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 Offering Circular was filed may be obtained.

 

Preliminary Offering Circular

January 14, 2020

Subject to Completion

 

GK INVESTMENT PROPERTY HOLDINGS II, LLC

257 East Main Street, Suite 200

Barrington, IL 60010

(847) 277-9930

 

7% Bonds

$50,000,000 Aggregate Maximum Offering Amount (50,000 Bonds)

 

$5,000 Minimum Purchase (5 Bonds)

 

 

GK Investment Property Holdings II, LLC, a Delaware limited liability company, referred to herein as our company, is offering up to $50,000,000 in the aggregate of its 7% bonds, or the Bonds. The purchase price per Bond is $1,000, with a minimum purchase amount of $5,000. We may issue Bonds at volume-weighted discounts to certain investors. See “Plan of Distribution – Volume-Weighted Discount” for more information. The Bonds will be offered in four series, Series A, Series B, Series C and Series D, with the sole difference between the series being their respective maturity dates, over a 2-year period starting from the date of qualification of the Offering Statement of which this Offering Circular is a part. Each series of Bonds beginning with Series A will be offered for a total of six months. Each series of Bonds will mature on the fifth anniversary of the initial issuance date of Bonds in such series and will bear interest at a fixed rate of 7% per annum. Interest on the Bonds will be paid monthly on the 15th day of the month. The first interest payment on a Bond will be paid on the 15th day of the month following the issuance of such Bond. In addition, the company is obligated to pay bondholders, or Bondholders, a cumulative non-compounding 1% deferred interest, or Deferred Interest Payment, on maturity dates of the Bonds in such series. See “Description of Bonds – Deferred Interest Payment” for more information. The Bonds will be offered to prospective investors on a best efforts basis by our Managing Broker-Dealer, JCC Advisors, LLC, or JCC. “Best efforts” means that JCC is not obligated to purchase any specific number or dollar amount of Bonds, but it will use its best efforts to sell the Bonds. JCC may engage additional broker-dealers, or Selling Group Members, who are members of the Financial Industry Regulatory Authority, or FINRA, to assist in the sale of the Bonds. Until closing occurs and thereafter prior to each additional closing, the proceeds received in the offering will be kept in an escrow account held by UMB Bank as escrow agent. If the initial closing does not occur for any reason, the proceeds will be promptly returned to investors without interest. At each closing date, the proceeds for such closing will be disbursed to our company and Bonds relating to such proceeds will be issued to their respective investors. We expect to commence the sale of the Bonds as of the date on which the Offering Statement is declared qualified by the United States Securities and Exchange Commission, or the SEC. The offering will continue through the earlier of the second anniversary of qualification of the Offering Statement of which this Offering Circular forms a part, subject to extension in the sole discretion of GK Development for an additional twelve (12) months, or the date upon which all $50,000,000 in offering proceeds have been received, or the Offering Termination Date. If we extend the offering, we will offer Series E and Series F Bonds, for the first and second six-month periods of such extension, with the maturity date of each such series being the fifth anniversary of the initial issuance of such series.

  

 

	Price to Public	Managing Broker-Dealer Fee, Commissions and Expense Reimbursements(1)(2)	Proceeds to Issuer	Proceeds to Other Persons
Per Bond:	$1,000.00(3)	$90.00	$910.00	$0
Maximum Offering Amount:	$50,000,000.00	$4,500,000.00	$45,500,000.00	$0

_________

 

(1)	This includes selling commissions of 5.5% and a Managing Broker-Dealer Fee of up to 2.5% of the gross proceeds of this offering, which is the aggregate offering amount sold after application of any volume-weighted discounts (see “Plan of Distribution – Volume-Weighted Discount”), without consideration of any discounts for Bonds purchased by certain persons (see “Plan of Distribution – Discounts for Bonds Purchased by Certain Persons”), to be paid on Bonds offered on a best efforts basis. Our Managing Broker-Dealer, JCC, will receive selling commissions equal to 5.5% of aggregate gross offering proceeds, which it may re-allow, in whole or in part to the Selling Group Members, a Managing Broker-Dealer Fee of up to 2.5% of aggregate gross offering proceeds, which it may re-allow, in whole or in part to the Selling Group Members, and a non-accountable marketing and due diligence expense reimbursement in an amount up to 1% of aggregate gross offering proceeds, which it may re-allow, in whole or in part to the Selling Group Members. See “Use of Proceeds” and “Plan of Distribution” for more information.
(2)	The table above does not include anticipated organizational and offering fee in an amount equal to 2.50% of the gross proceeds of this offering ($1,250,000 if the maximum offering amount is sold) to be paid to GK Development, Inc. dba GK Real Estate in connection with this offering and our organization. See “Use of Proceeds” and “Plan of Distribution” for more information. Our manager will pay our actual organizational and offering expense out of the organizational and offering fee. Our manager will be entitled to retain as compensation for promoting the offering any amount by which 2.50% of the gross proceeds raised in the offering, the organizational and offering fee, exceeds the actual organizational and offering expenses. To the extent actual organizational and offering expenses exceed 2.50% of the gross proceeds raised in the offering, the organizational and offering fee, our manager will pay such amounts without reimbursement from us.
(3)	Assumes no Bonds are sold subject to a volume-weighted discount. If Bonds are sold at volume-weighted discounts (see “Plan of Distribution – Volume-Weighted Discount”), then all fees described in notes (1) and (2) above will be reduced in proportion to such Discounts. In addition to volume-weighted discounts, we may provide certain discounts in connection with the sale of Bonds in this offering to certain persons (see “Plan of Distribution – Discounts for Bonds Purchased by Certain Persons”).

 

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. 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.

 

An investment in the Bonds is subject to certain risks and should be made only by persons or entities able to bear the risk of and to withstand the total loss of their investment. Currently, there is no market for the Bonds being offered, nor does our company anticipate one developing. Prospective investors should carefully consider and review that risk as well as the RISK FACTORS beginning on page 7 of this Offering Circular.

 

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, OR THE COMMISSION, DOES NOT PASS UPON THE MERITS 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 SELLING LITERATURE. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

FORM S-11 DISCLOSURE FORMAT IS BEING FOLLOWED.

