0001722266-18-000001.txt : 20180717
0001722266-18-000001.hdr.sgml : 20180717
20180130182221
ACCESSION NUMBER: 0001722266-18-000001
CONFORMED SUBMISSION TYPE: 1-A/A
PUBLIC DOCUMENT COUNT: 7
FILED AS OF DATE: 20180131
DATE AS OF CHANGE: 20180618
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: Multi-Housing Income REIT, Inc.
CENTRAL INDEX KEY: 0001722266
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798]
IRS NUMBER: 000000000
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 1-A/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 024-10764
FILM NUMBER: 18560439
BUSINESS ADDRESS:
STREET 1: 9050 N. CAPITAL OF TEXAS HIGHWAY
STREET 2: SUITE 320
CITY: AUSTIN
STATE: TX
ZIP: 78759
BUSINESS PHONE: 512-872-2898
MAIL ADDRESS:
STREET 1: 9050 N. CAPITAL OF TEXAS HIGHWAY
STREET 2: SUITE 320
CITY: AUSTIN
STATE: TX
ZIP: 78759
1-A/A
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512-872-2898
Terrence Griffiths
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PART II AND III
2
Revised_Offering_Circular.txt
AMENDED OFFERING CIRCULAR
Preliminary Offering Circular dated January 30, 2018
An offering statement pursuant to Regulation A relating to these
securities has been filed with the Securities and Exchange
Commission. Information contained in this Preliminary Offering
Circular is subject to completion or amendment. These securities
may not be sold nor may offers to buy be accepted before the
offering statement filed with the Commission is qualified. This
Preliminary Offering Circular shall not constitute an offer to
sell or the solicitation of an offer to buy nor may there be any
sales of these securities in any state in which such offer,
solicitation or sale would be unlawful before registration or
qualification under the laws of any such state. We may elect to
satisfy our obligation to deliver a Final Offering Circular by
sending you a notice within two business days after the
completion of our sale to you that contains the URL where the
Final Offering Circular or the offering statement in which such
Final Offering Circular was filed may be obtained.
OFFERING CIRCULAR
Multi-Housing Income REIT, Inc.
____________________
Sponsored by Casoro Capital Partners, LLC
Up to $50,000,000 in Shares of Common Stock
Multi-Housing Income REIT, Inc. (the "REIT," the "Company"
also referred to by "we," "us," and "our") is a Maryland
corporation, recently formed to invest in real property. We
expect to use substantially all of the net proceeds from this
offering to acquire a diversified portfolio of (primarily)
multi-housing properties. Our investment strategies center on
multi-housing within the continental U.S. in the areas of
student housing, multi-housing, conventional apartments, and
senior living (both existing and new development projects). We
seek to leverage our current financial expertise and operational
experience in acquiring and repositioning multi-housing
properties with upside potential.We plan to acquire assets
for both income and capital gains.
We may also invest, to a limited extent, in other real
estate related assets. We plan to diversify our portfolio's
investment risk with the goal of attaining a portfolio of real
estate assets that provides attractive cash yields to our
shareholders with the potential for capital appreciation. We
intend to qualify as a real estate investment trust, or REIT,
for U.S. federal income tax purposes beginning with our taxable
year ending December 31, 2018.
We will be externally managed and advised by Casoro
Investment Advisory Firm, LLC, a Texas limited liability
company, (our "Manager"), which is an affiliate of Casoro
Capital Partners, LLC, a Texas limited liability company (our
"Sponsor"). Our Sponsor is a real estate investment firm that
creates discretionary funds that are suitable, attractive, and
efficient for high net worth individuals, family offices, and
institutions. It is affiliated with the PPA Group, LLC, an
experienced real estate investment firm. The principals of the
Sponsor and the Manager are Monte K. Lee-Wen and Yuen Yung
(together, the "Principals"). Our sponsor is also the sponsor
of a private real estate fund, the Casoro Real Estate Fund, LP.
We are offering a maximum of up to $50,000,000 in shares
of our common stock on a "best efforts maximum" basis. We expect
to offer common shares in this offering until we raise the
maximum amount being offered, unless terminated by our
Manager at an earlier time.
Because this is a "best efforts maximum" offering, we
are only required to use our best efforts to sell shares of our
common stock. We are offering up to $50,000,000 in shares of
common stock in our offering at $10 per share for the 12 months
of this offering. The minimum investment amount for initial
purchases of shares of our common stock is 200 shares, or $2,000
based on the initial offering price per share. We intend to
permit investors to purchase additional shares in increments of,
at minimum, 10 shares or $100, each month subsequent to the
initial investment. Additional share purchases are of shares
included in this offering. The minimum amount of capital we will
raise prior to beginning operations is $3,000,000. We may
terminate this offering at any time. We do intend to place the
funds into a segregated account up to $3,000,000 that will
be held in escrow by our intended transfer and escrow agent,
Prime Trust, LLC.
After the close of this offer, we intend to subsequently
commence new share offerings annually.
We have adopted a shareholder redemption plan designed to
provide our shareholders with limited liquidity on an annual
basis for their investment in shares of our common stock. See
"Shareholder Redemption Plan."
Shares of our common stock will be subject to the ownership
and transfer limitations in our charter which are intended to
assist us in qualifying and maintaining our qualification as a
REIT, including, subject to certain exceptions, a 9.8% ownership
limit. See "Description of Capital Stock and Certain Provisions
of Maryland Law, our Charter and Bylaws-Restrictions on
Ownership of Shares."
We intend to distribute our shares primarily through
our website at www.upsideavenue.com.
This offering is intended to qualify as a "Tier 2" offering
pursuant to Regulation A promulgated under the Securities Act of
1933, as amended, or the Securities Act. In preparing this
offering circular, we have elected to comply with the applicable
disclosure requirements of Form S-11 under the Securities Act.
Per Share
Total Minimum
Raise
Total
Maximum
Raise
Public Offering
Price(1)
$ 10.00
$3,000,000
$50,000,000.00
Selling Commissions(2)
$ - ?
$ -
Proceeds to Us from
this Offering to the
Public (Before
Expenses)(3)
$ 10.00
$3,000,000
$50,000,000.00
Generally, no sale may be made to you in this offering if
the aggregate purchase price you pay is more than 10% of the
greater of your annual income or net worth. However, different
rules apply to accredited investors and non-natural persons.
Before making any representation that your investment does not
exceed applicable thresholds, we encourage you to review Rule
251(d)(2)(i)(C) of Regulation A. For general information on
investing, we encourage you to refer to www.investor.gov.
Investing in shares of our common stock is speculative
and involves substantial risks. You should purchase these
securities only if you can afford a complete loss of your
investment. See "Risk Factors" beginning on page 21 to read
about the more significant risks you should consider before
buying shares of our common stock. These risks include the
following:
? We depend on our Manager to select our investments
and conduct our operations. We will pay fees and
expenses to our Manager and its affiliates that were
not determined through the benefit of arm's length
negotiations of the type normally conducted between
unrelated parties. These fees increase your risk of
loss.
? We have limited operating history. Our prior
performance, and the prior performance of the funds
and other entities affiliated with our Sponsor may
not predict our future results. Therefore, there is
no assurance that we will achieve our investment
objectives.
? This is a "blind pool" offering because our Manager
has not yet identified any investments to acquire
with the net proceeds of this offering. Furthermore,
you will not be able to evaluate our future
investments prior to purchasing shares.
? Real estate investments are subject to general
downturns in the industry as well as downturns in
specific geographic areas. We cannot predict what the
occupancy level will be at a particular property. We
also cannot predict the future value of our
properties or the completion of any project in which
we invest. Accordingly, we cannot guarantee that you
will receive cash dividends or appreciation of your
investment.
? This offering is being made pursuant to recently
adopted rules and regulations under Regulation A of
the Securities Act. The legal and compliance
requirements of these rules and regulations,
including ongoing reporting requirements related
thereto, are relatively untested.
? Our Sponsor's executive officers and key real estate
professionals are also officers, directors, managers
and/or key professionals of our Sponsor and its
affiliates. As a result, they will face conflicts of
interest, including time constraints, allocation of
investment opportunities, and significant conflicts
created by our Manager's compensation arrangements
with us and other affiliates of our Sponsor.
? Our Sponsor may sponsor other companies that compete
with us, invest in the same or substantially same
assets as us.
? Our Manager does not have an exclusive management
arrangement with us.
? If we raise substantially less than the maximum
offering amount, we may not be able to acquire a
diverse portfolio of investments and the value of
your shares may vary more widely with the performance
of specific assets. We may commence operations with
as little as $3,000,000. Furthermore, our offering
and organizational expenses (which may be reimbursed
up to 3% of the gross offering proceeds, or up to
$1.5 million), could significantly reduce the amount
of capital which we have available to source and make
investments, particularly if we raise substantially
less than the maximum offering amount and incur high
expenses.
? If we internalize our management functions, your
interest in us could be diluted and we could incur
other significant costs associated with being self-
managed.
? We may change our investment guidelines without
shareholder consent, which could result in
investments that are different from those described in
this offering circular.
? We intend to make quarterly dividends as required to
comply with the REIT distribution requirements and
avoid U.S. federal income and excise taxes on retained
income. However, although our goal is to pay dividends
from our cash flow from operations, we may use other
sources to fund dividends, including offering proceeds,
borrowings and sales of assets. We have not established
a limit on the amount of proceeds we may use to fund
dividends. If we pay dividends from sources other than
our cash flow from operations, we will have less funds
available for investments and your overall return may
be reduced.
? No public market currently exists for our shares, and
while we may attempt to effectuate a liquidity event
within approximately ten years from the completion of
this offering, we are not required to plan or
effectuate a liquidity event by any specific date. If
you are able to sell your shares through our
shareholder redemption plan, through secondary market
sales or otherwise, you may have to sell them at a
discount to their fair value.
? If we fail to qualify as a REIT for U.S. federal
income tax purposes and no relief provisions apply,
we would be subject to entity-level federal income
tax and, as a result, our cash available for
distribution to our shareholders and the value of our
shares could materially decrease.
The United States Securities and Exchange Commission does not
pass upon the merits of or give its approval to any securities
offered or the terms of the offering, nor does it pass upon the
accuracy or completeness of any offering circular or other
solicitation materials. These securities are offered pursuant to
an exemption from registration with the Commission; however, the
Commission has not made an independent determination that the
securities offered are exempt from registration.
IMPORTANT INFORMATION ABOUT
THIS OFFERING CIRCULAR
Please carefully read the information in this offering
circular and any accompanying offering circular supplements,
which we refer to collectively as this offering circular. You
should rely only on the information contained in this
offering circular. We have not authorized anyone to provide
you with different information. This offering circular may
only be used where it is legal to sell these securities. You
should not assume that the information contained in this
offering circular is accurate as of any date later than the
date hereof or such other dates as are stated herein or as of
the respective dates of any documents or other information
incorporated herein by reference.
This offering circular is part of an offering statement
that we filed with the SEC. Periodically, as we make material
investments, update our quarterly NAV per share amount, or
have other material developments, we will provide an offering
circular supplement that may add, update or change
information contained in this offering circular. Any
statement that we make in this offering circular will be
modified or superseded by any inconsistent statement made by
us in a subsequent offering circular supplement. The offering
statement we filed with the SEC includes exhibits that
provide more detailed descriptions of the matters discussed
in this offering circular. You should read this offering
circular and the related exhibits filed with the SEC and any
offering circular supplement, together with additional
information contained in our annual reports, semi-annual
reports, current event reports and other reports and
information statements that we will file periodically with
the SEC.
The offering statement and all supplements and reports
that we have filed or will file in the future can be read at
the SEC website, www.sec.gov and on our website at
www.upsideavenue.com.
Our board of directors and officers and those selling
shares on our behalf in this offering will be permitted to
make a determination that the purchasers of shares in this
offering are "qualified purchasers" in reliance on the
information and representations provided by the shareholder
regarding the shareholder's financial situation. Before
making any representation that your investment does not
exceed applicable thresholds, we encourage you to review Rule
251(d)(2)(i)(C) of Regulation A. For general information on
investing, we encourage you to refer to www.investor.gov.
TABLE OF CONTENTS
IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR 4
INVESTMENT
CRITERIA.................................................
...................................................................
..........................................6
FREQUENTLY ASKED QUESTIONS AND ANSWERS ABOUT THIS
OFFERING.....................................................
..................7
OFFERING
SUMMARY.......................................................
.................................................................
......................................14
RISK FACTORS 21
STATEMENTS REGARDING FORWARD-LOOKING
INFORMATION....................................................
................................47
ESTIMATED USE OF
PROCEEDS.............................................
.......................................................
..........................................50
MANAGEMENT...........................................
............
......................................................
............
...................................51
CONFLICTS OF INTEREST AND RELATED PARTY
TRANSACTIONS.......................................
..............
..........................58
INVESTMENT OBJECTIVES AND STRATEGY 61
PLAN OF
OPERATION.............................................
...........
........................................................
..........
.........................63
PRIOR PERFORMANCE
SUMMARY.........................................................
.................................................................
...68
DESCRIPTION OF CAPITAL STOCK AND CERTAIN PROVISIONS OF MARYLAND
LAW, OUR CHARTER AND
BYLAWS..........................................................
.................................................................
...........................................69
STOCKHOLDER REDEMPTION
PLAN............................................................
..............................................................78
U.S. FEDERAL INCOME TAX
CONSIDERATIONS..................................................
.......................................................81
ERISA
CONSIDERATIONS..................................................
.................................................................
.......................104
PLAN OF
DISTRIBUTION....................................................
.................................................................
......................108
PLATFORM; ADMINISTRATIVE AND PROCESSING AGENT; TRANSFER
AGENT...................................................... 108
LEGAL
MATTERS.........................................................
.................................................................
.............................108
AUDITOR
.................................................................
.................................................................
................................108
HOW TO
SUBSCRIBE.......................................................
.................................................................
........................109
ADDITIONAL
INFORMATION.....................................................
.................................................................
..............110
INVESTMENT CRITERIA
The shares of our common stock are being offered and
sold only to "qualified purchasers" (as defined in Regulation
A under the Securities Act). As a Tier 2 offering pursuant to
Regulation A under the Securities Act, this offering will be
exempt from state law "Blue Sky" review, subject to meeting
certain state filing requirements and complying with certain
anti-fraud provisions, to the extent that the shares of our
common stock offered hereby are offered and sold only to
"qualified purchasers" or at a time when our common stock is
listed on a national securities exchange. To be a "qualified
purchaser," a purchaser of shares must satisfy one of the
following:
(1) Accredited Investors: You are an accredited investor.
An "accredited investor" is:
(a) If a natural person, a person that has:
i. an individual net worth, or joint net
worth with his or her spouse, that
exceeds $1,000,000, excluding the value
of the primary residence of such natural
person (as described below); or
ii. individual income in excess of $200,000,
or joint income with his or her spouse in
excess of
$300,000, in each of the two most recent
years and has a reasonable expectation of
reaching the same income level in the
current year.
(b) If not a natural person, one of the following:
i. a corporation, an organization described
in Code Section 501(c)(3), a
Massachusetts or similar business trust,
or a partnership, not formed for the
specific purpose of acquiring shares,
with total assets in excess of
$5,000,000;
ii. a trust, with total assets in excess of
$5,000,000, not formed for the specific
purpose of acquiring the securities
offered and whose purchase is directed by
a person who has such knowledge and
experience in financial and business
matters that he or she can evaluate the
merits and risks of an investment in a
share;
iii. a broker-dealer registered pursuant to
Section 15 of the Securities Exchange Act
of 1934, as amended (the "Exchange Act");
iv. an investment company registered under
the Investment Company Act of 1940, as
amended (the "Investment Company Act");
v. a business development company (as defined
in Section 2(a)(48) of the Investment
Company Act);
vi. a Small Business Investment Company
licensed by the United States Small
Business Administration under Section
301(c) or (d) of the Small Business
Investment Act of 1958;
vii. an employee benefit plan within the
meaning of the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), if the investment decision is
made by a plan fiduciary (as defined in
Section 3(21) of ERISA), which is either
a bank, savings and loan association,
insurance company, or registered
investment adviser, or if the employee
benefit plan has total assets in excess
of $5,000,000, or, if a self-directed
plan, with investment decisions made
solely by persons who are accredited
investors;
viii. a private business development company
(as defined in Section 202(a)(22) of the
Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"));
ix. a bank as defined in Section 3(a)(2) of
the Securities Act, or any savings and
loan association or other institution as
defined in Section 3(a)(5)(A) of the
Securities Act whether acting in its
individual or fiduciary capacity; or
x. an entity in which all of the equity
owners are accredited investors.
(2) Non-Accredited Investors: If you are not an
accredited investor, your investment in shares of
our common stock may not be more than 10% of the
greater of:
(a) If you are a natural person:
i. your individual net worth , or joint net
worth with your spouse, excluding the
value of your primary residence (as
described below); or
ii. your individual income, or joint income
with your spouse, received in each of the
two most recent years and you have a
reasonable expectation that an investment
in the shares will not exceed 10% of your
individual or joint income in the current
year.
(b) If you are not a natural person,
i. your revenue, as of your most recently
completed fiscal year end; or
ii. your net assets, as of your most recently
completed fiscal year end.
We reserve the right to reject any investor's subscription in
whole or in part for any reason, including if we determine in
our sole and absolute discretion that such investor is not a
"qualified purchaser" for purposes of Regulation A.
FREQUENTLY ASKED QUESTIONS AND
ANSWERS ABOUT THIS OFFERING
Q: What is a real estate investment trust, or REIT?
A: In general, a REIT is an entity serving as an investment
vehicle that:
* combines the capital of many investors to acquire or
provide financing for a diversified portfolio of real
estate investments under professional management;
* is able to qualify as a "real estate investment trust" for
U.S. federal income tax purposes and is therefore
generally not subject to U.S. federal corporate income
taxes on its net income that is distributed, which
substantially eliminates the "double taxation" treatment
(i.e., taxation at both the corporate and shareholder
levels) that generally results from investments in a
corporation; and
* pays distributions to investors of at least 90% of its
annual ordinary taxable income.
In this offering circular, we refer to an entity that qualifies
to be taxed as a real estate investment trust for U.S. federal
income tax purposes as a REIT. We intend to qualify as a REIT
for U.S. federal income tax purposes commencing with our
taxable year ending December 31, 2018.
Q. What is Multi-Housing Income REIT, Inc?
A: Multi-Housing Income REIT, Inc. is a recently organized
Maryland corporation formed to originate, invest in and
manage a diversified portfolio primarily consisting of
investments in multi-housing within the continental U.S. in the
areas of student housing, multi-housing, conventional
apartments, and senior living (both existing and new
development projects).
Q. What is Casoro Capital Partners, LLC?
A: Casoro Capital Partners, LLC, a Texas limited liability
company, is the sponsor of Multi-Housing Income REIT, Inc. Our
Sponsor's team is experienced in managing complex multi-housing
real estate investments from acquisition and business plan
execution, to realization. Pursuant to a support agreement with
our Sponsor, our Manager will utilize our Sponsor's personnel
and resources to select our investments and manage our day-to-
day operations.
Q: Why should I invest in multi-housing rental properties and
development projects?
A: Our goal is to provide a professionally managed, diversified
portfolio consisting primarily of high-quality multi-housing
rental properties and development projects, to investors who
generally have had very limited access to such investments in
the past. Allocating some portion of your portfolio to a direct
investment in high-quality multi-housing rental properties and
development projects may provide you with:
a reasonably predictable and stable level of current
income from the investment;
diversification of your portfolio, by investing in an
asset class, real estate, that historically has not been
correlated with the stock market generally; and
the opportunity for capital appreciation.
Q: What kind of offering is this?
A: We are offering, principally through our website,
www.upsideavenue.com, a maximum of $50,000,000 in shares of our
common stock to the public on a "best efforts maximum" basis at
$10.00 per share initially. We will commence operations on a
date no later than on which we raise and accept at least
$3,000,000 in this offering.
This offering is being conducted as a continuous offering
pursuant to Rule 251(d)(3) of Regulation A, meaning that while
the offering of securities is continuous, active sales of
securities may happen sporadically over the term of the
offering.
Q: What is the purchase price for your common shares?
A: Our Manager set our initial offering price at $10.00 per
share, which will be the purchase price of our shares until
December 31, 2018.
Q: Are there any risks involved in buying shares of your
common stock?
A: Yes. Investing in shares of our common stock involves a high
degree of risk. If we are unable to effectively manage the
impact of these risks, we may not meet our investment
objectives, and therefore, you should purchase shares of our
common stock only if you can afford a complete loss of your
investment. See "Risk Factors" for a description of the risks
relating to this offering and an investment in shares of our
common stock.
Q: How is an investment in a non-traded REIT like yours
different from investing in shares of a listed REIT?
A: The fundamental difference between our common shares and a
listed REIT is the daily liquidity available with a listed
REIT. We may eventually list our common stock on the OTCQX
marketplace or another secondary market upon the completion of
this offering, however, our common stock will not initially be
listed for trading on a stock exchange or other trading market
and we will have no obligation to list our common stock for
trading at any time.
Although we intend to adopt a redemption plan that generally
allows investors to redeem shares on an annual basis, for
investors with a short-term investment horizon, a listed REIT
may be a better alternative than investing in our common
shares. However, we believe our common shares are an
alternative way for investors to deploy capital into a
diversified pool of real estate assets, with a lower
correlation to the general stock market than listed REITs.
Additionally, listed REITs are subject to more demanding
public disclosure and corporate governance requirements than
we will be subject to. While we are subject to the scaled
reporting requirements of Regulation A, such periodic reports
are substantially less than what would be required for a
listed REIT.
Q: How is an investment in your common shares different from
investing in shares of a traditional non-exchange traded REIT?
A: We may sell through a variety of low-cost channels in
addition to our direct-marketing to investors. Presently, we
neither charge nor pay any broker-dealer distribution fees,
saving investors in upfront expenses as compared to a
traditional non-exchange traded REIT. Traditional non-exchange
traded REITs use a highly manpower-intensive method with
hundreds to thousands of sales brokers calling on investors to
sell their offerings. We use a low-cost digital in conducting
this offering, thus reducing the financial burdens to us of
offering our common shares.
Q: How will your NAV per share be calculated?
A: Our NAV per share will be calculated at the end of each
fiscal quarter, by our internal accountants using a process
that reflects several components, including (1) estimated
values of each of our acquired real estate assets and
investments, including related liabilities, based upon (a)
market capitalization rates, comparable sales information,
interest rates, net operating income, (b) with respect to debt,
default rates, discount rates and loss severity rates, and (c)
in certain instances individual appraisal reports of the
underlying real estate provided by an independent valuation
expert, (2) the price of liquid assets for which third party
market quotes are available, (3) accruals of our periodic
distributions and (4) estimated accruals of our operating
revenues and expenses. In instances where an appraisal of the
real estate asset is necessary, we will engage an appraiser
that has expertise in appraising multi-housing real estate
assets, to act as our independent valuation expert. The
independent valuation expert will not be responsible for, or
prepare, our quarterly NAV per share. See "Description of our
Common Shares-Valuation Policies" for more details about our
NAV and how it will be calculated.
Q: How exact will the calculation of the quarterly NAV per
share be?
A: Our goal is to provide a reasonable estimate of the market
value of shares of our common stock as of the end of each
fiscal quarter. Our assets will consist principally of
commercial real estate equity investments. Our Manager's
valuation of our real estate assets is subject to a number of
judgments and assumptions that may not prove to be accurate.
The use of different judgments or assumptions would likely
result in different estimates of the value of our real estate
assets. Moreover, although we evaluate and provide our NAV per
share on a quarterly basis, our NAV per share may fluctuate
daily, so that the NAV per share in effect for any fiscal
quarter may not reflect the precise amount that might be paid
for your shares in a market transaction. Further, our published
NAV per share may not fully reflect certain material events to
the extent that they are not known or their financial impact on
our portfolio is not immediately quantifiable. Any resulting
potential disparity in our NAV per share may be in favor of
either stockholders who redeem their shares, or stockholders
who buy new shares, or existing stockholders. See "Plan of
Operation -Valuation Policies."
Q: Will I have the opportunity to redeem my shares of common
stock?
A: Yes. Our stockholder redemption plan may provide an
opportunity for our stockholders to have their shares of our
common stock redeemed by us, subject to certain restrictions
and limitations. Shares may not be redeemed under our
stockholder redemption plan until the first anniversary of the
date such shares were purchased.
The purchase price for shares redeemed under our stockholder
redemption plan will be as follows:
Less than 1 year No redemption allowed
1 year until 2 years 98.0% of NAV per share or $10,
whichever is greater
2 years until 3 years 99.0% of NAV or $10,
whichever is greater
3 years until 4 years 100.0% of NAV or $10,
whichever is greater
4 years until 5 years 100.0% of NAV or $10,
whichever is greater
5 years or more 100.0% of NAV or $10,
whichever is greater
In the event of a shareholder's death or complete disability
100% of NAV or $10,
whichever is greater
For purposes of the stockholder redemption plan, the per share
redemption price will be calculated as a percentage of the NAV
per share in effect at the time of the redemption. The
redemption price per share for shares redeemed pursuant to the
stockholder redemption plan will be further reduced by the
aggregate amount of net proceeds per share, if any, distributed
to our stockholders following the date that the NAV per share
in effect at the time of the redemption was established but
prior to the redemption date as a result of the sale of one or
more of our assets that constitutes a return of capital
distribution as a result of such sales.
In addition, the redemption price may be reduced by the
aggregate sum of dividends, if any, declared on the shares
subject to the redemption request with record dates during the
period between the quarter-end redemption request date and the
redemption date. Furthermore, a stockholder requesting
redemption will be responsible for any third-party costs
incurred by us in effecting such redemption, including but not
limited to, bank transaction charges, custody fees, taxes,
assessments and/or transfer agent charges. The redemption plan
may be suspended at any time. See "Stockholder Redemption Plan"
for more details.
Q: Will there be any limits on my ability to redeem my
shares?
A: Yes. While we designed our redemption plan to allow
stockholders to request redemptions on an annual basis of all
or any portion of their shares (subject to the one year
holding period and applicable redemption discount described
above), we need to impose limitations on the total amount of
net redemptions per quarter in order to maintain sufficient
sources of liquidity to satisfy redemption requests without
impacting our ability to invest in multi-housing real estate
assets and maximize investor returns. We will limit the number
of shares to be redeemed during any calendar year to 5.0% of
the weighted average number of shares of our common stock
outstanding during the prior calendar year and we will limit
redemptions to 1.25% per quarter, with excess capacity carried
over to later quarters in the calendar year. In the event that
we do not have sufficient funds available to redeem all of the
shares of our common stock for which redemption requests have
been submitted in any quarter, such pending requests will be
honored on a pro rata basis. For investors who hold shares of
our common stock with more than one record date, redemption
requests will be applied to such shares in the order in which
they were purchased, on a first in first out basis. Further,
our Manager may in its sole discretion, amend, suspend, or
terminate the redemption plan at any time, including to protect
our operations and our non-redeemed stockholders, to prevent an
undue burden on our liquidity, to preserve our status as a
REIT, following any material decrease in our NAV, or for any
other reason. Our limits on ownership of our shares also may
require us to decline redemption requests that would cause
other stockholders to exceed such ownership limits. In
addition, in order to comply with certain of the distribution
requirements applicable to REITs we will decline to honor any
redemption request that we believe is a "dividend equivalent"
redemption as discussed in "U.S. Federal Income Tax
Considerations-Taxation of Taxable U.S. Stockholders-
Redemptions of Common Stock. See "Stockholder Redemption Plan"
for more details.
Q: Who will pay your organization and offering costs?
A: We may pay or reimburse our Manager for organization and
offering expenses in an amount not to exceed 3% of the gross
offering proceeds.
Q: What fees and expenses will you pay to the Manager or its
affiliates, including your Sponsor?
A: Our Manager and its affiliates will receive fees and expense
reimbursements for services relating to this offering and the
investment and management of our assets. Our Manager does not
charge any other fees at the time of this offering. We reserve
the right to charge platform and subscription fees should this
expense arise. However, at present, we are not charging either
type of fee to our investors. The forms of compensation we plan
to charge are summarized in the following table.
Form of Compensation Determination of Amount
Organization & Offering
Up to 3% of the gross proceeds of the offering
(reimbursed to Sponsor)
Management Fee 1% (annualized rate, paid quarterly to
Manager)
Operating Expense Fee 1% (annualized rate, paid quarterly to
Sponsor)
Property Management Fee 1% 1%
(annualized rate, paid quarterly to Sponsor)
Disposition Fee 2% of total sale value (paid at closing
to Sponsor)
Q: May we use leverage?
A: Yes, we may use leverage or otherwise borrow capital.
Leverage will only be utilized if obtained at attractive rates
and loan-to-value ratio (LTV). We may utilize leverage in our
investment program whenever the Manager considers it appropriate,
including to acquire portfolio investments. Additionally,
we may incur also indebtedness:
(i) to pay expenses of the REIT, (ii) to purchase
the shares of any withdrawing shareholder, (iii) to finance
improvements to a portfolio investment and (iv) to otherwise
protect any portfolio investment or other asset as determined
by the Manager in its sole discretion. We currently limit
our use of leverage to a maximum of 80% of NAV. Our Manager
may from time to time modify our leverage policy in its
discretion. Please see "Investment Objectives and Strategy" for
more details.
Q: How often will I receive dividends?
A: We expect that we will declare and pay dividends on a
quarterly basis, or more or less frequently as determined by us
following advice from our Manager, in arrears. Any dividends we
make will be following consultation with our Manager, and will
be based on, among other factors, our present and reasonably
projected future cash flow. We expect that we will set the rate
of dividends at a level that will be reasonably consistent and
sustainable over time.
The payment of dividends will be limited by the REIT
distribution requirements, which generally require that we make
aggregate annual dividends to our stockholders of at least 90%
of our REIT taxable income, computed without regard to the
dividends paid deduction and excluding net capital gain.
Moreover, even if we make the required minimum dividends under
the REIT rules, we are subject to federal income and excise
taxes on our undistributed taxable income and gains. As a
result, we may make such additional dividends, beyond the
minimum REIT distribution, to avoid such taxes. See
"Description of Capital Stock and Certain Provisions of
Maryland Law, Our Charter and Bylaws - Dividends" and "U.S.
Federal Income Tax Considerations."
Any dividends that we make will directly impact our NAV, by
reducing the amount of our assets. Over the course of your
investment, your dividends plus the change in NAV per share
(either positive or negative) will produce your total return.
Q: What will be the source of your dividends?
A: Our goal is to pay dividends from our cash flow from
operations. However, to the extent necessary or advisable, we
may use other sources to fund dividends, including the net
proceeds of this offering, cash advances by our Manager, cash
resulting from a waiver or accrual of fees or reimbursements
due to our Manager, borrowings and the issuance of additional
securities.
Use of some or all of these sources may reduce the amount of
capital we invest in assets and negatively impact the return on
your investment and the value of your investment. We have not
established a limit on the amount of proceeds we may use to
fund dividends. We can provide no assurances that future cash
flow will support payment of dividends or maintaining dividends
at any particular level or at all.
Q: Will the dividends I receive be taxable as ordinary
income?
A: Unless your investment is held in a qualified tax-exempt
account or we designate certain dividends as capital gain
dividends, dividends that you receive generally will be taxed
as ordinary income to the extent they are from current or
accumulated earnings and profits. The portion of your
distribution in excess of current and accumulated earnings and
profits is considered a return of capital for U.S. federal
income tax purposes and will reduce the tax basis of your
common stock, rather than result in current tax, until your
basis is reduced to zero. Return of capital dividends made to
you in excess of your tax basis in shares of our common stock
will be treated as sales proceeds from the sale of shares of
our common stock for U.S. federal income tax purposes.
Dividends we designate as capital gain dividends will generally
be taxable at long-term capital gains rates for U.S. federal
income tax purposes. However, because each investor's tax
considerations are different, we recommend that you consult
with your tax advisor. You also should review the section of
this offering circular entitled "U.S. Federal Income Tax
Considerations," including for a discussion of the special
rules applicable to dividends in redemption of shares and
liquidating dividends.
Q: May I reinvest my cash dividends in additional shares?
We do not yet have a dividend reinvestment plan in place. In
the future, we may implement an automatic dividend reinvestment
plan into which investors may opt-in.
Q: How does a "best efforts maximum" offering work?
A: A "best efforts maximum" offering means that we are
only required to use our best efforts to sell shares of our
common stock to the public. Neither our Sponsor, our Manager
nor any other party has a firm commitment or obligation to
purchase any shares of our common stock. Accordingly, we may
sell less than the maximum amount of shares of common stock
being offered hereby.
Q: Is there any minimum initial offering amount required to
be sold?
A: Yes. We will only commence operations if/when we raise
$3,000,000 in this offering.
Q: Who can buy shares of your common stock?
A: Generally, you may purchase shares of our common stock
if you are a "qualified purchaser" (as defined in Regulation A
under the Securities Act). "Qualified purchasers" include:
? "accredited investors" under Rule 501(a) of Regulation
D; and
? all other investors so long as their investment in
shares of our common stock does not represent more than
10% of the greater of their annual income or net worth
(for natural persons), or 10% of the greater of annual
revenue or net assets at fiscal year-end (for non-natural
persons).
Net worth in all cases should be calculated excluding the value
of an investor's home, home furnishings and automobiles. We
reserve the right to reject any investor's subscription in
whole or in part for any reason, including if we determine in
our sole and absolute discretion that such investor is not a
"qualified purchaser" for purposes of Regulation A. Please
refer to the section above entitled "Investment Criteria" for
more information.
Q: How do I buy shares of your common stock?
A: You may purchase shares of our common stock on our
website, www.upsideavenue.com. Through the website you will be
asked to electronically fill out a subscription agreement like
the one attached to this offering circular as Appendix B for a
certain investment amount and pay for the shares at the time
you subscribe. In the future, we may also offer shares of our
common stock on other websites or through registered broker-
dealers. The Company and its officers, employees and associated
persons intend to conduct the offering in accordance with Rule
3a4-1 and, therefore, none of them are required to register as
a broker- dealer. Please refer to the section below entitled
"How to Subscribe" for more information.
OFFERING SUMMARY
This offering summary highlights certain material information
regarding our business and this offering. Because it is a
summary, it may not contain all of the information that is
important to you. To understand this offering fully, you should
read the entire offering circular carefully, including the
"Risk Factors" section before making a decision to invest in
shares of our common stock.
Multi-Housing Income REIT, Inc. Investment Objectives and
Strategies
Our investment objectives are (1) capital appreciation through
growth in the value of our properties, and (2) income from cash
flow that can be paid as dividends to our investors. We were
recently formed as a Maryland corporation to invest in and
manage a portfolio of real estate properties. Our investment
strategies center on multi-housing within the continental U.S.
in the areas of student housing, multi-housing, conventional
apartments, & senior living (existing and new development
projects). We expect to use substantially all of the net
proceeds from this offering to source, acquire, potentially
develop, manage, operate, selectively leverage, and sell a
diversified portfolio of primarily residential properties. Our
Manager looks to leverage its financial expertise and
operational experience in acquiring and repositioning multi-
housing properties with upside potential within the continental
U.S.. We are targeting mid-single digit cap rates with an IRR
of 12%+. The expected typical holding period is between 3 to 5
years. We do not expect to invest more than 15% of our assets
in any one property.
Our strategies include the following:
* Core Plus Strategy - Focused on quality multi-housing
properties with quality residents in primary and
secondary markets with an opportunity to increase net
operating income.
* Value Add Strategy - Focused on increasing occupancy
and net operating income on multi-housing properties
through renovations and repositioning of the property.
* Opportunistic Strategy - Finding opportunities to
participate in multi-housing new development,
distressed sales, and/or bankruptcy auctions.
We may also invest, to a limited extent, in other real
estate-related assets. We plan to diversify our portfolio's
investment risk with the goal of attaining a portfolio of real
estate assets that provides attractive cash yields to our
shareholders with the potential for capital appreciation.
Insofar as consistent with the REIT statutory restrictions, we
may investment, to a limited extent, in other assets, including
asset-backed and mortgage-backed obligations; loans; credit
paper; accounts and notes receivable and payable held by trade
or other creditors; trade acceptances; contract and other
claims; executory contracts; participations obligations of the
United States or any state thereof, foreign governments and
instrumentalities of any of them; commercial paper;
certificates of deposit; bankers' acceptances; trust receipts;
and any other obligations and instruments or evidences of
indebtedness. We may selectively leverage any and all of our
acquired properties. The number of mortgages which may be placed
on any one property is capped at three.
We may invest in private issuances of equity or debt
securities of public companies; and in a loan, security or other
full recourse obligations for which the business of the related
obligor is significantly related to real estate. We may offer
our own securities or the securities of our affiliates, alone
or in combination with cash or other assets in exchange for
real estate and related investments.
We intend to operate in a manner that will allow us to
qualify as a REIT for U.S. federal income tax purposes. Among
other requirements, REITs are required to distribute to
shareholders at least 90% of their annual REIT taxable income
(computed without regard to the dividends paid deduction and
excluding net capital gain).
Our corporate office is located at 9050 N. Capital of
Texas Highway, Suite 320, Austin, TX 78759. Our telephone
number is: 512-872-2898. Our email address is:
info@upsideavenue.com. Information regarding our company is
also available on our website at www.upsideavenue.com.
Information contained on or accessible through, our
website is not incorporated by reference into and does not
constitute a part of this offering circular or any other report
or documents we file with or furnish to the SEC.
Prior to acquiring an asset, our Manager committee will
perform an individual analysis of the asset to determine
whether it meets our investment guidelines.
We cannot assure you that we will attain these objectives
or that the value of our assets will not decrease. Furthermore,
within our investment objectives and policies, our Manager will
have substantial discretion with respect to the selection of
specific investments, the management of our portfolio and the
purchase and sale of our assets. Our Manager's investment
committee will review our investment guidelines at least
annually to determine whether our investment guidelines
continue to be in the best interests of our shareholders.
Any or all of the investments, investment strategies and
activities described here may be pursued by the REIT directly,
by the Manager or Sponsor by other affiliated or third-party
investment managers, if any, engaged by the Sponsor to manage
REIT capital.
Opportunity and Market Overview
We give our investors access to deals and potentially to
projects which typically are only available to institutional
investors. Furthermore, investing with us offers investors the
opportunity to gain real estate exposure with lower fees and
higher returns relative to other public non-traded REITs.
Compared to other public non-traded REITs, we offer lower
upfront fees and lower ongoing fees.
Lack of Allocation Requirements
Nothing in our charter, organizational documents or
otherwise provides for restrictions or limitations on the
percentage of our investments that must be (i) in a given
geographic area, (ii) of a particular type of real estate, or
(iii) acquired utilizing a particular method of financing. The
board of directors may change our targeted investments and
investment guidelines without specific restrictions or
limitations related to geographic location, diversification, or
otherwise. See "Risk Factors-Risks Related to an Investment in
our Company."
Risk Management
We will seek to manage risk through monitoring and
analysis by the Manager of our portfolio. Although the Manager
may commit a large portion of the REIT's capital to one or more
specific real estate assets, the Manager will also seek to
mitigate risk through portfolio diversification.
The Sponsor
Casoro Capital Partners, LLC, a Texas limited liability
company, is the sponsor of Multi-Housing Income REIT, Inc. The
office of the Sponsor is located at 9050 N. Capital of Texas
Highway, Suite 320, Austin, TX 78759. Our telephone number is:
512-872-2898. Our Sponsor's team is experienced in managing
complex multi-housing real estate investments from acquisition
and business plan execution, to realization. Pursuant to a
support agreement with our Sponsor, our Manager will utilize
our Sponsor's personnel and resources to select our investments
and manage our day-to-day operations.
The Manager
The Sponsor has delegated the investment management
responsibilities for the REIT to the Manager, Casoro
Investment Advisory Firm, LLC, a Texas limited liability
company, and an affiliate of the Sponsor sharing the same
principal place of business. Casoro Investment Advisory Firm,
LLC is a real estate investment firm that creates
discretionary funds that are suitable, attractive, and
efficient for high net worth individuals, family offices, and
institutions.
The Manager is charged by the Sponsor with the day-to-day
investment of the REIT's capital. Neither the Sponsor nor
Manager is registered as an investment adviser with the
Securities and Exchange Commission under the Advisers Act, or
the securities bureau of any state.
The principals of the Sponsor and the Manager are Monte
K. Lee-Wen and Yuen Yung (together, the "Principals"). Their
biographies are set forth below.
Monte K. Lee Wen
Monte Wen is a Principal of the Manager and an owner of
the Sponsor. He is also the President and CEO of The PPA Group,
LLC. Since 2002, Monte has executed over $600 million in
transactions, acquiring, managing, and repositioning commercial
property across the United States. In 2004, Monte formed The
PPA Group, LLC in Seattle, Washington doing business as a
multi-housing real estate investment company. The company is
now headquartered in Austin, Texas and also serves as a holding
company for The PPA Group family of companies. He has a unique
investment philosophy which involves evaluating and taking
advantage of opportunities where superior risk-adjusted returns
can be realized.
Through founding The PPA Group, Monte has been able to
combine his investment experience and philosophy with the
creative talent required to renovate and reposition properties.
Monte brings an extensive knowledge in property assessment and
transaction due diligence. He has created a standardized
internal analysis system to effectively evaluate investment
properties which has enabled The PPA Group to streamline the
process of acquiring profitable real estate investments.
In 2008, Monte formed a subsidiary company called PPA Real
Estate Management (REM) to serve as the property management
company for The PPA Group's real estate holdings and to conduct
third-party fee management business. PPA REM currently manages
a diverse portfolio of multi-housing properties. Monte takes
pride in investing not only in properties, but also in the
communities and families that reside at the company's
properties.
Monte is a seasoned entrepreneur having started and run
several companies since the mid-1990s. His networking and
speaking skills have propelled the company forward very
quickly. He is actively involved in board positions and
guidance committees of many private and public initiatives
nationwide.
Yuen Yung
Yuen Yung is a Principal of the Manager and an owner of
the Sponsor. Mr. Yung specializes in structuring investments
that are suitable, attractive, and efficient for high net
worth individuals, family offices, and institutions. With Yuen
at the helm of Casoro Capital, and in partnership with The PPA
Group, the companies have successfully achieved over $600
million in multi-housing transactions.
