. As specified by the agreement, our effective tax rate was 43.5% for the pre-IPO period in 2013. In 2014, our effective tax rate of 40.3% excluded the excess tax deduction associated with the settlement of shares under the Company’s 2013 Plan, disqualifying dispositions of shares issued from our 2013 ESPP Plan and a tax deduction associated with IPO transaction costs because such tax benefits, which totaled $5.2 million, were recorded as credits in additional paid-in capital. 42


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    Table of Contents Comparison of Year Ended December 31, 2013 and 2012 Year Ended Percentage Year Ended Percentage Total Total December 31, of December 31, of Dollar Percentage 2013 Revenue 2012 Revenue Change Change (in thousands) Revenues: Real estate brokerage commissions $ 393,203 90.3% $ 351,407 91.1% $ 41,796 11.9% Financing fees 25,921 5.9 21,132 5.5 4,789 22.7 Other revenues 16,771 3.8 13,177 3.4 3,594 27.3 Total revenues 435,895 100.0 385,716 100.0 50,179 13.0 Operating expenses: Cost of services 264,637 60.7 230,248 59.7 34,389 14.9 Selling, general, and administrative expense 115,661 26.5 103,479 26.8 12,182 11.8 Depreciation and amortization expense 3,043 0.7 2,981 0.8 62 2.1 Stock-based and other compensation in connection with IPO 31,268 7.2 — — 31,268 — Total operating expenses 414,609 95.1 336,708 87.3 77,901 23.1 Operating income 21,286 4.9 49,008 12.7 (27,722) (56.6) Other income (expense), net 655 0.2 433 0.1 222 51.3 Income before provision for income taxes 21,941 5.1 49,441 12.8 (27,500) (55.6) Provision for income taxes 13,735 3.2 21,507 5.6 (7,772) (36.1) Net income $ 8,206 1.9% $ 27,934 7.2% $(19,728) (70.6)% Adjusted EBITDA (1) $ 61,286 14.1% $ 59,708 15.5% $ 1,578 2.6% (1) Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non- GAAP Financial Measure.” Revenues Our total revenues were $435.9 million in 2013 compared to $385.7 million in 2012, an increase of $50.2 million, or 13.0%. Total revenues increased primarily as a result of increases in real estate brokerage commissions of $41.8 million, which contributed 83.3% of the total increase, as well as an increase in financing fees of $4.8 million, and an increase in other revenues of $3.6 million. • Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $393.2 million in 2013 from $351.4 million in 2012, an increase of $41.8 million or 11.9%. The increase was driven by a 9.6% increase in the number of investment sales transactions as well as a 2.1% increase in the average commission size during 2013 as compared to 2012. The increase in average commission per transaction was primarily due to an increase in average commission fee percentage. • Financing fees. Revenues from financing fees increased to $25.9 million in 2013 from $21.1 million in 2012, an increase of $4.8 million or 22.7%. The increase was primarily driven by a 27.7% increase in the number of loan transactions primarily due to an increase in the number of financing professionals combined with an increase in their productivity levels, partially offset by a 4.0% decrease in average loan fees per transaction due in part to an increase in the proportion of fees from smaller loan transactions during 2013 as compared to 2012. 43