 

 

TABLE OF CONTENTS

 

Contents	Page
OFFERING CIRCULAR SUMMARY	1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS	5
RISK FACTORS	6
USE OF PROCEEDS	18
PLAN OF DISTRIBUTION	19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	26
GENERAL INFORMATION AS TO OUR COMPANY	27
POLICY WITH RESPECT TO CERTAIN ACTIVITIES	29
INVESTMENT POLICIES OF OUR COMPANY	30
DESCRIPTION OF REAL ESTATE	33
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS	34
DESCRIPTION OF BONDS	37
LEGAL PROCEEDINGS	43
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	43
DIRECTORS AND EXECUTIVE OFFICERS	44
EXECUTIVE COMPENSATION	45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	45
SELECTION, RETENTION AND CUSTODY OF COMPANY’S INVESTMENTS	46
POLICIES WITH RESPECT TO CERTAIN TRANSACTIONS	47
COMPENSATION OF OUR MANAGER AND ITS AFFILIATES	48
PRIOR PERFORMANCE SUMMARY	49
LIMITATIONS ON LIABILITY	52
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	53
LEGAL MATTERS	53
WHERE YOU CAN FIND ADDITIONAL INFORMATION	53
INDEX TO FINANCIAL STATEMENTS	F-1
APPENDIX	A-1

  

 

OFFERING CIRCULAR SUMMARY

 

This summary highlights information contained elsewhere in this Offering Circular. This summary does not contain all of the information that you should consider before deciding whether to invest in our Bonds. You should carefully read this entire Offering Circular, including the information under the heading “Risk Factors” and all information included in the Offering Circular.

 

Our Company. GK Investment Property Holdings II, LLC was formed on July 11, 2019 to acquire existing income producing commercial rental properties.

 

Mr. Garo Kholamian is the beneficial owner of 100% of the outstanding units of our company. Our company is solely managed by GK Development, Inc. dba GK Real Estate, or GK Development or our manager. GK Development was formed on May 19, 1994 under the laws of Illinois, and Mr. Garo Kholamian is the sole director and shareholder of GK Development. As a result, Mr. Garo Kholamian will effectively manage our company.

 

Our company does not intend to act as a land developer in that it is has no intent to invest in, acquire, own, hold, lease, operate, manage, maintain, redevelop, sell or otherwise use undeveloped real property or “raw land,” as a ground up development. Our company, engaging in its commercial real estate activities, may have the opportunity to acquire commercial real property which includes unimproved pad sites for future development and lease-up opportunities. In such instances, our company will retain the unimproved pad sites for ground lease, build-to-suit and/or sell opportunities. In situations where our company has the opportunity to acquire commercial real property which includes a large tract of developable raw land, the developable raw land will not be acquired by our company, but may be acquired by an entity affiliated with GK Development. Our company may choose to redevelop real property for an alternative use than intended when originally acquired or developed.

 

Our company is focused on investments in existing, income producing commercial rental properties that will benefit from GK Development’s real estate operating and leasing skills, including releasing, redeveloping, renovating, refinancing, repositioning, and selling. GK Development intends to actively participate in the management of our company’s properties rather than hold the properties as passive investments.

 

Management. The sponsor of our company, GK Development, is a Barrington, Illinois based real estate acquisition and development company specializing in the acquisition, management, and redevelopment of commercial rental properties. Its management provides years of experience successfully acquiring, redeveloping and managing commercial rental properties. Mr. Garo Kholamian is the President and founder of GK Development. Prior to GK Development, Mr. Kholamian was Senior Vice President of Development for Homart Development Co., the real estate development arm of Sears Roebuck. In this position, he was instrumental in the development of shopping centers across the United States. See “Directors and Executive Officers” for more information on Mr. Kholamian and the seven other individuals responsible for the management of GK Development.

 

Advisory Board. GK Development has selected Garo Kholamian and Susan Dewar to be our advisory board members, or the Advisory Board, for this offering. The Advisory Board will advise GK Development on business and governance decisions, including decisions on property acquisitions and dispositions, loans, and corporate governance. GK Development, as the sole manager of the company, has sole discretion and absolute power in making the aforementioned decisions.

 

The Offering. Our company is offering up to $50,000,000 in the aggregate of its 7% Bonds in four series, Series A to D. See “Plan of Distribution - Who May Invest” for further information. The Company may accept purchases of the Bonds as soon as the Offering Statement of which this Offering Circular is a part has been qualified by the SEC. Until closing occurs and thereafter prior to each additional closing, the proceeds received in the offering will be kept in an escrow account held by UMB Bank as escrow agent. If the initial closing does not occur for any reason, the proceeds will be promptly returned to investors without interest. At each closing date, the proceeds for such closing will be disbursed to our company and Bonds relating to such proceeds will be issued to their respective investors. The offering will continue through the Offering Termination Date.

 

The Bonds will be offered in four series, Series A, Series B, Series C and Series D, with the sole difference between the series being their respective maturity dates, over a 2-year period starting from the date of qualification of the Offering Statement of which this Offering Circular is a part. Each series of Bonds beginning with Series A will be offered for a total of six months. Each series of Bonds will mature on the fifth anniversary of the initial issuance date of Bonds in such series and will bear interest at a fixed rate of 7% per annum. Interest on the Bonds will be paid monthly on the 15th day of the month. The first interest payment on a Bond will be paid on the 15th day of the month following the issuance of such Bond. In addition, the company is obligated to pay Bondholders a cumulative non-compounding 1% Deferred Interest Payment on maturity dates of the Bonds in such series. See “Description of Bonds – Deferred Interest Payment” for more information. If we extend the offering, we will offer Series E and Series F Bonds, for the first and second six-month periods of such extension, with the maturity date of each such series being the fifth anniversary of the initial issuance of such series.

 

 

Following achievement of our initial closing, which will be at the end of the first month following qualification of the Offering Statement in which we have accepted subscriptions, we will conduct closings in this offering at least monthly, on the last day of the applicable month, assuming there are funds to close, until the Offering Termination Date. Once a subscription has been submitted and accepted by our company, an investor will not have the right to request the return of its subscription payment prior to the next closing date. If subscriptions are received on or before a closing date and accepted by our company prior to such closing, any such subscriptions will be closed on that closing date. If subscriptions are received on or before a closing date but not accepted by the Company prior to such closing, any such subscriptions will be closed on the next closing date. On the date of each Closing, or a Closing Date, offering proceeds for that closing will be disbursed to the Company and the respective Bonds will be issued to investors in the offering, or the Bondholders. The offering is being made on a best-efforts basis through JCC.