Prior to joining Casoro Capital, Yuen previously spent 13
years in the investment management and advisory industry as the
Managing Partner of Kenty, Yung, Ozias & Associates, where he
oversaw 90 advisors and was responsible for the capital raise
and management of more than $300 million in funds raised from
high-net worth individuals, families, corporations, and
charitable organizations. While a young businessman, Yuen
developed 27 commercial retail sites as an entrepreneur.
More recently, Yuen was the founder and CEO of the
franchisor How Do You Roll? a fast-casual sushi restaurant. In
2013, he appeared on ABC's Shark Tank where the franchise
received a $1 million offer from investor Kevin O'Leary - the
highest investment offer in the history of the show. He
currently sits on the board of Greater Austin Asian Chamber of
Commerce, and volunteers as a mentor for Ignite Accelerator, an
Austin-based business incubator.
Yuen's advice and expertise in the investment and
financial space has been featured in national publications such
as such as The Wall Street Journal and Entrepreneur
magazine.Investopedia.com selected Yuen Yung as a contributor
to its Advisor Insights, showcasing his financial, investment,
and retirement advice to the site's readership, which currently
exceeds 20 million monthly readers.
Yuen holds a Bachelor of Business Administration from the
McCombs School of Business at The University of Texas at
Austin. He is also a graduate of MIT's Entrepreneurship Masters
Program and has professional certifications as a Chartered
Mutual Fund Counselor (CMFC(r)) and Board Certified Financial
Planner (CFP(r)). Yuen was named as a finalist for an Austin
Under 40 Award in 2013 and was honored with the Excellence in
Teaching Award from The University of Texas Professional
Development Center in 2006.
Board of Directors
We operate under the direction of our board of directors,
the members of which are accountable to us and our shareholders
as fiduciaries. Our board of directors has retained our Manager
to direct the management of our business and affairs, manage
our day-to- day affairs, and implement our investment strategy,
subject to the board of directors' supervision. The current
board members are Yuen Yung (initial term expires 1-1-2021),
Joy Schoffler (initial term expires 1-1-2021), and Monte Lee-
Wen (initial term expires 1-1-2021).
All of our directors are also principals or officers of
the Sponsor and Manager. All of our directors have invested in
projects and/or affiliates of the Sponsor. As a result, we do
not have any independent directors or management and conflicts
of interest that may arise.
Management Compensation
Our Manager and its affiliates will receive fees and
expense reimbursements for services relating to this offering
and the investment and management of our assets. The items of
compensation are summarized in the following table. Neither our
Manager nor its affiliates will receive any selling commissions
or dealer manager fees in connection with the offer and sale of
shares of our common stock.
Form of Compensation Determination of Amount
Organization & Offering
Up to 3% of the Gross Proceeds of the offering
(reimbursed to Sponsor)
Expenses
Management Fee 1% OF NAV (annualized rate, paid quarterly to
Manager)
Operating Expense Fee 1% OF NAV (annualized rate, paid quarterly
to Sponsor)
Property Management Fee 1% of property value (annualized rate,
paid quarterly to to Sponsor)
Disposition Fee 2% of total sale value (paid at closing
to Sponsor)
Conflicts of Interest and Related Party Transactions
Our Manager and its affiliates will experience conflicts of
interest in connection with the management of our business.
Some of the material conflicts that our Manager and its
affiliates may face include the following:
* Our Sponsor's real estate professionals acting on behalf
of our Manager must determine which investment
opportunities to recommend to us and other entities
affiliated with our Sponsor. Our Sponsor has previously
sponsored, as of the date of this offering circular, one
privately offered real estate fund that may have similar
investment criteria to our own.
* Our Sponsor's real estate professionals acting on behalf
of our Manager will have to allocate their time among us, our
Sponsor's business and other programs and activities in
which they are involved, including, potentially, additional
private or publicly offered investment funds.
* Our Sponsor may negotiate a share of proceeds from
sourcing, investing in, and executing deals in which we
also participate, including receipt of performance-based
compensation from such deals.
* The terms of our management agreement (including our
Manager's rights and obligations and the compensation
payable to our Manager and its affiliates) were not
negotiated through the benefit of arm's length negotiations
of the type which are normally conducted between
unaffiliated parties.
Dividends
We expect that we will declare and pay dividends on a
quarterly basis, or more or less frequently as advised by our
Manager, in arrears, based on daily record dates. Any dividends
we make will be following consultation with our Manager, and
will be based on, among other factors, our present and
reasonably projected future cash flow. We expect that we will
set the rate of dividends at a level that will be reasonably
consistent and sustainable over time. Neither we nor our
Manager has pre-established a percentage range of return for
dividends to shareholders. We have not established a minimum
distribution level, and our charter does not require that we
pay dividends to our shareholders.
Borrowing and Leverage Policy
We may use leverage at attractive rates and loan-to-value
ratio (LTV) whenever the Manager considers it appropriate,
including to acquire portfolio investments. Additionally, we may
also incur indebtedness: (i) to pay expenses of the REIT, (ii) to
purchase the shares of any withdrawing shareholder, (iii) to
finance improvements to a portfolio investment and (iv) to
otherwise protect any portfolio investment or other asset as
determined by the Manager in its sole discretion.
Currently, the REIT,'s use of leverage is limited to a
maximum of 80% of NAV.
The use of leverage may, in certain circumstances,
maximize the adverse impact to which the REIT's investment
portfolio may be subject. Our Manager may from time to time
modify our leverage policy in its discretion.
Valuation and Net Asset Value (NAV) Policies
Our NAV per share will be calculated by our Manager at the
end of each fiscal quarter on a fully diluted basis, beginning
one year after commencement of the offering using a process
that reflects several components, including (1) estimated
values of each of our multi-housing real estate assets and
investments, including related liabilities, based upon (a)
market capitalization rates, comparable sales information,
interest rates, discount rates, net operating income, and (b)
in certain instances individual appraisal reports of the
underlying real estate provided by an independent valuation
expert, (2) the price of liquid assets for which third party
market quotes are available, (3) accruals of our periodic
dividends and (4) estimated accruals of our operating revenues
and expenses. In instances where we determine that an
independent appraisal of the real estate asset is necessary,
including, but not limited to, instances where our Manager is
unsure of its ability on its own to accurately determine the
estimated values of our multi-housing real estate assets and
investments, or instances where third party market values for
comparable properties are either nonexistent or extremely
inconsistent, we may engage an appraiser that has expertise in
appraising multi-housing real estate assets, to act as our
independent valuation expert. The independent valuation expert
will not be responsible for, or prepare, our NAV per share.
However, we may hire a third party to calculate, or assist with
calculating, the NAV per share. The use of different judgments
or assumptions would likely result in different estimates of
the value of our real estate assets. Moreover, although we
evaluate and provide our NAV per share on a quarterly basis,
our NAV per share may fluctuate in the interim, so that the NAV
per share in effect for any fiscal quarter may not reflect the
precise amount that might be paid for your shares in a market
transaction. Further, our published NAV per share may not fully
reflect certain material events to the extent that they are not
known or their financial impact on our portfolio is not
immediately quantifiable. Any resulting potential disparity in
our NAV per share may be in favor of either shareholders who
redeem their shares, or shareholders who buy new shares, or
existing shareholders. Note, in addition, that the
determination of our NAV is not based on, nor intended to
comply with, fair value standards under GAAP and our NAV may
not be indicative of the price that we would receive for our
assets at current market conditions.
Our goal is to provide a reasonable estimate of the NAV
per share on a quarterly basis. However, the majority of our
assets will consist of multi-housing investments and, as with
any multi-housing real estate valuation protocol, the
conclusions we reach or, solely in the case that there is a
conflict, the conclusion reached by our independent valuation
expert, will be based on a number of judgments, assumptions and
opinions about future events that may or may not prove to be
correct. The use of different judgments, assumptions or
opinions would likely result in different estimates of the
value of our multi-housing real estate assets and investments.
In addition, for any given quarter, our published NAV per share
may not fully reflect certain material events, to the extent
that the financial impact of such events on our portfolio is
not immediately quantifiable. As a result, the quarterly
calculation of our NAV per share may not reflect the precise
amount that might be paid for your shares in a market
transaction, and any potential disparity in our NAV per share
may be in favor of either shareholders who redeem their shares,
or shareholders who buy new shares, or existing shareholders.
However, to the extent quantifiable, if a material event occurs
in between quarterly updates of NAV that would cause our NAV
per share to change by 5% or more from the last disclosed NAV,
we will disclose the updated NAV per share and the reason for
the change in an offering circular supplement as promptly as
reasonably practicable.
Furthermore, we expect to engage an independent valuation
expert with expertise in appraising certain real estate loans
and assets to provide annual valuations of certain of our
multi-housing real estate assets and investments, including
related liabilities, to be set forth in individual appraisal
reports of the underlying real estate, and to adjust those
valuations for events known to the independent valuation expert
that it believes are likely to have a material impact on
previously provided estimates of the value of the affected real
estate assets and investments and related liabilities. Our
Manager will inform the independent valuation expert if a
material event occurs between scheduled annual valuations that
our Manager believes may materially affect the value of our
assets.
Quarterly NAV Per Share Adjustments
We set our initial offering price at $10.00 per share,
which will be the purchase price of our shares until twelve
months from the commencement of this offering. Thereafter, the
per share purchase price will be adjusted every fiscal quarter
and, as of January 1st, April 1st, July 1st and October 1st of
each year, will be equal to the greater of (i) $10.00 per share
or (ii) the sum of our NAV divided by the number of shares
outstanding as of the close of business on the last business
day of the prior fiscal quarter.
Beginning after one year from the commencement of this
offering, we will file with the SEC on a quarterly basis an
offering circular supplement disclosing the quarterly
determination of our NAV per share that will be applicable for
such fiscal quarter, which we refer to as the pricing
supplement. Except as otherwise set forth in this offering
circular, we will disclose, on a quarterly basis in an offering
circular supplement filed with the SEC, the principal valuation
components of our NAV.
Redemption Plan
While you should view your investment as long-term, we
have adopted a shareholder redemption plan which may provide an
opportunity for our shareholders to have their shares of our
common stock redeemed by us, subject to certain restrictions
and limitations. Shares may not be redeemed under our
shareholder redemption plan until the first anniversary of the
date such shares were purchased.
Redemption of shares of our common stock will be made annually
upon written request to us at least 15 days prior to the end
of the applicable year. We intend to provide notice of
redemption by the last business day of each year, with an
effective redemption date as of the last day of each year, and
to endeavor to remit the redemption price within 14 days of the
end of such year; although payment of the redemption price may
be delayed until 21 days after the end of such year, due to
exigent circumstances, including, without limitation, (1) our
partner real estate operators or borrower(s) failing to provide
adequate information regarding the assets within a time period
that allows us to perform our NAV calculation, which in turn
would prevent us from determining share redemption prices; (2)
macro-economic crises or property-level events, such as damage
to the property, that may affect our ability to make
redemptions or determine NAV; and (3) our payment processing
provider choosing to discontinue service or has technical
outages that prevent us from processing share redemptions in a
timely manner. Shareholders may withdraw their redemption
request at any time up to three (3) business days prior to the
redemption date. If we agree to honor a redemption request, the
shares of our common stock to be redeemed will cease to accrue
dividends or have voting rights as of the redemption date.
The purchase price for shares redeemed under our shareholder
redemption plan will be as follows:
Holding Period from Date of Purchase Redemption Price
Less than 1 year No redemption allowed
1 year until 2 years 98.0% of NAV
2 years until 3 years 99.0% of NAV
3 years until 4 years 100.0% of NAV
4 years until 5 years 100.0% of NAV
5 years or more 100.0% of NAV
In the event of a shareholder's death or complete disability,
100% of NAV
RISK FACTORS
An investment in shares of our common stock involves
substantial risks. You should carefully consider the following
risk factors in addition to the other information contained in
this offering circular before purchasing shares. The occurrence
of any of the following risks might cause you to lose a
significant part of your investment. The risks and
uncertainties discussed below are not the only ones we face,
but do represent those risks and uncertainties that we believe
are most significant to our business, operating results,
prospects and financial condition. Some statements in this
offering circular, including statements in the following risk
factors, constitute forward-looking statements. Please refer to
the section entitled "Statements Regarding Forward-Looking
Information."
Risks Related to an Investment in Multi-Housing Income REIT,
Inc.
We have little prior operating history, and the prior
performance of our Sponsor or other real estate investment
opportunities sponsored by our Sponsor may not predict our
future results.
We are a recently formed company and have little operating
history. You should not assume that our performance will be
similar to the past performance of our Sponsor or other real
estate investment opportunities sponsored by our Sponsor. Our
lack of a substantial operating history significantly increases
the risk and uncertainty you face in making an investment in
our shares.
Because no public trading market for our shares currently
exists, it will be difficult for you to sell your shares and,
if you are able to sell your shares, you may have to sell
them at a substantial discount to the offering price.
We are not required to effectuate a liquidity event by any
specific date. In addition, our charter does not require us to
list our shares for trading on a securities exchange by a
specified date or at all. Although we may apply to have our
shares of common stock approved for listing on the OTCQX
marketplace or another secondary market upon the completion of
this offering, there is currently no public market for our
shares and there may never be. Any subsequent sale of shares of
our common stock must comply with applicable state and federal
securities laws. Our charter prohibits the ownership of more
than 9.8% by value or number of shares, whichever is more
restrictive, of our outstanding shares of common stock, or 9.8%
by value or number of shares, whichever is more restrictive, of
our outstanding capital stock, unless exempted by our board of
directors, which may inhibit large investors from desiring to
purchase your shares. In addition, our charter contains certain
restrictions on the beneficial ownership of shares in order to
avoid being deemed "plan assets" under Title I of ERISA. See
"Description of Capital Stock and Certain Provisions of
Maryland Law, our Charter and Bylaws-Restrictions on Ownership
of Shares." Moreover, our shareholder redemption plan includes
numerous restrictions that limit your ability to sell your
shares to us, and we may amend, suspend, or terminate our
shareholder redemption plan. However, in the event that we
amend, suspend or terminate our shareholder redemption plan, we
will file an offering circular supplement and/or Form 1-U, as
appropriate, to disclose such event. We describe the
restrictions of our shareholder redemption plan in detail under
"Shareholder Redemption Plan." Because of the foregoing, it
will be difficult for you to sell your shares promptly or at
all. If you are able to sell your shares, you may have to sell
them at a discount to their offering price. It is also likely
that your shares will not be accepted as the primary collateral
for a loan. You should purchase our shares only as a long-term
investment because of the illiquid nature of the shares.
If we are unable to find suitable investments, we may not be
able to achieve our investment objectives or pay dividends.
Our ability to achieve our investment objectives and to
pay dividends depends upon the performance of our Manager in
the acquisition of our investments and the ability of our
Manager to source investment opportunities for us. If we fail
to raise sufficient proceeds from the sale of shares in this
offering, we will be unable to make additional investments. At
the same time, the more money we raise in this offering, the
greater our challenge will be to invest all of the net offering
proceeds in investments that meet our investment criteria. We
cannot assure you that our Manager will be successful in
obtaining suitable investments or that, if our Manager makes
investments on our behalf, our objectives will be achieved. If
we, through our Manager, are unable to find suitable
investments promptly, we may hold the proceeds from this
offering in an interest-bearing account or invest the proceeds
in short-term assets in a manner that is consistent with our
qualification as a REIT. If we would continue to be
unsuccessful in locating suitable investments, we may
ultimately decide to liquidate. In the event we are unable to
timely locate suitable investments, we may be unable or limited
in our ability to pay dividends and we may not be able to meet
our investment objectives.
Our ability to commence operations is dependent on our
successful raise of at least $3,000,000 in this offering.
Beginning operations in the near future will be dependent upon
our ability to finance our operations from the sale of equity
in this offering. There can be no assurance that we will be
able to successfully raise the minimum amount of operating
capital and therefore no assurance that will actually commence
operations or source investments.
If we raise substantially less than the maximum offering
amount, we may not be able to acquire a diverse portfolio of
investments.
If we raise substantially less than the maximum offering
amount, we may not be able to acquire a diverse portfolio of
investments (or procure any suitable investment), and the value
of your shares may vary more widely with the performance of
specific assets. We may commence operations with as little as
$3,000,000. Furthermore, our offering and organization expenses
(which are capped at 3% of our capital raised in this
offering), could significantly reduce the amount of capital
which we have available to source and make investments,
particularly if we raise substantially less than the maximum
offering amount and have incurred high offering and
organization expenses.
If we pay dividends from sources other than our cash flow from
operations, we will have less funds available for investments
and your overall return may be reduced.
Although our distribution policy is to use our cash flow
from operations to pay dividends, our charter permits us to pay
dividends from any source, including offering proceeds,
borrowings and sales of assets. Until the proceeds from this
offering are fully invested and from time to time during the
operational stage, we may not generate sufficient cash flow
from operations to fund dividends. If we pay dividends from
financings, the net proceeds from this or future offerings or
other sources other than our cash flow from operations, we will
have less funds available for investments in real estate
properties and other real estate-related assets and the number
of real estate properties that we invest in and the overall
return to our shareholders may be reduced. If we fund dividends
from borrowings, our interest expense and other financing
costs, as well as the repayment of such borrowings, will reduce
our earnings and cash flow from operations available for
distribution in future periods, and accordingly your overall
return may be reduced. If we fund dividends from the sale of
assets, this will affect our ability to generate cash flows
from operations in future periods.
Disruptions in the financial markets or deteriorating economic
conditions could adversely impact the multi-housing real estate
market as well as the market for equity-related investments
generally, which could hinder our ability to implement our
business strategy and generate returns to you.
We intend to acquire a diversified portfolio of primarily
multi-housing properties. We may also invest, to a limited
extent, in other real estate-related assets. Economic
conditions greatly increase the risks of these investments (see
"Risk Factors-Risks Related to Real Estate and Our
Investments"). The success of our business is significantly
related to general economic conditions and, accordingly, our
business could be harmed by an economic slowdown and downturn
in real estate asset values, property sales and leasing
activities. Periods of economic slowdown or recession,
significantly rising interest rates, declining employment
levels, decreasing demand for real estate, declining real
estate values, or the public perception that any of these
events may occur, can negatively impact the value of our
holdings. These economic conditions could result in a general
decline in acquisition, disposition and leasing activity, as
well as a general decline in the value of real estate and in
rents, which in turn would reduce revenue from investment
management activities. In addition, these conditions could lead
to a decline in property sales prices as well as a decline in
funds invested in existing multi-housing real estate assets.
During an economic downturn, it may also take longer for
us to dispose of real estate investments or the selling prices
may be lower than originally anticipated. As a result, the
carrying value of our real estate investments may become
impaired and we could record losses as a result of such
impairment or we could experience reduced profitability related
to declines in real estate values. Further, as a result of our
target leverage, our exposure to adverse general economic
conditions is heightened. We are unable to predict the likely
duration and severity of any disruption in financial markets
and adverse economic conditions in the United States and other
countries.
All of the conditions described above could adversely
impact our business performance and profitability, which could
result in our failure to pay dividends to our shareholders and
could decrease the value of an investment in us. In addition,
in an extreme deterioration of our business, we could have
insufficient liquidity to meet our debt service obligations
when they come due in future years. If we fail to meet our
payment or obligations under any credit or other loan
agreements, the lenders under any such agreements will be
entitled to proceed against the collateral granted to them to
secure the debt owed.
We may suffer from delays in locating suitable investments,
which could limit our ability to pay dividends and lower the
overall return on your investment.
We rely upon our Sponsor and Manager's real estate
professionals to identify suitable investments. Our Sponsor and
other affiliates of our Sponsor also rely on Mr. Yung and Mr.
Lee-Wen for investment opportunities. To the extent that our
Sponsor's real estate and other professionals face competing
demands upon their time in instances when we have capital ready
for investment, we may face delays in execution.
Additionally, the current market for acquiring multi-
housing properties that meet our investment objectives is
highly competitive.. The more shares we sell in this offering,
the greater our challenge will be to invest all of the offering
proceeds (after expenses) on attractive terms. Except for
investments that may be described in supplements to this
offering circular prior to the date you subscribe for shares of
our common stock, you will have no opportunity to evaluate the
terms of transactions or other economic or financial data
concerning our investments. You must rely entirely on the
oversight and management ability of our Manager and the
performance of any property manager. We cannot be sure that our
Manager will be successful in obtaining suitable investments on
financially attractive terms.
We could also suffer from delays in locating suitable
investments as a result of our reliance on our Manager at times
when its officers, employees, or agents are simultaneously
seeking to locate suitable investments for other programs
sponsored by our Sponsor, some of which may have investment
objectives and employ investment strategies that are similar to
ours.
We have not yet identified any investments to acquire with the
net proceeds of this offering. It is currently a "blind-pool"
offering. You will not be able to evaluate our future
investments prior to purchasing shares, which makes your
investment more speculative.
We will seek to invest substantially all of the offering
proceeds available for investment, after the payment of fees
and expenses, in multi-housing real estate equity investments.
However, because you will be unable to evaluate the economic
merit of assets before we invest in them, you will have to rely
entirely on the ability of our Manager to select suitable and
successful investment opportunities. As of the date of this
offering circular, we have no revenue.
Because we are limited in the amount of funds we can raise, we
will be limited in the number and type of investments we make
and the value of your investment in us will fluctuate with the
performance of the specific assets we acquire.
This offering is being made on a "best efforts maximum"
basis and we may begin to invest net proceeds from this
offering immediately after the commencement of this offering.
Further, under Regulation A, we are only allowed to raise up to
$50,000,000 in any 12-month period (although we may raise
capital in other ways). As a result, the amount of proceeds we
raise in this offering may be substantially less than the
amount we would need to achieve a diversified portfolio of
investments, even if we are successful in raising the maximum
offering amount. If we are unable to raise substantial funds,
we will make fewer investments resulting in less
diversification in terms of the type, number and size of
investments that we make. In that case, the likelihood that any
single asset's performance would adversely affect our
profitability will increase. Your investment in shares of our
common stock will be subject to greater risk to the extent that
we lack a diversified portfolio of investments. Further, we
will have certain fixed operating expenses, including certain
expenses as a public reporting company, regardless of whether
we are able to raise substantial funds in this offering. Our
inability to raise substantial funds would increase our fixed
operating expenses as a percentage of gross income, reducing
our net income and limiting our ability to pay dividends.
You may be more likely to sustain a loss on your investment
because our Sponsor does not have as strong an economic
incentive to avoid losses as do sponsors who have made
significant equity investments in their companies.
Our Sponsor has not purchased shares in this offering at this
time. Therefore, if we are successful in raising enough
proceeds to be able to reimburse our Sponsor for our
organization and offering expenses, our Sponsor will not have
exposure to loss in the value of our shares. Without this
exposure, our investors may be at a greater risk of loss
because our Sponsor does not have as much to lose from a
decrease in the value of our shares as do those Sponsors who
make significant equity investments in their companies.
Any adverse changes in our Sponsor's financial health or our
relationship with our Sponsor or its affiliates could hinder
our operating performance and the return on your investment.
We have engaged our Manager to manage our operations and
our portfolio of multi-housing real estate investments and
other select real estate-related assets. Our Manager relies on
a support agreement with our Sponsor to perform services on its
behalf for us. Our ability to achieve our investment objectives
and to pay dividends is dependent upon the performance of our
Sponsor and its affiliates as well as our Sponsor's real estate
professionals in the identification and acquisition of
investments, the management of our assets and operation of our
day-to-day activities. Any adverse changes in our Sponsor's
financial condition or our relationship with our Sponsor could
hinder our Manager's ability to successfully manage our
operations and our portfolio of investments.
Our ability to implement our investment strategy is dependent,
in part, upon our ability to successfully conduct this offering
directly through online distribution channels, which makes an
investment in us more speculative.
We will primarily conduct this offering directly through
online distribution channels, including our website, and
possibly various "crowdfunding" and registered investment advisor
(RIA) platforms.
The success of this offering, and our ability to implement our
business strategy, is dependent upon our ability to sell our shares
to investors directly through online distribution channels and to
execute on such sales. If we are not successful in selling our
shares directly through online distribution channels, our
ability to raise proceeds through this offering will be limited
and we may not have adequate capital to implement our
investment strategy. If we are unsuccessful in implementing our
investment strategy, you could lose all or a part of your
investment.
If we do not successfully implement a liquidity transaction,
you may have to hold your investment for an indefinite period.
Although we may complete a transaction providing liquidity
to shareholders within approximately ten years from the
completion of this offering, we are not required to effectuate
a liquidity event by any specific date. Market conditions and
other factors could cause us to delay the listing of our common
stock on a national securities exchange or delay the
commencement of a liquidation or other type of liquidity
transaction, such as a merger or sale of assets, beyond ten
years from the termination of this offering. If our Manager
does determine to pursue a liquidity transaction, we would be
under no obligation to conclude the process within a set time.
If we adopt a plan of liquidation, the timing of the sale of
assets will depend on real estate and financial markets,
economic conditions in areas in which properties are located,
and federal income tax effects on shareholders, that may
prevail in the future. We cannot guarantee that we will be able
to liquidate all assets. After we adopt a plan of liquidation,
we would likely remain in existence until all our investments
are liquidated. If we do not pursue a liquidity transaction, or
delay such a transaction due to market conditions, your shares
may continue to be illiquid and you may, for an indefinite
period of time, be unable to convert your investment to cash
easily and could suffer losses on your investment.
We may change our targeted investments and investment
guidelines without shareholder consent.
Our Manager may change our targeted investments and
investment guidelines at any time without the consent of our
shareholders, which could result in our making investments that
are different from, and possibly riskier than, the investments
described in this offering circular. A change in our targeted
investments or investment guidelines may increase our exposure
to interest rate risk, default risk and real estate market
fluctuations, all of which could adversely affect the value of
shares of our common stock and our ability to pay dividends to
you.
We have minimal operating capital, no assets and limited
revenue from operations.
We have minimal operating capital and for the foreseeable
future will be dependent upon our ability to finance our
operations from the sale of equity or other financing
alternatives. There can be no assurance that we will be able to
successfully raise operating capital. The failure to
successfully raise operating capital could result in our
bankruptcy or other event which would have a material adverse
effect on us and our shareholders. We have no asset and no
significant financial resources, so such adverse event could
put your investment dollars at significant risk.
The market in which we participate is competitive and, if we do
not compete effectively, our operating results could be harmed.
We compete with many other entities engaged in real estate
investment activities, including individuals, corporations,
bank and insurance company investment accounts, other REITs,
private real estate funds, online real estate investment
platforms and other entities engaged in real estate investment
activities. This market is competitive and rapidly changing. We
expect competition to persist and intensify in the future.
Competition could result in reduced volumes or the failure
of our Sponsor and the other entities it sponsors to achieve or
maintain more widespread market acceptance, any of which could
harm our business. In addition, in the future we may experience
new competition from more established internet companies
possessing large, existing customer bases, substantial
financial resources and established distribution channels. If
any of these companies or any major financial institution
decided to enter the online investment business, acquire one of
our existing competitors or form a strategic alliance with one
of our competitors, our ability to compete effectively could be
significantly compromised and our operating results could be
harmed.
Most of our current or potential competitors have
significantly more financial, technical, marketing and other
resources than we do and may be able to devote greater
resources to the development, promotion, sale and support of
their platforms and distribution channels. Larger real estate
programs may enjoy significant competitive advantages that
result from, among other things, a lower cost of capital and
enhanced operating efficiencies. In addition, the number of
entities and the amount of funds competing for suitable
properties may increase. Any such increase would result in
increased demand for these assets and therefore increased
prices paid for them. If we pay higher prices for properties
and other investments, our profitability will be reduced and
you may experience a lower return on your investment.
Our potential competitors may also have longer operating
histories, more extensive customer bases, greater brand
recognition and broader customer relationships than we have.
These competitors may be better able to develop new products,
to respond quickly to new technologies and to undertake more
extensive marketing campaigns. The online real estate investing
industry is driven by constant innovation. If we or our Sponsor
are unable to compete with such companies and meet the need for
innovation, the demand for our Sponsor's investment products
could stagnate or substantially decline.
The management agreement with our Manager was not negotiated
with an unaffiliated third party on an arm's length basis and
may not be as favorable to us as if it had been negotiated with
an unaffiliated third party.
We have no employees and will rely heavily on our Manager
to provide us with all necessary services. Certain of our
executive officers also serve as officers of our Manager. Our
management agreement with our Manager was negotiated between
related parties and its terms, including fees payable, may not
be as favorable to us as if it had been negotiated with an
unaffiliated third party.
We will pay our Manager a management fee regardless of the
performance of our portfolio. Our Manager's entitlement to a
management fee, which is not based upon performance metrics or
goals, might reduce its incentive to devote its time and effort
to seeking investments that provide attractive risk-adjusted
returns for our portfolio. This in turn could hurt both our
ability to pay dividends to our shareholders and the market
price of our common stock.
Terminating the management agreement for unsatisfactory
performance of our Manager or electing not to renew the
management agreement may be difficult.
Our board of directors will approve very broad investment
guidelines for our Manager and will not approve each investment
and financing decision made by our Manager unless required by
our investment guidelines.
Our Manager will be authorized to follow very broad
investment guidelines. Our board of directors will periodically
review our investment guidelines and our investment portfolio
but will not, and will not be required to, review all of our
proposed investments. In addition, in conducting periodic
reviews, our board of directors may rely primarily on
information provided to them by our Manager. Furthermore, our
Manager may use complex strategies, and transactions entered
into by our Manager may be costly, difficult or impossible to
unwind by the time they are reviewed by our board of directors.
Our Manager will have great latitude within the broad
parameters of our investment guidelines in determining the
types and amounts of target assets it may decide are attractive
investments for us, which could result in investment returns
that are substantially below expectations or that result in
losses, which would materially and adversely affect our
business operations and results. Further, decisions made and
investments and financing arrangements entered into by our
Manager may not fully reflect the best interests of our
shareholders.
We will have no recourse to our Sponsor if it does not fulfill
its obligations under the support agreement, and our recourse
against our Manager if it does not fulfill its obligations
under the management agreement will be limited to our
termination of the management agreement.
Our Manager has no employees or separate facilities. As a
result, our Manager has entered into a support agreement with
our Sponsor pursuant to which our Sponsor will provide our
Manager with the personnel, services and resources necessary
for our Manager to perform its obligations and responsibilities
under the management agreement in exchange for certain amounts
payable by our Manager. Because we are not a party to the
support agreement, we will not have any recourse to our Sponsor
if it does not fulfill its obligations under the support
agreement, or if our Sponsor and our Manager choose to amend or
terminate the support agreement. Also, our Manager only has
limited assets and our recourse against our Manager if it does
not fulfill its obligations under the management agreement will
likely be limited to our termination of the management
agreement.
Our Manager's liability is limited under the management
agreement, and we have agreed to indemnify our Manager against
certain liabilities. As a result, we could experience poor
performance or losses for which our Manager would not be
liable.
Pursuant to the management agreement, our Manager will not
assume any responsibility other than to render the services
called for thereunder and will not be responsible for any
action of our board of directors in following or declining to
follow its advice or recommendations. Under the terms of the
management agreement, our Manager, its officers, members,
managers, directors, personnel, any person controlling or
controlled by our Manager and any person providing services to
our Manager will not be liable to us, any subsidiary of ours,
our shareholders or partners or any subsidiary's shareholders
or partners for acts or omissions performed in accordance with
and pursuant to the management agreement, except by reason of
acts constituting bad faith, willful misconduct, gross
negligence, or reckless disregard of their duties under the
management agreement pursuant to a final unappealable judgment.
In addition, we will agree to indemnify our Manager, its
officers, shareholders, members, managers, directors,
personnel, any person controlling or controlled by our Manager
and any person providing services to our Manager with respect
to all expenses, losses, damages, liabilities, demands, charges
and claims arising from acts of our Manager that do not stem
from a final unappealable judgment of bad faith, willful
misconduct, gross negligence, or reckless disregard of duties
that are performed in good faith in accordance with and
pursuant to the management agreement.
Our Manager and its affiliates have limited experience managing
a portfolio of assets in the manner necessary to maintain our
qualification as a REIT or our exclusion or an exemption under
the Investment Company Act.
In order to maintain our qualification as a REIT and our
exclusion or an exemption from registration under the
Investment Company Act, the assets in our portfolio are subject
to certain restrictions that limit our operations meaningfully.
The REIT rules and regulations are highly technical and
complex, and the failure to comply with the income, asset,
organizational and ownership tests, dividend requirements and
other limitations imposed by these rules and regulations could
prevent us from qualifying as a REIT or could force us to pay
unexpected taxes and penalties. Our Manager and its affiliates
have limited experience managing a portfolio in the manner
necessary to maintain our qualification as a REIT and our
exclusion or an exemption from registration under the
Investment Company Act. The inexperience of our Manager and its
affiliates described above may hinder its ability to achieve
our objectives or result in loss of our qualification as a REIT
or payment of taxes and penalties. As a result, we cannot
assure you that we will be able to successfully operate as a
REIT, comply with regulatory requirements applicable to REITs,
maintain our exclusion or an exemption under the Investment
Company Act, or execute our business strategies.
Our residential real estate and real estate-related assets will
be subject to the risks typically associated with real estate.
Our residential real estate and real estate-related assets
will be subject to the risks typically associated with real
estate. The value of real estate may be adversely affected by a
number of risks, including:
? natural disasters such as hurricanes, earthquakes and
floods;
? acts of war or terrorism, including the consequences
of terrorist attacks, such as those that occurred on
September 11, 2001 or those that have been carried
out or inspired by ISIS and other radical terrorist
groups;
? adverse changes in national and local economic and
real estate conditions, including availability of and
demand for multi-housing housing;
? an oversupply of (or a reduction in demand for) space
in the areas where particular properties are located
and the attractiveness of particular properties to
prospective residents;
? changes in governmental laws and regulations, fiscal
policies and zoning ordinances and the related costs
of compliance therewith and the potential for
liability under applicable laws;
? costs of remediation and liabilities associated with
environmental, ADA and other physical conditions
affecting properties; and
? the potential for uninsured or underinsured property
losses.
The value of each property is affected significantly by
its ability to generate cash flow and net income, which in turn
depends on the amount of rental or other income that can be
generated net of expenses required to be incurred with respect
to the property. Many expenditures associated with properties
(such as operating expenses and capital expenditures) cannot be
reduced when there is a reduction in income from the
properties.
These factors may have a material adverse effect on the
value that we can realize from our assets.
Our Manager's due diligence may not reveal all factors or risks
affecting a property.
There can be no assurance that our Manager's due diligence
processes will uncover all relevant facts that would be
material to an investment decision. Before making an
investment, our Manager will assess the strength of the
underlying properties and any other factors that it believes
are material to the performance of the investment. In making
the assessment and otherwise conducting customary due
diligence, our Manager will rely on the resources available to
it and, in some cases, investigations by third parties.
A concentration of our investments in residential property may
leave our profitability vulnerable to a downturn or slowdown in
the sector.
We expect our property portfolio to be comprised primarily
of residential rental properties and development projects. As a
result, we will be subject to risks inherent in investments in
such types of property. Because our investments are primarily
in the residential sector, the potential effects on our revenue
and profits resulting from a downturn or slowdown in the
residential sector could be more pronounced than if we had more
fully diversified our investments.
The actual rents we receive for the properties in our portfolio
may be less than estimated market rents, and we may experience
a decline in realized rental rates from time to time, which
could adversely affect our financial condition, results of
operations and cash flow.
As a result of potential factors, including competitive
pricing pressure in our markets, a general economic downturn
and the desirability of our properties compared to other
properties in our markets, we may be unable to realize our
estimated market rents across the properties in our portfolio.
In addition, depending on market rental rates at any given time
as compared to expiring leases in our portfolio, from time to
time rental rates for expiring leases may be higher than
starting rental rates for new leases. If we are unable to
obtain sufficient rental rates across our portfolio, then our
ability to generate cash flow growth will be negatively
impacted.
Our reliance on short-term leases may intensify the effects of
declining market rents.
We expect substantially all of our apartment leases to be
for a term of one year or less. Because these leases generally
permit the residents to leave at the end of the lease term
without penalty, our rental revenues may be impacted by
declines in market rents more quickly than if our leases were
for longer terms.
Increased competition, including increased affordability of
single-family homes, could limit our ability to attract or
retain residents, or increase or maintain rents.
Any apartment communities we may acquire will most likely
compete with numerous housing alternatives in attracting
residents, including single-family homes, as well as owner
occupied single- and multi-housing homes available to rent.
Competitive housing in a particular area and the increasing
affordability of owner occupied single- and multi-housing homes
available to rent or buy caused by declining mortgage interest
rates and government programs to promote home ownership could
adversely affect our ability to attract or retain our
residents, or increase or maintain rents.
We may not be able to rebuild our existing properties to their
existing specifications if we experience a substantial or
comprehensive loss of such properties.
In the event that we experience a substantial or
comprehensive loss of one of our properties, we may not be able
to rebuild such property to its existing specifications.
Further, reconstruction or improvement of such a property would
likely require significant upgrades to meet zoning and building
code requirements. Environmental and legal restrictions could
also restrict the rebuilding of our properties.
Potential development and construction delays and resultant
increased costs and risks may hinder our operating results and
decrease our net income.
From time to time we may acquire unimproved real property
or properties that are under development or construction.
Investments in such properties will be subject to the
uncertainties associated with the development and construction
of real property, including those related to re-zoning land for
development, environmental concerns of governmental entities
and/or community groups and our builders' ability to build in
conformity with plans, specifications, budgeted costs and
timetables. If a builder fails to perform, we may resort to
legal action to rescind the purchase or the construction
contract or to compel performance. A builder's performance may
also be affected or delayed by conditions beyond the builder's
control. We may incur additional risks when we make periodic
progress payments or other advances to builders before they
complete construction. These and other factors can result in
increased costs of a project or loss of our investment. In
addition, we will be subject to normal lease-up risks relating
to newly constructed projects. We also must rely on rental
income and expense projections and estimates of the fair market
value of property upon completion of construction when agreeing
upon a purchase price at the time we acquire the property. If
our projections are inaccurate, we may pay too much for a
property, and the return on our investment could suffer. In
addition, to the extent we make or acquire loans to finance
construction or renovation projects, risks of cost overruns and
non-completion of the construction or renovation of the
properties underlying loans we make or acquire may materially
adversely affect our investment.
A retail component of our residential properties may expose us
to the unique risks of owning retail properties.
Some of our residential properties may have a retail
component. The retail space at such properties primarily serves
as an additional amenity for their residents. The long-term
nature of our retail leases and the characteristics of our
expected tenants (the majority of which may be small, local
businesses) may subject us to certain risks. We may not be able
to lease new space for rents that are consistent with our
projections or for market rates. Also, when leases for our
existing retail space expire, the terms of reletting, including
the cost of allowances and concessions to tenants, may be less
favorable than the current lease terms.
In addition, our properties compete with other properties
for retail space. The presence of competitive alternatives may
affect our ability to lease space and the level of rents we can
obtain. If our retail tenants experience financial distress or
bankruptcy, they may fail to comply with their contractual
obligations, seek concessions in order to continue operations
or cease their operations which could adversely impact our
results of operations and financial condition.
Actions of any joint venture partners that we may have in the
future could reduce the returns on joint venture investments
and decrease our shareholders' overall return.
We may enter into joint ventures to acquire properties and
other assets. We may also purchase and develop properties in
joint ventures or in partnerships, co-tenancies or other co-
ownership arrangements. Such investments may involve risks not
otherwise present with other methods of investment, including,
for example, the following risks:
* that our co-venturer partner in an investment could
become insolvent or bankrupt;
* that such co-venturer or partner may at any time have
economic or business interests or goals that are or
that become inconsistent with our business interests
or goals;
* that such co-venturer, or partner may be in a position
to take action contrary to our instructions or
requests or contrary to our policies or objectives; or
* that disputes between us and our co-venturer or
partner may result in litigation or arbitration that
would increase our expenses and prevent our officers
and directors from focusing their time and effort on
our operations.
Any of the above might subject a property to liabilities in
excess of those contemplated and thus reduce our returns on that
investment and the value of your investment.
Costs imposed pursuant to governmental laws and regulations may
reduce our net income and the cash available for distributions
to our shareholders.
Real property and the operations conducted on real property
are subject to federal, state and local laws and regulations
relating to protection of the environment and human health. We
could be subject to liability in the form of fines, penalties or
damages for noncompliance with these laws and regulations. These
laws and regulations generally govern wastewater discharges, air
emissions, the operation and removal of underground and above-
ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials,
the remediation of contamination associated with the release or
disposal of solid and hazardous materials, the presence of toxic
building materials and other health and safety-related concerns.
Some of these laws and regulations may impose joint and
several liability on the residents, owners or operators of real
property for the costs to investigate or remediate contaminated
properties, regardless of fault, whether the contamination
occurred prior to purchase, or whether the acts causing the
contamination were legal. Activities of our residents, the
condition of properties at the time we buy them, operations in
the vicinity of our properties, such as the presence of
underground storage tanks, or activities of unrelated third
parties may affect our properties.
The presence of hazardous substances, or the failure to
properly manage or remediate these substances, may hinder our
ability to sell, rent or pledge such property as collateral for
future borrowings. Any material expenditures, fines, penalties
or damages we must pay will reduce our ability to make
distributions and may reduce the value of your investment.
The costs of defending against claims of environmental
liability, of complying with environmental regulatory
requirements, of remediating any contaminated property or of
paying personal injury or other damage claims could reduce the
amounts available for distribution to our shareholders.
Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous real property
owner or operator may be liable for the cost of removing or
remediating hazardous or toxic substances on, under or in such
property. These costs could be substantial. Such laws often
impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic
substances. Environmental laws also may impose liens on property
or restrictions on the manner in which property may be used or
businesses may be operated, and these restrictions may require
substantial expenditures or prevent us from entering into leases
with prospective residents that may be impacted by such laws.
Environmental laws provide for sanctions for noncompliance and
may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws
and common law principles could be used to impose liability for
the release of and exposure to hazardous substances, including
asbestos-containing materials and lead-based paint. Third
parties may seek recovery from real property owners or operators
for personal injury or property damage associated with exposure
to released hazardous substances and governments may seek
recovery for natural resource damage. The costs of defending
against claims of environmental liability, of complying with
environmental regulatory requirements, of remediating any
contaminated property, or of paying personal injury, property
damage or natural resource damage claims could reduce the
amounts available for distribution to you.