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    Table of Contents • Other revenues. Other revenues increased to $16.8 million in 2013 from $13.2 million in 2012, an increase of $3.6 million or 27.3%. The increase was primarily driven by an increase in fees generated from advisory services during 2013 as compared to 2012. Total operating expenses. Our total operating expenses were $414.6 million in 2013 compared to $336.7 million in 2012, an increase of $77.9 million, or 23.1%. Operating expenses increased due to $34.4 million increase in cost of services, $31.3 million of non-cash stock-based and other compensation charges in connection with the IPO during the fourth quarter of 2013 and $12.2 million increase in selling, general and administrative costs. • Cost of services. Cost of services, which are primarily commissions paid to our investment sales professionals and compensation-related costs in connection with our financing activities in 2013 increased approximately $34.4 million, or 14.9% to $264.6 million from $230.2 million in 2012. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above and to a lesser extent, an increase in referral fees paid to other real estate brokers and an increase in the proportion of transactions closed by our senior sales agents who are paid higher commission rates. • Selling, general and administrative expense. Selling, general and administrative expense in 2013 increased $12.2 million, or 11.8%, to $115.7 million from $103.5 million in 2012. The increase was primarily due to (i) a $6.7 million increase in staff salaries, wages and related benefits expenses driven by an increase in our average headcount to build and support our sales force, including hiring of national and regional specialty directors to directly support our more senior agents, recruiters to assist in the recruitment of experienced agents and corporate personnel in connection with being a public company, (ii) a $4.4 million increase in legal expenses, driven by higher legal settlement costs combined with lower insurance recoveries during 2013 as compared 2012, (iii) a $1.7 million increase in sales promotional expenses, driven by an increase in our annual sales recognition event and increased marketing expenses to support increased sales, and (iv) a $1.4 million increase in professional fees primarily driven by an increase in accounting and third party consulting service fees in preparation of and operating as a public company. These increases were partially offset by a $2.5 million decrease in stock-based compensation expense. Stock-based compensation expense included in selling, general and administrative expense decreased primarily due to the Company’s book value restricted stock and SARs plans being terminated and replaced with immediately vested stock compensation granted in conjunction with the IPO. See Note 10 – “Stock-Based Compensation Plans” of our Notes to Consolidated Financial Statements for additional information on stock-based compensation. Stock-based compensation expense in connection with the IPO is presented separately and is further described below. • Depreciation and amortization expense. There were no significant changes in depreciation and amortization expenses in 2013 as compared to 2012. • Stock-based and other compensation in connection with IPO. Stock-based compensation charges in connection with IPO in 2013 were $30.9 million and related to the acceleration of vesting of restricted stock and SARs, modifications to remove the formula settlement value of the restricted stock and SARs awards, grants of replacement awards in the form of DSUs to MMREIS’s managing directors, a DSU grant to Mr. Millichap and grants of other stock-based compensation awards pursuant to the 2013 Plan. Additionally, there were other compensation expenses of $0.4 million pertaining to the IPO. There were no similar costs for 2012. See Note 10 – “Stock-Based Compensation Plans” of our Notes to Consolidated Financial Statements. Other income (expense), net. There were no significant changes in other income, net in 2013 as compared to 2012. 44


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    Table of Contents Provision for income taxes. Provision for income tax was $13.7 million for 2013 as compared to $21.5 million in 2012, a decrease of $7.8 million or 36.1%. Our effective tax rate was 62.6% for 2013 as compared to 43.5% in 2012. The increase was attributable to no longer being subject to a tax-sharing agreement with MMC, which was terminated effective October 31, 2013, as well as unfavorable permanent book/tax differences associated with a portion of IPO related stock-based compensation in 2013. Prior to the IPO and during the year ended December 31, 2012, our income tax expense was based on a tax-sharing agreement between us and MMC. As specified by the agreement, our effective tax rate was 43.5% for the year ended December 31, 2012. Subsequent to the completion of the IPO, we calculated our effective tax rate as a stand- alone tax entity. Non-GAAP Financial Measure In this Annual Report on Form 10-K, we include a non-GAAP financial measure, adjusted earnings before interest income/expense, taxes, depreciation and amortization and stock-based compensation (“Adjusted EBITDA”). We define Adjusted EBITDA as net income before (i) interest income/expense, (ii) income tax expense, (iii) depreciation and amortization and (iv) stock-based compensation expense. We use Adjusted EBITDA in our business operations to, among other things, evaluate the performance of our business, develop budgets and measure our performance against those budgets. We also believe that analysts and investors use Adjusted EBITDA as supplemental measures to evaluate our overall operating performance. However, Adjusted EBITDA has material limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. We find Adjusted EBITDA as a useful tool to assist in evaluating performance because it eliminates items related to capital structure and taxes and non-cash stock-based compensation charges. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. Because Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies. A reconciliation of the most directly comparable GAAP financial measure, net income, to Adjusted EBITDA is as follows (in thousands): Year Ended December 31, 2014 2013 2012 2011 2010 Net income $49,531 $ 8,206 $ 27,934 $ 13,450 $ 8,391 Adjustments: Interest income and other (1) (50) 356 (166) (153) (722) Interest expense 1,651 105 4 12 35 Provision for income taxes 33,452 13,735 21,507 10,355 6,460 Depreciation and amortization 3,206 3,043 2,981 2,971 3,333 Stock-based compensation (2) 5,034 35,841 7,448 2,851 1,246 Adjusted EBITDA $92,824 $61,286 $ 59,708 $ 29,486 $ 18,743 (1) The year ended December 31, 2013 includes employer taxes related to DSUs and restricted stock in connection with IPO. (2) The year ended December 31, 2013 includes non-cash stock-based compensation charges of $30.9 million in connection with the IPO. 45