 

Issuer		GK Investment Property Holdings II, LLC.
Securities Offered		Maximum – $50,000,000, aggregate principal amount of the Bonds.
Maturity Date		Each series of Bonds offered hereby will mature on the fifth anniversary of the initial issuance date of Bonds in such series.
Interest Rate		7% per annum computed on the basis of a 360-day year.
Interest Payment Dates		Commencing on the 15th of the month following the issuance of such Bond and continuing monthly until its Maturity Date.
Price to Public		$1,000 per Bond.
Offering Schedule		The Bonds will be offered in four series, Series A, Series B, Series C and Series D, with the sole difference between the series being their respective maturity dates, over a 2-year period starting from the date of qualification of the Offering Statement of which this Offering Circular is a part. Each series of Bonds beginning with Series A will be offered for a total of six months.
Deferred Interest Payment		In addition, the company is obligated to pay Bondholders a cumulative non-compounding 1% Deferred Interest Payment on maturity dates of the Bonds in such series. See “Description of Bonds – Deferred Interest Payment” for more information.   On maturity dates of the Bonds in such series, the company is obligated to pay the Bondholders a cumulative non-compounding Deferred Interest Payment at a fixed rate of 1% per annum. Deferred Interest Payments will not be made in the instances of any optional redemption at the option of the Bondholders, or the Optional Redemption, or Death and Disability Redemption. See “Description of Bonds – Optional Redemption At The Option Of The Bondholders” and “Description of Bonds – Death and Disability Redemption” for more information.   While our company is required to make the Deferred Interest Payments, we do not intend to establish a sinking fund to fund such payments. Therefore, our ability to honor this obligation will be subject to our ability to generate sufficient cash flow or procure additional financing in order to fund those payments. If we cannot generate sufficient cash flow or procure additional financing to honor this obligation, we may need to liquidate some or all of our company’s assets to fund the payments, or we may not be able to fund the payments in their entirety or at all, which shall constitute an Event of Default. See “Description of Company’s Securities - Event of Default” for more information.
Ranking		The Bonds are senior unsecured indebtedness of our company. They rank equally with our other senior unsecured indebtedness structurally subordinated to all indebtedness of our subsidiaries. The Bonds would rank junior to any of our secured indebtedness; however, we have covenanted not to incur any indebtedness that would be senior to the Bonds and not to permit our subsidiaries to incur any indebtedness except for indebtedness secured by a first position lien on real property acquired by us or one of our subsidiaries.

 

 

Volume-Weighted Discount

We are offering a volume-weighted discount to the Price to the Public, or the Discount, for certain purchases of Bonds (See “Plan of Distribution – Volume-Weighted Discount”). The company may terminate application of Discount at any time in its sole discretion by filing a supplement to its Offering Circular with the SEC at least thirty (30) calendar days prior to the termination date of Discount announcing such termination date. If Bonds are sold at volume-weighted discounts, then selling commissions, Managing Broker-Dealer Fee, non-accountable marketing and due diligence expense reimbursements, organizational and offering fee and amount available for investment will be reduced in proportion to such Discounts. The Discount is as follows:

 

	Purchase Amount	Discount			Resulting Price Per Bond
	20 – 29 Bonds	3 %			$ 970
	30 – 39 Bonds	4 %			$ 960
	40 or more Bonds	5 %			$ 950

 

Use of Proceeds		We estimate that the net proceeds from this offering, after deducting the estimated offering costs and expenses payable by our company, will be approximately $44,250,000. This assumes that we sell the maximum offering amount without the application of the Discount. We intend to use the net proceeds from this offering to acquire commercial rental properties in our target asset class.
Certain Covenants		We will issue the Bonds under an indenture, or the Indenture, to be dated as of the initial issuance date of the Bonds between us and UMB Bank, as the trustee. The Indenture contains covenants that limit our ability to incur, or permit our subsidiaries to incur, third party indebtedness if certain debt to asset value and/or interest coverage ratios would be exceeded. In addition, our company is not permitted to incur any indebtedness that would be senior to the Bonds. None of our direct or indirect subsidiaries is permitted to incur any indebtedness other than indebtedness secured by a first position lien on real property. These covenants are subject to a number of important exceptions, qualifications, limitations and specialized definitions. See “Description of Company’s Securities Certain Covenants” in this Offering Circular. While any of the Bonds remain outstanding, the company shall commission or otherwise obtain an appraisal of each Property owned by the company or a subsidiary of the company to be dated on or before the second anniversary of the acquisition of such Property, and then on or before each subsequent anniversary of the prior appraisal. While any of the Bonds remain outstanding, the sum of the aggregate Property Equity Values plus any cash or cash equivalents, as defined by GAAP, then held by the company shall be equal to or exceed seventy percent (70%) of aggregate principal amount of the outstanding Bonds. While any Bonds remain outstanding, the company shall maintain a Cash Coverage Ratio (as defined below) equal to at least 120%. The company shall make monthly reports of its cash and cash equivalents to the Trustee to ensure compliance.
Change of Control - Offer to Purchase		If a Change of Control Repurchase Event as defined under “Description of Bonds - Certain Covenants” in this Offering Circular, occurs, we must offer to repurchase the Bonds at a repurchase price equal to (i) $1,020 per Bond if redeemed on or before the third anniversary of the initial issuance of Bonds of the series being prepaid; (ii) $1,015 per Bond if redeemed after the third anniversary and on or before the fourth anniversary of the initial issuance of Bonds of the series being prepaid; and (iii) $1,010 per Bond if redeemed after the fourth anniversary of the initial issuance of Bonds of the series being prepaid, plus, in all cases, any accrued and unpaid interest on the Bonds to be redeemed up to but not including the redemption date, including any Deferred Interest Payment on the Bonds to be redeemed, or the Company Redemption Price.
Optional Redemption At The Option Of The Bondholders		The Bonds will be redeemable at the election of the Bondholder beginning on the one-year anniversary of last issuance date of the series of Bonds held by the Bondholder. Bondholder must provide written notice to us requesting redemption. We will have 120 days from the date such notice is provided to redeem the Bondholder’s Bonds at a price per Bond equal to $850 plus any accrued but unpaid interest on the Bond due to such Bondholder. Our obligation to redeem Bonds and the cash available for the Optional Bond Redemption are subject to certain conditions and limitations. See “Description of Bonds – Optional Redemption At The Option Of The Bondholders” for more information.
Death and Disability Redemption		In the event of death or disability of a Bondholder, Bonds may be presented to us for repurchase. All or a portion (consisting of at least 50%), of the Bonds beneficially held by a Bondholder may be submitted to us for repurchase at any time in accordance with the procedures outlined by our company. At that time, we may, subject to the conditions and limitations, repurchase the Bonds presented for cash to the extent that we have sufficient funds available. If the repurchase is being made from the original purchaser of a Bond(s), the repurchase price will equal the price paid per Bond. The repurchase amount for the Bonds for all other persons will equal $1,000 per Bond being repurchased. Our obligation to repurchase Bonds and the cash available for the Death and Disability Redemption are subject to certain conditions and limitations. See “Description of Bonds – Death and Disability Redemption” for more information.