We expect that all of our properties will be subject to
Phase I environmental assessments at the time they are acquired;
however, such assessments may not provide complete environmental
histories due, for example, to limited available information
about prior operations at the properties or other gaps in
information at the time we acquire the property. A Phase I
environmental assessment is an initial environmental
investigation to identify potential environmental liabilities
associated with the current and past uses of a given property.
If any of our properties were found to contain hazardous or
toxic substances after our acquisition, the value of our
investment could decrease below the amount paid for such
investment. In addition, real estate-related investments in
which we invest may be secured by properties with recognized
environmental conditions. Where we are secured creditors, we
will attempt to acquire contractual agreements, including
environmental indemnities, that protect us from losses arising
out of environmental problems in the event the property is
transferred by foreclosure or bankruptcy; however, no assurances
can be given that such indemnities would fully protect us from
responsibility for costs associated with addressing any
environmental problems related to such properties.
Costs associated with complying with the Americans with
Disabilities Act (ADA) may decrease cash available for
distributions.
Our properties may be subject to the Americans with
Disabilities Act of 1990, as amended, or the ADA. Under the ADA,
all places of public accommodation are required to comply with
federal requirements related to access and use by disabled
persons. The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities" that
generally require that buildings and services be made accessible
and available to people with disabilities. The ADA's
requirements could require removal of access barriers and could
result in the imposition of injunctive relief, monetary
penalties or, in some cases, an award of damages. Any funds used
for ADA compliance will reduce our net income and the amount of
cash available for distributions to you.
Uninsured losses relating to real property or excessively
expensive premiums for insurance coverage could reduce our cash
flows and the return on our shareholders' investment.
There are types of losses, generally catastrophic in
nature, such as losses due to wars, acts of terrorism,
earthquakes, floods, hurricanes, pollution or environmental
matters, that are uninsurable or not economically insurable, or
may be insured subject to limitations, such as large deductibles
or co-payments. Insurance risks associated with potential acts
of terrorism could sharply increase the premiums we pay for
coverage against property and casualty claims. Additionally,
mortgage lenders in some cases insist that property owners
purchase coverage against terrorism as a condition for providing
mortgage loans. Such insurance policies may not be available at
reasonable costs, if at all, which could inhibit our ability to
finance or refinance our properties. In such instances, we may
be required to provide other financial support, either through
financial assurances or self-insurance, to cover potential
losses. We may not have adequate coverage for such losses. If
any of our properties incurs a casualty loss that is not fully
insured, the value of our assets will be reduced by any such
uninsured loss, which may reduce the value of your investment.
In addition, other than any working capital reserve or other
reserves we may establish, we have no source of funding to
repair or reconstruct any uninsured property. Also, to the
extent we must pay unexpectedly large amounts for insurance, we
could suffer reduced earnings that would result in lower
distributions to you.
In addition, insurance may not cover all potential losses
on properties underlying mortgage loans that we may originate or
acquire, which may impair our security and harm the value of our
assets. We will require that each of the borrowers under our
mortgage loan investments obtain comprehensive insurance
covering the mortgaged property, including liability, fire and
extended coverage. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, floods
and hurricanes that may be uninsurable or not economically
insurable. We may not require borrowers to obtain terrorism
insurance if it is deemed commercially unreasonable. Inflation,
changes in building codes and ordinances, environmental
considerations, and other factors also might make it infeasible
to use insurance
proceeds to replace a property if it is damaged or destroyed.
Under such circumstances, the insurance proceeds, if any, might
not be adequate to restore the economic value of the mortgaged
property, which might impair our security and decrease the value
of the property.
Investments in non-conforming or non-investment grade rated
loans involve greater risk of loss.
Some of our debt investments, if any, may not conform to
conventional loan standards applied by traditional lenders and
either will not be rated or will be rated as non-investment
grade by the rating agencies. The non-investment grade ratings
for these assets typically result from the overall leverage of
the loans, the lack of a strong operating history for the
properties underlying the loans, the borrowers' credit history,
the properties' underlying cash flow or other factors. As a
result, these investments may have a higher risk of default and
loss than investment grade rated assets. Any loss we incur may
be significant and may reduce distributions to our shareholders
and adversely affect the value of our common shares.
Investments that are not United States government insured
involve risk of loss.
We may originate and acquire uninsured loans and assets as
part of our investment strategy. Such loans and assets may
include mortgage loans, mezzanine loans and bridge loans. While
holding such interests, we are subject to risks of borrower
defaults, bankruptcies, fraud, losses and special hazard losses
that are not covered by standard hazard insurance. In the event
of any default under loans, we bear the risk of loss of
principal and nonpayment of interest and fees to the extent of
any deficiency between the value of the collateral and the
principal amount of the loan. To the extent we suffer such
losses with respect to our investments in such loans, the value
of the Company and the value of our common shares may be
adversely affected.
Changes in interest rates and/or credit spreads could
negatively affect the value of any debt investments we may make,
which could result in reduced earnings or losses and negatively
affect the cash available for distribution to our shareholders.
We may invest in fixed-rate debt investments with fixed
distribution amounts. Under a normal yield curve, an investment
in these instruments will decline in value if long-term interest
rates increase or if credit spreads widen. We may also invest in
floating-rate debt investments, for which decreases in interest
rates or narrowing of credit spreads will have a negative effect
on value and interest income. Even though a loan or other debt
investment may be performing in accordance with its loan
agreement and the underlying collateral has not changed, the
economic value of the loan may be negatively impacted by the
incremental interest foregone from the changes in interest rates
or credit spreads. Declines in market value may ultimately
reduce earnings or result in losses to us, which may negatively
affect cash available for distribution to our shareholders.
Prepayments can adversely affect the yields on any debt
investments we may make. Prepayments on debt instruments, where
permitted under the debt documents, are influenced by changes in
current interest rates and a variety of economic, geographic and
other factors beyond our control, and consequently, such
prepayment rates cannot be predicted with certainty. If we are
unable to invest the proceeds of such prepayments received, the
yield on our portfolio will decline. In addition, we may acquire
assets at a discount or premium and if the asset does not repay
when expected, our anticipated yield may be impacted. Under
certain interest rate and prepayment scenarios we may fail to
recoup fully our cost of acquisition of certain investments.
Complying with REIT requirements may limit our ability to hedge
effectively.
The REIT provisions of the Code may limit our ability to
hedge our assets and operations. Under these provisions, any
income that we generate from transactions intended to hedge our
interest rate, inflation and/or currency risks will be excluded
from gross income for purposes of the REIT 75% and 95% gross
income tests if the instrument hedges (1) interest rate risk on
liabilities incurred to carry or acquire real estate, (2) risk
of currency fluctuations with respect to any item of income or
gain that would be qualifying income under the REIT 75% or 95%
gross income tests or (3) certain other offsetting positions,
and such instrument is properly identified under applicable
Treasury Regulations. Income from hedging transactions that do
not meet these requirements will generally constitute
nonqualifying income for purposes of both the REIT 75% and 95%
gross income tests. As a result of these rules, we may have to
limit our use of hedging techniques that might otherwise be
advantageous, which could result in greater risks associated
with interest rate or other changes than we would otherwise
incur.
Many of our investments are illiquid and we may not be able to
vary our portfolio in response to changes in economic and other
conditions.
Many factors that are beyond our control affect the real
estate market and could affect our ability to sell properties
and other investments for the price, on the terms or within the
time frame that we desire. These factors include general
economic conditions, the availability of financing, interest
rates and other factors, including supply and demand. Because
real estate investments are relatively illiquid, we have a
limited ability to vary our portfolio in response to changes in
economic or other conditions. Further, before we can sell a
property on the terms we want, it may be necessary to expend
funds to correct defects or to make improvements. However, we
can give no assurance that we will have the funds available to
correct such defects or to make such improvements. As a result,
we expect many of our investments will be illiquid, and if we
are required to liquidate all or a portion of our portfolio
quickly, we may realize significantly less than the value at
which we have previously recorded our investments and our
ability to vary our portfolio in response to changes in economic
and other conditions may be relatively limited, which could
adversely affect our results of operations and financial
condition.
Competition with third parties in acquiring properties and other
investments may reduce our profitability and the return on your
investment.
We have significant competition with respect to our
acquisition of properties and other investments with many other
companies, including other REITs, insurance companies, private
investment funds, hedge funds, online investment platforms and
other investors, many of which have greater resources than us.
We may not be able to compete successfully for investments. In
addition, the number of entities and the amount of funds
competing for suitable investments may increase. If we acquire
properties and other investments at higher prices than our
competitors and/or by using less-than-ideal capital structures,
our returns will be lower and the value of our assets may not
increase or may decrease significantly below the amount we paid
for such assets. If such events occur, you may experience a
lower return on your investment.
If we sell a property by providing financing to the purchaser,
we will bear the risk of default by the purchaser, which could
delay or reduce the dividends available to our shareholders.
If we decide to sell any of our properties, we intend to
use our best efforts to sell them for cash; however, in some
instances, we may sell our properties by providing financing to
purchasers. When we provide financing to a purchaser, we will
bear the risk that the purchaser may default, which could reduce
our cash dividends to shareholders. Even in the absence of a
purchaser default, the distribution of the proceeds of the sale
to our shareholders, or the reinvestment of the proceeds in
other assets, will be delayed until the promissory note or other
property we may accept upon a sale are actually paid, sold,
refinanced or otherwise disposed.
Risks Related to this Offering and Our Corporate Structure
The ownership limits that apply to REITs, as prescribed by the
Code and by our charter, limits the number of shares a person
may own, which may inhibit market activity in shares of our
common stock and restrict our business combination
opportunities.
In order for us to qualify as a REIT, not more than 50% in
value of our outstanding shares of stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities) at any time during the last
half of each taxable year after the first year for which we
elect to qualify as a REIT. Additionally, at least 100 persons
must beneficially own our stock during at least 335 days of a
taxable year (other than the first taxable year for which we
elect to be taxed as a REIT). Our charter, with certain
exceptions, authorizes our directors to take such actions as are
necessary and desirable to preserve our qualification as a REIT.
To help us comply with the REIT ownership requirements of the
Code, our charter prohibits a person from directly, beneficially
or constructively owning more than 9.8% by value or number of
shares, whichever is more restrictive, of our outstanding shares
of common stock, or 9.8% by value or number of shares, whichever
is more restrictive, of our outstanding capital stock, unless
exempted by our board of directors. These 9.8% ownership
limitations will apply as of the first date of the second
taxable year for which we elect to be treated as a REIT, which
will be January 1, 2019 assuming we elect to be treated as a
REIT for the taxable year ending December 31, 2018. However, our
charter will also prohibit any actual, beneficial or
constructive ownership of our shares that causes us to fail to
qualify as a REIT (including any ownership that would result in
any of our income that would otherwise qualify as "rents from
real property" for purposes of the REIT rules to fail to qualify
as such) and such ownership limitation shall not be waived. In
addition, our charter will prohibit a person from owning
actually or constructively shares of our outstanding capital
stock if such ownership would result in any of our income that
would otherwise qualify as "rents from real property" for
purposes of the REIT rules to fail to qualify as such. Our board
of directors may, in its sole discretion, subject to such
conditions as it may determine and the receipt of certain
representations and undertakings, prospectively or
retroactively, waive the 9.8% ownership limits or establish a
different limit on ownership, or excepted holder limit, for a
particular shareholder if the shareholder's ownership in excess
of the ownership limit would not result in our being "closely
held" under Section 856(h) of the Code or otherwise failing to
qualify as a REIT. These restrictions may have the effect of
delaying, deferring, or preventing a change in control of us,
including an extraordinary transaction (such as a merger, tender
offer or sale of all or substantially all of our assets) that
might provide a premium price for holders of our common stock or
otherwise be in the best interest of our shareholders.
Rapid changes in the values of our assets may make it more
difficult for us to maintain our qualification as a REIT or our
exception from the definition of an investment company under the
Investment Company Act.
If the market value or income potential of our qualifying
real estate assets changes as compared to the market value or
income potential of our non-qualifying assets, or if the market
value or income potential of our assets that are considered
"real estate-related assets" under the Investment Company Act or
REIT qualification tests changes as compared to the market value
or income potential of our assets that are not considered "real
estate-related assets" under the Investment Company Act or REIT
qualification tests, whether as a result of increased interest
rates, prepayment rates or other factors, we may need to modify
our investment portfolio in order to maintain our REIT
qualification or exception from the definition of an investment
company. If the decline in asset values or income occurs
quickly, this may be especially difficult, if not impossible, to
accomplish. This difficulty may be exacerbated by the illiquid
nature of many of the assets that we may own. We may have to
make investment decisions that we otherwise would not make
absent REIT and Investment Company Act considerations.
Our shareholders will have limited voting rights and will not
have control over changes in our policies and operations, which
increases the uncertainty and risks our shareholders face.
Our Manager and/or our board of directors determines our
major policies, including our policies regarding financing,
growth, debt capitalization, REIT qualification and dividends.
Our Manager and/or our board of directors may amend or revise
these and other policies without a vote of the shareholders.
Under Maryland General Corporation Law and our charter, our
shareholders have a right to vote only on limited matters. Our
Manager's and/or our board of directors' broad discretion in
setting policies and our shareholders' inability to exert
control over those policies increases the uncertainty and risks
our shareholders face.
Our shareholders may not be able to sell their shares under
our shareholder redemption plan and, if our shareholders are
able to sell their shares under the redemption plan, they may
not be able to recover the amount of their investment in our
shares.
Our shareholder redemption plan includes numerous
restrictions that limit your ability to sell your shares. You
must hold your shares for at least one year in order to
participate in the shareholder redemption plan, except for
redemptions sought upon a shareholder's death or complete
disability (as defined in the redemption plan). We limit the
number of shares redeemed pursuant to the shareholder redemption
plan in any calendar year to 5.0% of the weighted average number
of shares outstanding during the prior calendar year We will not
redeem shares if our board of directors determines, in its sole
discretion, that the redemption price determined in accordance
with the terms of the shareholder redemption plan exceeds the
then current fair market value of the shares to be redeemed.
Further, we have no obligation to redeem shares if the
redemption would violate the restrictions on dividends under
Maryland law, which prohibits dividends that would cause a
corporation to fail to meet statutory tests of solvency. These
limits may prevent us from accommodating all redemption requests
made in any year.
Under our shareholder redemption plan, shares may be
repurchased at varying prices depending on (a) the number of
years the shares have been held, (b) the estimated value per
share and (c) whether the redemptions are sought upon a
shareholder's death or complete disability. Thus, if your shares
are redeemed by us pursuant to our redemption plan, it is
possible that you will receive less than the fair market value
of the shares at the time of such redemption.
Our board of directors may amend, suspend or terminate our
shareholder redemption plan at any time without prior notice,
including to protect our operations and our non-redeemed
shareholders, to prevent an undue burden on our liquidity, to
preserve our status as a REIT, following any material decrease
in our NAV, or for any other reason. Our limits on ownership of
our shares also may require us to decline redemption requests
that would cause other shareholders to exceed such ownership
limits. In addition, in order to comply with certain of the
distribution requirements applicable to REITs we will decline to
honor any redemption request that we believe is a "dividend
equivalent" redemption as discussed in "U.S. Federal Income Tax
Considerations-Taxation of Taxable U.S. Shareholders-Redemptions
of Common Stock." However, in the event that we amend, suspend
or terminate our redemption plan, we will file an offering
circular supplement and/or Form 1-U, as appropriate, to disclose
such amendment. See "Shareholder Redemption Plan" for more
information about the redemption plan. The restrictions of our
shareholder redemption plan will severely limit your ability to
sell your shares should you require liquidity and limit your
ability to recover the value you invest in our common stock.
Breaches of our data security could materially harm us,
including our business, financial performance and reputation.
We collect and retain certain personal information provided
by our actual and prospective investors during the subscription
process, as well as our residents and employees. Security
measures we have implemented to protect the confidentiality of
this information and periodically review and improve our
security measures may not prevent unauthorized access to this
information. Any breach of our data security measures and loss
of this information may result in legal liability and costs
(including damages and penalties), as well as damage to our
reputation, that could materially and adversely affect us,
including our business and financial performance.
Risks Related to Compliance and Regulation
We are offering shares of our common stock pursuant to recent
amendments to Regulation A promulgated pursuant to the Jumpstart
Our Business Startups Act of 2012, or the JOBS Act, and we
cannot be certain if the reduced disclosure requirements
applicable to Tier 2 issuers will make shares of our common
stock less attractive to investors as compared to a traditional
initial public offering.
As a Tier 2 issuer, we will be subject to scaled disclosure
and reporting requirements, which may make shares of our common
stock less attractive to investors as compared to a traditional
initial public offering, which may make an investment in shares
of our common stock less attractive to investors who are
accustomed to enhanced disclosure and more frequent financial
reporting. In addition, given the relative lack of regulatory
precedence regarding the recent amendments to Regulation A,
there is a significant amount of regulatory uncertainty in
regard to how the SEC or the individual state securities
regulators will regulate both the offer and sale of our
securities, as well as any ongoing compliance that we may be
subject to. If our scaled disclosure and reporting requirements,
or regulatory uncertainty regarding Regulation A, reduces the
attractiveness of shares of our common stock, we may be unable
to raise the necessary funds necessary to commence operations,
or to develop a diversified portfolio of real estate
investments, which could severely affect the value of shares of
our common stock.
Our use of Form 1-A and our reliance on Regulation A for this
offering may make it more difficult to raise capital as and when
we need it, as compared to if we were conducting a traditional
initial public offering on Form S-11.
Because of the exemptions from various reporting
requirements provided to us under Regulation A and because we
are only permitted to raise up to $50,000,000 in any 12-month
period under Regulation A (although we may raise capital in
other ways), we may be less attractive to investors and it may
be difficult for us to raise additional capital as and when we
need it. Investors may be unable to compare our business with
other companies in our industry if they believe that our
financial accounting is not as transparent as other companies in
our industry. If we are unable to raise additional capital as
and when we need it, our financial condition and results of
operations may be materially and adversely affected.
There may be deficiencies with our internal controls that
require improvements, and if we are unable to adequately
evaluate internal controls, we may be subject to sanctions.
As a Tier 2 issuer, we will not need to provide a report on
the effectiveness of our internal controls over financial
reporting, and we will be exempt from the auditor attestation
requirements concerning any such report so long as we are a Tier
2 issuer. We are in the process of evaluating whether our
internal control procedures are effective and therefore there is
a greater likelihood of undiscovered errors in our internal
controls or reported financial statements as compared to issuers
that have conducted such evaluations.
Laws intended to prohibit money laundering may require our
Sponsor to disclose investor information to regulatory
authorities.
The Uniting and Strengthening America By Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (The "PATRIOT" Act) requires that financial
institutions establish and maintain compliance programs to guard
against money laundering activities, and requires the Secretary
of the U.S. Treasury ("Treasury") to prescribe regulations in
connection with anti-money laundering policies of financial
institutions. The Financial Crimes Enforcement Network
("FinCEN"), an agency of the Treasury, has announced that it is
likely that such regulations would subject certain pooled
investment vehicles to enact anti-money laundering policies. It
is possible that there could be promulgated legislation or
regulations that would require our Sponsor or its service
providers to share information with governmental authorities
with respect to prospective investors in connection with the
establishment of anti-money laundering procedures. Such
legislation and/or regulations could require us to implement
additional restrictions on the transfer of shares of our common
stock to comply with such legislation and/or regulations. We
reserve the right to request such information as is necessary to
verify the identity of prospective shareholders and the source
of the payment of subscription monies, or as is necessary to
comply with any customer identification programs required by
FinCEN and/or the SEC. In the event of delay or failure by a
prospective shareholder to produce any information required for
verification purposes, an application for, or transfer of,
shares of our common stock may be refused. We will not have the
ability to reject a transfer of shares of our common stock where
all necessary information is provided and any other applicable
transfer requirements, including those imposed under the
transfer provisions of our charter, are satisfied.
Risks Related to Conflicts of Interest
There are conflicts of interest between us, our Manager and its
affiliates.
Our executive officers are principals in both our Manager
and our Sponsor, which provides asset management and other
services to our Manager and us. Prevailing market rates are
determined by our Manager based on industry standards and
expectations of what our Manager would be able to negotiate with
a third party on an arm's length basis. All of the agreements
and arrangements between such parties, including those relating
to compensation, are not the result of arm's length negotiations
with an unaffiliated third party. Some of the conflicts inherent
in our transactions with our Manager and its affiliates, and the
limitations on such parties adopted to address these conflicts,
are described below. We, our Manager and their affiliates will
try to balance our interests with their own. However, to the
extent that such parties take actions that are more favorable to
other entities than us, these actions could have a negative
impact on our financial performance and, consequently, on
dividends to shareholders and the value of shares of our common
stock. We have adopted a conflicts of interest policy and
certain conflicts will be reviewed by the Independent
Representative (defined below). See "Conflicts of Interest and
Related Party Transactions-Certain Conflict Resolution Measures-
Independent Representative" and "-Our Policies Relating to
Conflicts of Interest".
The interests of our Manager, the principals and its other
affiliates may conflict with your interests.
The management agreement provides our Manager with broad
powers and authority which may result in one or more conflicts
of interest between your interests and those of our Manager, the
principals and its other affiliates. This risk is increased by
our Manager being controlled by the principals of our Sponsor,
who sponsor and participate, or expect to sponsor and
participate, directly or indirectly in other offerings by our
Sponsor and its affiliates. Potential conflicts of interest
include, but are not limited to, the following:
? the Manager, the principals and/or its other affiliates
may continue to offer other real estate investment
opportunities, including additional securities offerings similar
to this offering, and may make investments in real
estate assets for their own respective accounts,
whether or not competitive with our business;
? the Manager, the principals and/or its other affiliates
will not be required to disgorge any profits or fees or
other compensation they may receive from any other
business they own separately from us, and you will not
be entitled to receive or share in any of the profits
return fees or compensation from any other business
owned and operated by the Manager, the principals
and/or its other affiliates for their own benefit;
? we may engage the Manager or affiliates of the Manager
to perform services at prevailing market rates.
Prevailing market rates are determined by the Manager
based on industry standards and expectations of what
the Manager would be able to negotiate with a third
party on an arm's length basis; and
? the Manager, the principals and/or its other affiliates
are not required to devote all of their time and
efforts to our affairs.
As our Sponsor establishes additional REIT offerings closed-end
funds and other investment vehicles in the future, there may be
conflicts of interest among the various REIT offerings, closed-
end funds and other investment vehicles, which may result in
opportunities that would otherwise benefit us being allocated to
the other offerings.
Our Sponsor has in the past established and sponsored
private real estate funds, and in the future expects to
establish and sponsor additional private real estate funds and
additional REIT offerings, as well as other potential investment
vehicles (including open-end funds and separate accounts). The
existing private real estate fund does, and any future
investment vehicles may, have investment criteria similar to
ours. If a sale, financing, investment or other business
opportunity would be suitable for more than one REIT, closed-end
fund or other investment vehicle, our Manager's investment
committee will allocate it according to the policies and
procedures adopted by our Manager. Any allocation of this type
may involve the consideration of a number of factors that our
Manager's investment committee may determine to be relevant.
Except under any policies that may be adopted by our Manager or
our Sponsor in the future, no REIT (including us), closed-end
fund or other investment vehicle sponsored by our Sponsor will
have any duty, responsibility or obligation to refrain from:
* Engaging in the same or similar activities or lines of
business as any other REIT, closed-end fund or other
investment vehicle sponsored by our Sponsor;
* Doing business with any potential or actual investor,
resident, lender, purchaser, supplier, customer, or
competitor of any REIT, closed-end fund or other investment
vehicle sponsored by our Sponsor;
* Engaging in, or refraining from, any other activities
whatsoever relating to any of the potential or actual
residents, investors, lenders, purchasers, suppliers or
customers of any REIT, closed-end fund or other investment
vehicle sponsored by our Sponsor;
* Establishing material commercial relationships with another
REIT, closed-end fund or other investment vehicle sponsored
by our Sponsor, and arranging for compensation from such
relationships on better than we can achieve or than our
manager can achieve on our behalf; or
* Making operational and financial decisions that could be
considered to be detrimental to another REIT, closed-end
fund or other investment vehicle sponsored by our Sponsor.
In addition, any decisions by our Sponsor or Manager to
renew, extend, modify or terminate an agreement or arrangement,
or enter into similar agreements or arrangements in the future,
may benefit one REIT, closed-end fund or other investment
vehicle more than another REIT, closed-end fund or other
investment vehicle or limit or impair the ability of any REIT,
closed-end fund or other investment vehicle to pursue business
opportunities. In addition, third parties may require as a
condition to their arrangements or agreements with or related to
any one particular REIT, closed-end fund or other investment
vehicle that such arrangements or agreements include or not
include another REIT, closed-end fund or other investment
vehicle, as the case may be. Any of these decisions may benefit
one REIT, closed-end fund or other investment vehicle more than
another REIT, closed-end fund or other investment vehicle.
Risks Related to Sources of Financing and Hedging
We may incur significant debt, which may subject us to increased
risk of loss and may reduce cash available for dividends to our
shareholders.
Subject to market conditions and availability, we may
incur significant debt through bank credit facilities
(including term loans and revolving facilities), repurchase
agreements, warehouse facilities and structured financing
arrangements, public and private debt issuances and derivative
instruments, in addition to transaction or asset specific
funding arrangements. The percentage of leverage we employ, if
any, will vary depending on our available capital, our ability
to obtain and access financing arrangements with lenders, debt
restrictions contained in those financing arrangements and the
lenders' and rating agencies' estimate of the stability of our
investment portfolio's cash flow. During the period when we are
acquiring our initial portfolio, we may employ greater leverage
on individual assets (that will also result in greater leverage
of the interim portfolio) in order to quickly build a
diversified portfolio of assets. Our Manager may from time to
time modify our leverage policy in its discretion. Incurring
substantial debt could subject us to many risks that, if
realized, would materially and adversely affect us, including
the risk that:
? Our cash flow from operations may be insufficient to
make required payments of principal of and interest
on the debt or we may fail to comply with all of the
other covenants contained in the debt, which is
likely to result in (a) acceleration of such debt
(and any other debt containing a cross-default or
cross-acceleration provision) that we may be unable
to repay from internal funds or to refinance on
favorable terms, or at all, (b) our inability to
borrow unused amounts under our financing
arrangements, even if we are current in payments on
borrowings under those arrangements or pay dividends
of excess cash flow held in reserve by such financing
sources, and/or (c) the loss of some or all of our
assets to foreclosure or sale;
? Our debt may increase our vulnerability to adverse
economic and industry conditions with no assurance
that investment yields will increase with higher
financing costs;
? We may be required to dedicate a substantial portion
of our cash flow from operations to payments on our
debt, thereby reducing funds available for
operations, future business opportunities,
shareholder dividends or other purposes; and
? We are not able to refinance debt that matures prior
to the investment it was used to finance on favorable
terms, or at all. There can be no assurance that a
leveraging strategy will be successful.
Any lending facilities which we enter would be expected to
contain customary negative covenants and other financial and
operating covenants that, among other things, may affect our
ability to incur additional debt, make certain investments or
acquisitions, reduce liquidity below certain levels, pay
dividends to our shareholders, redeem debt or equity securities
and impact our flexibility to determine our operating policies
and investment strategies. For example, such loan documents may
contain negative covenants that limit, among other things, our
ability to repurchase our common stock, distribute more than a
certain amount of our net income or funds from operations to our
shareholders, employ leverage beyond certain amounts, sell
assets, engage in mergers or consolidations, grant liens, and
enter into transactions with affiliates (including amending the
management agreement with our Manager in a material respect). If
we fail to meet or satisfy any such covenants, we would likely
be in default under these agreements, and the lenders could
elect to declare outstanding amounts due and payable, terminate
their commitments, require the posting of additional collateral
and enforce their interests against existing collateral. We
could also become subject to cross-default and acceleration
rights and, with respect to collateralized debt, the posting of
additional collateral and foreclosure rights upon default.
Further, such restrictions could also make it difficult for us
to satisfy the qualification requirements necessary to maintain
our status as a REIT.
Interest rate fluctuations could increase our financing costs
and reduce our ability to generate income on our investments,
each of which could lead to a significant decrease in our
results of operations, cash flows and the market value of our
investments.
Our primary interest rate exposures will relate to the
yield on our investments and the financing cost of our debt, as
well as our interest rate derivatives that we utilize for
hedging purposes. Changes in interest rates will affect our net
interest income, which is the difference between the income we
earn on our investments and the interest expense we incur in
financing these investments. Interest rate fluctuations
resulting in our interest expense exceeding income would result
in operating losses for us. Changes in the level of interest
rates also may affect our ability to invest in investments, the
value of our investments and our ability to realize gains from
the disposition of assets.
To the extent that our financing costs will be determined
by reference to floating rates, such as LIBOR or a Treasury
index, plus a margin, the amount of such costs will depend on a
variety of factors, including, without limitation, (a) for
collateralized debt, the value and liquidity of the collateral,
and for non-collateralized debt, our credit, (b) the level and
movement of interest rates, and (c) general market conditions
and liquidity. In a period of rising interest rates, our
interest expense on floating rate debt would increase, while any
income we earn may not compensate for such increase in interest
expense.
Our operating results will depend, in part, on differences
between the income earned on our investments, net of credit
losses, and our financing costs. For any period during which our
investments are not match-funded, the income earned on such
investments may respond more slowly to interest rate
fluctuations than the cost of our borrowings. Consequently,
changes in interest rates, particularly short-term interest
rates, may immediately and significantly decrease our results of
operations and cash flows and the market value of our
investments.
Any bank credit facilities and repurchase agreements that we may
use in the future to finance our assets may require us to
provide additional collateral or pay down debt.
We may utilize bank credit facilities or repurchase
agreements (including term loans and revolving facilities) to
finance our assets if they become available on acceptable terms.
Such financing arrangements would involve the risk that the
market value of the investments pledged by us to the provider of
the bank credit facility or repurchase agreement counterparty
may decline in value, in which case the lender may require us to
provide additional collateral or to repay all or a portion of
the funds advanced. We may not have the funds available to repay
our debt at that time, which would likely result in defaults
unless we are able to raise the funds from alternative sources,
which we may not be able to achieve on favorable terms or at
all. Posting additional collateral would reduce our liquidity
and limit our ability to leverage our assets. If we cannot meet
these requirements, the lender could accelerate our
indebtedness, increase the interest rate on advanced funds and
terminate our ability to borrow funds from it, which could
materially and adversely affect our financial condition and
ability to implement our investment strategy. In addition, if
the lender files for bankruptcy or becomes insolvent, our loans
may become subject to bankruptcy or insolvency proceedings, thus
depriving us, at least temporarily, of the benefit of these
assets. Such an event could restrict our access to bank credit
facilities and increase our cost of capital. The providers of
bank credit facilities and repurchase agreement financing may
also require us to maintain a certain amount of cash or set
aside assets sufficient to maintain a specified liquidity
position that would allow us to satisfy our collateral
obligations. As a result, we may not be able to leverage our
assets as fully as we would choose, which could reduce our
return on assets. If we are unable to meet these collateral
obligations, our financial condition and prospects could
deteriorate rapidly.
There can be no assurance that we will be able to obtain
additional bank credit facilities or repurchase agreements on
favorable terms, or at all.
If we enter into financing arrangements involving balloon
payment obligations, it may adversely affect our ability to make
distributions to our shareholders.
Some of our financing arrangements may require us to make a
lump-sum or "balloon" payment at maturity. Our ability to make a
balloon payment is uncertain and may depend upon our ability to
obtain replacement financing or our ability to sell particular
properties. At the time the balloon payment is due, we may or
may not be able to refinance the balloon payment on terms as
favorable as the original loan or sell the particular property
at a price sufficient to make the balloon payment. Such a
refinancing would be dependent upon interest rates and lenders'
policies at the time of refinancing, economic conditions in
general and the value of the underlying properties in
particular. The effect of a refinancing or sale could affect the
rate of return to shareholders and the projected time of
disposition of our assets.
Our access to sources of financing may be limited and thus our
ability to grow our business and to maximize our returns may be
adversely affected.
Subject to market conditions and availability, we may incur
significant debt through bank credit facilities (including term
loans and revolving facilities), repurchase agreements,
warehouse facilities and structured financing arrangements,
public and private debt issuances and derivative instruments, in
addition to transaction or asset specific funding arrangements.
We may also issue additional debt or equity securities to fund
our growth.
Our access to sources of financing will depend upon a
number of factors, over which we have little or no control,
including:
? general economic or market conditions;
? the market's view of the quality of our assets;
? the market's perception of our growth potential; and
? our current and potential future earnings and cash
dividends.
We will need to periodically access the capital markets to
raise cash to fund new investments. Unfavorable economic or
capital market conditions may increase our funding costs, limit
our access to the capital markets or could result in a decision
by our potential lenders not to extend credit. An inability to
successfully access the capital markets could limit our ability
to grow our business and fully execute our business strategy and
could decrease our earnings, if any. In addition, uncertainty in
the capital and credit markets could adversely affect one or
more private lenders and could cause one or more of our private
lenders to be unwilling or unable to provide us with financing
or to increase the costs of that financing. In addition, if
regulatory capital requirements imposed on our private lenders
change, they may be required to limit, or increase the cost of,
financing they provide to us. In general, this could potentially
increase our financing costs and reduce our liquidity or require
us to sell assets at an inopportune time or price. No assurance
can be given that we will be able to obtain any such financing
on favorable terms or at all.
Federal Income Tax Risks
Failure to qualify as a REIT would reduce our net earnings
available for investment or distribution and would adversely
affect the timing, amount, and character of dividends to
shareholders.
Our qualification as a REIT will depend upon our ability to
meet requirements regarding our organization and ownership,
dividends of our income, the nature and diversification of our
income and assets, and other tests imposed by the Code. If we
fail to qualify as a REIT for any taxable year after electing
REIT status, we will be subject to federal income tax on our
taxable income at corporate rates. In addition, we would
generally be disqualified from treatment as a REIT for the four
taxable years following the year of losing our REIT status.
Losing our REIT status would reduce our net earnings available
for investment or distribution to shareholders because of the
additional tax liability. Dividends to shareholders would no
longer qualify for the dividends-paid deduction and we would no
longer be required to pay dividends. If this occurs, we might be
required to borrow funds or liquidate some investments in order
to pay the applicable taxes.
Even if we qualify as a REIT for federal income tax purposes, we
may be subject to other tax liabilities that reduce our cash
flow and our ability to pay dividends to our shareholders.
Even if we qualify as a REIT for federal income tax
purposes, we may be subject to some federal, state and local
taxes on our income or property. For example:
? In order to qualify as a REIT, we must distribute
annually at least 90% of our REIT taxable income to our
shareholders (which is determined without regard to the
dividends-paid deduction or net capital gain). To the
extent that we satisfy the distribution requirement but
distribute less than 100% of our REIT taxable income,
we will generally be subject to federal corporate
income tax on the undistributed income.
? We will be subject to a 4% nondeductible excise tax on
the amount, if any, by which dividends we pay in any
calendar year are less than the sum of 85% of our
ordinary income, 95% of our capital gain net income,
and 100% of our undistributed income from prior years.
? If we have net income from the sale of foreclosure
property that we hold primarily for sale to customers
in the ordinary course of business or other non-
qualifying income from foreclosure property, we must
pay a tax on that income at the highest corporate
income tax rate.
? If we sell an asset, other than foreclosure property,
that we hold primarily for sale to customers in the
ordinary course of business, our gain would be subject
to the 100% "prohibited transaction" tax unless such
sale were made by one of our TRSs or we qualified for a
"safe harbor" under the Code.
We intend to pay dividends to our shareholders to comply with
the REIT requirements of the Code.
REIT distribution requirements could adversely affect our
ability to execute our business plan or our liquidity and may
force us to borrow funds during unfavorable market conditions.
In order to maintain our REIT status and to meet the REIT
distribution requirements, we may need to borrow funds on a
short-term basis or sell assets, even if the then-prevailing
market conditions are not favorable for these borrowings or
sales. In addition, we may need to reserve cash (including
proceeds from this offering) to satisfy our REIT distribution
requirements, even though there are attractive investment
opportunities that may be available. To qualify as a REIT, we
generally must distribute to our shareholders at least 90% of
our net taxable income each year, excluding capital gains. In
addition, we will be subject to corporate income tax to the
extent we distribute less than 100% of our taxable income
including any net capital gain. We intend to make distributions
to our shareholders to comply with the requirements of the Code
for REITs and to minimize or eliminate our corporate income tax
obligation to the extent consistent with our business
objectives. Our cash flows from operations may be insufficient
to fund required distributions, for example as a result of
differences in timing between the actual receipt of income and
the recognition of income for U.S. federal income tax purposes,
the effect of non-deductible capital expenditures, the creation
of reserves or required debt service or amortization payments
(including, for example, where a borrower defers the payment of
interest in cash pursuant to a contractual right or otherwise).
The insufficiency of our cash flows to cover our distribution
requirements could have an adverse impact on our ability to
raise short- and long-term debt or sell equity securities in
order to fund distributions required to maintain our REIT
status. In addition, we will be subject to a 4% nondeductible
excise tax on the amount, if any, by which distributions paid by
us in any calendar year are less than the sum of 85% of our
ordinary income, 95% of our capital gain net income and 100% of
our undistributed income from prior years. To address and/or
mitigate some of these issues, we may make taxable distributions
that are in part paid in cash and in part paid in our common
stock. In such cases our shareholders may have tax liabilities
from such distributions in excess of the cash they receive. The
treatment of such taxable share distributions is not clear, and
it is possible the taxable share distribution will not count
towards our distribution requirement, in which case adverse
consequences could apply.
Dividends payable by REITs generally do not qualify for the
reduced tax rates on dividend income from regular corporations,
which could adversely affect the value of our common stock.
The maximum regular U.S. federal income tax rate for
certain qualified dividends payable to U.S. holders of U.S.
corporate stock that are individuals, is currently 20%.
Dividends payable by REITs, however, are generally not eligible
for the reduced rates and therefore are subject to regular U.S.
federal income tax rates on ordinary income of a noncorporate
U.S. holder (currently at a maximum rate of 39.6%). Such
dividends are also not eligible for the dividends received
deduction generally available to corporations with respect to
dividends from U.S. corporations. Although the reduced U.S.
federal income tax rate applicable to dividend income from
regular corporate dividends does not adversely affect the
taxation of REITs or dividends paid by REITs, the more favorable
rates applicable to regular corporate dividends could cause
investors who are individuals, trusts and estates to perceive
investments in REITs to be relatively less attractive than
investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares
of REITs, including our common stock.
To maintain our REIT status, we may be forced to forego
otherwise attractive opportunities, which may delay or hinder
our ability to meet our investment objectives and reduce our
shareholders' overall return.
To qualify as a REIT, we must satisfy certain tests on an
ongoing basis concerning, among other things, the sources of our
income, nature of our assets, and the amounts we distribute to
our shareholders. We may be required to pay dividends to
shareholders at times when it would be more advantageous to
reinvest cash in our business or when we do not have funds
readily available for distribution. Compliance with the REIT
requirements may hinder our ability to operate solely on the
basis of maximizing profits and the value of our shareholders'
investment.
If we fail to invest a sufficient amount of the net proceeds
from selling our common stock in real estate assets within one
year from the receipt of the proceeds, we could fail to qualify
as a REIT.
Temporary investment of the net proceeds from sales of our
common stock in short-term securities and income from such
investment generally will allow us to satisfy various REIT
income and asset requirements, but only during the one-year
period beginning on the date we receive the net proceeds. If we
are unable to invest a sufficient amount of the net proceeds
from sales of our common stock in qualifying real estate assets
within such one-year period, we could fail to satisfy one or
more of the gross income or asset tests and/or we could be
limited to investing all or a portion of any remaining funds in
cash or cash equivalents. If we fail to satisfy any such income
or asset test, unless we are entitled to relief under certain
provisions of the Code, we could fail to qualify as a REIT. See
"U.S. Federal Income Tax Considerations."
Our ability to provide certain services to our residents may be
limited by the REIT rules, or may have to be provided through a
TRS.
As a REIT, we generally cannot hold interests in rental
property where residents receive services other than services
that are customarily provided by landlords, nor can we derive
income from a third party that provides such services. If
services to residents at properties in which we hold an interest
are limited to customary services, those properties may be
disadvantaged as compared to other properties that can be
operated without the same restrictions. However, we can provide
such non-customary services to residents or share in the revenue
from such services if we do so through a TRS, though income
earned through the TRS will be subject to corporate income
taxes.
If we form a taxable REIT subsidiary (TRS), our overall tax
liability could increase.
Any TRS we form will be subject to U.S. federal, state and
local income tax on its taxable income. Accordingly, although
our ownership of any TRSs may allow us to participate in the
operating income from certain activities that we could not
participate in, that operating income will be fully subject to
income tax. The after-tax net income of any TRS would be
available for distribution to us, however any dividends received
by us from our domestic TRSs will only be qualifying income for
the 95% REIT income test, not the 75% REIT income test.
Although our use of TRSs may partially mitigate the impact of
meeting certain requirements necessary to maintain our
qualification as a REIT, there are limits on our ability to own
and engage in transactions with TRSs, and a failure to comply
with such limits would jeopardize our REIT qualification and may
result in the application of a 100% excise tax.
A REIT may own up to 100% of the stock or securities of one
or more TRSs. A TRS may hold assets and earn income that would
not be qualifying assets or income if held or earned directly by
a REIT. Both the subsidiary and the REIT must jointly elect to
treat the subsidiary as a TRS. A corporation of which a TRS
directly or indirectly owns more than 35% of the voting power or
value of the stock will automatically be treated as a TRS.