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    Table of Contents Liquidity and Capital Resources Our primary sources of liquidity are cash and cash equivalents on hand, marketable securities, available for sale, cash flows from operations and, if necessary borrowings under our Credit Agreement. We have invested a portion of our cash in money market funds and in fixed income debt securities, in accordance with our investment policy approved by the Board of Directors in order to enhance yield to us. Although we have historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations or availability under the Credit Agreement. Our total cash and cash equivalents balance increased by $48.2 million to $149.2 million at December 31, 2014, compared to $101.0 million at December 31, 2013. The following table sets forth our summary cash flows for the years ended December 31, 2014, 2013 and 2012 (in thousands): Cash Flows Year Ended December 31, 2014 2013 2012 Net cash provided by operating activities $ 71,437 $ 96,944 $ 35,354 Net cash used in investing activities (17,225) (4,024) (4,637) Net cash (used in) provided by financing activities (6,005) 4,925 (30,768) Net increase (decrease) in cash and cash equivalents 48,207 97,845 (51) Cash and cash equivalents at beginning of period 100,952 3,107 3,158 Cash and cash equivalents at end of period $ 149,159 $ 100,952 $ 3,107 Prior to its termination on June 30, 2013, we were subject to a cash sweep arrangement with MMC and the change in our cash held by MMC was considered to be an operating activity. Under the arrangement, our cash was swept daily into an MMC money market account. We received interest on the balances held in the sweep accounts. See Note 7 – “Related-Party Transactions” of our Notes to Consolidated Financial Statements for additional information. Operating Activities 2014 Compared to 2013 Net Cash provided by operating activities was $71.4 million in 2014 compared to $96.9 million in 2013. The decrease from 2013 was due principally to a reduction in amounts due from affiliates of $60.4 million which resulted from the return of cash related to the termination of the cash sweep arrangement with MMC during 2013 and a decrease of $28.8 million in stock-based compensation expense (2013 includes stock-based compensation in connection with our IPO of $30.9 million). The decrease was partially offset by an increase in net income of $41.3 million and differences due to the timing of payments and receipts and bonus accruals related to our increased operating results. 2013 Compared to 2012 Net Cash provided by operating activities was $96.9 million in 2013 compared to $35.4 million in 2012. The increase was due principally to a reduction in amounts due from affiliates of $80.3 million which resulted from the return of cash related to the termination of the cash sweep arrangement with MMC and a $29.6 million increase in stock-based compensation expense (2013 includes stock-based compensation in connection with our IPO of $30.9 million). This increase was partially offset by a decrease in net income of $19.7 million and differences related to the timing of payments and receipts and other accruals. 46


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    Table of Contents Investing Activities 2014 Compared to 2013 Cash flows used in investing activities were $17.2 million in 2014, as compared to $4.0 million in 2013. The increase in cash flows used for investing activities in 2014, as compared to the same period in 2013 was primarily due to a total of $14.7 million in purchases of marketable securities in 2014 with no such purchases in 2013, partially offset by a $2.2 million decrease in cash paid for investment in information technology, computer hardware and software and furniture, fixtures and equipment. 2013 Compared to 2012 Cash flows used in investing activities were $4.0 million in 2013, as compared to $4.6 million in 2012. The decrease in cash flows used for investing activities in 2013 as compared to 2012 was primarily due to net advances and collections of employee notes receivable. Financing Activities 2014 Compared to 2013 Cash flows used in financing activities were $6.0 million in 2014, as compared to cash flows provided by financing activities of $4.9 million in 2013. The change in cash flows used for financing activities in 2014, as compared to the same period in 2013 was primarily due to (i) a $42.5 million in proceeds received from our IPO, net of issuance costs and dividend payments to MMC of $37.7 million in 2013 with no such comparable proceeds and payments in 2014 and (ii) $6.0 million of withholding taxes paid in 2014 related to shares withheld from equity awards to employees (See Note 10 – “Stock-Based Compensation Plans” our Notes to Consolidated Financial Statements for additional information). 2013 Compared to 2012 Cash flows provided by financing activities were $4.9 million in 2013, as compared to $30.8 million used in financing activities in 2012. The change in cash flows provided by financing activities was primarily due to proceeds received from our IPO, net of issuance costs of $42.5 million. This increase was partially offset by a $6.9 million increase in cash attributed to dividends paid to MMC. Prior to our IPO, we distributed substantially all of our net income to MMC in the form of cash dividends. Following the IPO, we do not intend to pay a regular dividend. See Note 9 – “Stockholders’ Equity” of our Notes to Consolidated Financial Statements for additional information on dividends. We believe that our existing balances of cash and cash equivalents, marketable securities, available for sale, cash flows expected to be generated from our operations and borrowings available under the Credit Agreement will be sufficient to satisfy our operating requirements for at least the next twelve months. If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could prevent us from, among other factors, to fund acquisitions or to otherwise finance our growth or operations. In addition, our notes payable to former stockholders and SARs liability have provisions, which could accelerate repayment of outstanding principal and accrued interest and adversely impact our liquidity. Credit Agreement On June 18, 2014, we entered into the Credit Agreement with Wells Fargo Bank, National Association (“Bank”), dated as of June 1, 2014 (the “Credit Agreement”). The Credit Agreement provides for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries 47