   

Form		The Bonds will be evidenced by global bond certificates deposited with nominee holders. The nominee holders are the Depository Trust Company, or DTC, or its nominee, Cede & Co., for those purchasers purchasing through a DTC participant subsequent to the Bonds gaining DTC eligibility and Direct Transfer LLC, or Direct Transfer, for those purchasers not purchasing through a DTC participant. See “Description of Company’s Securities - Book-Entry, Delivery and Form” for more information.
Bond Service Reserve		Our company will be required to keep 7% of the gross offering proceeds from the sale of Bonds in each series in a reserve account with the trustee for a period of one (1) year following the initial issuance date of Bonds in such series. Each series of Bonds will have a separate reserve account which reserve account will be available solely for the payment of our company’s Bond Service Obligations relating to the particular series of Bonds. Following the expiration of one (1) year from the date of initial issuance of Bonds in a series, the remaining amount in any series reserve account shall be released to our company if our company is otherwise in compliance with all terms of the Bonds.
Denominations		We will issue the Bonds only in denominations of $1,000.
Payment of Principal and Interest		Principal and interest on the Bonds will be payable in U.S. dollars or other legal tender, coin or currency of the United States of America.
Future Issuances		We may, from time to time, without notice to or consent of the Bondholders, increase the aggregate principal amount of the Bonds, including Series A to D, outstanding by issuing additional bonds in the future with the same terms or series of the Bonds, except for the issuance date and offering price, and such additional bonds shall be consolidated with any series of Bonds in this offering, subject to the sole discretion of the company.

 

Liquidity		This is a Tier 2, Regulation A offering where the offered securities will not be listed on a registered national securities exchange upon qualification. This offering is being conducted pursuant to an exemption from registration under Regulation A of the Securities Act of 1933, as amended. We may apply for these qualified securities to be eligible for quotation on an alternative trading system or over the counter market, if we determine that such market is appropriate given the structure of the Bonds and our company and our business objectives. There is no guarantee that the Bonds will be publicly listed or quoted or that a market will develop for them. Please review carefully “Risk Factors - Investment Risk” for more information. Additionally, subject to certain terms and conditions, the Bonds will be redeemable at the election of the Bondholder. See “Description of Bonds – Optional Bond Redemption” for more information.
Trustee, Registrar and Paying Agent		We have designated UMB Bank as paying agent for the Bonds and Direct Transfer LLC as sub-paying agent in respect of Bonds registered to it. UMB Bank will act as trustee under the Indenture and registrar for the Bonds. The Bonds are being issued in book-entry form only, evidenced by global certificates, as such, payments are being made to DTC, its nominee or to Direct Transfer.
Governing Law		The Indenture and the Bonds are governed by the laws of the State of Delaware.
Material Tax Considerations		You should consult your tax advisors concerning the U.S. federal income tax consequences of owning the Bonds in light of your own specific situation, as well as consequences arising under the laws of any other taxing jurisdiction.
Risk Factors		An investment in our Bonds involves certain risks. You should carefully consider the risks above, as well as the other risks described under “Risk Factors” beginning on page 7 of this Offering Circular before making an investment decision.

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Offering Circular contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth or anticipated in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, funds derived from operations, cash flows, liquidity and prospects include, but are not limited to, the factors referenced in this Offering Circular, including those set forth below.

 

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Offering Circular. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Offering Circular. The matters summarized below and elsewhere in this Offering Circular could cause our actual results and performance to differ materially from those set forth or anticipated in forward-looking statements. Accordingly, we cannot guarantee future results or performance. Furthermore, except as required by law, we are under no duty to, and we do not intend to, update any of our forward-looking statements after the date of this Offering Circular, whether as a result of new information, future events or otherwise.

 

 

RISK FACTORS

 

An investment in our Bonds is highly speculative and is suitable only for persons or entities that are able to evaluate the risks of the investment. An investment in our Bonds should be made only by persons or entities able to bear the risk of and to withstand the total loss of their investment. Prospective investors should consider the following risks before making a decision to purchase our Bonds. To the best of our knowledge, we have included all material risks to investors in this section.

 

Risks Related to the Offering

 

The Bonds are unsecured obligations of our company and not obligations of our subsidiaries and are structurally subordinated to any future obligations of our company’s subsidiaries. Structural subordination increases the risk that we will be unable to meet our obligations on the Bonds.

 

The Bonds are unsecured obligations of our company and will rank equally in right of payment with all of our company’s other unsecured indebtedness and senior in right of payment to any of our company’s future obligations that are by their terms expressly subordinated or junior in right of payment to the Bonds. The Bonds are not secured. However, we have covenanted not to incur any indebtedness that would be senior to the Bonds and not to permit our subsidiaries to incur any indebtedness except for indebtedness secured by a first position lien on real property acquired by us or one of our subsidiaries.

 

The Bonds are obligations exclusively of our company and not of any of its subsidiaries. None of our company’s subsidiaries is a guarantor of the Bonds and the Bonds are not required to be guaranteed by any subsidiaries our company may acquire or create in the future. The Bonds are also effectively subordinated to all of the liabilities of our company’s subsidiaries, to the extent of their assets, since they are separate and distinct legal entities with no obligation to pay any amounts due under our company’s indebtedness, including the Bonds, or to make any funds available to make payments on the Bonds. Our company’s right to receive any assets of any subsidiary in the event of a bankruptcy or liquidation of the subsidiary, and therefore the right of our company’s creditors to participate in those assets, will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors, in each case to the extent that our company is not recognized as a creditor of such subsidiary. In addition, even where our company is recognized as a creditor of a subsidiary, our company’s rights as a creditor with respect to certain amounts will be subordinated to other indebtedness of that subsidiary, including secured indebtedness to the extent of the assets securing such indebtedness.

 

Our covenants require only a 70% real property equity, in addition to our cash on hand, to principal ratio; if we default on the Bonds, the proceeds from liquidation upon sale of our assets may not be sufficient to repay the aggregate principal amount of the Bonds.

 

One of our trustee’s and Bondholders’ principal remedies in the event of a default is to force the sale of the rental properties we acquire. Under the Indenture we must maintain, in addition to our cash on hand, a ratio of 70% equity to the principal amount of outstanding Bonds, subject to our right to cure any deficiency within one hundred twenty (120) days of the occurrence of such deficiency. See “Description of Bonds - Event of Default” for more information. Because the amount of real property equity we are required to maintain, in addition to our cash on hand, may not cover the full principal amount of the Bonds, if we default on the Bonds, the proceeds from liquidation upon sale of our assets may not be sufficient to fully repay the outstanding Bondholders.

 

Subject to specified limitations in the Indenture, the Bonds do not restrict or eliminate our company’s or its subsidiaries’ ability to incur additional debt or take other action that could negatively impact holders of the Bonds.

 

Subject to specified limitations in the Indenture and as described under “Description of Bonds - Certain Covenants,” the Indenture does not contain any other provisions that would directly limit our company’s ability or the ability of its subsidiaries to incur indebtedness, including unsecured indebtedness that would be senior to the Bonds. We have covenanted not to incur any indebtedness that would be senior to the Bonds and not to permit our subsidiaries to incur any indebtedness except for indebtedness secured by a first position lien on real property acquired by us or one of our subsidiaries. Another limitation on our company’s or its subsidiaries’ ability to take on additional debt is the requirement to maintain our Equity-Bond Ratio.