Overall, no more than 25% (for taxable years beginning before
January 1, 2018) or 20% (for taxable years beginning on or after
January 1, 2018) of the value of a REIT's assets may consist of
stock or securities of one or more TRSs. In addition, the rules
limit the deductibility of interest paid or accrued by a TRS to
its parent REIT to assure that the TRS is subject to an
appropriate level of corporate taxation. The rules also impose a
100% excise tax on certain transactions between a TRS and its
parent REIT that are not conducted on an arm's-length basis. We
may jointly elect with one or more subsidiaries for those
subsidiaries to be treated as TRSs for U.S. federal income tax
purposes. These TRSs will pay U.S. federal, state and local
income tax on their taxable income, and their after-tax net
income will be available for distribution to us but is not
required to be distributed to us. We will monitor the value of
our respective investments in any TRSs we may form for the
purpose of ensuring compliance with TRS ownership limitations
and intend to structure our transactions with any such TRSs on
terms that we believe are arm's-length to avoid incurring the
100% excise tax described above. There can be no assurance,
however, that we will be able to comply with the TRS ownership
limitation or to avoid application of the 100% excise tax.
You may be restricted from acquiring, transferring or redeeming
certain amounts of our common stock.
In order to maintain our REIT qualification, among other
requirements, no more than 50% in value of our outstanding
shares may be owned, directly or indirectly, by five or fewer
individuals, as defined in the Code to include certain kinds of
entities, during the last half of any taxable year, other than
the first year for which a REIT election is made. To assist us
in qualifying as a REIT, our charter contains an aggregate share
ownership limit and a common stock ownership limit. Generally,
any of our shares owned by affiliated owners will be added
together for purposes of the aggregate share ownership limit,
and any common stock owned by affiliated owners will be added
together for purposes of the common stock ownership limit. In
addition, our charter prohibits a person from owning actually or
constructively shares of our outstanding capital stock if such
ownership would result in any of our income that would otherwise
qualify as rents from real property for purposes of the REIT
rules to fail to qualify as such.
If anyone attempts to transfer or own shares in a way that
would violate the aggregate share ownership limit or the common
stock ownership limit or results in ownership that would result
in any of our income that would otherwise qualify as rents from
real property for purposes of the REIT rules to fail to qualify
as such, or would prevent us from continuing to qualify as a
REIT), unless such ownership limits have been waived by our
Manager, those shares instead will be deemed transferred to a
trust for the benefit of a charitable beneficiary and will be
either redeemed by us or sold to a person whose ownership of the
shares will not violate the aggregate share ownership limit or
the common stock ownership limit and will not prevent us from
qualifying as a REIT. If this transfer to a trust fails to
prevent such a violation or our disqualification as a REIT, then
the initial intended transfer or ownership will be null and void
from the outset. Anyone who acquires or owns shares in violation
of the aggregate share ownership limit or the common stock
ownership limit, unless such ownership limit or limits have been
waived by our Manager, or the other restrictions on transfer or
ownership in our charter, bears the risk of a financial loss
when the shares are redeemed or sold, if the NAV of our shares
falls between the date of purchase and the date of redemption or
sale.
Our limits on ownership of our shares also may require us
to decline redemption requests that would cause other
shareholders to exceed such ownership limits or to the extent we
determine is necessary to preserve our status as a REIT. In
addition, in order to comply with certain of the distribution
requirements applicable to REITs we will decline to honor any
redemption request that we believe is a "dividend equivalent"
redemption as discussed in "U.S. Federal Income Tax
Considerations-Taxation of Taxable U.S. Shareholders-Redemptions
of Common Stock."
In addition, our charter provides that, prior to the first
date on which any class or series of shares of our capital stock
constitutes "publicly-offered securities" (as defined in the
Plan Assets Regulation), "benefit plan investors" may not hold,
in the aggregate, 25 percent or more of the value of any class
or series of shares of our capital stock. If benefit plan
investors exceed this 25% limit, we may redeem their interests
at a price equal to the then current NAV per share or transfer
their interests to a trust for the benefit of a charitable
beneficiary. See "ERISA Considerations-The 25% Limit" for more
information.
Furthermore, our charter provides that, in the event we
determine in our discretion that there is a material likelihood
that we would be a fiduciary under applicable law with respect
to an investor that is subject to ERISA and/or Section 4975 of
the Code (e.g., an IRA), we have the authority to redeem such
investor's interests at a price equal to the then current NAV
per share.
The tax on prohibited transactions will limit our ability to
/engage in transactions that would be treated as sales for
federal income tax purposes.
A REIT's net income from prohibited transactions is subject
to a 100% tax. In general, prohibited transactions are sales or
other dispositions of assets, other than foreclosure property,
deemed held primarily for sale to customers in the ordinary
course of business (subject to a safe harbor under the Code for
certain sales). It may be possible to reduce the impact of the
prohibited transaction tax by conducting certain activities
through TRSs. However, to the extent that we engage in such
activities through TRSs, the income associated with such
activities may be subject to full corporate income tax.
We may be subject to adverse legislative or regulatory tax
changes.
At any time, the federal income tax laws or regulations
governing REITs or the administrative interpretations of those
laws or regulations may be amended. We cannot predict when or if
any new federal income tax law, regulation or administrative
interpretation, or any amendment to any existing federal income
tax law, regulation or administrative interpretation, will be
adopted, promulgated or become effective and any such law,
regulation or interpretation may take effect retroactively. Any
such change could result in an increase in our, or our
shareholders', tax liability or require changes in the manner in
which we operate in order to minimize increases in our tax
liability. A shortfall in tax revenues for states and
municipalities in which we operate may lead to an increase in
the frequency and size of such changes. If such changes occur,
we may be required to pay additional taxes on our assets or
income or be subject to additional restrictions. These increased
tax costs could, among other things, adversely affect our
financial condition, the results of operations and the amount of
cash available for the payment of dividends. We and our
shareholders could be adversely affected by any such change in,
or any new, federal income tax law, regulation, or
administrative interpretation.
In addition, according to publicly released statements, a
top legislative priority of the Trump administration and the
next Congress may be significant reform of the Code, including
significant changes to taxation of business entities and the
deductibility of interest expense. There is a substantial lack
of clarity around the likelihood, timing and details of any such
tax reform and the impact of any potential tax reform on our
business and on the price of our common stock. Shareholders are
urged to consult with their own tax advisors with respect to the
impact that legislation may have on their investment and the
status of legislative, regulatory or administrative developments
and proposals and their potential effect on their investment in
our shares.
Non-United States investors may be subject to FIRPTA on the sale
of shares of our common stock if we are unable to qualify as a
"domestically controlled qualified investment entity."
Except with respect to a "qualified foreign pension plan"
or a non-United States person that is a "qualified shareholder",
a non-United States person disposing of a United States real
property interest, including shares of a United States
corporation whose assets consist principally of United States
real property interests, is generally subject to a tax under the
Foreign Investment in Real Property Trust Act, or FIRPTA, on the
gain recognized on the disposition of such interest. FIRPTA does
not apply, however, to the disposition of shares in a REIT if
the REIT is a "domestically controlled qualified investment
entity." A REIT is a domestically controlled qualified
investment entity if, at all times during a specified testing
period (the continuous five-year period ending on the date of
disposition or, if shorter, the entire period of the REIT's
existence), less than 50% in value of its shares is held
directly or indirectly by non-United States holders. We cannot
assure you that we will qualify as a domestically controlled
qualified investment entity. If we were to fail to so qualify,
gain realized by a non-United States investor that is not a
"qualified foreign pension plan" or a "qualified shareholder" on
a sale of our common stock would be subject to FIRPTA unless our
common stock was regularly traded on an established securities
market and the non-United States investor did not at any time
during a specified testing period directly or indirectly own
more than 10% of the value of our outstanding common stock.
If we were considered to actually or constructively pay a
"preferential dividend" to certain of our shareholders, our
status as a REIT could be adversely affected.
In order to qualify as a REIT, we must distribute annually
to our shareholders at least 90% of our REIT taxable income,
determined without regard to the deduction for dividends paid
and excluding net capital gain. In order for dividends to be
counted as satisfying the annual distribution requirements for
REITs, and to provide us with a REIT-level tax deduction, the
dividends must not be "preferential dividends." A dividend is
generally not a preferential dividend if the distribution is pro
rata among all outstanding shares of stock within a particular
class, and in accordance with the preferences among different
classes of stock as set forth in the REIT's organizational
documents. There is no de minimis exception with respect to
preferential dividends. Therefore, if the Internal Revenue
Service (the "IRS") were to take the position that we
inadvertently paid a preferential dividend, we may be deemed
either to (a) have distributed less than 100% of our REIT
taxable income and be subject to tax on the undistributed
portion, or (b) have distributed less than 90% of our REIT
taxable income and our status as a REIT could be terminated for
the year in which such determination is made if we were unable
to cure such failure. It also is possible that under certain
technical rules relating to the deduction for dividends paid,
the IRS could take the position that redemptions taxed as
dividends impair our ability to satisfy our distribution
requirements under the Code. To avoid certain issues related to
our ability to comply with the REIT distribution requirements
(see "U.S. Federal Income Tax Considerations- Qualification as a
REIT - Annual Distribution Requirements"), we have implemented
procedures designed to track our shareholders' percentage
interests in our common stock and identify any such dividend
equivalent redemptions, and we will decline to effect a
redemption to the extent that we believe that it would
constitute a dividend equivalent redemption. However, we cannot
assure you that we will be successful in preventing all dividend
equivalent redemptions. We can provide no assurance that we will
not be treated as inadvertently paying preferential dividends.
Sales of our assets may constitute "prohibited transactions,"
which are subject to a 100% tax.
Net income derived from prohibited transactions is subject
to a 100% tax. The term "prohibited transactions" generally
includes a sale or other disposition of property (other than
foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. Whether
property is held "primarily for sale to customers in the
ordinary course of a trade or business" depends on the specific
facts and circumstances. The Code provides a safe harbor
pursuant to which sales of properties held for at least two
years (which period, for property being developed, does not
begin to run until the property is placed in service) and
meeting certain additional requirements will not be treated as
prohibited transactions, but compliance with the safe harbor may
not always be practical. We intend to continue to conduct our
operations so that no asset that we own (or are treated as
owning) will be treated as held as inventory or for sale to
customers and that a sale of any such asset will not be treated
as having been in the ordinary course of our business. However,
we may have to sell assets from time to time to fund redemption
requests, to satisfy our REIT distribution requirements, to
satisfy other REIT requirements, or for other purposes. In
addition, part of our investment strategy is to purchase assets
that provide an opportunity for gain through capital
appreciation, and we may sell such assets if beneficial
opportunities arise. Therefore, no assurance can be given that
any particular property in which we hold a direct or indirect
interest will not be treated as property held for sale to
customers, or that the safe-harbor provisions will apply. The
potential application of the prohibited transactions tax could
cause us to forego potential dispositions of other property or
to forego other opportunities that might otherwise be attractive
to us (such as developing property for sale), or to undertake
such dispositions or other opportunities through a TRS, which
would generally result in corporate income taxes being incurred.
Our qualification as a REIT and avoidance of 100% tax may depend
on the characterization of any loans that we make as debt for
U.S. federal income tax purposes.
For U.S. federal income tax purposes, the IRS or a court
may treat a loan with sufficient equity characteristics as
equity for tax purposes. We may obtain equity participation
rights with respect to our loans, and we may make loans with
relatively high loan-to- value ratios and/or high yields, which
are among the features that can cause a loan to be treated as
equity for federal income tax purposes. Although we intend to
structure each of our loans so that the loan should be respected
as debt for U.S. federal income tax purposes, it is possible
that the IRS or a court could disagree and seek to re-
characterized the loan as equity. Re-characterization of one of
our loans to a non-corporate borrower as equity for U.S. federal
income tax purposes generally would require us to include our
share of the gross assets and gross income of the borrower in
our REIT asset and income tests. Inclusion of such items could
jeopardize our REIT status. Moreover, to the extent our
borrowers hold their assets as dealer property or inventory, if
we are treated as holding equity in a borrower for U.S. federal
income tax purposes, our share of gains from sales by the
borrower would be subject to the 100% tax on prohibited
transactions (except to the extent earned through a TRS). To the
extent one of our loans to a corporate borrower is
recharacterized as equity for U.S. federal income tax purposes,
it could cause us to fail one or more of the asset tests
applicable to REITs.
The treatment of an investment in preferred equity could
adversely affect our ability to qualify as a REIT.
We may make investments in preferred equity in an entity
that directly or indirectly owns real property. Although
economically comparable to investments in mezzanine loans in
many cases, investments in preferred equity will be treated
differently for tax purposes. If the issuer of the preferred
equity is taxed as a partnership or an entity disregarded as
separate from its owners for U.S. federal income tax purposes
(aside from a qualified REIT subsidiary), we will generally be
treated as owing an interest in the underlying real estate and
other assets of the partnership for tax purposes. As a result,
absent sufficient controls to ensure that the underlying real
property is operated in compliance with the REIT rules,
preferred equity investments may jeopardize our compliance with
the REIT income and asset tests. In addition, the treatment of
interest-like preferred returns in a partnership or disregarded
entity (other than a qualified REIT subsidiary) also is not
clear under the REIT rules and could be treated as non-
qualifying income. More importantly, in many cases the status of
debt-like preferred equity as debt or equity for tax purposes is
unclear. The IRS could challenge our treatment of such preferred
equity investment for purposes of applying the REIT income and
asset tests and, if such a challenge were sustained, we could
fail to continue to qualify as REIT. In addition to the risk of
loss of REIT status due to nonqualifying income, if the
underlying property is dealer property, our gains from the sale
of the property would be subject to a 100% tax. In addition, if
the issuer of the preferred equity is taxed as a corporation for
U.S. federal income tax purposes, such preferred equity
generally will be a nonqualifying asset unless the issuer is a
REIT, qualified REIT subsidiary or TRS.
A portion of our distributions may be treated as a return of
capital for U.S. federal income tax purposes, which could reduce
the basis of a shareholder's investment in our common stock and
may trigger taxable gain.
A portion of our distributions may be treated as a return
of capital for U.S. federal income tax purposes. As a general
matter, a portion of our distributions will be treated as a
return of capital for U.S. federal income tax purposes if the
aggregate amount of our distributions for a year exceeds our
current and accumulated earnings and profits for that year. To
the extent that a distribution is treated as a return of capital
for U.S. federal income tax purposes, it will reduce a holder's
adjusted tax basis in the holder's shares, and to the extent
that it exceeds the holder's adjusted tax basis will be treated
as gain resulting from a sale or exchange of such shares. See
"U.S. Federal Income Tax Considerations."
Your investment has various tax risks.
Although the provisions of the Code generally relevant to
an investment in shares of our common stock are described in
"U.S. Federal Income Tax Considerations," we urge you to consult
your tax advisor concerning the effects of United States
federal, state, local and non-U.S. tax laws to you with regard
to an investment in shares of our common stock.
Risks Related to Employee Benefit Plans and Individual
Retirement Accounts
In some cases, if you fail to meet the fiduciary and other
standards under ERISA, the Code or common law as a result of an
investment in our common shares, you could be subject to
liability for losses as well as civil penalties.
There are special considerations that apply to investing in
our common shares on behalf of pension, profit sharing or 401(k)
plans, health
or welfare plans, individual retirement accounts or Keogh plans.
If you are investing the assets of any of the entities
identified in the prior
sentence in our common shares, you should satisfy yourself that:
* your investment is consistent with your fiduciary
obligations under applicable law, including common law,
ERISA and the Code;
* your investment is made in accordance with the documents
and instruments governing the trust, plan or IRA, including
a plan's investment policy;
* your investment satisfies the prudence and diversification
requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of
ERISA, if applicable, and other applicable provisions of
ERISA and the Code;
* your investment will not impair the liquidity of the trust,
plan or IRA;
* your investment will not produce "unrelated business
taxable income" for the plan or IRA;
* you will be able to value the assets of the plan annually
in accordance with ERISA requirements and applicable
provisions of the applicable trust, plan or IRA document;
and
* your investment will not constitute a prohibited
transaction under Section 406 of ERISA or Section 4975 of
the Code.
Failure to satisfy the fiduciary standards of conduct and
other applicable requirements of ERISA, the Code, or other
applicable statutory or common law may result in the imposition
of civil penalties, and can subject the fiduciary to liability
for any resulting losses as well as equitable remedies. In
addition, if an investment in our common shares constitutes a
prohibited transaction under the Code, the "disqualified person"
that engaged in the transaction may be subject to the imposition
of excise taxes with respect to the amount invested.
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
We make statements in this offering circular that are
forward-looking statements within the meaning of the federal
securities laws. The words "believe," "estimate," "expect,"
"anticipate," "intend," "plan," "seek," "may," and similar
expressions or statements regarding future periods are intended
to identify forward-looking statements. These forward-looking
statements involve known and unknown risks, uncertainties and
other important factors that could cause our actual results,
performance or achievements, or industry results, to differ
materially from any predictions of future results, performance
or achievements that we express or imply in this offering
circular or in the information incorporated by reference into
this offering circular.
The forward-looking statements included in this offering
circular are based upon our current expectations, plans,
estimates, assumptions and beliefs that involve numerous risks
and uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately
and many of which are beyond our control. Although we believe
that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, our actual
results and performance could differ materially from those set
forth in the forward-looking statements. Factors which could
have a material adverse effect on our operations and future
prospects include, but are not limited to:
? our ability to effectively deploy the proceeds raised
in this offering;
? changes in economic conditions generally and the real
estate and securities markets specifically;
? risks associated with geographic and asset class
markets where we may have - or end up having - a high
concentration of investments;
? risks associated with ownership of real estate in
general, and residential properties in particular;
? limited ability to dispose of assets because of the
relative illiquidity of real estate investments;
? intense competition in the real estate market that may
limit our ability to attract or retain residents or re-
lease space;
? defaults on or non-renewal of leases by residents;
? increased interest rates and operating costs;
? our failure to obtain necessary outside financing;
? decreased rental rates or increased vacancy rates;
? difficulties in identifying properties, and
consummating, real estate acquisitions, joint ventures
and dispositions;
? our failure to successfully operate acquired properties
and operations;
? exposure to liability relating to environmental and
health and safety matters;
? changes in real estate and zoning laws and increases in
real estate property tax rates;
? our failure to maintain our status as a REIT;
? our failure to successfully implement a liquidity
transaction, including listing our shares of common
stock on a securities exchange;
? loss of key personnel;
? risks associated with breaches of our data security;
? exposure to litigation or other claims;
? risks associated with derivatives or hedging activity;
? legislative or regulatory changes impacting our
business or our assets (including changes to the laws
governing the taxation of REITs and SEC guidance
related to Regulation A or the JOBS Act);
? changes in business conditions and the market value of
our assets, including changes in interest rates, market
rents, resident defaults or bankruptcy, and generally
the increased risk of loss if our investments fail to
perform as expected;
? our ability to implement effective conflicts of
interest policies and procedures among the various real
estate investment opportunities sponsored by our
Sponsor;
? our ability to access sources of liquidity when we have
the need to fund redemptions of shares of our common
stock in excess of the proceeds from the sales of
shares of our common stock in our continuous offering
and the consequential risk that we may not have the
resources to satisfy redemption requests;
? our compliance with applicable local, state and federal
laws, including the Investment Advisers Act, the
Investment Company Act and other laws; and
? changes to generally accepted accounting principles, or
GAAP.
Any of the assumptions underlying forward-looking
statements could be inaccurate. You are cautioned not to place
undue reliance on any forward-looking statements included in
this offering circular. All forward-looking statements are made
as of the date of this offering circular and the risk that
actual results will differ materially from the expectations
expressed in this offering circular will increase with the
passage of time. Except as otherwise required by the federal
securities laws, we undertake no obligation to publicly update
or revise any forward-looking statements after the date of this
offering circular, whether as a result of new information,
future events, changed circumstances or any other reason. In
light of the significant uncertainties inherent in the forward-
looking statements included in this offering circular,
including, without limitation, the risks described under "Risk
Factors," the inclusion of such forward- looking statements
should not be regarded as a representation by us or any other
person that the objectives and plans set forth in this offering
circular will be achieved.
ESTIMATED USE OF PROCEEDS
The table below sets forth our estimated use of proceeds
from this offering, assuming we sell in this offering the
minimum number of shares necessary to commence with our
investment program.
We expect to use substantially all of the net proceeds from
this offering (after paying or reimbursing organization and
offering expenses) to invest in and manage a diverse portfolio
of assets primarily consisting of multi-housing rental
properties and development projects through the acquisition of
equity interests in such properties or debt, as well as real
estate debt securities and other real estate-related assets,
where the underlying assets primarily consist of such
properties. We may make our investments through majority-owned
subsidiaries, some of which may have rights to receive preferred
economic returns. We expect that any expenses or fees payable to
our Manager for its services in connection with managing our
daily affairs, including but not limited to, the selection and
acquisition or origination of our investments, will be paid from
cash flow from operations. If such fees and expenses are not
paid from cash flow (or waived) they will reduce the cash
available for investment and distribution and will directly
impact our quarterly NAV. See "Management Compensation" for more
details regarding the fees that will be paid to our Manager and
its affiliates. Many of the amounts set forth in the table below
represent our Manager's best estimate since they cannot be
precisely calculated at this time.
We may not be able to promptly invest the net proceeds of
this offering in multi-housing rental properties and development
projects and real estate related assets. In the interim, we may
invest in short-term, highly liquid or other authorized
investments, subject to the requirements for qualification as a
REIT. Such short-term investments will not earn as high of a
return as we expect to earn on our real estate-related
investments.
Per Share
Total Minimum
Raise
Total
Maximum
Raise
Public Offering Price
$ 10.00
3,000,000.00
$50,000,000.00
Offering &
Organization Expenses
$ -
$90,000.00
$1,500,000.00
Proceeds to Us from
this Offering to the
Public (Less Expenses)
$ 10.00
$2,910,000.00
$48,500,000.00
MANAGEMENT
Our Board of Directors
We operate under the direction of our board of
directors, the members of which are accountable to us and
our shareholders as fiduciaries.
Our board of directors has retained our Manager
to direct the management of our business and affairs, manage our
day-to- day affairs, and implement our investment strategy,
subject to the board of directors' supervision. The current
board members are Yuen Yung, Joy Schoffler, and Monte Lee-Wen.
All of our directors are also partners of our Sponsor, and
all of our directors have invested in projects and/or affiliates
of our Sponsor. As a result, we do not have
any independent directors or management and conflicts of
interest may arise. For more details, see "Conflicts of Interest
and Related Party Transactions."
Although the number of board members may be increased or
decreased, a decrease may not have the effect of shortening the
term of any incumbent director. Any director may resign at any
time or may be removed for fraud, gross negligence or willful
misconduct as determined by non-appealable decision of a court
of competent jurisdiction, or by the shareholders upon the
affirmative vote of at least two-thirds of all the votes
entitled to be cast at a meeting called for the purpose of the
proposed removal. The notice of the meeting will indicate that
the purpose, or one of the purposes, of the meeting is to
determine if the director will be removed.
Our charter and bylaws provide that any and all vacancies
on our board of directors may be filled only by the affirmative
vote of a majority of the remaining directors in office, even if
the remaining directors do not constitute a quorum, and any
individual elected to fill such vacancy will serve for the
remainder of the full term of the class in which the vacancy
occurred and until a successor is duly elected and qualifies.
Our charter and bylaws provide that any action required or
permitted to be taken at any meeting of the shareholders may be
taken without a meeting with the unanimous consent, in writing
or by electronic transmissions, of each shareholder entitled to
vote on the matter.
Under Maryland law, our directors must perform their duties
in good faith and in a manner each director believes to be in
our best interests. Further, our directors must act with such
care as a prudent person in a similar position would use under
similar circumstances, including exercising reasonable inquiry
when taking actions. However, our directors and executive
officers are not required to devote all of their time to our
business and must devote only such time to our affairs as their
duties may require. We do not expect that our directors will be
required to devote a substantial portion of their time to us in
discharging their duties. All of our directors are also partners
of our Sponsor and serve on the investment committees for each
of the two closed-end funds sponsored by our Sponsor. As a
result, we do not have any independent directors or management
and conflicts of interest may arise. For more details, see
"Conflicts of Interest and Related Party Transactions."
Our general investment and borrowing policies are set forth
in this offering circular. Our directors may establish further
written policies on investments and borrowings and will monitor
our administrative procedures, investment operations and
performance to ensure that our executive officers and Manager
follow these policies and that these policies continue to be in
the best interests of our shareholders. Unless modified by our
directors, we will follow the policies on investments and
borrowings set forth in this offering circular.
Our Manager
We will follow investment guidelines adopted by our Manager
and the investment and borrowing policies set forth in this
offering circular unless they are modified by our Manager. Our
Manager may establish further written policies on investments
and borrowings and will monitor our administrative procedures,
investment operations and performance to ensure that the
policies are fulfilled. Our Manager may change our investment
objectives at any time without approval of our shareholders.
Our Manager performs its duties and responsibilities
pursuant to our management agreement. Our Manager maintains a
contractual, as opposed to a fiduciary relationship, with us and
our shareholders. Furthermore, we have agreed to limit the
liability of our Manager and to indemnify our Manager against
certain liabilities.
Management Agreement
We have entered into a management agreement with our
Manager, effective as of October 16, 2017, pursuant to which it
will provide for the day-to-day management of our operations.
The management agreement will require our Manager to manage our
business affairs in conformity with the investment guidelines
and policies that are approved and monitored by our board of
directors. Our Manager's role as manager will be under the
supervision and direction of our board of directors.
Term and Termination of Management Agreement
The management agreement may be amended or modified by
agreement between us and our Manager. The initial term of the
management agreement expires on the third anniversary of the
effective date of the agreement and will be automatically
renewed for a one-year term each anniversary date thereafter
unless previously terminated as described below. Our board of
directors will review our Manager's performance and the
management fee annually and, following the initial term, the
asset management agreement may be terminated annually upon the
affirmative vote of at least two-thirds of our directors, based
upon (a) unsatisfactory performance that is materially
detrimental to us taken as a whole, or (b) our determination
that the management fee payable to our Manager is not fair,
subject to our Manager's right to prevent such termination due
to unfair fees by accepting a reduction of the management fee
agreed to by at least two-thirds of our directors. We must
provide 180 days' prior notice of any such termination. During
the initial three-year term of the management agreement, we may
not terminate the management agreement except for cause.
We may also terminate the management agreement at any time,
including during the initial term, with 30 days' prior written
notice from our board of directors for cause, which is defined
as:
? our Manager's continued breach of any material
provision of the management agreement following a
period of 30 days after written notice thereof (or 45
days after written notice of such breach if our
Manager, under certain circumstances, has taken steps
to cure such breach within 30 days of the written
notice);
? the commencement of any proceeding relating to the
bankruptcy or insolvency of our Manager, including an
order for relief in an involuntary bankruptcy case or
our Manager authorizing or filing a voluntary
bankruptcy petition;
? any change of control of our Manager which our
Independent Representative determines is materially
detrimental to us taken as a whole;
? our Manager committing fraud against us,
misappropriating or embezzling our funds, or acting,
or failing to act, in a manner constituting bad
faith, willful misconduct, gross negligence or
reckless disregard in the performance of its duties
under the management agreement; provided, however,
that if any of these actions is caused by an
employee, personnel and/or officer of our Manager or
one of its affiliates and our Manager (or such
affiliate) takes all necessary and appropriate action
against such person and cures the damage caused by
such actions within 30 days of our Manager's actual
knowledge of its commission or omission, the
management agreement shall not be terminable; in
addition, if our Manager (or such affiliate)
diligently takes necessary and appropriate action to
cure the damage caused by such actions in the first
30 days of our Manager's actual knowledge of its
commission or omission, our Manager (or such
affiliate) will have a total of 180 days in which to
cure such damage before the management agreement
shall become terminable; or
? the dissolution of our Manager.
Our Manager may assign the agreement in its entirety or
delegate certain of its duties under the management agreement to
any of its affiliates without the approval of our board of
directors so long as our Manager remains liable for any such
affiliate's performance, and if such assignment or delegation
does not require our approval under the Investment Advisers Act.
Our Manager may terminate the management agreement if we
become required to register as an investment company under the
Investment Company Act, with such termination deemed to occur
immediately before such event. Our Manager may decline to renew
the management agreement by providing us with 180 days' written
notice prior to the expiration of the initial term or the then
current automatic renewal term. In addition, if we default in
the performance of any material term of the agreement and the
default continues for a period of 30 days after written notice
to us specifying such default and requesting the same be
remedied in 30 days, our Manager may terminate the management
agreement upon 60 days' written notice.
We may not assign our rights or responsibilities under the
management agreement without the prior written consent of our
Manager, except in the case of assignment to another REIT or
other organization which is our successor, in which case such
successor organization will be bound under the management
agreement and by the terms of such assignment in the same manner
as we are bound under the management agreement.
Management Compensation and Expense Reimbursements
We do not expect to maintain an office or directly employ
personnel. Instead, we rely on the facilities and resources of
our Manager to manage our day-to-day operations.
Our Manager and its affiliates will receive fees and
expense reimbursements for services relating to this offering
and the investment and management of our assets, including a
quarterly asset management fee. See "Management Compensation"
for a detailed explanation of the fees and expenses payable to
our Manager and its affiliates. Neither our Manager nor its
affiliates will receive any selling commissions or dealer
manager fees in connection with the offer and sale of shares of
our common stock.
Responsibilities of Manager
The responsibilities of our Manager include the following:
Investment Advisory, Origination and Acquisition Services
approve and oversee our overall investment strategy,
which will consist of elements such as investment selection
criteria, diversification strategies and asset disposition
strategies;
serve as our investment and financial manager with
respect to sourcing, underwriting, acquiring, financing,
originating, servicing, investing in and managing a
diversified portfolio of multi-housing rental properties
and development projects, including commercial real estate
equity, commercial real estate loans, and other real
estate-related assets;
adopt and periodically review our investment guidelines;
structure the terms and conditions of our acquisitions,
sales and joint ventures;
enter into leases and service contracts for the
properties and other investments;
approve and oversee our debt financing strategies;
approve joint ventures, limited partnerships and other
such relationships with third parties;
approve any potential liquidity transaction;
obtain market research and economic and statistical data
in connection with our investments and investment
objectives and policies;
oversee and conduct the due diligence process related to
prospective investments;
prepare reports regarding prospective investments that
include recommendations and supporting documentation
necessary for our Manager's investment committee to
evaluate the proposed investments; and
negotiate and execute approved investments and other
transactions.
Offering Services
the development of this offering, including the
determination of its specific terms;
preparation and approval of all marketing materials to be
used by us relating to this offering;
the negotiation and coordination of the receipt,
collection, processing and acceptance of subscription
agreements, commissions, and other administrative support
functions;
creation and implementation of various technology and
electronic communications related to this offering; and
all other services related to this offering.
Asset Management Services
investigate, select, and, on our behalf, engage and
conduct business with such persons as our Manager deems
necessary to the proper performance of its obligations
under our management agreement, including but not limited to
consultants, accountants, lenders, technical managers,
attorneys, corporate fiduciaries, escrow agents,
depositaries, custodians, agents for collection, insurers,
insurance agents, developers, construction companies and
any and all persons acting in any other capacity deemed by
our Manager necessary or desirable for the performance of
any of the services under our management agreement;
monitor applicable markets and obtain reports (which may
be prepared by our Manager or its affiliates) where
appropriate, concerning the value of our investments;
monitor and evaluate the performance of our investments,
provide daily management services to us and perform and
supervise the various management and operational functions
related to our investments;
formulate and oversee the implementation of strategies
for the administration, promotion, management, operation,
maintenance, improvement, financing and refinancing,
marketing, leasing and disposition of investments on an
overall portfolio basis; and
coordinate and manage relationships between us and any
joint venture partners.
Accounting and Other Administrative Services
manage and perform the various administrative functions
necessary for our day-to-day operations;
arrange for third-party service providers to assist with
administrative services and legal services;
provide or arrange for office space, office furnishings,
personnel and other overhead items necessary and incidental
to our business and operations;
provide or arrange for financial and operational planning
services and portfolio management functions;
maintain accounting data and any other information
concerning our activities as will be required to prepare
and to file all periodic financial reports and returns
required to be filed with the SEC and any other regulatory
agency, including annual financial statements;
maintain all appropriate company books and records;
oversee tax and compliance services and risk management
services and coordinate with appropriate third parties,
including independent accountants and other consultants, on
related tax matters;
supervise the performance of such ministerial and
administrative functions as may be necessary in connection
with our daily operations;
provide us with all necessary cash management services;
manage and coordinate with the transfer agent, if any,
the process of making distributions and payments to
shareholders;
evaluate and obtain adequate insurance coverage based
upon risk management determinations;
provide timely updates related to the overall regulatory
environment affecting us, as well as managing compliance
with regulatory matters;
evaluate our corporate governance structure and
appropriate policies and procedures related thereto; and
oversee all reporting, record keeping, internal controls
and similar matters in a manner to allow us to comply with
applicable law.
Shareholder Services
determine our distribution policy and authorizing
distributions from time to time;
approve amounts available for redemptions of our common
shares;
manage communications with our shareholders, including
answering phone calls, preparing and sending written and
electronic reports and other communications; and
establish technology infrastructure to assist in
providing shareholder support and services.
Financing Services
identify and evaluate potential financing and refinancing
sources, engaging a third-party broker if necessary;
negotiate terms of, arrange and execute financing
agreements;
manage relationships between us and our lenders, if any;
and
monitor and oversee the service of our debt facilities
and other financings, if any.
Disposition Services
evaluate and approve potential asset dispositions, sales
or liquidity transactions; and
structure and negotiate the terms and conditions of
transactions pursuant to which our assets may be sold.
Executive Officers of Manager
Name Age
Position
Yuen Yung 44
Chief Executive Officer; Investment Committee
Monte K. Lee-Wen 41
Principal; Investment Committee
Compensation of Executive Officers
We do not currently have any employees nor do we currently
intend to hire any employees who will be compensated directly by
us. Each of the executive officers of our sponsor also serves as
an executive officer of our Manager. Each of these individuals
receives compensation for his or her services, including
services performed for us on behalf of our Manager, from our
sponsor. As executive officers of our Manager, these individuals
will serve to manage our day-to-day affairs, oversee the review,
selection and recommendation of investment opportunities,
service acquired investments and monitor the performance of
these investments to ensure that they are consistent with our
investment objectives. Although we will indirectly bear some of
the costs of the compensation paid to these individuals, through
fees we pay to our Manager, we do not intend to pay any
compensation directly to these individuals.
Limited Liability and Indemnification of our Manager and Others
Subject to certain limitations, our management agreement
limits the liability of our Manager, its officers and directors,
our sponsor and our sponsor's shareholder and affiliates, for
monetary damages and provides that we will indemnify and pay or
reimburse reasonable expenses in advance of final disposition of
a proceeding to our Manager, its officers and directors, our
sponsor and our sponsor's shareholder and affiliates.
Our management agreement provides that to the fullest extent
permitted by applicable law our Manager, its officers and
directors, our sponsor and our sponsor's shareholders and
affiliates will not be liable to us. In addition, pursuant to
our management agreement, we have agreed to indemnify our
Manager, its officers and directors, our sponsor and our
sponsor's shareholders and affiliates, to the fullest extent
permitted by law, against all expenses and liabilities
(including judgments, fines, penalties, interest, amounts paid
in settlement with the approval of the company and attorney's
fees and disbursements) arising from the performance of any of
their obligations or duties in connection with their service to
us or the management agreement, including in connection with any
civil, criminal, administrative, investigative or other action,
suit or proceeding to which any such person may hereafter be
made party by reason of being or having been the Manager or one
of our Manager's directors or officers. Insofar as the foregoing
provisions permit indemnification of directors, officers or
persons controlling us for liability arising under the
Securities Act, we have been informed that, in the opinion of
the SEC, this indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Support Agreement
Our Manager has entered into a support agreement with our
Sponsor. Pursuant to this agreement, our Manager will be
provided with access to, among other things, our Sponsor's
portfolio management, asset valuation, risk management and asset
management services as well as administration services
addressing legal, compliance, investor relations and information
technologies necessary for the performance by our Manager of its
duties in exchange for a fee representing our Manager's
allocable cost for these services. However,
under the support agreement, our Sponsor will be entitled to
receive reimbursement of expenses incurred on behalf of us or
our Manager the the REIT is required to pay to our Manager under the
management agreement.
Investment Committee of our Manager
The investment committee of our Manager is a standing
committee, established to assist our Manager in fulfilling its
oversight responsibilities by (1) considering and approving of
each investment made by us, (2) establishing our investment
guidelines and overseeing our investments, and the investment
activity of other accounts and funds held for our benefit and
(3) overseeing the investment activities of certain of our
subsidiaries. The investment committee will consist of three
members, each of whom will be appointed by our Manager, who will
serve until such time as such investment committee member
resigns or is replaced by our Manager, in its sole and absolute
discretion. The initial investment committee will be comprised
of Mr. Yung and Mr. Lee-Wen. In the event that two or more
members of the investment committee are interested parties in a
transaction, the Independent Representative (defined below) will
be required to approve the transaction. See "Conflicts of
Interest and Related Party Transactions-Certain Conflict
Resolution Measures-Our Policies Relating to Conflicts of
Interest". The investment committee may request information from
third parties in making its recommendations.
CONFLICTS OF INTEREST AND RELATED
PARTY TRANSACTIONS
We are subject to various conflicts of interest arising out
of our relationship with our Manager, our Sponsor and their
affiliates. We discuss these conflicts below and conclude
this section with a discussion of the corporate governance
measures we have adopted to mitigate some of the risks posed
by these conflicts.
General
Our Manager and its affiliates will experience conflicts
of interest in connection with the management of our business.
Some of the material conflicts that our Manager and its
affiliates may face include the following:
* Our Sponsor's real estate professionals acting on behalf
of our Manager must determine which investment
opportunities to recommend to us and other entities
affiliated with our Sponsor. Our Sponsor has previously
sponsored, as of the date of this offering circular, one
privately offered real estate fund that may have similar
investment criteria to our own. It is possible that this fund
could compete with us for investment opportunities.
* Our Sponsor's real estate professionals acting on behalf of
our Manager will have to allocate their time among us, our
Sponsor's business and other programs and activities in
which they are involved, including, potentially, additional
private or publicly offered investment funds.
* The terms of our management agreement (including our
Manager's rights and obligations and the compensation
payable to our Manager and its affiliates) were not
negotiated through the benefit of arm's length negotiations
of the type which are normally conducted between
unaffiliated parties.
Allocation of Investment Opportunities
We rely on our Sponsor's executive officers and key real
estate professionals who act on behalf of our Manager to
identify suitable investments. Our Sponsor has in the past
established and sponsored closed-end private equity real
estate funds, and in the future, expects to establish and
sponsor additional closed-end private equity real estate
funds and additional REIT offerings, as well as other
potential investment vehicles (including open-end funds and
separate accounts). The existing closed-end private equity
real estate funds do, and any future investment vehicles may,
have investment criteria similar to ours. If a sale,
investment or other business opportunity would be suitable
for more than one investment vehicle sponsored by our
Sponsor, our Manager's investment committee will allocate it
according to the policies and procedures adopted by our
Manager. Any allocation of this type may involve the
consideration of a number of factors that our Manager's
investment committee may determine to be relevant. The
factors that our Sponsor's real estate professionals could
consider when determining the particular investment vehicle
for which an investment opportunity would be the most
suitable include the following:
? the investment objectives and criteria of our
Sponsor's various investment vehicles;
? the cash requirements of our Sponsor's various
investment vehicles;
? the effect of the investment on the diversification
of the portfolios of our Sponsor's various investment
vehicles by type of investment, and risk of
investment;
? the policy of our Sponsor's various investment vehicles
relating to leverage;
? the anticipated cash flow of the asset to be acquired;
? the income tax effects of the purchase on our Sponsor's
various investment vehicles;
? the size of the investment; and
? the amount of funds available to our Sponsor's various
investment vehicles.
Competition for Potential Investors by Affiliates of the Sponsor
The Casoro Real Estate Fund and the PPA Group could
compete with us for potential investors, although both of these
entities impose different criteria with regard to investor
eligibility than we do. There may be sufficient overlap
between investment programs that all of our affiliates compete
for certain investors. For instance, the limited partnership
interests offered by the Casoro Real Estate Fund are available
only to accredited investors. However, it is possible that the
private Fund could compete with us for some investor capital.
Allocation of Sponsor's and Affiliates' Time
We rely on our Sponsor's key real estate professionals
who act on behalf of our Manager, including Mr. Yung and Mr.
Lee-Wen, for the day-to-day operation of our business. Mr.
Yung and Mr. Lee-Wen also managing members of our Sponsor. As
a result of their interests in other affiliates of our
Sponsor, including the PPA Group and the Casoro Real Estate
Fund, LP, their obligations to other investors and the fact
that they engage in and will continue to engage in other
business activities on behalf of themselves and others, Mr.
Yung and Mr. Lee-Wen will face conflicts of interest in
allocating their time among us, our Manager and other
affiliates of our Sponsor and other business activities in
which they are involved. However, we believe that our Manager
and its affiliates have sufficient real estate professionals
to fully discharge their responsibilities to the affiliates of
our Sponsor for which they work.
Duties Owed by Some of Our Affiliates to Our Manager
and our Manager's Affiliates
Our Manager's officers and directors and the key real estate
and debt finance professionals of our sponsor performing services
on behalf of our Manager are also officers, directors, managers
and/or key professionals of:
- Casoro Capital Partners, our sponsor;
- Casoro Investment Advisory Firm, our Manager;
- The PPA Group
- The Casoro Real Estate Fund
As a result, they owe duties to each of these entities, their
shareholders, members and limited partners. These duties may
from time to time conflict with the duties that they owe to us.
Receipt of Fees and Other Compensation by our Manager and its
Affiliates
Our Manager and its affiliates will receive an asset
management fee from us, which fee has not been negotiated at
arm's length with an unaffiliated third party. This fee could
influence our Manager's advice to us as well as the judgment
of affiliates of our Manager, some of whom also serve as our
Manager's officers and directors and the key real estate
professionals of our Sponsor. Among other matters, these
compensation arrangements could affect their judgment with
respect to:
? the continuation, renewal or enforcement of
provisions in our management agreement involving our
Manager and its affiliates, or the support agreement
between our Manager and our Sponsor;
? public offerings of equity by us, which will likely
entitle our Manager to an increase in the asset
management fee;
? acquisitions of investments from other Sponsor
entities, which might entitle affiliates of our
Manager or Sponsor to profit participations or to
fees in connection with services for the seller;
? whether and when we seek to list shares of our common
stock on a stock exchange or other trading market;
? whether we seek shareholder approval to internalize
our management, which may entail acquiring assets
(such as office space, furnishings and technology
costs) and the key real estate professionals of our
Sponsor who are performing services for us on behalf
of our Manager for consideration that would be
negotiated at that time and may result in these real
estate professionals receiving more compensation from
us than they currently receive from our Sponsor;
? whether and when we seek to sell the company or its
assets; and
? whether and when we merge or consolidate our assets
with other companies, including companies affiliated
with our Manager.