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    Table of Contents (the “Credit Facility”), which matures on June 1, 2017. We may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. We must pay a commitment fee of up to 0.1% per annum, payable quarterly commencing on July 1, 2014, based on the amount of unutilized commitments under the Credit Facility. The Credit Agreement is intended to provide for future liquidity needs, if needed. The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit. Borrowings under the Credit Facility bear interest, at our option, at either the (i) Base Rate (defined as the highest of (a) the Bank’s prime rate, (b) the Federal Funds Rate plus 1.5% and (c) one-month LIBOR plus 1.5%), or (ii) at a variable rate between 0.875% and 1.125% above LIBOR, based upon the total funded debt to EBITDA ratio. The Credit Facility contains customary covenants, including financial covenants (which require us, on a combined basis with our guarantors, to maintain (i) an EBITDAR Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25:1.0 as of each quarter end on a rolling 4-quarter basis and (ii) total funded debt to EBITDA not greater than 2.0:1.0), reporting requirements and events of default. The Credit Facility is secured by substantially all of our assets, including pledges of 100% of the stock or other equity interest of each subsidiary except to the extent such property constitutes the capital stock of a controlled foreign corporation (as defined in the Internal Revenue Code), in which case no such pledge is required. As of December 31, 2014, there were no amounts outstanding under the Credit Agreement or any standby letters of credit relating to the Credit Agreement. See Note 14 – “Commitments and Contingencies” of our Notes to Consolidated Financial Statements for additional information. Contractual Obligations and Commitments The following table summarizes our contractual obligations and other commitments at December 31, 2014 (dollars in thousands): Less than More Than 5 Total 1 Year 1-3 Years 3-5 Years Years Other Operating lease obligations (1) $ 45,868 $ 13,144 $ 17,733 $ 9,333 $ 5,658 $ — SARs liability (principal and interest) (2) 34,470 — 101 1,311 33,058 — Notes payable (principal and interest) (3) 14,256 1,470 2,943 2,946 6,897 — Deferred commissions payable (4) 17,256 5,080 12,176 — — — Deferred compensation liability (5) 3,863 — — — — 3,863 Total contractual obligations $ 115,713 $ 19,694 $ 32,953 $ 13,590 $ 45,613 $ 3,863 (1) See Note 14 – “Commitments and Contingencies” of our Notes to the Consolidated Financial Statements. (2) The Company accrues interest on the outstanding balance at a rate based on the 10-year treasury note plus 2%. Interest is estimated based on the contractual rate beginning on January 2, 2015 of 4.173%. Forecasted principal payments are based on each participants estimated retirement age. See Note 4 – “Selected Balance Sheet Data” of our Notes to the Consolidated Financial Statements. (3) See Note 6 – “Notes Payable to Former Stockholders” of our Notes to the Consolidated Financial Statements. (4) Includes short-term and long-term deferred commissions payable. See Note 4 – “Selected Balance Sheet Data” of our Notes to the Consolidated Financial Statements. (5) Actual payments are dependent on each participant’s future elections as to settlement of deferred compensation. The Company holds investments in rabbi trust of $4.3 million to settle outstanding amounts when they become due. See Note 4 – “Selected Balance Sheet Data” of our Notes to the Consolidated Financial Statements. 48