 

Liquidation upon default may be limited by covenants and penalties in debt documents for senior mortgages secured by the respective underlying properties.

 

Our Bonds are unsecured. If we default on the Bonds, our trustee (or sufficient Bondholders) will need to rely on liquidation proceeds upon sales of our assets, including properties and any equity interest we own, for repayment. We expect that any such properties may be financed with debt and that the terms of such debt will require that the ownership interest of such property, directly or indirectly, cannot change without lender’s consent. If the ownership changes without lender consent, the respective borrower under the respective loan will be in default. If either of the direct or indirect owners of such a property is found to be in default under any loans, your investment will be adversely affected. We anticipate using senior secured debt to acquire each new property we purchase. Often senior lender loans secured by real property contain prepayment penalties and/or requirements of defeasance. Any such prepayment penalties or defeasance requirements may reduce the proceeds of sale of our properties or may render such a sale prohibitively expensive. This would materially and adversely affect the repayment of your investment in the event of a default.

 

 

Due to the possible prepayment penalties on the mortgage debt and mezzanine debt, we may be unable to pay down a portion of the indebtedness secured by the property.

 

We have not identified any properties to be purchased as of the date of this offering circular, however, we expect that we may purchase some properties by using a mixture of indebtedness including mortgage debt, mezzanine debt and interim debt. Our company may use offering proceeds to pay down any future indebtedness including mortgage debt, mezzanine debt and interim debt. The amounts of principal and interest of the debts are not practical to predict now. Additionally, if we repay such indebtedness, we may be required to pay certain prepayment penalties. If we are required to pay the prepayment penalty, we may not be able to or may not be willing to pay off such indebtedness. If we do not pay off such debt, our debt service obligations may reduce our ability to make payments on the Bonds.

   

The cash flow indirectly received from the properties we acquire in the future will be significantly impacted by the debt burden on the property.

 

We may finance our purchase of properties in the future using various debt financing. If so, we will be required to make the debt service payments on each of the loans in the future before making distributions to Bondholders. The debt burden is not practical to predict now. As a result, our ability to make payments to Bondholders when they become due may be adversely affected by the debt burden in the future.

 

If we sell substantially less than all of the Bonds we are offering, our investment objectives may become more difficult to reach.

 

While we believe we will be able to reach our investment objectives regardless of the amount of the raise, it may be more difficult to do so if we sell substantially less than all of the Bonds. Such a result may negatively impact our liquidity and increase our dependence on higher interest debt to acquire target properties. In that event, our investment costs will increase, which may decrease our ability to make payments to Bondholders.

 

Our trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request, order or direction of any of the Bondholders, pursuant to the provisions of the Indenture, unless such Bondholders shall have offered to the trustee reasonable security or indemnity against the costs, expenses and liabilities that may be incurred therein or thereby.

 

The Indenture provides that in case an Event of Default (as herein defined) in the Indenture shall occur and not be cured, the trustee will be required, in the exercise of its power, to use the degree of care of a reasonable person in the conduct of his own affairs. Subject to such provisions, the trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Bondholder, unless the Bondholder has offered to the trustee security and indemnity satisfactory to it against any loss, liability or expense.

 

Bondholders of later series could be subject to higher risks in terms of getting their Bond Service Obligations paid and principal repaid.

 

We plan to offer the Bonds in four series, Series A, Series B, Series C and Series D, with the sole difference between the series being their respective maturity dates, over a 2-year period starting from the date of qualification of the Offering Statement of which this Offering Circular is a part. Each series of Bonds beginning with Series A will be offered for a total of six months. Each series of Bonds will mature on the fifth anniversary of the initial issuance date of Bonds in such Series and will bear interest at a fixed rate of 7% per annum. Since the Bonds in different series have different maturity dates, in the event that the company does not have sufficient funds to pay all its Bond Service Obligations and repay all the principal, Bondholders of later series could be subject to higher risks in terms of getting their Bond Service Obligations paid and principal repaid.

 

 

Investment Risks

 

The Bonds will have limited transferability and liquidity.

 

There is no active market for the Bonds. Although we may apply for quotation of the Bonds on an alternative trading system or over the counter market, even if we obtain that quotation, we do not know the extent to which investor interest will lead to the development and maintenance of a liquid trading market. Further, the Bonds will not be quoted on an alternative trading system or over the counter market until after the termination of this offering, if at all. Therefore, investors will be required to wait until at least after the final termination date of this offering for such quotation. The initial public offering price for the Bonds has been determined by us. You may not be able to sell the Bonds you purchase at or above the initial offering price.

 

Alternative trading systems and over the counter markets, as with other public markets, may from time to time experience significant price and volume fluctuations. As a result, the market price of the Bonds may be similarly volatile, and Bondholders may from time to time experience a decrease in the value of their Bonds, including decreases unrelated to our operating performance or prospects. The price of the Bonds could be subject to wide fluctuations in response to a number of factors, including those listed in this “Risk Factors” section of this Offering Circular.

 

No assurance can be given that the market price of the Bonds will not fluctuate or decline significantly in the future or that Bondholders will be able to sell their Bonds when desired on favorable terms, or at all. Further, the sale of the Bonds may have adverse federal income tax consequences.

 

We have no prior operating history which may make it difficult for you to evaluate this investment.

 

We have no prior operating history and may not be able to successfully operate our business or achieve our investment objectives. We may not be able to conduct our business as described in our plan of operation.

 

You will not have the opportunity to evaluate our investments before we make them and we may make real estate investments that would have changed your decision as to whether to invest in our Bonds.

 

As of the date of this offering circular, we do not own any properties. We are not able to provide you with information to evaluate our future investments prior to acquisition. We will seek to invest substantially all of the offering proceeds available for investment, after the payment of fees and expenses, in the acquisition of real estate and real estate related investments. We have established criteria for evaluating potential investments. See “Investment Policies of Company” for more information. However, you will be unable to evaluate the transaction terms, location, and financial or operational data concerning the investments before we invest in them. You will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments prior to our investment. You will be relying entirely on the ability of GK Development and its management team to identify suitable investments and propose transactions for GK Development, our sole manager, to oversee and approve. These factors increase the risk that we may not generate the returns that you seek by investing in our Bonds.

 

The inability to retain or obtain key personnel, property managers and leasing agents could delay or hinder implementation of our investment strategies, which could impair our ability to honor our obligations under the terms of Bonds and could reduce the value of your investment.