No Independent Underwriter
As we are conducting this offering without the aid of an
independent underwriter, you will not have the benefit of an
independent due diligence review and investigation of the type
normally performed by an independent underwriter in connection
with the offering of securities. See "Plan of Distribution."
Certain Conflict Resolution Measures
Independent Representative
If our Sponsor, our Manager or their affiliates have a
conflict of interest with us that is not otherwise covered by
an existing policy we have adopted, our Manager will appoint
an independent representative (the "Independent
Representative") to protect the interests of the shareholders
and review and approve such transactions. Any compensation
payable to the Independent Representative for serving in such
capacity on our behalf will be payable by us. Principal
transactions are defined as transactions between our Sponsor,
our Manager or their affiliates, on the one hand, and us or
one of our subsidiaries, on the other hand. Our Manager is
only authorized to execute principal transactions with the
prior approval of the Independent Representative and in
accordance with applicable law. Such prior approval may
include but not be limited to pricing methodology for the
acquisition of assets and/or liabilities for which there are
no readily observable market prices.
Our Policies Relating to Conflicts of Interest
In addition to our Manager's investment allocation
policies described above, we have adopted the following
policies prohibiting us from entering into certain types of
transactions with respect to future investments with our
Manager, our Sponsor, their officers or any of their
affiliates in order to further reduce the potential for
conflicts inherent in transactions with affiliates.
Pursuant to these conflicts of interest policies, we may
not engage in the following types of transactions unless such
transaction is approved by the Independent Representative:
* sell or lease any investments to our Manager, our
Sponsor, their officers or any of their affiliates; or
* acquire or lease any investments from our Manager, our
Sponsor, their officers or any of their affiliates.
We may, however, purchase an investment from an entity
affiliated with our Sponsor in the event that such entity
initially acquires an investment that is suitable for us at a
time when we are unable to do so, with the intention of
providing us the opportunity to acquire the investment at a
later date when we are able to acquire the investment. Other
than with respect to the acquisition of our initial property
upon the commencement of this offering, we will not purchase
investments from an entity affiliated with our Sponsor in
these circumstances without a determination by the Independent
Representative that such transaction is fair and reasonable to
us and at a price to us that is not materially greater than
the cost of the asset to the applicable entity affiliated with
our Sponsor.
In addition, pursuant to these conflicts of interest
policies, we will neither make any loans to our Manager, our
Sponsor, their officers or any of their affiliates nor borrow
money from our Manager, our Sponsor, their officers or any of
their affiliates, except as otherwise provided in the offering
circular or unless approved by the Independent Representative.
These restrictions on loans will only apply to advances of
cash that are commonly viewed as loans, as determined by the
Manager. By way of example only, the prohibition on loans
would not restrict advances of cash for legal expenses or
other costs incurred as a result of any legal action for which
indemnification is being sought nor would the prohibition
limit our ability to advance reimbursable expenses incurred by
our Manager, our Sponsor, their officers or any of their
affiliates. Notwithstanding the above, from time to time we
may borrow from our Sponsor at a rate that is the lesser of
(a) market or (b) our Sponsor's cost of capital.
These conflicts of interest policies may be amended at
any time in our Manager's discretion.
INVESTMENT OBJECTIVES AND STRATEGY
Our investment objectives are capital appreciation through
growth in the value of our properties, and income from cash
flow that can be paid as dividends to our investors. We were
recently formed as a Maryland corporation to invest in and
manage a portfolio of real estate properties. Our investment
strategies center on multi-housing within the continental U.S.
in the areas of student housing, multi-housing, conventional
apartments, & senior living (existing and new development
projects). We expect to use substantially all of the net
proceeds from this offering to source, acquire, potentially
develop, manage, operate, selectively leverage, and sell a
diversified portfolio of primarily residential properties. Our
Manager looks to leverage its financial expertise and
operational experience in acquiring and repositioning multi-
housing properties with upside potential within the continental
U.S. We are targeting mid-single digit cap rates with an IRR of
12%+. The expected typical holding period is between 3 to 5
years. We do not expect to invest more than 15% of our assets in
any one property.
Our strategies include the following:
* Core Plus Strategy - Focused on quality multi-housing
properties with quality residents in primary and
secondary markets with an opportunity to increase net
operating income.
* Value Add Strategy - Focused on increasing occupancy
and net operating income on multi-housing properties
through renovations and repositioning of the property.
* Opportunistic Strategy - Finding opportunities to
participate in multi-housing new development,
distressed sales and/or bankruptcy auctions.
We may also invest, to a limited extent, in other real
estate-related assets. We plan to diversify our portfolio's
investment risk with the goal of attaining a portfolio of real
estate assets that provides attractive cash yields to our
shareholders with the potential for capital appreciation.
Insofar as consistent with the REIT statutory restrictions, we
may investment, to a limited extent, in other assets, including
asset-backed and mortgage-backed obligations; loans; credit
paper; accounts and notes receivable and payable held by trade
or other creditors; trade acceptances; contract and other
claims; executory contracts; participations obligations of the
United States or any state thereof, foreign governments and
instrumentalities of any of them; commercial paper;
certificates of deposit; bankers' acceptances; trust receipts;
and any other obligations and instruments or evidences of
indebtedness. We may selectively leverage any and all of our
acquired properties. The number of mortgages which may be
placed on any one property is capped at three.
We may invest in private issuances of equity or debt securities
of public companies; and in a loan, security or other full
recourse obligations for which the business of the related obligor
is significantly related to real estate. We may offer our own
securities or the securities of our affiliates, alone or in
combination with cash or other assets in exchange for real estate
and related investments.
We intend to operate in a manner that will allow us to
qualify as a REIT for U.S. federal income tax purposes. Among
other requirements, REITs are required to distribute to
shareholders at least 90% of their annual REIT taxable income
(computed without regard to the dividends paid deduction and
excluding net capital gain).
Our corporate office is located at 9050 N. Capital of
Texas Highway, Suite 320, Austin, TX 78759. Our telephone
number is: 512-872-2898. Information regarding our company is
also available on our website at www.upsideavenue.com.
Information contained on or accessible through, our
website is not incorporated by reference into and does not
constitute a part of this offering circular or any other report
or documents we file with or furnish to the SEC.
Prior to acquiring an asset, our Manager committee will
perform an individual analysis of the asset to determine
whether it meets our investment guidelines.
We cannot assure you that we will attain these objectives
or that the value of our assets will not decrease. Furthermore,
within our investment objectives and policies, our Manager will
have substantial discretion with respect to the selection of
specific investments, the management of our portfolio and the
purchase and sale of our assets. Our Manager's investment
committee will review our investment guidelines at least
annually to determine whether our investment guidelines
continue to be in the best interests of our shareholders.
Any or all of the investments, investment strategies and
activities described here may be pursued by the REIT directly,
by the Manager or Sponsor by other affiliated or third-party
investment managers, if any, engaged by the Sponsor to manage
REIT capital.
Opportunity and Market Overview
Investing with us offers investors the opportunity to gain real
estate exposure with lower fees and higher returns relative to
other public non-traded REITs. Compared to other public non-
traded REITs, we offer lower upfront fees and lower ongoing
fees. We also give our investors access to deals which
typically are only available to institutional investors.
Lack of Allocation Requirements
Nothing in our charter, organizational documents or
otherwise provides for restrictions or limitations on the
percentage of our investments that must be (i) in a given
geographic area, (ii) of a particular type of real estate, or
(iii) acquired utilizing a particular method of financing. The
board of directors may change our targeted investments and
investment guidelines without specific restrictions or
limitations related to geographic location, diversification, or
otherwise. See "Risk Factors-Risks Related to an Investment in
our Company."
Risk Management
We will seek to manage risk through monitoring and
analysis by the Manager of our portfolio. Although the Manager
may commit a large portion of the REIT's capital to one or more
specific real estate assets, the Manager will also seek to
mitigate risk through portfolio diversification.
Borrowing and Leverage Policy
We may utilize leverage in our investment program when the
Manager considers it appropriate, including to acquire
portfolio investments. Additionally, we may incur also
indebtedness: (i) to pay expenses of the REIT, (ii) to purchase
the shares of any withdrawing shareholder, (iii) to finance
improvements to a portfolio investment and (iv) to otherwise
protect any portfolio investment or other asset as determined
by the Manager in its sole discretion.
Currently, the REIT's use of leverage is limited to a
maximum of 80% of NAV. The use of leverage may, in certain
circumstances, maximize the adverse impact to which the REIT's
investment portfolio may be subject. Our Manager may from time
to time modify our leverage policy in its discretion.
Liquidity Event
Subject to then existing market conditions, we may consider
alternatives to our liquidation as a means for providing
liquidity to our shareholders within approximately ten years
from the completion of this offering. While we expect to seek a
liquidity transaction in this time frame, there can be no
assurance that a suitable transaction will be available or that
market conditions for a transaction will be favorable during
that time frame. Our Manager has the discretion to consider a
liquidity transaction at any time if it determines such event to
be in our best interests. A liquidity transaction could consist
of a sale or partial sale of our assets, a sale or merger of the
company, a consolidation transaction with other companies
managed by our Manager or its affiliates, a listing of our
shares on a national securities exchange or a similar
transaction. We do not have a stated term, as we believe setting
a finite date for a possible, but uncertain future liquidity
transaction may result in actions that are not necessarily in
the best interest or within the expectations of our
shareholders.
Prior to our completion of a liquidity transaction, our
redemption plan may provide an opportunity for you to have your
common shares redeemed, subject to certain restrictions and
limitations.
PLAN OF OPERATION
General
We were recently formed as a Maryland corporation to invest
in and manage a portfolio of real estate properties. We expect
to use substantially all of the net proceeds from this offering
to acquire a diversified portfolio of primarily multi-housing
properties with a focus on markets where we feel that the risk-
return characteristics are favorable. We may also invest, to a
limited extent, in other real estate-related assets. We plan to
diversify our portfolio by investment risk with the goal of
attaining a portfolio of real estate assets that provide
attractive cash yields paid as dividends to our shareholders
with the potential for capital appreciation.
Casoro Investment Advisory Firm, LLC is our Manager. As our
Manager, it will manage our day-to-day operations and our
portfolio of investments. Our Manager also has the authority to
make all of the decisions regarding our investments, subject to
the direction and oversight of our Manager's investment
committee. Our Manager will also provide asset management,
marketing, investor relations and other administrative services
on our behalf.
We intend to make an election to be taxed as a REIT under
the Code, commencing with our taxable year ending December 31,
2018. If we qualify as a REIT for U.S. federal income tax
purposes, we generally will not be subject to U.S. federal
income tax to the extent we distribute dividends to our
shareholders.
If we fail to qualify as a REIT in any taxable year after
electing REIT status, we will be subject to U.S. federal income
tax on our taxable income at regular corporate income tax rates
and generally will not be permitted to qualify for treatment as
a REIT for U.S. federal income tax purposes for four years
following the year in which our qualification is denied. Such an
event could materially and adversely affect our net income and
cash available for distribution. However, we believe that we
will be organized and will operate in a manner that will enable
us to qualify for treatment as a REIT for U.S. federal income
tax purposes commencing with our taxable year ending December
31, 2018, and we intend to continue to operate so as to remain
qualified as a REIT for U.S. federal income tax purposes
thereafter.
Competition
Our net income depends, in large part, on our ability to
source, acquire and manage investments with attractive risk-
adjusted yields. We compete with many other entities engaged in
real estate investment activities, including individuals,
corporations, insurance company investment accounts, other
REITs, private real estate funds, and other entities engaged in
real estate investment activities, many of which have greater
financial resources and lower costs of capital available to them
than we have. In addition, there are numerous REITs with asset
acquisition objectives similar to ours, and others may be
organized in the future, which may increase competition for the
investments suitable for us. Competitive variables include
market presence and visibility, amount of capital to be invested
per investment and underwriting standards. To the extent that a
competitor is willing to risk larger amounts of capital in a
particular transaction or to employ more liberal underwriting
standards when evaluating potential investments than we are, our
investment volume and profit margins for our investment
portfolio could be impacted. Our competitors may also be willing
to accept lower returns on their investments and may succeed in
buying the assets that we have targeted for acquisition.
Although we believe that we are well positioned to compete
effectively in each facet of our business, there is enormous
competition in our market sector and there can be no assurance
that we will compete effectively or that we will not encounter
increased competition in the future that could limit our ability
to conduct our business effectively.
Results of Operations
We were formed on October 17, 2017. Our management is not
aware of any material trends or uncertainties, other than
national economic conditions affecting real estate generally
that may reasonably be expected to have a material impact,
favorable or unfavorable, on revenues or income from the
acquisition, management and operation of real estate and real
estate related investments.
Liquidity and Capital Resources
We are dependent upon the net proceeds from this offering
to conduct our proposed operations. We will obtain the capital
required to purchase new investments and conduct our operations
from the proceeds of this offering and any future offerings we
may conduct, from secured or unsecured financings from banks and
other lenders and from any undistributed funds from our
operations.
Further, we will have certain fixed operating expenses,
including certain expenses as a publicly offered REIT,
regardless of whether we are able to raise substantial funds in
this offering. Our inability to raise substantial funds would
increase our fixed operating expenses as a percentage of gross
income, reducing our net income and limiting our ability to pay
dividends.
In addition to making investments in accordance with our
investment objectives, we expect to use our capital resources to
make certain payments to our Manager. During our organization
and offering stage, these payments will include payments for
reimbursement of certain organization and offering expenses.
During our acquisition and development stage, we expect to make
payments to our Manager in connection with the management of our
assets and costs incurred by our Manager in providing services
to us. For a discussion of the compensation to be paid to our
Manager, see "Management Compensation".
Valuation Policies
Our NAV per share will be calculated by our Manager at the
end of each fiscal quarter on a fully diluted basis, beginning
twelve months after commencement of the offering using a process
that reflects several components, including (1) estimated values
of each of our commercial real estate assets and investments,
including related liabilities, based upon (a) market
capitalization rates, comparable sales information, interest
rates, discount rates, net operating income, and (b) in certain
instances individual appraisal reports of the underlying real
estate provided by an independent valuation expert, (2) the
price of liquid assets for which third party market quotes are
available, (3) accruals of our periodic dividends and (4)
estimated accruals of our operating revenues and expenses.
Specifically, our Manager will calculate NAV primarily
utilizing a discounted cash flow methodology, and will then
compare that NAV estimate to a valuation utilizing a comparable
sales methodology, to ensure no material variances exist. Both
the discounted cash flow methodology and the comparable sales
methodology are summarized below.
Discounted Cash Flow Methodology - Our Manager estimates
NAV of the Company's ownership interest in an investment based
on a forecasted cash flow stream to the Company (including a
contemplated disposition) discounted to a present/fair value at
a risk adjusted rate. Yield rates, disposition capitalization
rates, and growth assumptions are derived from market
transactions as well as other financial and industry data. The
discount rate utilized to establish fair value is intended to
reflect the leveraged return required of a third-party investor
acquiring the Company's ownership interest at the date of the
valuation. The discount rate is also intended to reflect key
risk factors associated with real estate properties under
development, redevelopment, repositioning, or stabilization,
including entitlement risk, construction risk, leasing/sales
risk, operation expense risk, credit risk, capital market risk,
pricing risk, event risk and valuation risk. Additionally, the
fair value is intended to include the timely recognition of
estimated entrepreneurial profit after such consideration.
Comparable Sales Methodology - Our Manager also estimates
NAV of the Company's ownership interest in an investment based
on completed sales and/or quoted prices in active marketing of
comparable assets. Comparable sales are identified by reviewing
recent sales of similar vintage in a defined geographic region
that are comparable in quality of improvements and tenancy. From
the real estate property fair value, our Manager estimates the
NAV of the Company's ownership interest by reducing the real
estate property value by (i) any ownership liabilities (i.e.
senior loans, secured and unsecured creditors, etc.) and (ii)
the ownership interest and/or profit participation of any other
members in the applicable venture.
We expect that the NAV calculations described above will
primarily be undertaken by our Sponsor's internal accountants
who will perform work on behalf of our Manager pursuant to the
support agreement between our Manager and our Sponsor.
In instances where we determine that an independent
appraisal of the real estate asset is necessary, including, but
not limited to, instances where our Manager is unsure of its
ability on its own to accurately determine the estimated values
of our commercial real estate assets and investments, or
instances where third party market values for comparable
properties are either nonexistent or extremely inconsistent, we
may engage an appraiser that has expertise in appraising
commercial real estate assets, to act as our independent
valuation expert. The independent valuation expert will not be
responsible for, or prepare, our NAV per share. However, we may
hire a third party to calculate, or assist with calculating, the
NAV per share.
The use of different judgments or assumptions would likely
result in different estimates of the value of our real estate
assets. Moreover, although we evaluate and provide our NAV per
share on a quarterly basis, our NAV per share may fluctuate in
the interim, so that the NAV per share in effect for any fiscal
quarter may not reflect the precise amount that might be paid
for your shares in a market transaction. Further, our published
NAV per share may not fully reflect certain material events to
the extent that they are not known or their financial impact on
our portfolio is not immediately quantifiable. Any resulting
potential disparity in our NAV per share may be in favor of
either shareholders who redeem their shares, or shareholders who
buy new shares, or existing shareholders.
Our goal is to provide a reasonable estimate of the NAV per
share on a quarterly basis. However, the majority of our assets
will consist of multi-family investments and, as with any real
estate valuation protocol, the conclusions reached by our
Manager will be based on a number of judgments, assumptions and
opinions about future events that may or may not prove to be
correct. The use of different judgments, assumptions or opinions
would likely result in different estimates of the value of our
multi-housing real estate assets and investments. In addition,
for any given quarter, our published NAV per share may not fully
reflect certain material events, to the extent that the
financial impact of such events on our portfolio is not
immediately quantifiable. As a result, the quarterly calculation
of our NAV per share may not reflect the precise amount that
might be paid for your shares in a market transaction, and any
potential disparity in our NAV per share may be in favor of
either shareholders who redeem their shares, or shareholders who
buy new shares, or existing shareholders. However, to the extent
quantifiable, if a material event occurs in between quarterly
updates of NAV that would cause our NAV per share to change by
5% or more from the last disclosed NAV, we will disclose the
updated NAV per share and the reason for the change in an
offering circular supplement as promptly as reasonably
practicable. Note, in addition, that the determination of our
NAV is not based on, nor intended to comply with, fair value
standards under GAAP and our NAV may not be indicative of the
price that we would receive for our assets at current market
conditions.
Dividend Reinvestment Plan
We may institute an elective dividend reinvestment plan at any
time in the future. We do not currently have such a plan in
place.
Contractual Obligations and Other Long-Term Liabilities
As of January 30, 2018, we did not have any contractual
obligations or other long-term liabilities.
Off-Balance Sheet Arrangements
As of January 30, 2018, we did not have any off-balance sheet
arrangements.
Critical Accounting Policies
Below is a discussion of the accounting policies that
management believes will be critical once we commence
operations. We consider these policies critical because we
believe that understanding these policies is critical to
understanding and evaluating our reported financial results.
Additionally, these policies may involve significant management
judgments and assumptions, or require estimates about matters
that are inherently uncertain. These judgments will affect the
reported amounts of assets and liabilities and our disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses
during the reporting periods. With different estimates or
assumptions, materially different amounts could be reported in
our financial statements. Additionally, other companies may
utilize different estimates that may impact the comparability of
our results of operations to those of companies in similar
businesses.
Real Estate Investments
We will record acquired real estate at cost and make
assessments as to the useful lives of depreciable assets. We
will have to make subjective assessments as to the useful lives
of our depreciable assets. We will consider the period of future
benefit of an asset to determine its appropriate useful life.
Impairment of Long Lived Assets
For operations related to properties that have been sold or
properties that are intended to be sold, we will present them as
discontinued operations in the statement of operations for all
periods presented, and properties intended to be sold to be
designated as "held for sale" on the balance sheet. Management
will deem the intent to sell to exist and utilize the "held for
sale" designation when a non-refundable deposit or option
payment has been made by a prospective buyer.
When circumstances indicate the carrying value of a
property may not be recoverable, we will review the asset for
impairment. This review is based on an estimate of the future
undiscounted cash flows, excluding interest charges, expected to
result from the property's use and eventual disposition.
These estimates consider factors such as expected future
operating income, market and other applicable trends and
residual value, as well as the effects of leasing demand,
competition and other factors.
If impairment exists, due to the inability to recover the
carrying value of a property, an impairment loss will be
recorded to the extent that the carrying value exceeds the
estimated fair value of the property for properties to be held
and used. For properties held for sale, the impairment loss is
the adjustment to fair value less estimated cost to dispose of
the asset. These assessments have a direct impact on net income
because recording an impairment loss results in an immediate
negative adjustment to net income.
Revenue Recognition
Real Estate
We recognize minimum rent, including rental abatements, lease
incentives and contractual fixed increases attributable to
operating leases, on a straight-line basis over the term of the
related leases when collectability is reasonably assured and
record amounts expected to be received in later years as
deferred rent receivable.
Real Estate Loans Receivable
We will recognize interest income from our real estate debt
investments on an accrual basis over the life of the investment
using the effective interest method. We will recognize fees,
discounts, premiums, anticipated exit fees and direct cost over
the term of the loan as an adjustment to the yield. We will
recognize fees on commitments that expire unused at expiration.
Related Party Loans and Warehousing of Assets
If we have sufficient funds to acquire only a portion of a
real estate investment then, in order to cover the shortfall, we
may obtain a related party loan from our Sponsor or its
affiliates. Each related party loan will be an unsecured
obligation of ours, that is payable solely to the extent that
such related party loan remains outstanding. As we sell
additional shares of common stock in this offering, we will use
the proceeds of such sales to pay down the principal and
interest of the related party loan, reducing the payment
obligation of the related party loan, and our obligation to the
holder of the related party loan. We may also utilize related
party loans, from time to time, as a form of leverage to acquire
real estate assets. From time to time we may borrow from our
Sponsor at a rate that is the lesser of (a) market or (b) our
Sponsor's cost of capital.
As an alternative means of acquiring investments for which
we do not yet have sufficient funds, our Sponsor or its
affiliates may close and fund a real estate investment prior to
it being acquired by us. This ability to warehouse investments
allows us the flexibility to deploy our offering proceeds as
funds are raised. We may then acquire such investment at a price
equal to the fair market value of such investment, provided that
its fair market value is materially equal to its cost (i.e., the
aggregate equity capital invested by our Sponsor or its
affiliates in connection with the acquisition and during the
warehousing of such investments, plus assumption of debt and
any costs, such as accrued property management fees and transfer
taxes, incurred during or as a result of the warehousing or,
with respect to debt, the principal balance plus accrued
interest net of any applicable servicing fees).
Quantitative and Qualitative Disclosures about Market Risk
Our future income, cash flows and fair values relating to
financial instruments are dependent upon prevailing market
interest rates. Market risk refers to the risk of loss from
adverse changes in market prices and interest rates. We may use
derivative financial instruments to manage or hedge interest
rate risks related to borrowing.
PRIOR PERFORMANCE
SUMMARY
The information presented in this section represents the
historical operating results for our Sponsor and the experience
of real estate programs sponsored by our Sponsor, which we refer
to as the "Programs." Investors in our common stock should not
assume that they will experience returns, if any, comparable to
those experienced by investors in our Sponsor's affiliated
Programs. Investors who purchase shares of our common stock will
not thereby acquire any ownership interest in any of the
entities to which the following information relates.
The returns to our shareholders will depend in part on the mix
of assets in which we invest. As our portfolio may not mirror
the portfolios of our Sponsor's affiliated Programs in any
respect, the returns to our shareholders may vary from those
generated by our Sponsor's affiliated Programs. The Programs
were conducted through privately-held entities that were not
subject to the fees and expenses associated with this offering
or many of the laws and regulations to which we will be subject.
In addition, our Sponsor is a self-managed, privately-held
company with an indefinite duration. As a result, you should not
assume the past performance of our Sponsor or the Programs
described below will be indicative of our future performance.
Prior Performance of The PPA Group
Our Sponsor and Manager's affiliated entity is the renowned real
estate investment firm, The PPA Group. Its principals are also
those of our Sponsor and Manager. Together, they form a highly
experienced team which has completed over $600 million in
transactions. Being a vertically integrated company that
leverages the disciplined analysis and asset-based knowledge
helps us develop products with exceptional risk-adjusted
returns.
DESCRIPTION OF CAPITAL STOCK AND CERTAIN PROVISIONS
OF MARYLAND LAW, OUR CHARTER AND BYLAWS
The following description of our capital stock, certain
provisions of Maryland law and certain provisions of our charter
and bylaws, which will be in effect upon commencement of this
offering, are summaries and are qualified by reference to
Maryland law and our charter and bylaws, copies of which are
filed as exhibits to the offering statement of which this
offering circular is a part. See "Additional Information."
General
We were incorporated in Maryland as a corporation on
October 17, 2017. Our charter authorizes us to issue 5,000,000
shares of common stock, $10.00 par value per share. We may
increase the number of shares of common stock without
shareholder consent. At this time, we have not issued any
preferred stock.
We intend to have a December 31st fiscal year end. In
addition, we intend to qualify as a REIT and to be taxed as a
REIT under the Code beginning with the year ending December 31,
2018; however, the board of directors may extend such date until
the taxable year ending December 31, 2019.
Common Stock
Holders of our common stock will be entitled to receive
such dividends as declared from time to time by our board of
directors out of legally available funds, subject to any
preferential rights of any preferred stock that we may issue in
the future. We have no plans to issue preferred stock at this
time. In any liquidation, each outstanding share of common stock
entitles its holder to share (based on the percentage of shares
held) in the assets that remain after we pay our liabilities and
any preferential dividends owed to preferred shareholders, if
applicable. Holders of shares of our common stock will not have
preemptive rights, which means that you will not have an
automatic option to purchase any new shares that we issue, nor
will holders of our shares of common stock have any preference,
conversion, exchange, sinking fund, redemption, or appraisal
rights. Our common stock will be non-assessable by us upon our
receipt of the consideration for which our board of directors
authorized its issuance.
Our board of directors has authorized the issuance of
shares of our common stock without certificates. We will not
issue shares in certificated form. Information regarding
restrictions on the transferability of our shares that, under
Maryland law, would otherwise have been required to appear on
our stock certificates will instead be furnished to shareholders
upon request and without charge.
We will maintain a stock ledger that contains the name and
address of each shareholder and the number of shares that the
shareholder holds. With respect to uncertificated stock, we will
continue to treat the shareholder registered on our stock ledger
as the owner of the shares until the new owner delivers a
properly executed form to us, which form we will provide to any
registered holder upon request.
Voting Common Stock
Subject to the restrictions in our charter on transfer and
ownership of shares and except as may otherwise be specified in
the charter, the holders of our common stock are entitled to one
vote per share on all matters submitted to a shareholder vote,
including election of our directors. Therefore, the holders of a
majority of our outstanding shares of common stock can elect the
entire board of directors. Except as set forth in our charter,
including any articles supplementary with respect to any series
of preferred stock we may issue in the future, the holders of
our common stock will possess exclusive voting power. Our
charter does not provide for cumulative voting in the election
of its directors.
Preferred Stock
Our charter authorizes our board of directors to designate
and issue one or more classes or series of preferred stock
without approval of our common shareholders. Our board of
directors may determine the relative rights, preferences and
privileges of each class or series of preferred stock so issued,
which may be more beneficial than the rights, preferences, and
privileges attributable to our common stock. The issuance of
preferred stock could have the effect of delaying or preventing
a change in control. Our board of directors has no present plans
to issue preferred stock but may do so at any time in the future
without shareholder approval.
Preferred Stock Issuance to Meet 100 Investor REIT Requirement
Following completion of this offering, to the extent
necessary to assist us in obtaining a sufficient number of
shareholders to meet certain of the qualification requirements
for taxation as a REIT under the Code, we may undertake to issue
and sell up to approximately 125 shares of a new series of
preferred stock in a private placement to up to approximately
125 investors who qualify as "accredited investors" (as that
term is defined in Rule 501(a) of Regulation D under the
Securities Act). The preferred stock is expected to be
perpetual, pay an annual market dividend for securities of this
type and be redeemable by us at a premium to the aggregate
liquidation value. For example, if we issue 125 shares of
preferred stock with a liquidation price of $1,000 per share and
an annual dividend of 12.5%, we would raise additional capital
of $125,000 and be required to be pay or set aside for payment,
in the aggregate, approximately $15,625 annually, before any
dividends on shares of our common stock could be made.
Meetings and Special Voting Requirements
An annual meeting of our shareholders will be held each
year, on a date and at the time and place set by the board of
directors.
Special meetings of shareholders may be called by our
chairman of the board of directors, chief executive officer,
president or the board of directors. In addition, a special
meeting of the shareholders must be called to act on any matter
that may properly be considered at a meeting of shareholders
upon the written request of shareholders entitled to cast not
less than a majority of all the votes entitled to be cast at
such meeting and the satisfaction by such shareholders of
certain procedural requirements set forth in the Bylaws.
The presence in person or by proxy of shareholders entitled
to cast a majority of all the votes entitled to be cast at any
shareholder meeting constitutes a quorum. The affirmative vote
of a plurality of all votes cast is sufficient to elect a
director. Unless otherwise provided by the Maryland General
Corporation Law or our charter, the affirmative vote of a
majority of all votes cast is sufficient to approve any other
matter which properly comes before the meeting.
Under the Maryland General Corporation Law, a Maryland
corporation generally cannot dissolve, amend its charter, merge,
sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary
course of business, unless declared advisable by its board of
directors and approved by the affirmative vote of shareholders
entitled to cast at least two-thirds of the votes entitled to be
cast on the matter. However, a Maryland corporation may provide
in its charter for approval of these matters by a lesser
percentage, but not less than a majority of all of the votes
entitled to be cast on the matter. Except for amendments of our
charter relating to the restrictions on transfer and ownership
of shares and the vote required to amend certain provisions of
the charter and except for those amendments permitted to be made
without shareholder approval under Maryland law or by specific
provision in the charter, any amendment to our charter will be
valid only if it is declared advisable by the board of directors
and approved by the affirmative vote of holders of shares
entitled to cast at least two-thirds of all votes entitled to be
cast on the matter.
Restrictions on Ownership of Shares Ownership Limit
To maintain our REIT qualification, not more than 50% in
value of our outstanding shares may be owned, directly or
indirectly, by five or fewer individuals (including certain
entities treated as individuals under the Code) during the last
half of each taxable year. In addition, at least 100 persons who
are independent of us and each other must beneficially own our
outstanding shares for at least 335 days per 12-month taxable
year or during a proportionate part of a shorter taxable year.
Each of the requirements specified in the two preceding
sentences will not apply to any period prior to the second year
for which we elect to be taxable as a REIT. We may prohibit
certain acquisitions and transfers of shares so as to ensure our
continued qualification as a REIT under the Code. However, we
cannot assure you that this prohibition will be effective.
To help ensure that we meet these tests, our charter
prohibits any person or group of persons from acquiring,
directly or indirectly, beneficial ownership of more than 9.8%
by value or number of shares, whichever is more restrictive, of
our outstanding shares of common stock, or 9.8% by value or
number of shares, whichever is more restrictive, of our
outstanding capital stock unless exempted by our board of
directors. Our board of directors may waive 9.8% ownership
limitations with respect to a particular person if the board of
directors receives evidence that ownership in excess of the
limit will not jeopardize our REIT status. For purposes of this
provision, we treat corporations, partnerships and other
entities as single persons. These 9.8% ownership limitations
will apply as of the first date of the second taxable year for
which we elect to be treated as a REIT, which will be January 1,
2019 assuming we elect to be treated as a REIT for the taxable
year ending December 31, 2018. However, our charter will also
prohibit any actual, beneficial or constructive ownership of our
shares that causes us to fail to qualify as a REIT (including
any ownership that would result in any of our income that would
otherwise qualify as "rents from real property" for purposes of
the REIT rules to fail to qualify as such) and such ownership
limitation shall not be waived. In addition, our charter
prohibits a person from owning actually or constructively shares
of our outstanding capital stock if such ownership would result
in any of our income that would otherwise qualify as "rents from
real property" for purposes of the REIT rules to fail to qualify
as such.
Any attempted transfer of our shares that, if effective,
would result in a violation of our ownership limit or would
otherwise cause us to fail to qualify as a REIT (including by
virtue of us being "closely held" or through our receipt of
related party resident income) will be null and void and will
cause the number of shares causing the violation to be
automatically transferred to a trust for the exclusive benefit
of one or more charitable beneficiaries. Any attempted transfer
of our shares that, if effective, would result in our shares
being owned by fewer than 100 persons will be null and void. The
prohibited transferee will not acquire any rights in the shares.
The automatic transfer will be deemed to be effective as of
the close of business on the business day prior to the date of
the attempted transfer. We will designate a trustee of the trust
that will not be affiliated with us or the prohibited
transferee. We will also name one or more charitable
organizations as a beneficiary of the share trust.
Shares held in trust will remain issued and outstanding
shares and will be entitled to the same rights and privileges as
all other shares of the same class or series. The prohibited
transferee will not benefit economically from any of the shares
held in trust, will not have any rights to dividends or
dividends, and will not have the right to vote or any other
rights attributable to the shares held in the trust. The trustee
will receive all dividends and dividends on the shares held in
trust and will hold such dividends or dividends in trust for the
benefit of the charitable beneficiary. The trustee may vote any
shares held in trust.
Within 20 days of receiving notice from us that any of our
shares have been transferred to the trust for the charitable
beneficiary, the trustee will sell those shares to a person
designated by the trustee whose ownership of the shares will not
violate the above restrictions. Upon the sale, the interest of
the charitable beneficiary in the shares sold will terminate and
the trustee will distribute the net proceeds of the sale to the
prohibited transferee and to the charitable beneficiary as
follows. The prohibited transferee will receive the lesser of
(i) the price paid by the prohibited transferee for the shares
or, if the prohibited transferee did not give value for the
shares in connection with the event causing the shares to be
held in the trust (e.g., a gift, devise or other similar
transaction), the market price (as defined in our charter) of
the shares on the day of the event causing the shares to be held
in the trust and (ii) the price received by the trustee from the
sale or other disposition of the shares. Any net sale proceeds
in excess of the amount payable to the prohibited transferee
will be paid immediately to the charitable beneficiary. If,
prior to our discovery that shares have been transferred to the
trust, the shares are sold by the prohibited transferee, then
(i) the shares will be deemed to have been sold on behalf of the
trust and (ii) to the extent that the prohibited transferee
received an amount for the shares that exceeds the amount he was
entitled to receive, the excess will be paid to the trustee upon
demand.
In addition, shares held in the trust for the charitable
beneficiary will be deemed to have been offered for sale to us,
or our designee, at a price per share equal to the lesser of (i)
the price per share in the transaction that resulted in the
transfer to the trust (or, in the case of a devise or gift, the
market price at the time of the devise or gift) and (ii) the
market price on the date we, or our designee, accept the offer.
We will have the right to accept the offer until the trustee has
sold the shares. Upon a sale to us, the interest of the
charitable beneficiary in the shares sold will terminate and the
trustee will distribute the net proceeds of the sale to the
prohibited transferee.
Any person who acquires or attempts to acquire shares in
violation of the foregoing restrictions or who would have owned
the shares that were transferred to any such trust must give us
immediate written notice of such event, and any person who
proposes or attempts to acquire or receive shares in violation
of the foregoing restrictions must give us at least 15 days'
written notice prior to such transaction. In both cases, such
persons will provide to us such other information as we may
request in order to determine the effect, if any, of such
transfer on our status as a REIT.
The foregoing restrictions will continue to apply until our
board of directors determines it is no longer in our best
interest to continue to qualify as a REIT. The 9.8% ownership
limitations described above do not apply to any underwriter in
an offering of our shares or to a person or persons exempted
from the ownership limit by our board of directors based upon
appropriate assurances that our qualification as a REIT would
not be jeopardized.
Within 30 days after the end of each taxable year, every
owner of 5% or more of our outstanding capital stock will be
asked to deliver to us a statement setting forth the number of
shares owned directly or indirectly by such person and a
description of how such person holds the shares. Each such owner
will also provide us with such additional information as we may
request in order to determine the effect, if any, of his or her
beneficial ownership on our status as a REIT and to ensure
compliance with our ownership limit.
In addition, our charter provides that, prior to the first
date on which any class or series of shares of our capital stock
constitutes "publicly-offered securities" (as defined in the
Plan Assets Regulation), "benefit plan investors" may not hold,
in the aggregate, 25 percent or more of the value of any class
or series of shares of our capital stock. If benefit plan
investors exceed this 25% limit, we may redeem their interests
at a price equal to the then current NAV per share or transfer
their interests to a trust for the benefit of a charitable
beneficiary. See "ERISA Considerations-The 25% Limit" for more
information.
Furthermore, our charter provides that, in the event we
determine in our discretion that there is a material likelihood
that we would be a fiduciary under applicable law with respect
to an investor that is subject to ERISA and/or Section 4975 of
the Code (e.g., an IRA), we have the authority to redeem such
investor's interests at a price equal to the then current NAV
per share.
These restrictions could delay, defer or prevent a
transaction or change in control of us that might involve a
premium price for our shares of common stock or otherwise be in
the best interests of our shareholders.
These restrictions could delay, defer or prevent a
transaction or change in control of us that might involve a
premium price for our shares of common stock or otherwise be in
the best interests of our shareholders.
Investment Criteria, Minimum Investment and Transfer
Restrictions
Pursuant to the requirements of Section 18(b)(4)(D)(ii) of
the Securities Act and Rule 251(d)(2)(i)(C) of Regulation A,
purchasers of our common stock must be "qualified purchasers,"
which means that they are required to satisfy certain investment
criteria regarding their net worth or income. Purchasers must
either (i) be an accredited investor or (ii) if you are not an
accredited investor, the investment in the shares is not more
than 10% of the greater of: (a) if you are a natural person: (1)
your individual net worth, or joint net worth with your spouse,
excluding the value of your primary residence; or (2) your
individual income, or joint income with your spouse, received in
each of the two most recent years and you have a reasonable
expectation that an investment in the shares will not exceed
10% of your individual or joint income in the current year or
(b) if you are not a natural person, (1) your revenue, as of
your most recently completed fiscal year end; or (2) your net
assets, as of your most recently completed fiscal year end. See
"Investment Criteria" on page iii of this offering circular for
more information.
No shareholder shall, without the prior written approval of
the board of directors, transfer any shares of Capital Stock if,
in the opinion of counsel, such transfer would result in our
being required to become a reporting company under the Exchange
Act. Any such transfer shall be void ab initio and the intended
transferee shall acquire no rights in such shares of Capital
Stock. This restriction shall not apply at any time (i) that we
have a class of securities registered under the Exchange Act or
are filing reports pursuant to Section 13 or 15(d) under the
Exchange Act or (ii) after the board of directors adopts a
resolution to such effect.
All subsequent sales must comply with applicable state and
federal securities laws.
The minimum investment required in this offering is 200
shares of common stock, or $2,000 based on the initial offering
price of $10.00 per share. Pursuant to a board policy, you may
not transfer your shares of common stock in a manner that causes
you or your transferee to own fewer than the number of shares of
common stock required to meet the minimum purchase requirements,
except for the following transfers without consideration:
transfers by gift; transfers by inheritance; intrafamily
transfers; family dissolutions; transfers to affiliates; and
transfers by operation of law. These minimum investment
requirements are applicable unless and until our shares of
common stock are listed on a national securities exchange, and
these requirements may make it more difficult for you to sell
your shares of common stock. We cannot assure you that our
shares of common stock will ever be listed on a national
securities exchange.
Dividends
We expect that we will declare and pay dividends on a
quarterly basis, or more or less frequently as advised by our
Manager, in arrears, based on daily record dates. Any dividends
we make will be following consultation with our Manager, and
will be based on, among other factors, our present and
reasonably projected future cash flow. We will set the rate of
dividends at a level that will be reasonably consistent and
sustainable over time. We have not established a minimum
distribution level, and our charter does not require that we pay
dividends to our shareholders.
Generally, our policy will be to pay dividends from cash
flow from operations. During our offering stage, when we may
raise capital in this offering more quickly than we acquire
income-producing assets, and for some period after our offering
stage, we may not be able to pay dividends solely from our
cash flow from operations. Further, because we may receive
property income or other revenue at various times during our
fiscal year and because we may need cash flow from operations
during a particular period to fund capital expenditures and
other expenses, we expect that at least during the early stages
of our development and from time to time during our operational
stage, we will declare dividends in anticipation of cash flow
that we expect to receive during a later period and we will pay
these dividends in advance of our actual receipt of these funds.
In these instances, we expect to look to third party borrowings
or lines of credit to fund our dividends. We may also fund such
dividends from the sale of assets or other investments. Our
charter permits us to pay dividends from any source, including
offering proceeds or borrowings (which may constitute a return
of capital), and our charter does not limit the amount of funds
we may use from any source to pay such dividends. If we pay
dividends from sources other than our cash flow from operations,
we will have less funds available for investment in properties
and other assets.
To maintain our qualification as a REIT, we must make
aggregate annual dividends to our shareholders of at least 90%
of our REIT taxable income (which is computed without regard to
the dividends-paid deduction or net capital gain and which does
not necessarily equal net income as calculated in accordance
with GAAP). If we meet the REIT qualification requirements, we
generally will not be subject to federal income tax on the
income that we distribute to our shareholders each year. See
"U.S. Federal Income Tax Considerations - Requirements for
Qualification - Annual Distribution Requirements." Our board of
directors may authorize dividends in excess of those required
for us to maintain REIT status depending on our financial
condition and such other factors as our board of directors deems
relevant.
Dividends that you receive, and which are not designated by
us as capital gain dividends, will generally be taxed as
ordinary income to the extent they are from current or
accumulated earnings and profits. To the extent any portion of
your distribution is not from current or accumulated earnings
and profits, it will not be subject to tax immediately; it will
be considered a return of capital for tax purposes and will
reduce the tax basis of your investment (and potentially result
in taxable gain upon your sale of the stock). Dividends that
constitute a return of capital, in effect, defer a portion of
your tax until your investment is sold or we are liquidated, at
which time you will be taxed at capital gains rates. See "U.S.