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    Table of Contents Off Balance Sheet Arrangements We do not have any off balance sheet arrangements. Inflation Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by general economic conditions including inflation. However, to date, we do not believe that general inflation has had a material impact upon our operations. Critical Accounting Policies and Estimates We prepare our financial statements in accordance with U.S. generally accepted accounting principles. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change negatively based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe that the critical accounting policies discussed below involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. See the notes to our consolidated financial statements for a summary of our significant accounting policies. We are an emerging growth company within the meaning of the rules under the Securities Act, and we may utilize certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies. Section 107 of the JOBS Act provides that an emerging growth company can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.” Revenue Recognition We generate real estate brokerage commissions by acting as a broker for real estate owners or investors seeking to buy or sell commercial properties. Revenues from real estate brokerage commissions are recognized when there is persuasive evidence of an arrangement, all services have been provided, the price is fixed and determinable and collectability is reasonably assured. These criteria are typically met at the close of escrow. We generate financing fees from securing financing on purchase transactions as well as fees earned from refinancing its clients’ existing mortgage debt and other financing activities. Revenues from financing fees are recognized at the time the loan closes and there are no remaining significant obligations for performance in connection with the transaction. Other revenues include fees generated from consulting and advisory services, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed. Stock-Based Compensation We follow the accounting guidance for share based payments which requires the measurement and recognition of compensation expense for all stock based awards made to employees, agents and directors. Awards are issued under the 2013 Plan and 2013 Employee Stock Purchase Plan (“2013 ESPP Plan”). 49


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    Table of Contents For awards made to our employees and directors, we initially value our restricted stock units and restricted stock awards based on the grant date closing price of our common stock. For awards with periodic vesting, we recognize the related expense on a straight-line basis over the requisite service period for the entire award, subject to periodic adjustments to ensure that the cumulative amount of expense recognized through the end of any reporting period is at least equal to the portion of the grant date value of the award that has vested through that date. For awards made to independent contractors, which are our sales and financing professionals, we determined that the fair value of the award shall be measured based on the fair value of the equity instrument as it is more reliably measureable than the fair value of the consideration received. We use the grant date as the performance commitment date, and the measurement date for these awards is the date the services are completed, which is the vesting date. As a result, we record stock-based compensation for these awards over the vesting period on a straight-line basis with periodic adjustments during the vesting period for changes in the fair value of the awards. For the above awards, we estimate forfeitures at the time of grant in order to estimate the amount of share-based payment awards ultimately expected to vest and adjusts the recorded expense accordingly. We calculate a separate forfeiture rate for our employees and non-employees awards. Forfeitures are required to be revised, if necessary, in subsequent periods. If estimated and actual forfeitures differ from these initial estimates, we adjust the cumulative expense as appropriate to account for the change in the estimated forfeiture rates. If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to accelerate, increase or cancel any remaining unrecognized stock-based compensation expense. Stock-based compensation expense is included in general and administrative expense in the accompanying consolidated statements of net and comprehensive income. For awards issued under the 2013 ESPP Plan, we determined that the plan was a compensatory plan and the Company is required to expense the fair value of the awards over each six-month offering period. We estimate the fair value of these awards using the Black-Scholes option pricing model. We calculate the expected volatility based on the historical volatility of our common stock and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant, both consistent with the term of the offering period. We incorporate no forfeiture rate and include no expected dividend yield as the company has not, and currently does not intend to pay a regular dividend. See Note 9 – “Stockholders’ Equity” of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K for additional information on dividends. Stock-Based Compensation Prior to the IPO MMREIS historically issued stock options and stock appreciation rights, or SARs, to key employees through a book value, stock-based compensation award program (the “Program”). The Program allowed for employees to exercise stock options in exchange for shares of unvested restricted common stock. The Program also allowed employees to exercise options through the issuance of notes receivable, which were recourse to the employee. The determination of the grant price and repurchase price of stock-based awards at the grant date and repurchase date were fixed as determined by a valuation formula using book value, as defined by the agreements between MMREIS and the employees. The stock awards generally vested over a three to five-year period. Under these plans, MMREIS retained the right to repurchase shares if certain events occurred, which included termination of employment. In these circumstances, the plan document provided for repurchase proceeds to be settled in the form of a note payable to (former) shareholders or cash, which was settled over a fixed period. While MMREIS had entered into the agreements to repurchase the stock and settle the SARs held by employees upon termination of their employment (subject to certain conditions as specified in the agreements), MMC had historically assumed the obligation to make payments to the former shareholders. While MMREIS recognized the compensation expense associated with these share-based payment arrangements, the liability had historically been assumed by MMC through a deemed contribution, which then has paid the former shareholders over time. The accounting for the stock options and SARs awards, including MMC’s assumption of MMREIS repurchase obligations, is discussed below. 50

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