 

Our success depends to a significant degree upon the contributions of GK Development’s management team. We do not have employment agreements with any of these individuals nor do we currently have key man life insurance on any of these individuals. If any of them were to cease their affiliation with us or GK Development, GK Development may be unable to find suitable replacements, and our operating results could suffer. We believe that our future success depends, in large part, upon GK Development’s property managers’ and leasing agents’ ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for highly skilled personnel is intense, and GK Development and any property managers we retain may be unsuccessful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of highly skilled personnel, property managers or leasing agents, our ability to implement our investment strategies could be delayed or hindered, and our ability to pay our Bond Service Obligations and repay principal may be materially and adversely affected.

 

We rely on JCC Advisors, LLC to sell our Bonds pursuant to this offering. If JCC Advisors, LLC is not able to market our Bonds effectively, we may be unable to raise sufficient proceeds to meet our business objectives.

 

We have engaged JCC Advisors, LLC to act as our Managing Broker-Dealer for this offering, and we rely on JCC Advisors, LLC to use its best efforts to sell the Bonds offered hereby. It would also be challenging and disruptive to locate an alternative Managing Broker-Dealer for this offering. Without improved capital raising, our portfolio will be smaller relative to our general and administrative costs and less diversified than it otherwise would be, which could adversely affect the value of your investment in us.

 

Under certain circumstances, subject to our sole discretion, we may redeem the Bonds before maturity, and you may be unable to reinvest the proceeds at the same or a higher rate of return.

 

We may redeem all or a portion of the Bonds at any time upon occurrence of Change of Control Repurchase Event or by redemption at the option of the company. See “Description of Bonds –Redemption At The Option Of The Company” and “Description of Bonds - Certain Covenants”for more information. While we are required to pay certain prepayment premiums on or prior to the third anniversary of the initial issuance date of Bonds in such series, if redemption occurs, you may be unable to reinvest the money you receive in the redemption at a rate that is equal to or higher than the rate of return on the Bonds.

 

 

There is no guarantee that a Bondholder will receive a Deferred Interest Payment.

 

On maturity dates of the Bonds in such series, the company is obligated to pay the Bondholders a cumulative non-compounding Deferred Interest Payment at a fixed rate of 1% per annum. Deferred Interest Payments will not be made in the instances of any Optional Redemption or Death and Disability Redemption. See “Description of Bonds – Optional Redemption At The Option Of The Bondholders” and “Description of Bonds – Death and Disability Redemption” for more information.

 

While our company is required to make the Deferred Interest Payments, we do not intend to establish a sinking fund to fund such payments. Therefore, our ability to honor this obligation will be subject to our ability to generate sufficient cash flow or procure additional financing in order to fund those payments. If we cannot generate sufficient cash flow or procure additional financing to honor this obligation, we may need to liquidate some or all of our company’s assets to fund the payments, or we may not be able to fund the payments in their entirety or at all, which shall constitute an Event of Default. See “Description of Company’s Securities - Event of Default” for more information.

 

Risks Related to This Offering and Our Corporate Structure

 

Because we are dependent upon GK Development and its affiliates to conduct our operations, any adverse changes in the financial health of GK Development or its affiliates or our relationship with them could hinder our operating performance and our ability to meet our financial obligations.

 

We are dependent on GK Development and its affiliates to manage our operations and acquire and manage our future portfolio of real estate assets. Our sole manager, GK Development makes all decisions with respect to the management of our company. GK Development depends upon the fees and other compensation that it receives from us in connection with the purchase, management and sale of our properties to conduct its operations. Any adverse changes in the financial condition of GK Development or our relationship with GK Development could hinder its ability to successfully manage our operations and our portfolio of investments.

 

You will have no control over changes in our policies and day-to-day operations, which lack of control increases the uncertainty and risks you face as an investor in our Bonds. In addition, our sole manager and sponsor, GK Development, may change our major operational policies without your approval.

 

Our sole manager and sponsor, GK Development determines our major policies, including our policies regarding financing, growth, debt capitalization, and distributions. GK Development may amend or revise these and other policies without your approval. As a Bondholder, you will have no rights under the limited liability company agreement of our company, or our Operating Agreement. See “General Information as to Our Company - Operating Agreement” herein for a detailed summary of our Operating Agreement. 

 

GK Development is responsible for the day-to-day operations of our company and the selection and management of investments and has broad discretion over the use of proceeds from this offering. Accordingly, you should not purchase our Bonds unless you are willing to entrust all aspects of the day-to-day management and the selection and management of investments to GK Development. Specifically, GK Development is controlled by Mr. Garo Kholamian as sole stockholder and sole director, and as a result, he will be able to exert significant control over our operations. Our company has no board of managers and Mr. Kholamian has exclusive control over the operations of GK Development, Inc. dba GK Real Estate and our company, as our manager. As a result, we are dependent on Mr. Kholamian rather than a group of managers to properly choose investments and manage our company. In addition, GK Development may retain independent contractors to provide various services for our company, and you should note that such contractors will have no fiduciary duty to you or the other Bondholders and may not perform as expected or desired.

 

Bondholders will have no right to remove our manager or otherwise change our management, even if we are underperforming and not attaining our investment objectives.

 

Only the members of our company have the right to remove our manager, and only if our manager has made a decision to file a voluntary petition or otherwise initiate proceedings to have it adjudicated insolvent, or to seek an order for relief as debtor under the United States Bankruptcy Code (11 U.S.C. §§ 101 et seq.); to file any petition seeking any composition, reorganization, readjustment, liquidation, dissolution or similar relief under the present or any future federal bankruptcy laws or any other present or future applicable federal, state or other statute or law relative to bankruptcy, insolvency, or other relief for debtors; to seek the appointment of any trustee, receiver, conservator, assignee, sequestrator, custodian, liquidator (or other similar official) of our company or of all or any substantial part of the assets of our company, to make any general assignment for the benefit of creditors of our company, to admit in writing the inability of our company to pay its debts generally as they become due, or to declare or effect a moratorium on our company’s debt or to take any action in furtherance of any of the above proscribed actions. Bondholders will have no rights in the management of our company. As an investor in this offering, you will have no ability to remove our manager.

 

 

Our manager and its executive officers will have limited liability for, and will be indemnified and held harmless from, the losses of our company.

 

GK Development, our manager and its executive officers and their agents and assigns, will not be liable for, and will be indemnified and held harmless (to the extent of our company’s assets) from any loss or damage incurred by them, our company or the members in connection with the business of our company resulting from any act or omission performed or omitted in good faith, which does not constitute fraud, willful misconduct, gross negligence or breach of fiduciary duty. A successful claim for such indemnification could deplete our company’s assets by the amount paid. See “General Information as to Our Company - Operating Agreement - Indemnification” below for a detailed summary of the terms of our Operating Agreement. Our Operating Agreement is filed as an exhibit to the Offering Statement of which this Offering Circular is a part.

 

If we sell substantially less than all of the Bonds we are offering, the costs we incur to comply with the rules of the Securities and Exchange Commission, or the SEC, regarding financial reporting and other fixed costs will be a larger percentage of our net income and may reduce the return on your investment.