Federal Income Tax Considerations-Taxation of Shareholders -
Taxation of Taxable Domestic Shareholders - Dividends" for an
additional discussion of these rules. However, because each
investor's tax considerations are different, we suggest that you
consult with your tax advisor.
Business Combinations
Under the Maryland General Corporation Law, certain
"business combinations" (including a merger, consolidation,
share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a
Maryland corporation and any interested shareholder, or an
affiliate of such an interested shareholder, are prohibited for
five years following the most recent date on which the
interested shareholder became an interested shareholder.
Maryland law defines an interested shareholder as:
? any person who beneficially owns, directly or
indirectly, 10% or more of the voting power of the
corporation's outstanding voting stock after the date
on which the corporation had 100 or more beneficial
owners of its stock; or
? an affiliate or associate of the corporation who, at
any time within the two-year period prior to the date
in question and after the date on which the corporation
had 100 or more beneficial owners of its stock, was the
beneficial owner, directly or indirectly, of 10% or
more of the voting power of the then outstanding voting
stock of the corporation.
After such five-year period, any such business combination must
be recommended by the board of directors of the corporation and
approved by the affirmative vote of at least:
? 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation;
and
? two-thirds of the votes entitled to be cast by holders
of voting stock of the corporation other than shares
held by the interested shareholder with whom (or with
whose affiliate) the business combination is to be
effected or held by an affiliate or associate of the
interested shareholder.
These supermajority approval requirements do not apply if, among
other conditions, the corporation's common shareholders receive
a minimum price (as defined in the Maryland General Corporation
Law) for their shares and the consideration is received in cash
or in the same form as previously paid by the interested
shareholder for its shares. In addition, a person is not an
interested shareholder under the statute if the board of
directors approved in advance the transaction by which the
person otherwise would have become an interested shareholder.
The board of directors may provide that its approval is subject
to compliance with any terms and conditions determined by it.
These provisions of the Maryland General Corporation Law do
not apply, however, to business combinations that are approved
or exempted by a corporation's board of directors prior to the
time that the interested shareholder becomes an interested
shareholder. Our board of directors has adopted a resolution
exempting any business combinations between us and any other
person or entity from the business combination provisions of the
Maryland General Corporation Law and, consequently, the five-
year prohibition and the supermajority vote requirements will
not apply to business combinations between us and any person as
described above. As a result, any person described above may be
able to enter into business combinations with us that may not be
in the best interest of our shareholders without compliance by
our company with the supermajority vote requirements and other
provisions of the statute.
None of these provisions of the Maryland General
Corporation Law will apply, however, to business combinations
that are approved or exempted by the board of directors of the
corporation prior to the time that the interested shareholder
becomes an interested shareholder. We have opted out of these
provisions by resolution of our board of directors. However, our
board of directors may, by resolution, opt in to the business
combination statute in the future.
Control Share Acquisitions
The Maryland General Corporation Law provides that holders
of "control shares" of a Maryland corporation acquired in a
"control share acquisition" have no voting rights with respect
to any control shares except to the extent approved at a special
meeting of shareholders by the affirmative vote of at least
two-thirds of the votes entitled to be cast on the matter,
excluding shares of stock of a corporation in respect of which
any of the following persons is entitled to exercise or direct
the exercise of the voting power of such shares in the election
of directors: (a) a person who makes or proposes to make a
control share acquisition; (b) an officer of the corporation; or
(c) an employee of the corporation who is also a director of the
corporation. "Control shares" are voting shares of stock which,
if aggregated with all other such shares of stock previously
acquired by the acquirer or in respect of which the acquirer is
able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the
acquirer to exercise voting power in electing directors within
one of the following ranges of voting power:
? one-tenth or more but less than one-third;
? one-third or more but less than a majority; or
? a majority or more of all voting power.
Control shares do not include shares that the acquiring person
is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition"
means the acquisition, directly or indirectly, of ownership of,
or the power to direct the exercise of voting power with
respect to, issued and outstanding control shares, subject to
certain exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including
an undertaking to pay expenses and making an "acquiring person
statement" as described in the Maryland General Corporation
Law), may compel our board of directors to call a special
meeting of shareholders to be held within 50 days of demand to
consider the voting rights of the shares acquired or to be
acquired in the control share acquisition. If no request for a
special meeting is made, the corporation may itself present the
question at any shareholders meeting.
If voting rights of control shares are not approved at the
meeting or if the acquiring person does not deliver an
"acquiring person statement" as required by the statute, then,
subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for
which voting rights have previously been approved) for fair
value determined, without regard to the absence of voting rights
for the control shares, as of the date of the last control share
acquisition by the acquirer or of any meeting of shareholders
at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a
shareholders meeting and the acquirer becomes entitled to vote a
majority of the shares entitled to vote, all other shareholders
may exercise appraisal rights, unless these specific appraisal
rights are eliminated under the charter or bylaws.
The control share acquisition statute does not apply to:
(a) shares acquired in a merger, consolidation or share exchange
if the corporation is a party to the transaction, or (b)
acquisitions approved or exempted by the charter or bylaws of
the corporation.
Our bylaws contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person
of our stock. There can be no assurance that this provision will
not be amended or eliminated by the board at any time in the
future.
Exclusive Forum
Our bylaws contain a provision designating the Circuit
Court for Baltimore City, Maryland (or, if that court does not
have jurisdiction, the United States District Court for the
District of Maryland, Baltimore Division) as the sole and
exclusive forum for derivative claims brought on our behalf,
claims against any of our directors, officers or other employees
alleging a breach of duty owed to us or our shareholders, claims
against us or any of our directors, officers or other employees
arising pursuant to any provision of the Maryland General
Corporation Law or our charter or bylaws, claims against us or
any of our directors, officers or other employees governed by
the internal affairs doctrine, and any other claims brought by
or on behalf of any shareholder of record or any beneficial
owner of our common stock (either on his, her or its own behalf
or on behalf of any series or class of shares of our stock or
any group of our shareholders) against us or any of our
directors, officers or other employees, unless we consent to an
alternative forum. However, it is possible that a court could
find our forum selection provision to be inapplicable or
unenforceable.
Indemnification and Limitation of Directors' and Officers'
Liability
Maryland law permits a Maryland corporation to include in
its charter a provision limiting the liability of its directors
and officers to the corporation and its shareholders for money
damages, except for liability resulting from:
? actual receipt of an improper benefit or profit in
money, property or services; or
? active and deliberate dishonesty established by a final
judgment and which is material to the cause of action.
Our charter contains such a provision that eliminates
directors' and officers' liability to the maximum extent
permitted by Maryland law. These limitations of liability do not
apply to liabilities arising under the federal securities laws
and do not generally affect the availability of equitable
remedies such as injunctive relief or rescission.
Our charter also authorizes our company, to the maximum
extent permitted by Maryland law, to obligate our company to
indemnify any present or former director or officer or any
individual who, while a director or officer of our company and
at the request of our company, serves or has served another
corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise as a
director, officer, partner or trustee, from and against any
claim or liability to which that individual may become subject
or which that individual may incur by reason of his or her
service in any such capacity and to pay or reimburse his or her
reasonable expenses in advance of final disposition of a
proceeding.
Our bylaws obligate us, to the maximum extent permitted by
Maryland law, to indemnify any present or former director or
officer or any individual who, while a director or officer of
our company and at the request of our company, serves or has
served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or
other enterprise as a director, officer, partner or trustee and
who is made, or threatened to be made, a party to the proceeding
by reason of his or her service in that capacity, from and
against any claim or liability to which that individual may
become subject or which that individual may incur by reason of
his or her service in any such capacity and to pay or reimburse
his or her reasonable expenses in advance of final disposition
of a proceeding. Our charter and bylaws also permit our company
to indemnify and advance expenses to any individual who served a
predecessor of our company in any of the capacities described
above and any employee or agent of our company or a predecessor
of our company.
Maryland law requires a corporation (unless its charter
provides otherwise, which our charter does not) to indemnify a
director or officer who has been successful in the defense of
any proceeding to which he or she is made, or threatened to be
made, a party by reason of his or her service in that capacity.
Maryland law permits a corporation to indemnify its present and
former directors and officers, among others, against judgments,
penalties, fines, settlements and reasonable expenses actually
incurred by them in connection with any proceeding to which they
may be made, or threatened to be made, a party by reason of
their service in those or other capacities unless it is
established that:
? the act or omission of the director or officer was
material to the matter giving rise to the proceeding
and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty;
? the director or officer actually received an improper
personal benefit in money, property or services; or
? in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the
act or omission was unlawful.
However, under Maryland law, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the
basis that personal benefit was improperly received, unless in
either case a court orders indemnification and then only for
expenses. In addition, Maryland law permits a corporation to
advance reasonable expenses to a director or officer upon the
corporation's receipt of:
? a written affirmation by the director or officer of
his or her good faith belief that he or she has met
the standard of conduct necessary for indemnification
by the corporation; and
? a written undertaking by him or her on his or her
behalf to repay the amount paid or reimbursed by the
corporation if it is ultimately determined that the
standard of conduct was not met.
Insofar as the foregoing provisions permit indemnification
of directors, executive officers or persons controlling us for
liability arising under the Securities Act, we have been
informed that, in the opinion of the SEC, this indemnification
is against public policy as expressed in the Securities Act and
is therefore unenforceable.
STOCKHOLDER REDEMPTION PLAN
Annual Redemption Plan
While you should view your investment as long-term, we
have adopted a shareholder redemption plan which may provide an
opportunity for our shareholders to have their shares of our
common stock redeemed by us, subject to certain restrictions
and limitations. Shares may not be redeemed under our
shareholder redemption plan until the first anniversary of the
date such shares were purchased.
The purchase price for shares redeemed under our shareholder
redemption plan will be as follows:
Less than 1 year No redemption allowed
1 year until 2 years 98.0% of NAV
2 years until 3 years 99.0% of NAV
3 years until 4 years 100.0% of NAV
4 years until 5 years 100.0% of NAV
5 years or more 100.0% of NAV
_________________
(1) For purposes of the shareholder redemption plan, the per
share redemption price will be calculated as a percentage
of the NAV per share in effect at the time of the
redemption. The redemption price per share for shares
redeemed pursuant to the shareholder redemption plan will
be further reduced by the aggregate amount of net proceeds
per share, if any, distributed to our shareholders
following the date that the NAV per share in effect at the
time of the redemption was established but prior to the
redemption date as a result of the sale of one or more of
our assets that constitutes a return of capital
distribution as a result of such sales. In addition, the
redemption price will be reduced by the aggregate sum of
dividends, if any, declared on the shares subject to the
redemption request with record dates during the period
between the quarter-end redemption request date and the
redemption date. For more details on how our Manager will
determine the net asset value, see "Plan of Operation -
Valuation Policies" and "Plan of Operation-Quarterly NAV
Share Price Adjustments."
(2) A shareholder requesting redemption will be responsible for
paying or reimbursing us for any third-party costs
incurred by us as a result of the redemption request,
including but not limited to, bank transaction charges,
custody fees, taxes, assessments and/or transfer agent
charges.
Redemption of shares of our common stock will be made
annually upon written request to us at least 15 days prior to
the end of the applicable year. We intend to provide notice of
redemption by the last business day of each year, with an
effective redemption date as of the last day of each year, and
to endeavor to remit the redemption price within 14 days of the
end of such year; although payment of the redemption price may
be delayed until 21 days after the end of such year, due to
exigent circumstances, including, without limitation, (1) our
partner real estate operators or borrower(s) fail to provide
adequate information regarding the assets within a time period
that allows us to perform our NAV calculation, which in turn
would prevent us from determining share redemption prices; (2)
macro-economic crises or property-level events, such as damage
to the property, that may affect our ability to make
redemptions or determine NAV; and (3) our payment processing
provider chooses to discontinue service or has technical
outages that prevent us from processing share redemptions in a
timely manner. Shareholders may withdraw their redemption
request at any time up to three (3) business days prior to the
redemption date. If we agree to honor a redemption request, the
shares of our common stock to be redeemed will cease to accrue
dividends or have voting rights as of the redemption date.
Because the Company's NAV per share will be calculated at
the end of each quarter, the redemption price may change
between the date the Company receives the redemption request
and the redemption date. As a result, the redemption price that
a shareholder will receive may be different from the redemption
price on the day the redemption request is made.
Upon the redemption of any shares of our common stock, the
redemption price will be reduced by the aggregate sum of
dividends, if any, declared on the shares subject to the
redemption request with record dates during the period between
the year-end redemption request date and the date of redemption.
If a redemption date with respect to shares of our common stock
comes after the record date for the payment of a distribution to
be paid on those shares but before the payment or distribution,
the registered holders of those shares at the close of business
on such record date will be entitled to receive the distribution
on the payment date, notwithstanding the redemption of those
shares or our default in payment of the distribution.
We cannot guarantee that the funds set aside for the
redemption plan will be sufficient to accommodate all requests
made in any year. In the event that we do not have sufficient
funds available to redeem all of the shares of our common stock
for which redemption requests have been submitted in any year,
we plan to redeem shares of our common stock on a pro rata
basis on the redemption date. In addition, if we redeem less
than all of the shares subject to a redemption request in any
year, with respect to any unredeemed shares, you can: (i)
withdraw your request for redemption; or (ii) ask that we honor
your request in a future year, if any, when such redemptions
can be made pursuant to the limitations of the redemption plan
when sufficient funds are available. Such pending requests will
be honored on a pro rata basis along with any new requests
received in that future year. For investors who hold shares of
our common stock with more than one record date, redemption
requests will be applied to such shares in the order in which
they were purchased, on a first in first out basis.
We are not obligated to redeem shares of our common stock
under the redemption plan. We will limit the number of shares
to be redeemed during any calendar year to 5.0% of the weighted
average number of shares of our common stock outstanding during
the prior calendar year. In addition, our Manager may, in its
sole discretion, amend, suspend, or terminate the redemption
plan at any time, including to protect our operations and our
non-redeemed shareholders, to prevent an undue burden on our
liquidity, to preserve our status as a REIT, following any
material decrease in our NAV, or for any other reason. Our
limits on ownership of our shares also may require us to
decline redemption requests that would cause other shareholders
to exceed such ownership limits. In addition, in order to
comply with certain of the distribution requirements applicable
to REITs we will decline to honor any redemption request that
we believe is a "dividend equivalent" redemption as discussed
in "U.S. Federal Income Tax Considerations-Taxation of Taxable
U.S. Shareholders- Redemptions of Common Stock." The Manager
may also, in its sole discretion, decline any particular
redemption request if it believes such action is necessary to
preserve our status as a REIT. Therefore, you may not have the
opportunity to make a redemption request prior to any potential
termination of our redemption plan.
We will treat a repurchase request that would cause a
shareholder to own less than 100 shares of our common stock as
a request to repurchase all of his or her shares of common
stock, and we will vary from pro rata treatment of repurchases
as necessary to avoid having shareholders holding fewer than
100 shares of our common stock or in other special situations
determined by our board of directors.
In several respects, we would treat repurchases sought upon a
shareholder's death or complete disability differently from
other repurchases:
? There is no one-year holding requirement; and
? The purchase price for the redeemed shares will be equal
to 100% of NAV per share (as described above).
Our Manager, in its sole discretion, will determine in good
faith whether a shareholder becomes completely disabled based
on the definition of "disabled" under the federal Social
Security Act. The federal Social Security Act generally defines
disabled or disability as the inability to engage in any
substantial gainful activity because of a medically
determinable physical or mental impairment(s) that either (i)
can be expected to result in death or (ii) has lasted or that
we can expect to last for a continuous period of not less than
12 months. Our Manager may rely on a determination made by the
Social Security Administration's office in the shareholder's
state in making its determination that the shareholder's
medical condition is considered a disability under the Social
Security Act.
Repurchase upon complete disability will only be available to
shareholders who become completely disabled after the purchase
of their shares. If the shares are purchased by joint owners,
the repurchase upon complete disability or death will be
available when either joint owner first becomes completely
disabled or dies.
A shareholder requesting redemption will be responsible for
paying or reimbursing us for any third-party costs incurred as
a result of the redemption request, including but not limited
to, bank transaction charges, custody fees, taxes, assessments
and/or transfer agent charges.
In addition, our Manager may, in its sole discretion, amend,
suspend, or terminate the redemption plan at any time,
including to protect our operations and our remaining
shareholders, to prevent an undue burden on our liquidity, to
preserve our status as a REIT, following any material decrease
in our NAV, or for any other reason. The Manager may also, in
its sole discretion, decline any particular redemption request
if it believes such action is necessary to preserve our status
as a REIT (for example, if a redemption request would cause a
non-redeeming shareholder to violate certain ownership limits
applicable to REITs or if a redemption constitutes a "dividend
equivalent redemption" that could give rise to a preferential
dividend issue, to the extent applicable). Therefore, you may
not have the opportunity to make a redemption request prior to
any potential termination of our redemption plan.
We have the right to monitor the trading patterns of
shareholders or their financial advisors and we reserve the
right to reject any purchase or redemption transaction at any
time based on what we deem to be a pattern of excessive,
abusive or short-term trading. We expect that there will be no
regular secondary trading market for the shares of our common
stock in the near term. However, in the event a secondary
market for our shares develops, we will terminate our
redemption plan.
For more information about our shareholder redemption plan or
to submit a redemption request, please contact us by email at
info@upsideavenue.com or telephone at 512-872-2898.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain material U.S. federal
income tax considerations relating to our qualification and
taxation as a REIT and relating to the purchase, ownership and
disposition of our shares of common stock. Because this is a
summary that is intended to address only certain material U.S.
federal income tax considerations relating to the ownership and
disposition of our common stock generally applicable to holders,
it may not contain all the information that may be important to
you. As you review this discussion, you should keep in mind
that:
? the tax consequences to you may vary depending on
your particular tax situation;
? special rules that are not discussed below may apply to
you if, for example, you are a broker-dealer, a trust,
an estate, a regulated investment company, a REIT, a
financial institution, an insurance company, a person
who holds 10% or more (by vote or value) of our stock,
a person holding their interest through a partnership
or similar pass-through entity, a person subject to the
alternative minimum tax provisions of the Code, a
person holding our common stock as part of a
"straddle," "hedge," "short sale," "conversion
transaction," "synthetic security" or other integrated
investment, a person who marks-to market our common
stock or preferred stock, a U.S. expatriate, a U.S.
shareholder (as defined below) whose functional
currency is not the U.S. dollar or are otherwise
subject to special tax treatment under the Code;
? this summary does not address state, local or non-
U.S. tax considerations;
? this summary does not address other federal tax
considerations aside from U.S. federal income taxes,
such as alternative minimum taxes or estate taxes;
? this summary assumes that shareholders hold our
common stock as a "capital asset" within the meaning
of Section 1221 of the Code;
? this summary does not address U.S. federal income tax
considerations applicable to tax-exempt organizations
and non-U.S. persons, except to the limited extent
described below; and
? this discussion is not intended to be, and should not
be construed as, tax advice.
You are urged both to review the following discussion and to
consult with your own tax advisor to determine the effect of
ownership and disposition of our common stock on your
particular tax situation, including any state, local or non-
U.S. tax consequences.
The information in this section is based on the current Code,
current, temporary and proposed Treasury Regulations, the
legislative history of the Code, current administrative
interpretations and practices of the IRS including its
practices and policies as endorsed in private letter rulings,
which are not binding on the IRS except in the case of the
taxpayer to whom a private letter ruling is addressed, and
existing court decisions. Future legislation, regulations,
administrative interpretations and court decisions could change
current law or adversely affect existing interpretations of
current law, possibly with retroactive effect. Any change could
apply retroactively. We have not obtained any rulings from the
IRS concerning the tax treatment of the matters discussed
below. Thus, it is possible that the IRS could challenge the
statements in this discussion that do not bind the IRS or the
courts, and that a court could agree with the IRS. Accordingly,
no assurance can be given that the IRS would not assert, or
that a court would not sustain, a position contrary to any of
the tax consequences described below. This summary is also
based upon the assumption that we will operate Multi-Housing
Income REIT, Inc. and its subsidiaries and affiliated entities
in accordance with their applicable organizational documents.
The federal income tax treatment of holders of our common stock
depends in some instances on determinations of fact and
interpretations of complex provisions of United States federal
income tax law for which no clear precedent or authority may be
available. In addition, the tax consequences to any particular
shareholder of holding our common stock will depend on the
shareholder's particular tax circumstances. You are urged to
consult your tax advisor regarding the federal, state, local,
and foreign income and other tax consequences to you in light
of your particular investment or tax circumstances of
acquiring, holding, exchanging, or otherwise disposing of our
common stock.
Taxation of Multi-Housing Income REIT, Inc.
We intend to elect to be taxed as a REIT beginning with the
taxable year ending December 31, 2018, which may be extended by
our board of directors until the taxable year ending December
31, 2019. A REIT generally is not subject to U.S. federal income
tax on the income that it distributes to shareholders if it
meets the applicable REIT distribution requirements and other
requirements for qualification.
We believe that our ownership, form of organization and our
operations through the date hereof and our proposed ownership,
organization and method of operations thereafter have enabled
and will enable us to qualify as a REIT beginning with our
taxable year ended December 31, 2017. Our qualification and
taxation as a REIT will depend on our ability to meet on a
continuing basis, through actual operating results, asset
composition, distribution levels, diversity of share ownership,
and various other qualification tests imposed under the Code
discussed below. In addition, our ability to qualify as a REIT
depends in part upon the operating results, organizational
structure and entity classification for U.S. federal income tax
purposes of certain entities in which we invest. Our ability to
qualify as a REIT for a particular year also requires that we
satisfy certain asset and gross income tests during such year,
some of which depend upon the fair market values of assets in
which we directly or indirectly own an interest. Such values may
not be susceptible to a precise determination. Accordingly, no
assurance can be given that the actual results of our operations
for any taxable year will satisfy such requirements for
qualification and taxation as a REIT.
Taxation of REITs in General
As indicated above, our qualification and taxation as a
REIT depends upon our ability to meet, on a continuing basis,
various qualification requirements imposed upon REITs by the
Code. The material qualification requirements are summarized
below under "- Requirements for Qualification-General." While we
intend to operate so that we qualify as a REIT, no assurance can
be given that the IRS will not challenge our qualification, or
that we will be able to operate in accordance with the REIT
requirements in the future. See "-Requirements for
Qualification-Failure to Qualify."
So long as we qualify for taxation as a REIT, we generally will
be entitled to a deduction for dividends that we pay and
therefore will not be subject to U.S. federal income tax on our
net income that we distribute currently to our shareholders.
This treatment substantially eliminates "double taxation" (that
is, taxation at both the corporate and shareholder levels) that
generally results from an investment in a corporation.
However, even if we qualify for taxation as a REIT, we will be
subject to federal income tax as follows:
? We will be taxed at regular corporate rates on any
undistributed "REIT taxable income." REIT taxable
income is the taxable income of the REIT subject to
specified adjustments, including a deduction for
dividends paid. See "- Requirements for
Qualification-Annual Distribution Requirements."
? Under some circumstances, we may be subject to the
"alternative minimum tax" on our items of tax
preference, including any deductions of net operating
losses.
? If we have net income from "prohibited transactions"
we will be subject to a 100% tax on this income. In
general, prohibited transactions are sales or other
dispositions of property held primarily for sale to
customers in the ordinary course of business other
than foreclosure property. See "-Requirements for
Qualification-Prohibited Transactions."
? If we elect to treat property that we acquire with a
foreclosure of a mortgage loan or certain leasehold
terminations as "foreclosure property," we may
thereby avoid the 100% tax on gain from resale of
that property (if the sale would otherwise constitute
a prohibited transaction), but the income from the
sale or operation of the property will be subject to
tax at the highest corporate rate. See "-Requirements
for Qualification-Prohibited Transactions" and "-
Requirements for Qualification-Foreclosure Property."
? If we fail to satisfy either the 75% gross income
test or the 95% gross income test discussed below,
but nonetheless maintain our qualification as a REIT
because other requirements are met, we will be
subject to a tax equal to the gross income
attributable to the greater of either (1) the amount
by which we fail the 75% gross income test for the
taxable year or (2) the amount by which we fail the
95% gross income test for the taxable year,
multiplied by a fraction intended to reflect our
profitability. See "-Requirements for Qualification-
Income Tests."
? If we fail to satisfy any of the REIT asset tests, as
described below, other than a failure by a de minimis
amount of the 5% or 10% assets tests, and we qualify
for and satisfy certain cure provisions, then we will
be required to pay a tax equal to the greater of
$50,000 or the product of (x) the net income
generated by the nonqualifying assets during the
period in which we failed to satisfy the asset tests
and (y) the highest U.S. federal income tax rate then
applicable to corporations. See "-Requirements for
Qualification-Asset Tests."
? If we fail to satisfy any provision of the Code that
would result in our failure to qualify as a REIT
(other than a gross income or asset test requirement)
and that violation is due to reasonable cause and not
due to willful neglect, we may retain our REIT
qualification, but we will be required to pay a
penalty of $50,000 for each such failure. See "-
Requirements for Qualification-Failure to Qualify."
? If we fail to qualify for taxation as a REIT because
we fail to distribute by the end of the relevant year
any earnings and profits we inherit from a taxable C
corporation during the year (e.g., by tax-free merger
or tax-free liquidation), and the failure is not due
to fraud with intent to evade tax, we generally may
retain our REIT status by paying a special
distribution, but we will be required to pay an
interest charge on 50% of the amount of undistributed
non-REIT earnings and profits. See "-Requirements for
Qualification-General." We may be required to pay
monetary penalties to the IRS in certain
circumstances, including if we fail to meet record-
keeping requirements intended to monitor our
compliance with rules relating to the composition of
our shareholders, as described below in "-
Requirements for Qualification-General."
? We will be subject to a nondeductible 4% excise tax
on the excess of the required distribution over the
sum of amounts actually distributed and amounts
retained for which federal income tax was paid, if we
fail to distribute during each calendar year at least
the sum of 85% of our REIT ordinary income for the
year, 95% of our REIT capital gain net income for the
year; and any undistributed taxable income from prior
taxable years. See "-Requirements for Qualification-
Annual Distribution Requirement."
? We will be subject to a 100% penalty tax on some
payments we receive or on certain other amounts (or
on certain expenses deducted by our TRS) if
arrangements among us, our residents and/or our TRS
are not comparable to similar arrangements among
unrelated parties. See "-Requirements for
Qualification-Effect of Subsidiary Entities."
? We may be subject to tax on gain recognized in a
taxable disposition of assets acquired by way of a
tax-free merger or other tax-free reorganization with
a non-REIT corporation or a tax-free liquidation of a
non-REIT corporation into us. Specifically, to the
extent we acquire any asset from a C corporation in a
carry-over basis transaction and we subsequently
recognize gain on a disposition of such asset during
a five-year period beginning on the date on which we
acquired the asset, then, to the extent of any
"built-in gain," such gain will be subject to U.S.
federal income tax at the highest regular corporate
tax rate, which is currently 35%. Built-in gain means
the excess of (i) the fair market value of the asset
as of the beginning of the applicable recognition
period over (ii) our adjusted basis in such asset as
of the beginning of such recognition period. See "-
Requirements for Qualification-Tax on Built-in Gains
of Former C Corporation Assets."
? We may elect to retain and pay income tax on our net
long-term capital gain. In that case, a shareholder
would: (1) include its proportionate share of our
undistributed long-term capital gain (to the extent
we make a timely designation of such gain to the
shareholder) in its income, (2) be deemed to have
paid its proportionate share of the tax that we paid
on such gain and (3) be allowed a credit for its
proportionate share of the tax deemed to have been
paid, with an adjustment made to increase the
shareholders' basis in our stock. See "-Taxation of
Shareholders-Taxation of Taxable Domestic
Shareholders-Dividends."
? We may have subsidiaries or own interests in other
lower-tier entities that are C corporations that will
elect, jointly with us, to be treated as our TRSs,
the earnings of which would be subject to U.S.
federal corporate income tax. See "- Requirements for
Qualification-Effect of Subsidiary Entities."
No assurance can be given that the amount of any such U.S.
federal income taxes will not be substantial. In addition, we
and our subsidiaries may be subject to a variety of taxes other
than U.S. federal income tax, including payroll taxes and
state, local and foreign income, franchise, property and other
taxes on assets and operations. We could also be subject to tax
in situations and on transactions not presently contemplated.
Requirements for Qualification-General
We intend to elect to be taxed as a REIT under the Code
effective with our taxable year ended December 31, 2018. In
order to have so qualified, we must have met and continue to
meet the requirements discussed below, relating to our
organization, ownership, sources of income, nature of assets
and dividends of income to shareholders, beginning with our
taxable year ended December 31, 2018, unless otherwise noted.
The Code defines a REIT as a corporation, trust, or
association:
(1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of
beneficial interest;
(3) that would be taxable as a domestic corporation, but for
its election to be subject to tax as a REIT under Sections
856 through 860 of the Code;
(4) that is neither a financial institution nor an insurance
company subject to applicable provisions of the Code;
(7) that makes an election to be taxable as a REIT, or has
made this election for a previous taxable year, which has
not been revoked or terminated, and satisfies all relevant
filing and other administrative requirements established
by the IRS that must be met to elect and maintain REIT
status;
(8) that uses a calendar year for U.S. federal income tax
purposes and complies with the recordkeeping requirements
of the Code and regulations promulgated thereunder;
(9) that has no earnings and profits from any non-REIT taxable
year as of a successor to any subchapter C corporation at
the close of any taxable year; and
(10) that meets other applicable tests, described below,
regarding the nature of its income and assets and the
amount of its distributions.
Conditions (1), (2), (3) and (4) above must be met during the
entire taxable year and condition (5) above must be met during
at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months.
Conditions (5) and (6) need not be satisfied during a
corporation's initial tax year as a REIT (which, in our case,
we intend to be our taxable year ended December 31, 2018).
We believe that after the offering we will have sufficient
diversity of ownership to allow us to satisfy conditions (5)
and (6) above. In addition, our charter provides restrictions
regarding the transfer of shares of our capital stock that are
intended to assist us in satisfying the share ownership
requirements described in conditions (5) and (6) above (as
described in "Description of Shares- Restriction on Ownership
of Shares."). These restrictions, however, may not ensure that
we will be able to satisfy these share ownership requirements.
In addition, to the extent necessary to assist us in obtaining
a sufficient number of shareholders to meet condition (5), we
may issue 125 shares of a new series of preferred stock in a
private offering.
We intend to comply with condition (7) above by electing to be
taxed as a REIT as part of our U.S. federal income tax return
for our taxable year ending December 31, 2018, which may be
extended by our board of directors until December 31, 2019.
To monitor its compliance with condition (6) above, a REIT is
required to send annual letters to its shareholders requesting
information regarding the actual ownership of its shares. If we
comply with the annual letters requirement and we do not know
or, exercising reasonable diligence, would not have known of
our failure to meet condition (6) above, then we will be
treated as having met condition (6) above. If you fail or
refuse to comply with the demands, you will be required by
Treasury Regulations to submit a statement with your tax return
disclosing your actual ownership of our shares and other
information.
For purposes of condition (8) above, we will use a calendar
year for U.S. federal income tax purposes, and we intend to
comply with the applicable recordkeeping requirements.
In addition, as described in condition (9) above, a REIT may
not have any undistributed C corporation earnings and profits
at the end of any taxable year. Upon our election to be taxable
as a REIT, any earnings and profits that we may have
accumulated while we were taxable as a C corporation would have
to be distributed no later than the end of the first year for
which we elect REIT status. If we fail to do so, we would not
qualify to be taxed as a REIT for that year and a number of
years thereafter, unless we are able to rely on certain relief
provisions.
The Code provides relief from violations of the REIT gross
income requirements, as described below under "-Requirements for
Qualification-Income Tests," in cases where a violation is due
to reasonable cause and not to willful neglect, and other
requirements are met. REITs that take advantage of this relief
provision must pay a penalty tax that is based upon the
magnitude of the violation. In addition, certain provisions of
the Code extend similar relief in the case of certain violations
of the REIT asset requirements (see "-Requirements for
Qualification-Asset Tests" below) and other REIT requirements,
again provided that the violation is due to reasonable cause and
not willful neglect, and other conditions are met. Again, REITs
that take advantage of this relief provision must pay a penalty
tax. If we fail to satisfy any of the various REIT requirements,
there can be no assurance that these relief provisions would be
available to enable us to maintain our qualification as a REIT,
and, if such relief provisions are available, the amount of any
resultant penalty tax could be substantial.
Effect of Subsidiary Entities
Ownership of Partnership Interests. A REIT that is a partner in
a partnership (or a member of a limited liability company or
other entity that is treated as a partnership for U.S. federal
income tax purposes) will be deemed to own its proportionate
share of the assets of the partnership based on its interest in
partnership capital, and will be deemed to earn its
proportionate share of the partnership's income. The assets and
gross income of the partnership retain the same character in the
hands of the REIT for purposes of the gross income and asset
tests applicable to REITs, as described below.
Disregarded Subsidiaries. If a REIT owns a corporate subsidiary
(including an entity that is treated as an association taxable
as a corporation for U.S. federal income tax purposes) that is a
"qualified REIT subsidiary," the separate existence of that
subsidiary is disregarded for U.S. federal income tax purposes.
Generally, a qualified REIT subsidiary is a corporation, other
than a TRS, all of the capital stock of which is owned by the
REIT (either directly or through other disregarded
subsidiaries). For U.S. federal income tax purposes, all assets,
liabilities and items of income, deduction and credit of the
qualified REIT subsidiary will be treated as assets, liabilities
and items of income, deduction and credit of the REIT itself.
Our qualified REIT subsidiaries will not be subject to U.S.
federal income taxation, but may be subject to state and local
taxation in some states. Certain other entities also may be
treated as disregarded entities for U.S. federal income tax
purposes, generally including any wholly-owned domestic
unincorporated entity that would be treated as a partnership if
it had more than one owner. For U.S. federal income tax
purposes, all assets, liabilities and items of income, deduction
and credit of any such disregarded entity will be treated as
assets, liabilities and items of income, deduction and credit of
the owner of the disregarded entity.
In the event that a disregarded subsidiary of ours ceases to be
wholly owned-for example, if any equity interest in the
subsidiary is acquired by a person other than us or another
disregarded subsidiary of ours-the subsidiary's separate
existence would no longer be disregarded for federal income tax
purposes. Instead, the subsidiary would have multiple owners and
would be treated as either a partnership or a taxable
corporation. Such an event could, depending on the
circumstances, adversely affect our ability to satisfy the
various asset and gross income requirements applicable to REITs,
including the requirement that REITs generally may not own,
directly or indirectly, more than 10% of the securities of
another corporation (other than a TRS). See "-Requirements for
Qualification-Asset Tests" and "-Requirements for Qualification-
Income Tests."
Taxable REIT Subsidiaries. A TRS is a corporation in which we
directly or indirectly own stock and that jointly with us elects
to be treated as our TRS under Section 856(l) of the Code. In
addition, if we have a TRS that owns, directly or indirectly,
securities representing more than 35% of the voting power or
value of a subsidiary corporation, that subsidiary would also be
treated as our TRS. A TRS is subject to U.S. federal income tax
and state and local income tax, where applicable, as a regular C
corporation.
Generally, a TRS can perform impermissible resident services
without causing us to receive impermissible resident services
income from those services under the REIT income tests. A TRS
may also engage in other activities that, if conducted by us
other than through a TRS, could result in the receipt of non-
qualified income or the ownership of non-qualified assets.
However, several provisions regarding the arrangements between a
REIT and its TRSs ensure that a TRS will be subject to an
appropriate level of U.S. federal income taxation. For example,
a TRS is limited in its ability to deduct interest payments made
to us in excess of a certain amount. In addition, we will be
obligated to pay a 100% penalty tax on some payments that we
receive or certain other amounts or on certain expenses deducted
by the TRS if the economic arrangements among us, our residents
and/or the TRS are not comparable to similar arrangements among
unrelated parties.
We may own interests in one or more TRSs that may perform
certain services for our residents, receive management fee
income and/or hold interests in joint ventures and private
equity real estate funds that might hold assets or generate
income that could cause us to fail the REIT income or asset
tests or subject us to the 100% tax on prohibited transactions.
Our TRSs may incur significant amounts of U.S. federal, state
and local income taxes.
The separate existence of a TRS or other taxable corporation is
not ignored for federal income tax purposes. Accordingly, a TRS
or other taxable corporation generally would be subject to
corporate income tax on its earnings, which may reduce the cash
flow that we and our subsidiaries generate in the aggregate, and
may reduce our ability to pay dividends to our shareholders.
We are not treated as holding the assets of a TRS or other
taxable subsidiary corporation or as receiving any income that
the subsidiary earns. Rather, the stock issued by a taxable
subsidiary to us is an asset in our hands, and we treat the
dividends paid to us from such taxable subsidiary, if any, as
income. This treatment can affect our income and asset test
calculations, as described below. Because we do not include the
assets and income of TRSs or other taxable subsidiary
corporations in determining our compliance with the REIT
requirements, we may use such entities to undertake indirectly
activities that the REIT rules might otherwise preclude us from
doing directly or through pass-through subsidiaries. For
example, we may use TRSs or other taxable subsidiary
corporations to conduct activities that give rise to certain
categories of income such as management fees or activities that
would be treated in our hands as prohibited transactions.
Subsidiary REITs
If any REIT in which we acquire an interest fails to
qualify for taxation as a REIT in any taxable year, that failure
could, depending on the circumstances, adversely affect our
ability to satisfy the various asset and gross income
requirements applicable to REITs, including the requirement that
REITs generally may not own, directly or indirectly, more than
10% of the securities of another corporation that is not a REIT
or a TRS, as further described below.
Income Tests
To qualify as a REIT, we must satisfy two gross income
tests annually. First, at least 75% of our gross income
generally must be derived from (1) rents from real property, (2)
interest on obligations secured by mortgages on real property or
on interests in real property, (3) gains from the sale or other
disposition of real property (including interests in real
property and interests in mortgages on real property) other than
property held primarily for sale to customers in the ordinary
course of our trade or business, (4) dividends from other
qualifying REITs and gain (other than gain from prohibited
transactions) from the sale of shares of other qualifying REITs,
(5) other specified investments relating to real property or
mortgages thereon, and (6) for a limited time, temporary
investment income. Interest and gain on debt instruments issued
by publicly offered REITs that are not secured by mortgages on
real property or interests in real property are not qualifying
income for the 75% test. Second, at least 95% of our gross
income for each taxable year, excluding gross income from
prohibited transactions and certain other income and gains
described below, must be derived from any combination of income
qualifying under the 75% test and dividends, interest and gain
from the sale or disposition of stock or securities other than
stock or securities held primarily for sale to customers in the
ordinary course of our trade or business.
Rents we receive will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described
above only if several conditions are met. First, the amount of
rent must not be based in whole or in part on the income or
profits of any person. However, an amount received or accrued
generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage
or percentages of receipts or sales. This limitation does not
apply, however, where the lessee leases substantially all of its
interest in the property to residents or subresidents to the
extent that the rental income derived by the lessee would
qualify as rents from real property had we earned the income
directly. Second, rents received from a "related party resident"
will not qualify as rents from real property in satisfying the
gross income tests unless the resident is a TRS and either (i)
at least 90% of the property is leased to unrelated residents
and the rent paid by the TRS is substantially comparable to the
rent paid by the unrelated residents for comparable space, or
(ii) the property leased is a "qualified lodging facility," as
defined in Section 856(d)(9)(D) of the Code, or a "qualified
health care property," as defined in Section 856(e)(6)(D)(i),
and certain other conditions are satisfied. A resident is a
related party resident if the REIT, or an actual or constructive
owner of 10% or more of the REIT, actually or constructively
owns 10% or more of the resident. Third, if rent attributable to
personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under
the lease, then the portion of rent attributable to the personal
property will not qualify as rents from real property.
Generally, for rents to qualify as rents from real property for
the purpose of satisfying the gross income tests, we may provide
directly only an insignificant amount of services, unless those
services are "usually or customarily rendered" in connection
with the rental of real property and not otherwise considered
"rendered to the occupant." Accordingly, we may not provide
"impermissible services" to residents (except through an
independent contractor from whom we derive no revenue and that
meets other requirements or through a TRS) without giving rise
to "impermissible resident service income." Impermissible
resident service income is deemed to be at least 150% of the
direct cost to us of providing the service. If the impermissible
resident service income exceeds 1% of our total income from a
property, then all of the income from that property will fail to
qualify as rents from real property. If the total amount of
impermissible resident service income from a property does not
exceed 1% of our total income from the property, the services
will not disqualify any other income from the property that
qualifies as rents from real property, but the impermissible
resident service income will not qualify as rents from real
property.
We may directly or indirectly receive dividends from TRSs or
other corporations that are not REITs or qualified REIT
subsidiaries. These dividends generally are treated as dividend
income to the extent of the earnings and profits of the
distributing corporation. Such dividends will generally
constitute qualifying income for purposes of the 95% gross
income test, but not for purposes of the 75% gross income test.
Any dividends that we receive from a REIT, however, will be
qualifying income for purposes of both the 95% and 75% income
tests.
We may receive various fees in connection with our operations
relating to the origination or purchase of whole loans secured
by first mortgages and other loans secured by real property. The
fees will generally be qualifying income for purposes of both
the 75% and 95% gross income tests if they are received in
consideration for entering into an agreement to make a loan
secured by real property and the fees are not determined by the
income and profits of any person. Other fees generally are not
qualifying income for purposes of either gross income test and
will not be favorably counted for purposes of either gross
income test. Any fees earned by any TRS will not be included for
purposes of the gross income tests.
We have not derived, and do not anticipate deriving, rents based
in whole or in part on the income or profits of any person,
rents from related party residents and/or rents attributable to
personal property leased in connection with real property that
exceeds 15% of the total rents from that property in sufficient
amounts to jeopardize our status as REIT. We also have not
derived, and do not anticipate deriving, impermissible resident
service income that exceeds 1% of our total income from any
property if the treatment of the rents from such property as
nonqualifying rents would jeopardize our status as a REIT.