 

We expect to incur significant costs in maintaining compliance with the financial reporting for a Tier II Regulation A issuer and that our management will spend a significant amount of time assessing the effectiveness of our internal control over financial reporting. We do not anticipate that these costs or the amount of time our management will be required to spend will be significantly less if we sell substantially less than all of the Bonds we are offering.

 

Risks Related to Conflicts of Interest

 

Our sole manager, its executive officers and their affiliates face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could limit our investment opportunities, impair our ability to make distributions and reduce the value of your investment.

 

We rely on GK Development to identify suitable investment opportunities. We may be buying properties at the same time as other entities that are affiliated with or sponsored by GK Development. Other programs sponsored by GK Development or its affiliates also rely on GK Development, its executive officers and their affiliates for investment opportunities. GK Development has sponsored privately and publicly offered real estate programs and may in the future sponsor privately and publicly offered real estate programs that have investment objectives similar to ours. Therefore, GK Development and its affiliates could be subject to conflicts of interest between our company and other real estate programs. Many investment opportunities would be suitable for us as well as other programs. GK Development could direct attractive investment opportunities or tenants to other entities. Such events could result in our investing in properties that provide less attractive returns or getting less attractive tenants, impairing our ability to honor our obligations under the terms of the Bonds and the value of your investment. See “Selection, Retention and Custody of Company’s Investments” and “Policies with Respect to Certain Transactions” for more information.

 

Payment of fees to GK Development and its affiliates will reduce cash available for investment and payment of our Bond Service Obligations.

 

GK Development and its affiliates perform services for us in connection with the selection and acquisition of our properties and other investments, and possibly the development, management and leasing of our properties. They are paid fees for these services, which reduces the amount of cash available for investment and for payment of our Bond Service Obligations. Although customary in the industry, the fees to be paid to GK Development and its affiliates were not determined on an arm’s-length basis. We cannot assure you that a third party unaffiliated with GK Development would not be willing to provide such services to us at a lower price. If the maximum offering amount is raised, without the application of any Discount we estimate that 2.58% of the gross proceeds of this offering will be paid to GK Development, its affiliates and third parties for upfront fees and expenses associated with the offer and sale of the Bonds. The expenses we actually incur in connection with the offer and sale of the Bonds, excluding acquisition and origination fees and expenses, may exceed the amount we expect to incur. In addition to this, GK Development will receive a 2% acquisition fee based on the purchase price of assets acquired from nonaffiliated, third party sellers, a 2% financing fee based on the amount of debt raised to acquire new assets or refinance existing assets, exclusive of any lender fees, an asset management fee equal to 1% of the appraisal value of real properties acquired by the company or its subsidiaries or pro rata portion of such value if a company subsidiary is not wholly-owned, and a 2% disposition fee based on the sales price of assets sold, exclusive of any brokerage fees. See “Selection, Retention and Custody of Company’s Investments” and “Policies with Respect to Certain Transactions” for more information.

 

GK Development will receive certain fees regardless of the performance of our company or an investment in the Bonds.

 

GK Development will receive an acquisition fee equal to 2% of the purchase price of each acquired asset from non-affiliated, third party sellers, an asset management fee equal to 1% of the appraisal value of real properties acquired by the company or its subsidiaries or pro rata portion of such value if a company subsidiary is not wholly-owned, and a financing fee equal to 2% of the amount of debt raised to acquire new assets or refinance existing assets of our company. These fees will be paid regardless of our company’s success and the performance of the Bonds.

 

GK Development, as our manager, may increase the fees payable to it and/or its affiliates with the consent of a majority of the Bonds.

 

GK Development will have the power to contractually bind our company as its manager. As a result, GK Development may agree to increase the fees payable to it and/or its affiliates with the consent of a majority of the Bonds. For this purpose, a Bondholder will be deemed to have consented with respect to its Bonds if the Bondholder has not objected in writing within five (5) calendar days after the receipt of the consent request. As a result, GK Development may increase fees paid to it or its affiliates without the affirmative consent of the Bondholders.

 

 

GK Development and its affiliates, including our officers, face conflicts of interest caused by compensation arrangements with us and other programs sponsored by affiliates of GK Development, which could result in actions that are not in the long-term, best interests of our Bondholders.

 

GK Development and its affiliates receive fees from us. These fees could influence GK Development’s advice to us, as well as the judgment of the affiliates of GK Development who serve as our officers. Among other matters, the compensation arrangements could affect their judgment with respect to property acquisitions from, or the making of investments in, other programs sponsored by GK Development, which might entitle affiliates of GK Development to disposition fees and other possible fees in connection with its services for the seller. See “Selection, Retention and Custody of Company’s Investments” and “Policies with Respect to Certain Transactions” for more information.

 

Considerations relating to their compensation from other programs could result in decisions that are not in the best interests of our Bondholders, which could hurt our ability to perform our obligations due under the Bonds or result in a decline in the value of your investment.

 

If the competing demands for the time of GK Development, its affiliates and our officers result in them spending insufficient time on our business, we may miss investment opportunities or have less efficient operations, which could reduce our profitability and impair our ability to honor our obligations under the Bonds.

 

We do not have any employees. We rely on the employees of GK Development and its affiliates for the day to day operation of our business. The amount of time that GK Development and its affiliates spend on our business will vary from time to time and is expected to be greater while we are raising money and acquiring properties. GK Development and its affiliates, including our officers, have interests in other programs and engage in other business activities. As a result, they will have conflicts of interest in allocating their time between us and other programs and activities in which they are involved. Because these persons have competing interests on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than are necessary or appropriate to manage our business. We expect that as our real estate activities expand, GK Development will attempt to hire additional employees who would devote substantially all of their time to our business. There is no assurance that GK Development will devote adequate time to our business. If GK Development suffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, it may allocate less time and resources to our operations. If any of these things occur, our ability to honor obligations under the Bonds may be adversely affected.

 

We may procure future debt financing from affiliates of our manager, and there is nothing restricting us from doing so.

 

We may use offering proceeds to repay future debt financing from affiliates of our manager. There is nothing restricting us from receiving future debt financing from affiliates of our manager to make future investments. We believe the terms of any future loans from an affiliate of our manager will be, fair and at market rates for such loans. However, we cannot assure you that a third party unaffiliated with GK Development would not be willing to provide current loan financing on better terms.

 

Risks Related to Investments in Commercial Rental Real Estate

 

Our operating results may be affected by economic conditions that have an adverse impact on the commercial real estate market in general, and may cause us to be unable to realize appreciation in the value of our commercial real estate properties.