Interest income constitutes qualifying mortgage interest for
purposes of the 75% income test (as described above) to the
extent that the obligation upon which such interest is paid is
secured by a mortgage on real property. For purposes of this
analysis, real property includes ancillary personal property
whose value is less than 15% of the total value of the
collateral. If we receive interest income with respect to a
mortgage loan that is secured by both real property and other
property, the fair market value of the personal property is 15%
or more of the total value of the collateral, and the highest
principal amount of the loan outstanding during a taxable year
exceeds the fair market value of the real property on the date
that we acquired or originated the mortgage loan, then the
interest income will be apportioned between the real property
and the other collateral, and our income from the arrangement
will qualify for purposes of the 75% income test only to the
extent that the interest is allocable to the real property. Even
if a loan is not secured by real property, or is undersecured,
the income that it generates may nonetheless qualify for
purposes of the 95% income test.
We and our subsidiaries may invest in mezzanine loans, which are
loans secured by equity interests in an entity that directly or
indirectly owns real property, rather than by a direct mortgage
of the real property. The IRS has issued Revenue Procedure 2003-
65, which provides a safe harbor applicable to mezzanine loans.
Under the Revenue Procedure, if a mezzanine loan meets each of
the requirements contained in the Revenue Procedure, (1) the
mezzanine loan will be treated by the IRS as a real estate asset
for purposes of the asset tests described below and (2) interest
derived from the mezzanine loan will be treated as qualifying
mortgage interest for purposes of the 75% income test. Although
the Revenue Procedure provides a safe harbor on which taxpayers
may rely, it does not prescribe rules of substantive tax law. We
intend to structure any investments in mezzanine loans in a
manner that generally complies with the various requirements
applicable to our qualification as a REIT. In addition, we may
be required to retest an otherwise qualifying mezzanine loan if
we modify the loan and the modification results in a
"significant modification" of the loan for tax purposes. The
retesting is applied by comparing the value of the real property
collateral at the time of the modification to the outstanding
balance of the modified loan. In certain cases, this could
result in a previously qualifying loan becoming unqualified in
whole or in part. Moreover, if a mezzanine loan or other loan
issued by a partnership or disregarded entity was
recharacterized as equity for tax purposes, it would likely mean
that we should be treated as owning a preferred partnership
interest in the underlying assets and would have to include a
share of property revenues and gains in our REIT income tests
and asset tests as described below. Although loans between
unrelated parties are generally respected as debt for tax
purposes, no assurance could be given that such loans would not
be recharacterized as equity. To the extent that any of our
mezzanine loans do not meet all of the requirements for reliance
on the safe harbor set forth in the Revenue Procedure, there can
be no assurance that the IRS will not challenge the tax
treatment of these loans.
In addition, we and our subsidiaries may invest in the preferred
equity of an entity that directly or indirectly owns real
property. If the issuer of the preferred equity is taxed as a
partnership or an entity disregarded as separate from its owners
for U.S. federal income tax purposes (aside from a qualified
REIT subsidiary), a REIT holding preferred equity generally will
be treated as owing an interest in the underlying real estate
for REIT purposes. As a result, absent sufficient controls to
ensure that the underlying real property is operated in
compliance with the REIT rules, preferred equity investments may
jeopardize the REIT's compliance with the REIT income and asset
tests described below. In addition, the treatment of interest-
like preferred returns in a partnership or a disregarded entity
(other than a qualified REIT subsidiary) also is not clear under
the REIT rules and could be treated as non-qualifying income. In
addition to the risk of loss of REIT status due to nonqualifying
income, if the underlying property is dealer property, our gains
from the sale of the property would be subject to a 100% tax.
More importantly, in many cases the status of debt-like
preferred equity as debt or equity for tax purposes is unclear.
If the issuer of the preferred equity is a corporation for U.S.
federal income tax purposes, such preferred equity generally
will be a nonqualifying asset unless the issuer is a REIT, our
own qualified REIT subsidiary, or a TRS.
If we fail to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, we may nevertheless qualify as a
REIT for that year if we are entitled to relief under the Code.
These relief provisions generally will be available if our
failure to meet the tests is due to reasonable cause and not due
to willful neglect, we attach a schedule of the sources of our
income to our federal income tax return and otherwise comply
with the applicable Treasury Regulations. It is not possible,
however, to state whether in all circumstances we would be
entitled to the benefit of these relief provisions. For example,
if we fail to satisfy the gross income tests because
nonqualifying income that we intentionally incur unexpectedly
exceeds the limits on nonqualifying income, the IRS could
conclude that the failure to satisfy the tests was not due to
reasonable cause. If these relief provisions are inapplicable to
a particular set of circumstances involving us, we will fail to
qualify as a REIT. Even if these relief provisions apply, a tax
would be imposed based on the amount of nonqualifying income.
Asset Tests
At the close of each quarter of our taxable year, we must
satisfy five tests relating to the nature of our assets:
(1)
at least 75% of the value of our total assets must be
represented by real estate assets, cash, cash items and
U.S. Government securities. Real estate assets include
interests in real property (such as land, buildings,
leasehold interests in real property and personal property
leased with real property if the rents attributable to the
personal property would be rents from real property under
the income tests discussed above), interests in mortgages
on real property or on interests in real property, shares
in other qualifying REITs, stock or debt instruments held
for less than one year purchased with the proceeds from an
offering of shares of our stock or certain debt, and debt
instruments issued by publicly offered REITs;
(2)
not more than 25% of the value of our total assets may be
represented by securities other than those in the 75%
asset
class;
(3)
except for equity investments in REITs, qualified REIT
subsidiaries, other securities that qualify as "real
estate assets" for purposes of the test described in
clause (1) or securities of our TRSs: the value of any one
issuer's securities owned by us may not exceed 5% of the
value of our total assets; we may not own more than 10% of
any one issuer's outstanding voting securities; and we may
not own more than 10% of the value of the outstanding
securities of any one issuer;
(4)
not more than 25% (for taxable years beginning before
January 1, 2018) or 20% (for taxable years beginning on or
after January 1, 2018) of the value of our total assets
may be represented by securities of one or more TRSs; and
(5)
not more than 25% of the value of our total assets may be
represented by debt instruments of publicly offered REITs
that are not secured by mortgages on real property or
interests in real property.
Securities for purposes of the asset tests may include debt
securities that are not fully secured by a mortgage on real
property (or treated as such). However, the 10% value test does
not apply to certain "straight debt" and other excluded
securities, as described in the Code including, but not limited
to, any loan to an individual or estate, any obligation to pay
rents from real property and any security issued by a REIT. In
addition, (a) a REIT's interest as a partner in a partnership
is not considered a security for purposes of applying the 10%
value test to securities issued by the partnership; (b) any
debt instrument issued by a partnership (other than straight
debt or another excluded security) will not be considered a
security issued by the partnership if at least 75% of the
partnership's gross income is derived from sources that would
qualify for the 75% REIT gross income test; and (c) any debt
instrument issued by a partnership (other than straight debt or
another excluded security) will not be considered a security
issued by the partnership to the extent of the REIT's interest
as a partner in the partnership. In general, straight debt is
defined as a written, unconditional promise to pay on demand or
at a specific date a fixed principal amount, and the interest
rate and payment dates on the debt must not be contingent on
profits or the discretion of the debtor. In addition, straight
debt may not contain a convertibility feature.
We believe that our assets will comply with the above asset
tests and that we can operate so that we can continue to comply
with those tests. However, our ability to satisfy these asset
tests depends upon our analysis of the characterization and
fair market values of our assets, some of which are not
susceptible to a precise determination and for which we will
not obtain independent appraisals. For example, we may hold
significant assets through a TRS or hold significant non-real
estate assets (such as certain goodwill), and we cannot provide
any assurance that the IRS might not disagree with our
determinations.
After initially meeting the asset tests at the close of any
quarter, we will not lose our status as a REIT if we fail to
satisfy the 25%, 20% and 5% asset tests and the 10% value
limitation at the end of a later quarter solely by reason of
changes in the relative values of our assets (including changes
in relative values as a result of fluctuations in foreign
currency exchange rates). If the failure to satisfy the 25%,
20% or 5% asset tests or the 10% value limitation results from
an acquisition of securities or other property during a
quarter, the failure can be cured by disposition of sufficient
non-qualifying assets within 30 days after the close of that
quarter. We intend to maintain adequate records of the value of
our assets to ensure compliance with the asset tests and to
take any available actions after the close of any quarter as
may be required to cure any noncompliance with the 25%, 20% or
5% asset tests or 10% value limitation. If we fail the 5% asset
test or the 10% asset test at the end of any quarter, and such
failure is not cured within 30 days thereafter, we may dispose
of sufficient assets or otherwise satisfy the requirements of
such asset tests within six months after the last day of the
quarter in which our identification of the failure to satisfy
those asset tests occurred to cure the violation, provided that
the non-permitted assets do not exceed the lesser of 1% of the
total value of our assets at the end of the relevant quarter or
$10,000,000. If we fail any of the other asset tests, or our
failure of the 5% and 10% asset tests is in excess of this
amount, as long as the failure was due to reasonable cause and
not willful neglect and, following our identification of the
failure, we filed a schedule in accordance with the Treasury
Regulations describing each asset that caused the failure, we
are permitted to avoid disqualification as a REIT, after the 30
day cure period, by taking steps to satisfy the requirements of
the applicable asset test within six months after the last day
of the quarter in which our identification of the failure to
satisfy the REIT asset test occurred, including the disposition
of sufficient assets to meet the asset tests. In such case we
would be required to pay a tax equal to the greater of $50,000
or the product of (x) the net income generated by the
nonqualifying assets during the period in which we failed to
satisfy the relevant asset test and (y) the highest U.S.
federal income tax rate then applicable to U.S. corporations.
In addition, see the discussion of investments in loans and
preferred equity above under "Income Tests" and the discussion
below under "Investments in Loans and Preferred Equity" for a
discussion of how such investments could impact our ability to
meet the asset tests.
Sale-Leaseback Transactions
We may make investments in the form of sale-leaseback
transactions. We intend to treat these transactions as true
leases for federal income tax purposes. However, depending on
the terms of any specific transaction, the IRS might take the
position that the transaction is not a true lease but is more
properly treated in some other manner. If such
recharacterization were successful, we would not be entitled to
claim the depreciation deductions available to an owner of the
property. In addition, the recharacterization of one or more of
these transactions might cause us to fail to satisfy the asset
tests or the income tests described above and such failure
could result in our failing to qualify as a REIT.
Alternatively, the amount or timing of income inclusion or the
loss of depreciation deductions resulting from the
recharacterization might cause us to fail to meet the
distribution requirement described below for one or more
taxable years absent the availability of the deficiency
dividend procedure or might result in a larger portion of our
dividends being treated as ordinary income to our shareholders.
Annual Distribution Requirements
To qualify as a REIT, we are required to distribute
dividends, other than capital gain dividends, to our
shareholders each year in an amount at least equal to (1) the
sum of (a) 90% of our REIT taxable income, computed without
regard to the dividends paid deduction and our net capital gain
and (b) 90% of the net income, after tax, from foreclosure
property, minus (2) the sum of certain specified items of
noncash income. For purposes of the distribution requirements,
any built-in gain (net of the applicable tax) we recognize
during the applicable recognition period that existed on an
asset at the time we acquired it from a C corporation in a
carry- over basis transaction will be included in our REIT
taxable income. See "-Requirements for Qualification-Tax on
Built-in Gains of Former C Corporation Assets" for a discussion
of the possible recognition of built-in gain. These
distributions must be paid either in the taxable year to which
they relate, or in the following taxable year if declared
before we timely file our tax return for the prior year and if
paid with or before the first regular dividend payment date
after the declaration is made.
In order for distributions to be counted as satisfying the
annual distribution requirements for REITs, and to provide us
with a REIT-level tax deduction, the distributions must not be
"preferential dividends." A dividend is generally not a
preferential dividend if the distribution is pro rata among all
outstanding shares of stock within a particular class, and in
accordance with the preferences among different classes of
stock as set forth in the REIT's organizational documents.
There is no de minimis exception with respect to preferential
dividends. To avoid paying preferential dividends, we must
treat every shareholder of the class of shares with respect to
which we make a distribution the same as every other
shareholder of that class, and we must not treat any class of
shares other than according to its dividend rights as a class.
Under certain technical rules governing deficiency dividends,
we could lose our ability to cure an under-distribution in a
year with a subsequent year deficiency dividend if we pay
preferential dividends. Preferential dividends potentially
include "dividend equivalent redemptions." Accordingly, we
intend to pay dividends pro rata within each class, and to
abide by the rights and preferences of each class of our shares
if there is more than one, and will seek to avoid dividend
equivalent redemptions. (See "- Taxation of U.S. Shareholders -
Redemptions of Common Stock" below for a discussion of when
redemptions are dividend equivalent and measures we intend to
take to avoid them.). If the IRS were to take the position that
we inadvertently paid a preferential dividend, we may be deemed
either to (a) have distributed less than 100% of our REIT
taxable income and be subject to tax on the undistributed
portion, or (b) have distributed less than 90% of our REIT
taxable income and our status as a REIT could be terminated for
the year in which such determination is made if we were unable
to cure such failure. We can provide no assurance that we will
not be treated as inadvertently paying preferential dividends.
To the extent that we do not distribute (and are not deemed to
have distributed) all of our net capital gain or distribute at
least 90%, but less than 100%, of our REIT taxable income, as
adjusted, we will be subject to U.S. federal income tax on
these retained amounts at regular corporate tax rates.
We will be subject to a nondeductible 4% excise tax on the
excess of the required distribution over the sum of amounts
actually distributed and amounts retained for which U.S.
federal income tax was paid, if we fail to distribute during
each calendar year at least the sum of:
(1) 85% of our REIT ordinary income for the year;
(2) 95% of our REIT capital gain net income for the year;
and
(3) any undistributed taxable income from prior taxable
years.
A REIT may elect to retain rather than distribute all or a
portion of its net capital gains and pay the tax on the gains.
In that case, a REIT may elect to have its shareholders include
their proportionate share of the undistributed net capital
gains in income as long-term capital gains and receive a credit
for their share of the tax paid by the REIT. For purposes of
the 4% excise tax described above, any retained amounts would
be treated as having been distributed. Our shareholders would
then increase their adjusted basis of their stock by the
difference between (a) the amounts of capital gain dividends
that we designated and that they include in their taxable
income minus (b) the tax that we paid on their behalf with
respect to that income.
To the extent that we have available net operating losses
carried forward from prior tax years, such losses may reduce
the amount of dividends that we must make in order to comply
with the REIT distribution requirements. Such losses, however,
will generally not affect the character, in the hands of our
shareholders, of any dividends that are actually made as
ordinary dividends or capital gains. See "-Taxation of
Shareholders-Taxation of Taxable Domestic Shareholders-
Distributions."
We intend to make timely distributions sufficient to satisfy
the annual distribution requirements.
We anticipate that we will generally have sufficient cash or
liquid assets to enable us to satisfy the 90% distribution
requirement and to distribute such greater amount as may be
necessary to avoid U.S. federal income and excise taxes. It is
possible, however, that, from time to time, we may not have
sufficient cash or other liquid assets to fund required
distributions as a result, for example, of differences in
timing between our cash flow, the receipt of income for GAAP
purposes and the recognition of income for U.S. federal income
tax purposes, the effect of non-deductible capital
expenditures, the creation of reserves, payment of required
debt service or amortization payments, or the need to make
additional investments in qualifying real estate assets. The
insufficiency of our cash flow to cover our distribution
requirements could require us to (1) sell assets in adverse
market conditions, (2) borrow on unfavorable terms, (3)
distribute amounts that would otherwise be invested in future
acquisitions or capital expenditures or used for the repayment
of debt, (4) pay dividends in the form of taxable stock
dividends or (5) use cash reserves, in order to comply with the
REIT distribution requirements. Under some circumstances, we
may be able to rectify a failure to meet the distribution
requirement for a year by paying dividends to shareholders in a
later year, which may be included in our deduction for
dividends paid for the earlier year. We refer to such dividends
as "deficiency dividends." Thus, we may be able to avoid being
taxed on amounts distributed as deficiency dividends. We will,
however, be required to pay interest based upon the amount of
any deduction taken for deficiency dividends.
Failure to Qualify
In the event we violate a provision of the Code that would
result in our failure to qualify as a REIT, specified relief
provisions will be available to us to avoid such
disqualification if (1) the violation is due to reasonable
cause and not willful neglect, (2) we pay a penalty of $50,000
for each failure to satisfy the provision and (3) the violation
does not include a violation under the gross income or asset
tests described above (for which other specified relief
provisions are available). This cure provision reduces the
instances that could lead to our disqualification as a REIT for
violations due to reasonable cause. It is not possible to state
whether, in all circumstances, we will be entitled to this
statutory relief. If we fail to qualify as a REIT in any
taxable year, and the relief provisions of the Code do not
apply, we will be subject to tax, including any applicable
alternative minimum tax, on our taxable income at regular
corporate rates. Dividends to our shareholders in any year in
which we are not a REIT will not be deductible by us, nor will
they be required to be made. In this situation, to the extent
of current and accumulated earnings and profits, and, subject
to limitations of the Code, dividends to our shareholders will
generally be taxable to shareholders who are individual U.S.
shareholders at a maximum rate of 20%, and dividends received
by our corporate U.S. shareholders may be eligible for a
dividends received deduction. Unless we are entitled to relief
under specific statutory provisions, we will also be
disqualified from re-electing REIT status for the four taxable
years following a year during which qualification was lost.
Tax on Built-in Gains of Former C Corporation Assets
If a REIT acquires an asset from a C corporation in a
transaction in which the REIT's basis in the asset is
determined by reference to the basis of the asset in the hands
of the C corporation (e.g., a tax-free reorganization under
Section 368(a) of the Code), the REIT may be subject to an
entity-level tax upon a taxable disposition during a five-year
period following the acquisition date. The amount of the tax is
determined by applying the highest regular corporate tax rate,
which is currently 35%, to the lesser of (i) the excess, if
any, of the asset's fair market value over the REIT's basis in
the asset on the acquisition date, or (ii) the gain recognized
by the REIT in the disposition. The amount described in clause
(i) is referred to as "built-in gain." Assuming we elect to be
taxed as a REIT for the taxable year ending December 31, 2018,
we do not believe we have acquired and do not currently expect
to acquire assets the disposition of which would be subject to
the built-in gains tax but are not foreclosed from doing so in
the future.
Prohibited Transactions
Net income derived from prohibited transactions is subject
to a 100% tax. The term "prohibited transactions" generally
includes a sale or other disposition of property (other than
foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. We
intend to conduct our operations so that no asset that we own
(or are treated as owning) will be treated as, or as having
been, held for sale to customers, and that a sale of any such
asset will not be treated as having been in the ordinary course
of our business. Whether property is held "primarily for sale
to customers in the ordinary course of a trade or business"
depends on the specific facts and circumstances. The Code
provides a safe harbor pursuant to which sales of properties
held for at least two years and meeting certain additional
requirements will not be treated as prohibited transactions,
but compliance with the safe harbor may not always be
practical. We intend to continue to conduct our operations so
that no asset that we own (or are treated as owning) will be
treated as held as inventory or for sale to customers and that
a sale of any such asset will not be treated as having been in
the ordinary course of our business. However, part of our
investment strategy is to purchase assets that provide an
opportunity for gain through capital appreciation, and we may
sell such assets if beneficial opportunities arise. Therefore,
no assurance can be given that any particular property in which
we hold a direct or indirect interest will not be treated as
property held for sale to customers, or that the safe-harbor
provisions will apply. The 100% tax will not apply to gains
from the sale of property held through a TRS or other taxable
corporation, although such income will be subject to U.S.
federal income tax at regular corporate income tax rates. The
potential application of the prohibited transactions tax could
cause us to forego potential dispositions of other property or
to forego other opportunities that might otherwise be
attractive to us (such as developing property for sale), or to
undertake such dispositions or other opportunities through a
TRS, which would generally result in corporate income taxes
being incurred.
Foreclosure Property
Foreclosure property is real property (including interests
in real property) and any personal property incident to such
real property (1) that is acquired by a REIT as a result of the
REIT having bid in the property at foreclosure, or having
otherwise reduced the property to ownership or possession by
agreement or process of law, after there was a default (or
default was imminent) on a lease of the property or a mortgage
loan held by the REIT and secured by the property, (2) for
which the related loan or lease was made, entered into or
acquired by the REIT at a time when default was not imminent or
anticipated and (3) for which such REIT makes an election to
treat the property as foreclosure property. REITs generally are
subject to tax at the maximum corporate rate (currently 35%) on
any net income from foreclosure property, including any gain
from the disposition of the foreclosure property, other than
income that would otherwise be qualifying income for purposes
of the 75% gross income test. Any gain from the sale of
property for which a foreclosure property election has been
made will not be subject to the 100% tax on gains from
prohibited transactions described above, even if the property
is held primarily for sale to customers in the ordinary course
of a trade or business.
Hedging Transactions
We may enter into hedging transactions with respect to one
or more of our assets or liabilities. Hedging transactions could
take a variety of forms, including interest rate swaps or cap
agreements, options, futures contracts, forward rate agreements
or similar financial instruments. Except to the extent provided
by Treasury Regulations, any income from a hedging transaction
(1) made in the normal course of our business primarily to
manage risk of interest rate or price changes or currency
fluctuations with respect to borrowings made or to be made, or
ordinary obligations incurred or to be incurred by us to acquire
or own real estate assets, (2) entered into primarily to manage
the risk of currency fluctuations with respect to any item of
income or gain that would be qualifying income under the 75% or
95% income tests (or any property that generates such income or
gain), or (3) that hedges against transactions described in
clause (i) or (ii) and is entered into in connection with the
extinguishment of debt or sale of property that is being hedged
against by the transaction described in clause (i) or (ii), and
which complies with certain identification requirements,
including gain from the disposition or termination of such a
transaction, will not constitute gross income for purposes of
the 95% gross income test and the 75% gross income test. To the
extent we enter into other types of hedging transactions, the
income from those transactions is likely to be treated as non-
qualifying income for purposes of both the 75% and 95% gross
income tests. We intend to structure any hedging transactions in
a manner that does not jeopardize our ability to qualify as a
REIT. As a result of these rules, we may have to limit our use
of hedging techniques that might otherwise be advantageous,
which could result in greater risks associated with interest
rate or other changes than we would otherwise incur.
Investments in Loans and Preferred Equity
Except as provided below, in cases where a mortgage loan
is secured by both real property and other property, if the
outstanding principal balance of a mortgage loan during the
year exceeds the value of the real property securing the loan
at the time we committed to acquire the loan, which may be the
case, for instance, if we acquire a "distressed" mortgage loan,
including with a view to acquiring the collateral, a portion
of the interest accrued during the year will not be qualifying
income for purposes of the 75% gross income test applicable to
REITs and a portion of such loan will not be a qualifying real
estate asset. Furthermore, we may be required to retest
modified loans that we hold to determine if the modified loan
is adequately secured by real property as of the modification
date. If the IRS were to assert successfully that any mortgage
loans we hold were not properly secured by real estate or that
the value of the real estate collateral (at the time of
commitment or retesting) was otherwise less than the amount of
the loan, we could, as mentioned, earn income that is not
qualifying for the 75% income test and also be treated as
holding a non-real estate investment in whole or part, which
could result in our failure to qualify as a REIT.
Notwithstanding the foregoing, a mortgage loan secured by both
real property and personal property shall be treated as a
wholly qualifying real estate asset and all interest shall be
qualifying income for purposes of the 75% income test if the
combined fair market values of the personal and real property
combined exceed the balance of the mortgage and the fair market
value of such personal property does not exceed 15% of the
total fair market value of all such property, even if the real
property collateral value is less than the outstanding
principal balance of the loan.
The IRS has provided a safe harbor with respect to the
treatment of a mezzanine loan as a mortgage loan and therefore
as a qualifying asset for purposes of the REIT asset tests.
Pursuant to the safe harbor, if a mezzanine loan meets certain
requirements, it will be treated by the IRS as a qualifying
real estate asset for purposes of the REIT asset tests, and
interest derived from the mezzanine loan will be treated as
qualifying mortgage interest for purposes of the REIT 75%
income test. However, structuring a mezzanine loan to meet the
requirements of the safe harbor may not always be practical. To
the extent that any of our mezzanine loans do not meet all of
the requirements for reliance on the safe harbor, such loans
might not be properly treated as qualifying mortgage loans for
REIT purposes.
In addition, we and our subsidiaries may invest in the
preferred equity of an entity that directly or indirectly owns
real property. If the issuer of the preferred equity is taxed
as a partnership or an entity disregarded as separate from its
owners for U.S. federal income tax purposes (aside from a
qualified REIT subsidiary), we generally will be treated as
owing an interest in the underlying real estate for REIT
purposes. As a result, absent sufficient controls to ensure
that the underlying real property is operated in compliance
with the REIT rules, preferred equity investments may
jeopardize our compliance with the REIT income and asset tests
described above. In addition, the treatment of interest-like
preferred returns in a partnership or disregarded entity (other
than a qualified REIT subsidiary) also is not clear under the
REIT rules and could be treated as non-qualifying income. More
importantly, in many cases the status of debt-like preferred
equity as debt or equity for tax purposes is unclear. The IRS
could challenge our treatment of such preferred equity
investment for purposes of applying the REIT income and asset
tests and, if such a challenge were sustained, we could fail to
continue to qualify as REIT. In addition, if the issuer of the
preferred equity is a corporation for U.S. federal income tax
purposes, such preferred equity generally will be a
nonqualifying asset unless the issuer is a REIT, our own
qualified REIT subsidiary, or TRS.
Taxation of Shareholders
Taxation of Taxable Domestic Shareholders
The term "U.S. shareholder" means a holder of shares of common
stock who, for U.S. federal income tax purposes, is:
? an individual who is a citizen or resident of the
United States;
? a corporation (including an entity treated as a
corporation for U.S. federal income tax purposes)
created or organized under the laws of the United
States, any state thereof, or the District of
Columbia;
? an estate, the income of which is subject to U.S.
federal income taxation regardless of its source; or
? any trust if (1) a United States court is able to
exercise primary supervision over the administration
of such trust and one or more United States persons
have the authority to control all substantial
decisions of the trust or (2) it has a valid election
in place to be treated as a United States person.
If a partnership or an entity treated as a partnership for U.S.
federal income tax purposes holds our stock, the U.S. federal
income tax treatment of a partner in the partnership will
generally depend on the status of the partner and the
activities of the partnership. If you are a partner in a
partnership holding our common stock, you should consult your
own tax advisor regarding the consequences of the ownership and
disposition of shares of common stock by the partnership.
Dividends. As long as we qualify as a REIT, a taxable U.S.
shareholder must generally take into account as ordinary income
dividends made out of our current or accumulated earnings and
profits that we do not designate as capital gain dividends.
Dividends paid to a non-corporate U.S. shareholder generally
will not qualify for the 20% tax rate for "qualified dividend
income." Qualified dividend income generally includes dividends
paid to most U.S. non-corporate taxpayers by domestic C
corporations and certain qualified foreign corporations. Because
we are not generally subject to U.S. federal income tax on the
portion of our REIT taxable income distributed to our
shareholders, our ordinary dividends generally will not be
eligible for the 20% tax rate on qualified dividend income. As a
result, our ordinary dividends will continue to be taxed at the
higher tax rate applicable to ordinary income. However, the 20%
tax rate for qualified dividend income will apply to our
ordinary dividends (1) attributable to dividends received by us
from taxable corporations, such as a TRS, and (2) to the extent
attributable to income upon which we have paid corporate income
tax (e.g., to the extent that we distribute less than 100% of
our taxable income). In general, to qualify for the reduced tax
rate on qualified dividend income, a shareholder must hold our
stock for more than 60 days during the 121-day period beginning
on the date that is 60 days before the date on which our stock
becomes ex-dividend. Dividends paid to a corporate U.S.
shareholder will not qualify for the dividends received
deduction generally available to corporations. If we declare a
distribution in October, November, or December of any year that
is payable to a U.S. shareholder of record on a specified date
in any such month, such distribution will be treated as both
paid by us and received by the U.S. shareholder on December 31
of such year, provided that we actually pay the distribution
during January of the following calendar year.
Dividends from us that are designated as capital gain
dividends will be taxed to U.S. shareholders as long-term
capital gains, to the extent that they do not exceed our actual
net capital gains for the taxable year, without regard to the
period for which the U.S. shareholder has held our common stock.
Corporate U.S. shareholders may be required to treat up to 20%
of some capital gain dividends as ordinary income. Long-term
capital gains are generally taxable at a maximum U.S. federal
rate of 20%, in the case of U.S. shareholders who are
individuals, trusts, and estates, and 35% for corporations.
Capital gains dividends attributable to the sale of depreciable
real property held for more than 12 months are subject to a 25%
U.S. federal income tax rate for U.S. shareholders who are
individuals, trusts or estates, to the extent of previously
claimed depreciation deductions.
We may elect to retain and pay income tax on the net long-
term capital gain that we receive in a taxable year. In that
case, we may elect to designate the retained amount as a capital
gain dividend with the result that a U.S. shareholder would be
taxed on its proportionate share of our undistributed long-term
capital gain. The U.S. shareholder would receive a credit or
refund for its proportionate share of the tax we paid. The U.S.
shareholder would increase the basis in its common stock by the
amount of its proportionate share of our undistributed long-term
capital gain, minus its share of the tax we paid.
A U.S. shareholder will not incur tax on a distribution in
excess of our current and accumulated earnings and profits if
the distribution does not exceed the adjusted basis of the U.S.
shareholder's stock. Instead, the distribution will reduce the
adjusted basis of such stock. A U.S. shareholder will recognize
gain upon a distribution in excess of both our current and
accumulated earnings and profits and the U.S. shareholder's
adjusted basis in his or her stock as long-term capital gain if
the shares of stock have been held for more than one year, or
short-term capital gain, if the shares of stock have been held
for one year or less.
Shareholders may not include in their own income tax
returns any of our net operating losses or capital losses.
Instead, these losses are generally carried over by us for
potential offset against our future income. Taxable dividends
from us and gain from the disposition of our common stock will
not be treated as passive activity income and, therefore,
shareholders generally will not be able to apply any "passive
activity losses," such as losses from certain types of limited
partnerships in which the shareholder is a limited partner,
against such income. In addition, taxable dividends from us
generally will be treated as investment income for purposes of
the investment interest limitations. A U.S. shareholder that
elects to treat capital gain dividends, capital gains from the
disposition of stock or qualified dividend income as investment
income for purposes of the investment interest limitation will
be taxed at ordinary income rates on such amounts. We will
notify shareholders after the close of our taxable year as to
the portions of the dividends attributable to that year that
constitute ordinary income, return of capital and capital gain.
However, the aggregate amount of dividends we may designate as
qualified dividend income or as capital gain dividends with
respect to any tax year beginning after December 31, 2015 cannot
exceed the dividends actually paid by us during such tax year.
Dispositions of Our Stock. In general, a U.S. shareholder
who is not a dealer in securities must treat any gain or loss
realized upon a taxable disposition of our stock as long-term
capital gain or loss if the U.S. shareholder has held our stock
for more than one year. Otherwise, the U.S. shareholder must
treat any such gain or loss as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or
exchange of our stock held by such shareholder for six months or
less as a long-term capital loss to the extent of capital gain
dividends and any other actual or deemed dividends from us that
such U.S. shareholder treats as long-term capital gain. All or a
portion of any loss that a U.S. shareholder realizes upon a
taxable disposition of our common stock may be disallowed if the
U.S. shareholder repurchases our common stock within 30 days
before or after the disposition.
Capital Gains and Losses. The tax rate differential between
capital gain and ordinary income for non-corporate taxpayers may
be significant. A taxpayer generally must hold a capital asset
for more than one year for gain or loss derived from its sale or
exchange to be treated as long-term capital gain or loss. The
highest marginal individual income tax rate is currently 39.6%.
The maximum tax rate on long-term capital gains applicable to
non-corporate taxpayers is currently 20% for sales and exchanges
of capital assets held for more than one year. The maximum tax
rate on long-term capital gain from the sale or exchange of
"section 1250 property," or depreciable real property, is 25% to
the extent that such gain, known as unrecaptured section 1250
gains, would have been treated as ordinary income on
depreciation recapture if the property were "section 1245
property." With respect to dividends that we designate as
capital gain dividends and any retained capital gain that we are
deemed to distribute, we generally may designate whether such a
distribution is taxable to our non-corporate shareholders as
long-term capital gains or unrecaptured section 1250 gains. The
IRS has the authority to prescribe, but has not yet prescribed,
regulations that would apply a capital gain tax rate of 25%
(which is generally higher than the long-term capital gain tax
rates for non-corporate taxpayers) to a portion of capital gain
realized by a non-corporate shareholder on the sale of REIT
stock that would correspond to the REIT's "unrecaptured Section
1250 gain." In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of
capital losses. A non-corporate taxpayer may deduct capital
losses not offset by capital gains against its ordinary income
only up to a maximum annual amount of $3,000. A non-corporate
taxpayer may carry forward unused capital losses indefinitely. A
corporate taxpayer must pay tax on its net capital gain at
ordinary corporate rates (currently up to 35%). A corporate
taxpayer can deduct capital losses only to the extent of capital
gains, with unused losses being carried back three years and
forward five years.
If a U.S. shareholder recognizes a loss upon a subsequent
disposition of our common stock in an amount that exceeds a
prescribed threshold, it is possible that the provisions of
certain Treasury Regulations involving "reportable transactions"
could apply, with a resulting requirement to separately disclose
the loss generating transactions to the IRS. While these
regulations are directed towards "tax shelters," they are
written quite broadly, and apply to transactions that would not
typically be considered tax shelters. Significant penalties
apply for failure to comply with these requirements. You should
consult your tax advisors concerning any possible disclosure
obligation with respect to the receipt or disposition of our
common stock, or transactions that might be undertaken directly
or indirectly by us. Moreover, you should be aware that we and
other participants in transactions involving us might be subject
to disclosure or other requirements pursuant to these
regulations.
Redemptions of our Stock. A redemption of shares of our
common stock will be treated under Section 302 of the Code as a
taxable distribution unless the redemption satisfies one of the
tests set forth in Section 302(b) of the Code enabling the
redemption to be treated as a sale or exchange of the redeemed
shares. A redemption that is not treated as a sale or exchange
will be taxed in the same manner as regular distributions (e.g.,
ordinary dividend income to the extent paid out of earnings and
profits unless properly designated as a capital gain dividend),
and a redemption treated as a sale or exchange will be taxed in
the same manner as other taxable sales discussed above.
The redemption will be treated as a sale or exchange if it
(i) is "substantially disproportionate" with respect to the
shareholder, (ii) results in a "complete termination" of the
shareholder's interest in us, or (iii) is "not essentially
equivalent to a dividend" with respect to the shareholder, all
within the meaning of Section 302(b) of the Code. In determining
whether any of these tests have been met, shares considered to
be owned by the shareholder by reason of certain constructive
ownership rules set forth in the Code, as well as shares
actually owned, must generally be taken into account. Because
the determination as to whether any of the alternative tests of
Section 302(b) of the Code is satisfied with respect to any
particular redemption will depend upon the facts and
circumstances as of the time the determination is made and the
constructive ownership rules are complicated, prospective
shareholders are advised to consult their own tax advisers to
determine such tax treatment.
If a redemption of shares is treated as a distribution that is
taxable as a dividend, the amount of the distribution would be
measured by the amount of cash and the fair market value of the
property received by the redeeming shareholder. In addition,
although guidance is sparse, the IRS could take the position
that shareholders who do not participate in any redemption
treated as a dividend should be treated as receiving a
constructive stock distribution taxable as a dividend in the
amount of the increased percentage ownership in us as a result
of the redemption, even though such shareholder did not actually
receive cash or other property as a result of such redemption.
The amount of any such constructive dividend would be added to
the nonredeeming shareholder's basis in his shares. It also is
possible that under certain technical rules relating to the
deduction for dividends paid, the IRS could take the position
that redemptions taxed as dividends impair our ability to
satisfy our distribution requirements under the Code. To avoid
certain issues related to our ability to comply with the REIT
distribution requirements (see "- Requirements for
Qualification--General - Annual Distribution Requirements"), we
have implemented procedures designed to track our shareholders'
percentage interests in our common stock and identify any such
dividend equivalent redemptions, and we will decline to effect a
redemption to the extent that we believe that it would
constitute a dividend equivalent redemption. However, we cannot
assure you that we will be successful in preventing all dividend
equivalent redemptions.
Liquidating Distributions. Once we have adopted (or are
deemed to have adopted) a plan of liquidation for U.S. federal
income tax purposes, liquidating distributions received by a
U.S. shareholder with respect to our common stock will be
treated first as a recovery of the shareholder's basis in the
shares (computed separately for each block of shares) and
thereafter as gain from the disposition of our common stock.
Medicare Tax. A U.S. person that is an individual is
subject to a 3.8% tax on the lesser of (1) the U.S. person's
"net investment income" for the relevant taxable year and (2)
the excess of the U.S. person's modified gross income for the
taxable year over a certain threshold (which currently is
between $125,000 and $250,000, depending on the individual's
circumstances). Estates and trusts that do not fall into a
special class of trusts that is exempt from such tax are subject
to the same 3.8% tax on the lesser of their undistributed net
investment income and the excess of their adjusted gross income
over a certain threshold. Net investment income generally
includes dividends on our stock and gain from the sale of our
stock. If you are a U.S. person that is an individual, estate or
trust, you are urged to consult your tax advisors regarding the
applicability of this tax to your income and gains in respect of
your investment in our common stock.
Information Reporting and Backup Withholding. We will
report to our shareholders and to the IRS the amount of
dividends we pay during each calendar year and the amount of tax
we withhold, if any. Under the backup withholding rules, a
shareholder may be subject to backup withholding at a current
rate of up to 28% with respect to dividends unless the holder:
? is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact;
or
? provides a taxpayer identification number, certifies as
to no loss of exemption from backup withholding and
otherwise complies with the applicable requirements of
the backup withholding rules.
A shareholder who does not provide us with its correct
taxpayer identification number also may be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will
be creditable against the shareholder's income tax liability. In
addition, we may be required to withhold a portion of any
dividends or capital gain dividends to any shareholders who fail
to certify their non-foreign status to us. For a discussion of
the backup withholding rules as applied to non-U.S.
shareholders, see "-Taxation of Shareholders-Taxation of Foreign
Shareholders-Information Reporting and Backup Withholding."
Taxation of Foreign Shareholders
The rules governing U.S. federal income taxation of
nonresident alien individuals and foreign corporations ("non-
U.S. shareholders") are complex. This section is only a summary
of such rules. We urge non-U.S. shareholders to consult their
own tax advisors to determine the impact of federal, state and
local income tax laws on ownership of our stock, including any
reporting requirements.
Dividends. A non-U.S. shareholder who receives a
distribution that is not attributable to gain from our sale or
exchange of real property interests, or USRPIs, as defined
below, and that we do not designate as a capital gain dividend
or retained capital gain will recognize ordinary income to the
extent that we pay the distribution out of our current or
accumulated earnings and profits. A withholding tax equal to 30%
of the gross amount of the dividend ordinarily will apply unless
an applicable tax treaty reduces or eliminates the tax. Under
some treaties, lower withholding tax rates do not apply to
dividends from REITs (or are not as favorable for REIT dividends
as compared to non-REIT dividends). However, if a distribution
is treated as effectively connected with the non-U.S.
shareholder's conduct of a U.S. trade or business, the non-U.S.
shareholder generally will be subject to U.S. federal income tax
on the distribution at graduated rates, in the same manner as
U.S. shareholders are taxed on dividends, and in the case of a
corporate non-U.S. shareholder also may be subject to a branch
profits tax at the rate of 30% (or lower treaty rate). We plan
to withhold U.S. federal income tax at the rate of 30% on the
gross amount of any distribution paid to a non-U.S. shareholder
unless either:
(i) a lower treaty rate applies and the non-U.S.
shareholder files an IRS Form W-8BEN or Form W-8BEN-E (with
appropriate attachments) evidencing eligibility for that
reduced rate with us; or
(ii) the non-U.S. shareholder files an IRS Form W-8ECI with
us claiming that the distribution is income that is
effectively connected with a trade or business in the
United States.
A non-U.S. shareholder generally will not be subject to
U.S. federal income tax on a distribution in excess of our
current and accumulated earnings and profits if the excess
portion of the distribution does not exceed the adjusted basis
of its stock. Instead, the excess portion of the distribution
will reduce the adjusted basis of that stock. A non-U.S.
shareholder will be subject to U.S. federal income tax on a
distribution that exceeds both our current and accumulated
earnings and profits and the adjusted basis of its stock, if the
non-U.S. shareholder otherwise would be subject to U.S. federal
income tax on gain from the sale or disposition of its stock, as
described below. Because we generally cannot determine at the
time we make a distribution whether or not the distribution will
exceed our current and accumulated earnings and profits, we may
withhold tax on the entire amount of any distribution at the
same rate as we would withhold on a dividend. However, a non-
U.S. shareholder may obtain a refund of amounts that we withhold
if we later determine that a distribution in fact exceeded our
current and accumulated earnings and profits.
Additional withholding regulations may require us to withhold
15% of any distribution that exceeds our current and accumulated
earnings and profits. Consequently, although we intend to
withhold at a rate of 30% on the entire amount of any
distribution (other than actual gain dividends subject to
FIRPTA, as described below, and except to the extent an
exemption or a lower rate of withholding applies), to the extent
that we do not do so, we will withhold at a rate of 15% on any
portion of such a distribution.
Capital Gain Dividends. Except as discussed below with
respect to 10% or less holders of regularly traded classes of
stock, "qualified shareholders," and "qualified foreign pension
funds," for any year in which we qualify as a REIT, a non-U.S.
shareholder will incur tax on dividends by us that are
attributable to gain from our sale or exchange of USRPIs under
special provisions of the U.S. federal income tax laws known as
the Foreign Investment in Real Property Act, or FIRPTA. The term
USRPIs includes interests in real property and shares in
corporations at least 50% of whose real estate and business
assets consist of interests in U.S. real property. Under those
rules, a non-U.S. shareholder is taxed on actual gain dividends
by us attributable to gain from sales of USRPIs as if the gain
were effectively connected with a U.S. trade or business of the
non-U.S. shareholder. This FIRPTA look through rule also applies
to distributions in redemption of shares and liquidating
distributions, to the extent they represent distributions of
gain attributable to the sale of a USRPI. A non-U.S. shareholder
thus would be taxed on such a distribution at regular tax rates
applicable to U.S. shareholders, subject to any applicable
alternative minimum tax. A corporate non-U.S. shareholder not
entitled to treaty relief or exemption also may be subject to
the 30% branch profits tax on such a distribution. We must
withhold 35% of any distribution that we could designate as a
capital gain dividend and is a distribution attributable to
USRPI gain. In addition, we may be required to withhold 35% of
any of other capital gain dividends, and we reserve the right to
withhold such amounts until guidance is issued clarifying that
withholding is not required. A non-U.S. shareholder may receive
a credit against its tax liability for the amount we withhold.
However, FIRPTA and the 35% withholding tax will not apply to
any distribution with respect to any class of our stock that is
regularly traded on an established securities market located in
the United States if the recipient non-U.S. shareholder did not
own more than 10% of such class of stock at any time during the
one-year period ending on the date of distribution. Instead, any
capital gain dividend will be treated as an ordinary
distribution subject to the rules discussed above, which
generally impose a 30% withholding tax (unless reduced by a
treaty). At the time you purchase shares in this offering, our
shares will not be regularly traded on an established securities
market and we can give you no assurance that our shares will
ever be regularly traded on an established securities market.
Although the law is not clear on the matter, it appears that
amounts designated by us as undistributed capital gains
generally should be treated with respect to non-U.S.
shareholders in the same manner as actual distributions by us of
capital gain dividends. Under that approach, the non-U.S.
shareholders would be able to offset as a credit against their
U.S. federal income tax liability resulting therefrom an amount
equal to their proportionate share of the tax paid by us on the
undistributed capital gains and to receive from the IRS a refund
to the extent their proportionate share of this tax paid by us
exceeds their actual U.S. federal income tax liability.
Dispositions of Our Stock. A non-U.S. shareholder generally
will not incur tax under FIRPTA with respect to gain on a
disposition of our common stock as long as at all times during
the five-year period ending on the date of disposition non-U.S.
persons hold, directly or indirectly, less than 50% in value of
our stock. For these purposes, if a class of our stock was
regularly traded on an established securities market in the
United States, a person holding less than 5% of our regularly
traded class of stock for five years will be treated as a U.S.
person unless we have actual knowledge that such person is not a
U.S. person. However, at the time you purchase shares in this
offering, our shares will not be regularly traded on an
established securities market and we can give you no assurance
that our shares will ever be regularly traded in an established
securities market. We cannot assure you that our non-U.S.
ownership will be less than 50% at any time. Even if our non-
U.S. ownership remains under 50% for five years and we otherwise
meet the requirements of this rule, pursuant to "certain wash
sale" rules under FIRPTA, a non-U.S. shareholder may incur tax
under FIRPTA to the extent such shareholder disposes of our
stock within a certain period prior to a distribution
attributable to USRPI gain and directly or indirectly (including
through certain affiliates) reacquires our stock within certain
prescribed periods.
Regardless of the extent of our non-U.S. ownership, a non-
U.S. shareholder will not incur tax under FIRPTA on a
disposition of the shares of our stock if such stock is publicly
traded and if such non-U.S. shareholder owned, actually or
constructively, at all times during a specified testing period,
10% or less of the total fair market value of such class of
stock. The testing period is the shorter of (1) the period
during which the non-U.S. shareholder held the shares and (2)
the five-year period ending on the disposition date. Therefore,
if our stock were to be regularly traded on an established
securities market, a non-U.S. shareholder should not incur tax
under FIRPTA with respect to gain on a sale of our common stock
unless it owns, actually or constructively, more than 10% of our
common stock during such testing period. However, at the time
you purchase shares in this offering, our shares will not be
regularly traded on an established securities market and we can
give you no assurance that our shares will ever be regularly
traded in an established securities market.
To the extent our stock is held directly (or indirectly
through one or more partnerships) by a "qualified shareholder,"
it will not be treated as a USRPI. Further, to the extent such
treatment applies, any distribution to such shareholder will not
be treated as gain recognized from the sale or exchange of a
USRPI. For these purposes, a qualified shareholder is generally
a non-U.S. shareholder that (i)(A) is eligible for treaty
benefits under an income tax treaty with the United States that
includes an exchange of information program, and the principal
class of interests of which is listed and regularly traded on
one or more stock exchanges as defined by the treaty, or (B) is
a foreign limited partnership organized in a jurisdiction with
an exchange of information agreement with the United States and
that has a class of regularly traded limited partnership units
(having a value greater than 50% of the value of all partnership
units) on the New York Stock Exchange or NASDAQ, (ii) is a
"qualified collective investment vehicle" (within the meaning of
Section 897(k)(3)(B) of the Code) and (iii) maintains records of
persons holding 5% or more of the class of interests described
in clauses (i)(A) or (i)(B) above. However, in the case of a
qualified shareholder having one or more "applicable investors,"
the exception described in the first sentence of this paragraph
will not apply with respect to a portion of the qualified
shareholder's stock (determined by applying the ratio of the
value of the interests held by applicable investors in the
qualified shareholder to the value of all interests in the
qualified shareholder and applying certain constructive
ownership rules). Such ratio applied to the amount realized by a
qualified shareholder on the disposition of our stock or with
respect to a distribution from us attributable to gain from the
sale or exchange of a USRPI will be treated as amounts realized
from the disposition of USRPIs. Such treatment shall also apply
to applicable investors in respect of dividends treated as a
sale or exchange of stock with respect to a qualified
shareholder. For these purposes, an "applicable investor" is a
person who holds an interest in the qualified shareholder and
holds more than 10% of our stock applying certain constructive
ownership rules. Furthermore, while the substantive FIRPTA rules
will not apply to qualified shareholders, absent guidance from
the IRS the withholding taxes described above may still apply.
We reserve the right to withhold such amounts until guidance is
issued clarifying that withholding is not required.
The FIRPTA rules will not apply to any USRPI held directly
(or indirectly through one or more partnerships) by, or to any
distribution received from a REIT by a "qualified foreign
pension fund" or any entity all of the interests of which are
held by a qualified foreign pension fund. For these purposes, a
"qualified foreign pension fund" is an organization or
arrangement (i) created or organized in a foreign country, (ii)
established to provide retirement or pension benefits to current
or former employees (or their designees) of one or more
employers for services rendered, (iii) which does not have a
single participant or beneficiary that has a right to more than
5% of its assets or income, (iv) which is subject to government
regulation and provides annual information reporting about its
beneficiaries to relevant local tax authorities and (v) with
respect to which, under its local laws, contributions that would
otherwise be subject to tax are deductible or excluded from its
gross income or taxed at a reduced rate, or taxation of its
income is deferred or taxed at a reduced rate. Dividends
received by qualified foreign pension funds will be taxed as
described above under "- Taxation of Shareholders-Taxation of
Foreign Shareholders-Dividends" as if such distribution is not
attributable to the sale of a USRPI. Gain treated as gain from
the sale or exchange of our stock (including capital gain
dividends and dividends treated as gain from the sale or
exchange of our stock under the rules described above at" -
Taxation of Shareholders-Taxation of Foreign Shareholders-
Dividends") will not be subject to tax unless such gain is
treated as effectively connected with the non-U.S. shareholder's
conduct of a U.S. trade or business, in which case the non-U.S.
shareholder generally will be subject to a tax at the graduated
rates applicable to ordinary income, in the same manner as U.S.
shareholders. A Non-U.S. shareholder that is a qualified foreign
pension fund can also avoid the withholding taxes described
above to the extent it provides the REIT with a certification as
to its status.
If the gain on the sale of our stock were taxed under
FIRPTA, a non-U.S. shareholder would be taxed on that gain in
the same manner as U.S. shareholders, subject to any applicable
alternative minimum tax. Furthermore, a non-U.S. shareholder
generally will incur U.S. federal income tax on gain not subject
to FIRPTA if:
? the gain is effectively connected with the non-U.S.
shareholder's U.S. trade or business, in which case
the non-U.S. shareholder will be subject to the same
treatment as U.S. shareholders with respect to such
gain and may be subject to the 30% branch profits tax
in the case of a foreign corporation; or
? the non-U.S. shareholder is a nonresident alien
individual who was present in the United States for
183 days or more during the taxable year and meets
certain other criteria, in which case the non-U.S.
shareholder will incur a 30% tax on his or her capital
gains derived from sources within the United States.
Redemptions and Liquidating Distributions
A redemption of shares by a non-U.S. shareholder will be
treated as a regular distribution or as a sale or exchange of
the redeemed shares under the same rules of Section 302 of the
Code that apply to U.S. shareholders and which are discussed
above under "Taxation of Taxable U.S. Shareholders-Redemptions
of Common Stock." Subject to the FIRPTA look-through rule, (i)
if our shares are a USRPI, gain from a redemption treated as a
sale or exchange of our shares would be ECI to the non-U.S.
shareholder and (ii) if our shares are not a USRPI, gain from a
redemption treated as a sale or exchange of our shares would not
be subject to U.S. federal income tax.
Once we have adopted (or are deemed to have adopted) a plan
of liquidation for U.S. federal income tax purposes, liquidating
distributions received by a non-U.S. shareholder with respect to
our common stock will be treated first as a recovery of the
shareholder's basis in the shares (computed separately for each
block of shares) and thereafter as gain from the disposition of
our common stock. Subject to the FIRPTA look-through rule, (i)
if our shares are a USRPI, gain from a liquidating distribution
with respect our shares would be ECI to the non-U.S. shareholder
and (ii) if our shares are not a USRPI, gain from a liquidating
distribution with respect to our shares would not be subject to
U.S. federal income tax.
The IRS takes the view that under the FIRPTA look-through
rule, but subject to the exceptions described above that may
apply to a holder of no more than 10% of our common stock if our
common stock are regularly traded on an established securities
market, qualified foreign pension funds or qualified
shareholders, distributions in redemption of our common stock
and liquidating distributions to non-U.S. shareholders will be
treated as ECI and subject to 35% withholding, and also
potentially subject to branch profits tax in the case of
corporate non-U.S. shareholders, to the extent that the
distributions are attributable to gain from the sale of a USRPI,
regardless of whether our stock is a USRPI and regardless of
whether the distribution is otherwise treated as a sale or
exchange.
Estate Tax. If our stock is owned or treated as owned by an
individual who is not a citizen or resident of the United States
at the time of such individual's death, the stock will be
includable in the individual's gross estate for United States
federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise, and may therefore be subject to
United States federal estate tax. The test for whether an
individual is a resident of the United States for U.S. federal
estate tax purposes differs from the test used for U.S. federal
income tax purposes. Some individuals, therefore, may be "non-
U.S. shareholders" for U.S. federal income tax purposes, but not
for U.S. federal estate tax purposes, and vice versa.
FATCA Withholding on Certain Foreign Accounts and Entities.
The Foreign Account Tax Compliance Act, or FATCA, provisions of
the Code, enacted in 2010, together with administrative guidance
and certain intergovernmental agreements entered into
thereunder, impose a 30% withholding tax on certain types of
"withholdable" payments made to "foreign financial institutions"
and certain other non-U.S. entities unless (1) the foreign
financial institution undertakes certain diligence and reporting
obligations or (2) the foreign non-financial entity either
certifies it does not have any substantial U.S. owners or
furnishes identifying information regarding each substantial
U.S. owner. If the payee is a foreign financial institution that
is not subject to special treatment under certain
intergovernmental agreements, it must enter into an agreement
with the U.S. Treasury requiring, among other things, that it
undertakes to identify accounts held by certain U.S. persons or
U.S.-owned foreign entities, annually report certain information
about such accounts and withhold 30% on payments to account
holders whose actions prevent them from complying with these
reporting and other requirements. Investors in jurisdictions
that have entered into intergovernmental agreements may, in lieu
of the foregoing requirements, be required to report such
information to their home jurisdiction. For this purpose,
subject to certain exceptions, the term "withholdable payment"
generally means (i) any payment of interest, dividends, rents,
and certain other types of generally passive income if such
payment is from sources within the United States, and (ii) any
gross proceeds from the sale or other disposition of any
property of a type which can produce interest or dividends from
sources within the United States (including, for example, stock
and debt of U.S. corporations). Withholding under FATCA will
apply after December 31, 2018 with respect to the gross proceeds
from a disposition of property that can produce U.S. source
interest or dividends and began after June 30, 2014 with respect
to other withholdable payments. Prospective investors should
consult their tax advisors regarding this legislation.
Information Reporting and Backup Withholding. Generally, we
must report annually to the IRS the amount of dividends paid to
a non-U.S. shareholder, such holder's name and address and the
amount of tax withheld, if any. A similar report is sent to the
non-U.S. shareholder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax
authorities in the non-U.S. shareholder's country of residence.
Payments of dividends or of proceeds from the disposition of
stock made to a non-U.S. shareholder may be subject to
information reporting and backup withholding unless such holder
establishes an exemption, for example, by properly certifying
its non- U.S. status on an IRS Form W-8BEN, IRS Form W-8BEN-E or
another appropriate version of IRS Form W-8. Notwithstanding the
foregoing, backup withholding may apply if either we or our
paying agent has actual knowledge, or reason to know, that a
non-U.S. shareholder is a U.S. person.
Backup withholding is not an additional tax. Rather, the U.S.
income tax liability of persons subject to backup withholding
will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund or credit may be
obtained, provided the required information is furnished to the
IRS.
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension
and profit sharing trusts and individual retirement accounts,
generally are exempt from federal income taxation. However, they
are subject to taxation on their unrelated business taxable
income. Subject to the exceptions described below, a tax-exempt
shareholder generally would not recognize unrelated business
taxable income as a result of an investment in our common stock.
However, if a tax-exempt shareholder were to finance its
acquisition of common stock with debt, a portion of the income
that it receives from us and a portion of the gain on sale of
our common stock could constitute unrelated business taxable
income pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and
qualified group legal services plans that are exempt from
taxation under special provisions of the federal income tax laws
are subject to different unrelated business taxable income
rules, which generally will require them to characterize
dividends that they receive from us as unrelated business
taxable income. Finally, in certain circumstances, a qualified
employee pension or profit sharing trust that owns more than 10%
of our stock by value at any time during a taxable year must
treat a percentage of the dividends that it receives from us for
the taxable year as unrelated business taxable income.
Such percentage is equal to the gross income we derive from
an unrelated trade or business, determined as if we were a
pension trust, divided by our total gross income for the year in
which we pay the dividends. That rule applies to a pension trust
holding more than 10% of our shares by value only if:
? the percentage of our dividends that the tax-exempt
trust must treat as unrelated business taxable income
is at least 5%;
? we qualify as a REIT by reason of the modification of
the rule requiring that no more than 50% of the value
of our stock be owned by five or fewer individuals that
allows the beneficiaries of the pension trust to be
treated as holding our stock in proportion to their
actuarial interests in the pension trust; and
? either (a) one pension trust owns more than 25% of the
value of our stock; or (b) a group of pension trusts
individually holding more than 10% of the value of our
stock collectively owns more than 50% of the value of
our stock.
Tax-exempt shareholders are urged to consult their tax
advisors regarding the federal, state, local and foreign income
and other tax consequences of owning our stock.
Other Tax Considerations
State, Local and Foreign Taxes
We and/or holders of our stock may be subject to state,
local and foreign taxation in various state or local or foreign
jurisdictions, including those in which we or they transact
business or reside. The foreign, state and local tax treatment
of us and of holders of our stock may not conform to the U.S.
federal income tax considerations discussed above. Consequently,
prospective investors should consult their own tax advisors
regarding the effect of state, local and foreign tax laws on an
investment in our common stock.
Legislative or Other Actions Affecting REITs
The rules dealing with U.S. federal income taxation are
constantly under review by persons involved in the legislative
process and by the IRS and the U.S. Treasury Department. No
assurance can be given as to whether, when, or in what form,
U.S. federal income tax laws applicable to us and our
shareholders may be enacted, amended or repealed. Changes to the
U.S. federal income tax laws and to interpretations of the U.S.
federal income tax laws could adversely affect an investment in
our common stock.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), is a broad statutory framework that governs
most U.S. retirement and other U.S. employee benefit plans.
ERISA and the rules and regulations of the Department of Labor
(the "DOL") under ERISA contain provisions that should be
considered by fiduciaries of employee benefit plans subject to
the provisions of Title I of ERISA ("ERISA Plans") and their
legal advisors. In particular, a fiduciary of an ERISA Plan
should consider whether an investment in shares of our common
stock (or, in the case of a participant-directed defined
contribution plan (a "Participant-Directed Plan"), making shares
of our common stock available for investment under the
Participant-Directed Plan) satisfies the requirements set forth
in Part 4 of Title I of ERISA, including the requirements that
(1) the investment satisfy the prudence and diversification
standards of ERISA, (2) the investment be in the best interests
of the participants and beneficiaries of the ERISA Plan, (3) the
investment be permissible under the terms of the ERISA Plan's
investment policies and governing instruments and (4) the
investment does not give rise to a non-exempt prohibited
transaction under ERISA or Section 4975 of the Code.
In determining whether an investment in shares of our
common stock (or making our shares available as an investment
option under a Participant-Directed Plan) is prudent for ERISA
purposes, a fiduciary of an ERISA Plan should consider all
relevant facts and circumstances including, without limitation,
possible limitations on the transferability of shares of our
common stock, whether the investment provides sufficient
liquidity in light of the foreseeable needs of the ERISA Plan
(or the participant account in a Participant- Directed Plan),
and whether the investment is reasonably designed, as part of
the ERISA Plan's portfolio, to further the ERISA Plan's
purposes, taking into consideration the risk of loss and the
opportunity for gain (or other return) associated with the
investment. It should be noted that we will invest our assets in
accordance with the investment objectives and guidelines
described herein, and that neither our Manager nor any of its
affiliates has any responsibility for developing any overall
investment strategy for any ERISA Plan (or the participant
account in a Participant-Directed Plan) or for advising any
ERISA Plan (or participant in a Participant-Directed Plan) as
to the advisability or prudence of an investment in us. Rather,
it is the obligation of the appropriate fiduciary for each ERISA
Plan (or participant in a Participant-Directed Plan) to consider
whether an investment in shares of our common stock by the ERISA
Plan (or making such shares available for investment under a
Participant-Directed Plan in which event it is the obligation of
the participant to consider whether an investment in shares of
our common stock is advisable), when judged in light of the
overall portfolio of the ERISA Plan, will meet the prudence,
diversification and other applicable requirements of ERISA.
Section 406 of ERISA and Section 4975 of the Code prohibit
certain transactions involving the assets of an ERISA Plan, as
well as those plans that are not subject to ERISA but that are
subject to Section 4975 of the Code, such as individual
retirement accounts ("IRAs") and non-ERISA Keogh plans
(collectively with ERISA Plans, "Plans"), and certain persons
(referred to as "parties in interest" for purposes of ERISA or
"disqualified persons" for purposes of the Code) having certain
relationships to Plans, unless a statutory or administrative
exemption is applicable to the transaction. A party in interest
or disqualified person who engages in a non- exempt prohibited
transaction may be subject to non-deductible excise taxes and
other penalties and liabilities under ERISA and the Code, and
the transaction might have to be rescinded. In addition, a
fiduciary who causes an ERISA Plan to engage in a non-exempt
prohibited transaction may be personally liable for any
resultant loss incurred by the ERISA Plan and may be subject to
other potential remedies.
A Plan that proposes to invest in shares of our common
stock (or to make our shares available for investment under a
Participant-Directed Plan) may already maintain a relationship
with our Manager or one or more of its affiliates, as a result
of which our Manager or such affiliate may be a "party in
interest" under ERISA or a "disqualified person" under the Code,
with respect to such Plan (e.g., if our Manager or such
affiliate provides investment management, investment advisory or
other services to that Plan). ERISA (and the Code) prohibits
plan assets from being used for the benefit of a party in
interest (or disqualified person). This prohibition is not
triggered by "incidental" benefits to a party in interest (or
disqualified person) that result from a transaction involving
the Plan that is motivated solely by the interests of the Plan.
ERISA (and the Code) also prohibits a fiduciary from using its
position to cause the Plan to make an investment from which the
fiduciary, its affiliates or certain parties in which it has an
interest would receive a fee or other consideration or benefit.
In this circumstance, Plans that propose to invest in shares of
our common stock should consult with their counsel to determine
whether an investment in shares of our common stock would result
in a transaction that is prohibited by ERISA or Section 4975 of
the Code.
If our assets were considered to be assets of a Plan
(referred to herein as "Plan Assets"), our management might be
deemed to be fiduciaries of the investing Plan. In this event,
the operation of the company could become subject to the
restrictions of the fiduciary responsibility and prohibited
transaction provisions of Title I of ERISA and/or the prohibited
transaction rules of Section 4975 of the Code.
The DOL has promulgated a final regulation under ERISA, 29
C.F.R. 2510.3-101 (as modified by Section 3(42) of ERISA, the
"Plan Assets Regulation"), that provides guidelines as to
whether, and under what circumstances, the underlying assets of
an entity Under the Plan Assets Regulation, the assets of an
entity in which a Plan or IRA makes an equity investment will
generally be deemed to be assets of such Plan or IRA unless the
entity satisfies one of the exceptions to this general rule.
Generally, the exceptions require that the investment in the
entity be one of the following:
- in securities issued by an investment company
registered under the Investment Company Act;
- in "publicly offered securities," defined generally as
interests that are "freely transferable," "widely held"
and registered with the SEC;
- in an "operating company" which includes "venture
capital operating companies" and "real estate operating
companies;" or
- in which equity participation by "benefit plan
investors" is not significant (i.e., under 25%).
The shares will constitute an "equity interest" for purposes of
the Plan Assets Regulation, and the shares may not constitute
"publicly offered securities" for purposes of the Plan Assets
Regulation. In addition, the shares will not be issued by a
registered investment company.
The 25% Limit. Under the Plan Assets Regulation, and
assuming no other exemption applies, an entity's assets would be
deemed to include "plan assets" subject to ERISA on any date if,
immediately after the most recent acquisition of any equity
interest in the entity, 25% or more of the value of any class of
equity interests in the entity is held by "benefit plan
investors" (the "25% Limit"). For purposes of this
determination, the value of equity interests held by a person
(other than a benefit plan investor) that has discretionary
authority or control with respect to the assets of the entity or
that provides investment advice for a fee with respect to such
assets (or any affiliate of such a person) is disregarded. The
term "benefit plan investor" is defined in the Plan Assets
Regulation as (a) any employee benefit plan (as defined in
Section 3(3) of ERISA) that is subject to the provisions of
Title I of ERISA, (b) any plan that is subject to Section 4975
of the Code and (c) any entity whose underlying assets include
plan assets by reason of a plan's investment in the entity (to
the extent of such plan's investment in the entity). Thus, while
our assets would not be considered to be "plan assets" for
purposes of ERISA so long as the 25% Limit is not exceeded. Our
charter provides that if benefit plan investors exceed the 25%
Limit, we may redeem their interests at a price equal to the
then current NAV per share. We intend to rely on this aspect of
the Plan Assets Regulation.
IRAs. Our charter provides that, in the event we determine
in our discretion that there is a material likelihood that we
would be a fiduciary under applicable law with respect to an
investor that is subject to ERISA and/or Section 4975 of the
Code (e.g., an IRA), we have the authority to redeem such
investor's interests at a price equal to the then current NAV
per share.
Operating Companies. Under the Plan Assets Regulation, an
entity is an "operating company" if it is primarily engaged,
directly or through a majority-owned subsidiary or subsidiaries,
in the production or sale of a product or service other than the
investment of capital. In addition, the Plan Assets Regulation
provides that the term operating company includes an entity
qualifying as a real estate operating company ("REOC") or a
venture capital operating company ("VCOC"). An entity is a REOC
if: (i) on its "initial valuation date and on at least one day
within each annual valuation period," at least 50% of the
entity's assets, valued at cost (other than short-term
investments pending long-term commitment or distribution to
investors) are invested in real estate that is managed or
developed and with respect to which such entity has the right to
substantially participate directly in management or development
activities; and (ii) such entity in the ordinary course of its
business is engaged directly in the management and development
of real estate during the 12-month period. The "initial
valuation date" is the date on which an entity first makes an
investment that is not a short-term investment of funds pending
long-term commitment. An entity's "annual valuation period" is a
pre-established period not exceeding 90 days in duration, which
begins no later than the anniversary of the entity's initial
valuation date.
Certain examples in the Plan Assets Regulation clarify that
the management and development activities of an entity looking
to qualify as a REOC may be carried out by independent
contractors (including, in the case of a partnership, affiliates
of the general partner) under the supervision of the entity. An
entity will qualify as a VCOC if (i) on its initial valuation
date and on at least one day during each annual valuation
period, at least 50% of the entity's assets, valued at cost,
consist of "venture capital investments," and (ii) the entity,
in the ordinary course of business, actually exercises
management rights with respect to one or more of its venture
capital investments. The Plan Assets Regulation defines the term
"venture capital investments" as investments in an operating
company (other than a VCOC) with respect to which the investor
obtains management rights.
If the 25% Limit is exceeded and we do not exercise our
right to redeem benefit plan investors as described above, we
may try to operate in a manner that will enable us to qualify as
a VCOC or a REOC or to meet such other exception as may be
available to prevent our assets from being treated as assets of
any investing Plan for purposes of the Plan Assets Regulation.
Accordingly, we believe, on the basis of the Plan Assets
Regulation, that our underlying assets should not constitute
"plan assets" for purposes of ERISA. However, no assurance can
be given that this will be the case.
If our assets are deemed to constitute "plan assets" under
ERISA, certain of the transactions in which we might normally
engage could constitute a non-exempt "prohibited transaction"
under ERISA or Section 4975 of the Code. In such circumstances,
in our sole discretion, we may void or undo any such prohibited
transaction, and we may require each investor that is a "benefit
plan investor" to redeem their shares upon terms that we
consider appropriate.
Prospective investors that are subject to the provisions of
Title I of ERISA and/or Code Section 4975 should consult with
their counsel and advisors as to the provisions of Title I of
ERISA and/or Code Section 4975 relevant to an investment in
shares of our common stock.
As discussed above, although IRAs and non-ERISA Keogh plans
are not subject to ERISA, they are subject to the provisions of
Section 4975 of the Code, prohibiting transactions with
"disqualified persons" and investments and transactions
involving fiduciary conflicts. A prohibited transaction or
conflict of interest could arise if the fiduciary making the
decision to invest has a personal interest in or affiliation
with our company or any of its respective affiliates. In the
case of an IRA, a prohibited transaction or conflict of interest
that involves the beneficiary of the IRA could result in
disqualification of the IRA. A fiduciary for an IRA who has any
personal interest in or affiliation with our company or any of
its respective affiliates, should consult with his or her tax
and legal advisors regarding the impact such interest may have
on an investment in our shares with assets of the IRA.
Shares sold by us may be purchased or owned by investors
who are investing Plan assets. Our acceptance of an investment
by a Plan should not be considered to be a determination or
representation by us or any of our respective affiliates that
such an investment is appropriate for a Plan. In consultation
with its advisors, each prospective Plan investor should
carefully consider whether an investment in our company is
appropriate for, and permissible under, the terms of the Plan's
governing documents.
Governmental plans, foreign plans and most church plans,
while not subject to the fiduciary responsibility provisions of
ERISA or the provisions of Code Section 4975, may nevertheless
be subject to local, foreign, state or other federal laws that
are substantially similar to the foregoing provisions of ERISA
and the Code. Fiduciaries of any such plans should consult with
their counsel and advisors before deciding to invest in shares
of our common stock.
The DOL has issued a final regulation significantly
expanding the concept of "investment advice" for purposes of
determining fiduciary status under ERISA. The DOL recognized
that transactions such as the mere offering of the shares to
sophisticated Plans could be characterized as fiduciary
investment advice under this new regulation absent an exception
and that such potential for fiduciary status would not be
appropriate in these contexts. Accordingly, the DOL provided an
exception based upon satisfaction of certain factual conditions
and we may elect to ensure these conditions are satisfied in
connection with the offering of the shares. Finally,
fiduciaries of Plans should be aware that the Manager is not
undertaking to provide impartial investment advice or to give
advice in a fiduciary capacity in connection with the offering
or purchase of shares and that the Manager has financial
interests associated with the purchase of shares including the
fees and other allocations and distributions they may receive
from us as a result of the purchase of shares by a Plan.
Form 5500. Plan administrators of ERISA Plans that acquire
shares may be required to report compensation, including
indirect compensation, paid in connection with the ERISA Plan's
investment in shares on Schedule C of Form 5500 (Annual
Return/Report of Employee Benefit Plan). The descriptions in
this circular of fees and compensation, including the fees paid
to the Manager, are intended to satisfy the disclosure
requirement for "eligible indirect compensation," for which an
alternative reporting procedure on Schedule C of Form
5500 may be available.
PLAN OF DISTRIBUTION
We are offering a maximum of up to $50,000,000 in shares of
our common stock on a "best efforts maximum" basis. Because this
is a "best efforts maximum" offering, we are only required to
use our best efforts to sell shares of our common stock. We are
offering up to $50,000,000 in shares of common stock in our
offering at $10.00 per share for the first 12 months of this
offering. Thereafter, the per share purchase price will be
adjusted every fiscal quarter and, as of January 1st, April 1st,
July 1st and October 1st of each year, will equal the greater of
(i) $10.00 per share or (ii) our net asset value, or NAV,
divided by the number of shares of our common stock outstanding
as of the end of the prior fiscal quarter on a fully diluted
basis (NAV per share). The minimum investment amount for initial
purchases of shares of our common stock is 200 shares, or $2,000
based on the initial offering price per share. We may terminate
this offering at any time. We intend to permit investors to
purchase additional shares in increments of, at minimum, 10
shares or $100 at our initial share price of $10 per share, each
month, subsequent to the initial investment. Such additional share
purchases are of shares included in this offering.
This offering circular will be furnished to prospective
investors upon their request via electronic PDF format and will
be available for viewing and download 24 hours per day, 7 days
per week on our website, as well as on the SEC's website at
www.sec.gov.
In order to subscribe to purchase shares of our common
stock, a prospective investor must electronically complete, sign
and deliver to us an executed subscription agreement as provided
on www.upsideavenue.com (and attached to this offering circular
as Appendix B), and wire funds for its subscription amount in
accordance with the instructions provided on the subscription
agreement.
Settlement may occur up to 15 days after a prospective
investor submits a subscription agreement, depending on the
volume of subscriptions received. Shares of our common stock
will be issued to the subscriber as of the date of settlement,
which will not occur until an investor's funds have cleared and
we issue the shares of our common stock. The number of shares
issued to an investor will be calculated based on the price per
share in effect on the date we receive the subscription.
We reserve the right to reject any investor's subscription
in whole or in part for any reason, including if we determine in
our sole and absolute discretion that such investor is not a
"qualified purchaser" for purposes of Section 18(b)(4)(D)(ii) of
the Securities Act. If the offering terminates or if any
prospective investor's subscription is rejected, all funds
received from such investors will be returned without interest
or deduction.
Length of Offering
The number of shares that are covered by the offering
statement of which this offering circular forms a part is the
number that we reasonably expect to be offered and sold within
two years from the initial qualification date of the offering
statement. Under applicable SEC rules, we may extend this
offering one additional year if all of the shares covered by the
offering statement are not yet sold within two years. With the
filing of an offering statement for a subsequent offering, we
may also be able to extend this offering beyond three years
until the follow-on offering statement is declared qualified
(but in any event not more than an additional 180 calendar
days). All subscription funds which are accepted will be
deposited directly into the Company's escrow account with Prime
Trust, LLC. Subscription funds placed in the escrow account may only
be released if the Minimum Offering Amount is raised within the
Offering Period
Pursuant to this offering circular, we are offering to the
public all of the shares covered by the offering statement of
which this offering circular forms a part. Under Regulation A,
we are only allowed to raise up to $50,000,000 in any 12-month
period (although we may raise capital in other ways). Although
the offering statement covers a fixed dollar amount of our
shares, we intend effectively to conduct a continuous offering
of the maximum number of shares of our common stock that we are
permitted to sell pursuant to Regulation A over an unlimited
time period by filing a new offering statement prior to the end
of the three-year period described in Rule 251(d)(3). We reserve
the right to terminate this offering at any time and to extend
our offering term to the extent permissible under applicable
law.
Investment Criteria and Minimum Investment Amount
The shares of our common stock are being offered and sold
only to "qualified purchasers" (as defined in Regulation A under
the Securities Act). As a Tier 2 offering pursuant to Regulation
A under the Securities Act, this offering will be exempt from
state "Blue Sky" law review, subject to certain state filing
requirements and anti-fraud provisions, to the extent that the
shares of our common stock offered hereby are offered and sold
only to "qualified purchasers" or at a time when the shares of
our common stock are listed on a national securities exchange.
See "Investment Criteria" on page iii of this offering circular
for the definition of "qualified purchasers" and other
investment criteria that may apply. We reserve the right to
reject any investor's subscription in whole or in part for any
reason, including if we determine in our sole and absolute
discretion that such investor is not a "qualified purchaser" for
purposes of Regulation A.
The minimum investment required in this offering is 200 shares
of common stock, or $2,000 based on the initial offering price
of $10.00 per share. Pursuant to a board policy, you may not
transfer your shares of common stock in a manner that causes you
or your transferee to own fewer than the number of shares of
common stock required to meet the minimum purchase requirements,
except for the following transfers without consideration:
transfers by gift; transfers by inheritance; intrafamily
transfers; family dissolutions; transfers to affiliates; and
transfers by operation of law. These minimum investment
requirements are applicable unless and until our shares of
common stock are listed on a national securities exchange, and
these requirements may make it more difficult for you to sell
your shares of common stock. We cannot assure you that our
shares of common stock will ever be listed on a national
securities exchange.
Certificates Will Not be Issued
We will not issue stock certificates. Instead, our common
stock will be recorded and maintained on a shareholder register
that we maintain or that we engage a transfer agent to maintain.
Information regarding restrictions on the transferability of our
shares that, under Maryland law, would otherwise have been
required to appear on our stock certificates will instead be
furnished to shareholders upon request and without charge.
Offering Circular Supplements and Post-Qualification Amendments
In accordance with the Securities Act Industry Guide 5, we
undertake:
(1) to file a sticker supplement pursuant to Rule 253(g)
under the Securities Act during the distribution period describing
each real estate-related asset not identified in the offering
circular at such time as there arises a reasonable probability
that such asset will be acquired and to consolidate all such
stickers into a post-qualification amendment filed at least once
every three months, with the information contained in such
amendment provided simultaneously to the existing shareholders.
Each sticker supplement shall disclose all compensation and fees
received by our Manager and its affiliates in connection with any
such acquisition. Where appropriate, the post-qualification amendment
shall include or incorporate by reference audited financial
statements meeting the requirements of Rule 3-14 of Regulation
S-X for properties acquired during the distribution period; and
(2) to file, after the end of the distribution period, a current
report on Form 1-U containing the financial statements and any
additional information required by Rule 3-14 of Regulation S-X,
where applicable, to reflect each subscription made after the end
of the distribution period involving the use of 10% or more (on
a cumulative basis) of the net proceeds of the offering and to
provide the information contained in such report to the
shareholders at least once each quarter after the distribution
period of the offering has ended.
Advertising, Sales and other Promotional Materials
In addition to this offering circular, subject to
limitations imposed by applicable securities laws, we expect to
use additional advertising, sales and other promotional
materials regarding this offering. These materials may include
information relating to this offering, the past performance of
our Sponsor and its affiliates, property brochures, articles and
publications concerning real estate, or public advertisements
and audio-visual materials, in each case only as authorized by
us. In addition, the sales material may contain certain quotes
from various publications without obtaining the consent of the
author or the publication for use of the quoted material in the
sales material. Although these materials will not contain
information in conflict with the information provided by this
offering circular and will be prepared with a view to presenting
a balanced discussion of risk and reward with respect to shares
of our common stock, these materials will not give a complete
understanding of this offering, us or the shares of our common
stock and are not to be considered part of this offering
circular. This offering is made only by means of this offering
circular and prospective investors must read and rely on the
information provided in this offering circular in connection
with their decision to invest in shares of our common stock.
ADMINISTRATOR
[TBD]
LEGAL MATTERS
Riveles Wahab LLP
40 Wall St. 28th Floor
New York, NY. 10005
(212) 785-0076
AUDITOR
Cohn Reznick
816 Congress Avenue, Suite 200
Austin, TX 78701
(512) 494-9100
ESCROW AGENT
Prime Trust, LLC
2300 W. Sahara Ave. Suite 1170
Las Vegas, NV 89102
HOW TO SUBSCRIBE
Subscription Procedures
Investors seeking to purchase shares of our common stock who
satisfy the "qualified purchaser" standards should proceed as
follows:
(1) Read this entire offering circular and any
supplements accompanying this offering circular.
(2) Via our website, www.upsideavenue.com, electronically
complete and execute a copy of the subscription
agreement. A specimen copy of the subscription
agreement, including instructions for completing it,
is included in this offering circular as Appendix B.
(3) Electronically provide ACH instructions to us for the
full purchase price of the shares of our common stock
being subscribed for.
By executing the subscription agreement and paying the total
purchase price for the shares of our common stock subscribed
for, each investor agrees to accept the terms of the
subscription agreement and attests that the investor meets the
minimum standards of a "qualified purchaser," and that such
subscription for shares of our common stock does not exceed 10%
of the greater of such investor's annual income or net worth
(for natural persons), or 10% of the greater of annual revenue
or net assets at fiscal year-end (for non-natural persons).
Subscriptions will be effective only upon our acceptance and we
reserve the right to reject any subscription in whole or in
part.
We will attempt to accept or reject subscriptions within 60
days of receipt by us. If we accept your subscription, we will
email you a confirmation.
An approved trustee must process and forward to us
subscriptions made through IRAs, Keogh plans and 401(k) plans.
In the case of investments through IRAs, Keogh plans and 401(k)
plans, we will send the confirmation and notice of our
acceptance to the trustee.
Minimum Investment Requirement
You must initially purchase at least 200 shares of our common
stock in this offering, or $2,000 based on the current per share
price. You should note that an investment in shares of our
common stock will not, in itself, create a retirement plan and
that, in order to create a retirement plan, you must comply with
all applicable provisions of the Code.
ADDITIONAL INFORMATION
We have filed with the SEC an offering statement under the
Securities Act on Form 1-A regarding this offering. This
offering circular, which is part of the offering statement,
does not contain all the information set forth in the offering
statement and the exhibits related thereto filed with the SEC,
reference to which is hereby made. Upon the qualification of
the offering statement, we will be subject to the informational
reporting requirements of the Exchange Act that are applicable
to Tier 2 companies whose securities are registered pursuant to
Regulation A, and accordingly, we will file annual reports,
semi-annual reports and other information with the SEC. You may
read and copy the offering statement, the related exhibits and
the reports and other information we file with the SEC at the
SEC's public reference facilities maintained by the SEC at 100
F Street, N.E., Washington, DC 20549. You can also request
copies of those documents, upon payment of a duplicating fee,
by writing to the SEC. Please call the SEC at 1-800-SEC-0330
for further information regarding the operation of the public
reference rooms. The SEC also maintains a website at
www.sec.gov that contains reports, information statements and
other information regarding issuers that file with the SEC.
You may also request a copy of these filings at no cost, by
writing, emailing or telephoning us at:
Multi-Housing Income REIT, Inc.
9050 N. Capital of Texas Highway, Suite 320
Austin, TX 78759
Telephone: 512-
872-2898
Email:
info@upsideavenue.com
Within 120 days after the end of each fiscal year we will
provide to our shareholders of record an annual report. The
annual report will contain audited financial statements and
certain other financial and narrative information that we are
required to provide to shareholders.
We also maintain a website at www.upsideavenue.com where there
may be additional information about our business, but the
contents of that site are not incorporated by reference in, or
otherwise a part of, this offering circular.
Item 1. Index to Exhibits
1. Articles of Incorporation
2. Bylaws
3. Sample Subscription Agreement
4. Material Contracts - Management Agreement; Support Agreement
5. Escrow Agreement
6. Consent
7. Counsel Opinion Re: Legality
SIGNATURES
Pursuant to the requirements of Regulation A, the issuer
certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form 1-A and has
duly caused this offering statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in New York, NY
on November 15, 2017.
Multi-Housing Income Reit, Inc.
By:
Casoro Capital Partners, LLC
By:
/s/ Yuen Yung
Name:
Yuen Yung
This offering statement has been signed by the
following persons in the capacities and on the
dates indicated.
Signature
Title
Date
/s/ Monte K. Lee-Wen
Director and Principal January 30, 2018
Monte K. Lee-Wen
/s/ Yuen Yung
Director, CEO January 30, 2018
Yuen Yung
Title
:
Chief Executive Officer
Casoro Capital Partners, LLC is wholly owned by its parent,
Casoro Capital, LLC, a Texas limited liability company
owned by the Principals of the Sponsor and Manager.
(c) In addition, the SEC has issued certain no-action
letters and interpretations in which it deemed certain
trusts to be accredited investors, such as trusts where the
trustee is a bank as defined in Section 3(a)(2) of the
Securities Act and revocable grantor trusts established by
individuals who meet the requirements of clause
(1)(a)(i) or (1)(a)(ii) of this section. However, these no-action
letters and interpretations are very fact specific and
should not be relied upon without close consideration of
your unique facts.
For purposes of this definition, "net worth" means the
excess of total assets at fair market value over total
liabilities, except that the value of the principal residence
owned by a natural person will be excluded for purposes
of determining such natural person's net worth. In addition,
for purposes of this definition, the related amount of
indebtedness secured by the primary residence up to the primary
residence's fair market value may also be
excluded, except in the event such indebtedness increased
in the 60 days preceding the purchase of our common
stock and was unrelated to the acquisition of the primary
residence, then the amount of the increase must be
included as a liability in the net worth calculation. Moreover,
indebtedness secured by the primary residence in
excess of the fair market value of such residence should be
considered a liability and deducted from the natural
person's net worth.
3% of gross offering proceeds.
PART II AND III
3
Amended_Offering_Circular.pdf
AMENDED OFFERING CIRCULAR PDF
begin 644 Amended_Offering_Circular.pdf
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