 

Our operating results are subject to risks generally associated with the ownership of commercial real estate, including, but not limited to changes in general economic conditions, changes in interest rates and the availability of mortgage funds that may make the sale a of commercial real estate difficult. Although we intend to hold the commercial real estate and related investments we expect to own until such a time as our sole manager, GK Development, determines that a sale or other disposition appears to be advantageous to our overall investment objectives; we cannot predict the various market conditions affecting commercial real estate investments that will exist at any particular time in the future. Because of this uncertainty, we cannot assure you that we will realize any appreciation in the value of the commercial real estate properties we expect to own.

 

Competition from other commercial rental properties for tenants could reduce our profitability and impair our ability to honor our obligations under the terms of the Bonds.

 

The commercial rental property industry is highly competitive. This competition could reduce occupancy levels and revenues at the commercial rental properties we expect to own, which would adversely affect our operations. We may face competition from many sources. We may face competition from other commercial rental properties both in the immediate vicinity and in the larger geographic market where our commercial rental properties will be located. Overbuilding of commercial rental properties may occur. If so, this will increase the number of units available and may decrease occupancy and rental rates. In addition, increases in operating costs due to inflation may not be offset by increased rental rates.

 

 

Increased construction of similar properties that may compete with the commercial rental properties we expect to own, in any particular location could adversely affect the operating results of our commercial rental properties and our cash available to honor our obligations under the terms of the Bonds.

 

We may acquire commercial rental properties in locations which experience increases in construction of properties that compete with our properties. This increased competition and construction could:

 

●	make it more difficult for us to find tenants to lease units in our commercial rental properties;

 

●	force us to lower our rental prices in order to lease units in our commercial properties; and/or

 

●	substantially reduce our revenues and cash available to honor our obligations under the terms of the Bonds.

 

We compete with numerous other parties or entities for commercial real estate assets and tenants and may not compete successfully.

 

We will compete with numerous other persons or entities engaged in commercial real estate investment activities, many of which have greater resources than we do. Some of these investors may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may be willing to offer space at rates below our rates, causing us to lose existing or potential tenants.

 

Many of our investments will be dependent on tenants for revenue, and lease terminations could reduce our revenues from rents, resulting in the decline in the value of your investment.

 

The underlying value of the commercial properties we expect to own, and the ability to honor our obligations under the terms of the Bonds will depend upon the ability of the tenants of our commercial properties to generate enough income to pay their rents in a timely manner, and the success of our investments depends upon the occupancy levels, rental income and operating expenses of our commercial properties and our company. Tenants’ inability to timely pay their rents may be impacted by employment and other constraints on their personal finances, including debts, purchases and other factors. These and other changes beyond our control may adversely affect our tenants’ ability to make lease payments. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur costs in protecting our investment and re-leasing the premises. We may be unable to re-lease the premises for the rent previously received. We may be unable to sell a commercial property with low occupancy without incurring a loss. These events and others could impair our ability to honor our obligations under the terms of the Bonds and may also cause the value of your investment to decline.

 

Our operating results and distributable cash flow depend on our ability to generate revenue from leasing our commercial properties to tenants on terms favorable to us.

 

Our operating results will depend, in large part, on revenues derived from leasing space in the commercial properties we expect to own. We will be subject to the credit risk of our tenants, and to the extent our tenants default on their leases or fail to make rental payments we may suffer a decrease in our revenue. In addition, if a tenant does not pay its rent, we may not be able to enforce our rights as landlord without delays and we may incur substantial legal costs. We are also subject to the risk that we will not be able to lease space in our commercial properties or that, upon the expiration of leases for space located in our commercial properties, leases may not be renewed, the space may not be re-leased or the terms of renewal or re-leasing (including the cost of required renovations or concessions to customers) may be less favorable to us than current lease terms. If vacancies continue for a long period of time, we may suffer reduced revenues which would impair our ability to honor our obligations under the terms of the Bonds. In addition, the resale value of the commercial property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property. Further, costs associated with commercial real estate investment, such as real estate taxes and maintenance costs, generally are not reduced when circumstances cause a reduction in income from the investment. These events would cause a significant decrease in revenues and could impair our ability to honor our obligations under the terms of the Bonds.

 

Costs incurred in complying with governmental laws and regulations may reduce our net income and the cash available for distributions.

 

Our company and the commercial properties we expect to own are subject to various federal, state and local laws and regulations relating to environmental protection and human health and safety. Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Solid Waste Disposal Act as amended by the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act and their resolutions and corresponding state and local counterparts govern such matters as 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 and the remediation of contamination associated with disposals. The commercial properties we acquire will be subject to the Americans with Disabilities Act of 1990 which generally requires that certain types of buildings and services be made accessible and available to people with disabilities. These laws may require us to make modifications to our properties. Some of these laws and regulations impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were illegal. Compliance with these laws and any new or more stringent laws or regulations may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. In addition, there are various federal, state and local fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance.

 

 

Our commercial properties may be affected by our tenants’ activities or actions, the existing condition of land when we buy it, operations in the vicinity of our commercial properties, such as the presence of underground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent such property. Any material expenditures, fines, or damages we must pay will impair our ability to honor our obligations under the terms of the Bonds and may reduce the value of your investment.

 

Any uninsured losses or high insurance premiums will reduce our net income and the amount of our cash available to honor our obligations under the terms of the Bonds.

 

Our company will attempt to obtain adequate insurance to cover significant areas of risk to us, as a company, and to the commercial properties we expect to own. However, there are types of losses at the property level, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. We may not have adequate coverage for such losses. If any of our commercial properties incur a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. 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 damaged property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would impair our ability to honor our obligations under the terms of the Bonds.

 

As part of otherwise attractive properties, we may acquire some properties with existing lock out provisions, which may inhibit us from selling a commercial property, or may require us to maintain specified debt levels for a period of years on some properties.

 

Loan provisions could materially restrict us from selling or otherwise disposing of or refinancing commercial properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available to honor our obligations under the terms of the Bonds. Loan provisions may prohibit us from reducing the outstanding indebtedness with respect to commercial properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties.

 

Loan provisions could impair our ability to take actions that would otherwise be in the best interests of the Bondholders and, therefore, may have an adverse impact on the value of your investment, relative to the value that would result if the loan provisions did not exist. In particular, loan provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our Bondholders.

 

 

If we elect to improve any vacant portions of, or redevelop, properties we expect to acquire, such actions will expose us to additional risks beyond those associated with owning and operating commercial rental properties and could materially and adversely affect us.

 

We may redevelop one or more of the properties we expect to acquire or improve vacant portions of the properties we expect to acquire. If we elect to do so, we will be subject to additional risks and our business may be adversely affect by:

 

●	abandonment of redevelopment or improvement opportunities after expending significant cash and other resources to determine feasibility, requiring us to expense costs incurred in connection with the abandoned property redevelopment or improvement;

 

●	construction costs of a property redevelopment or improvement exceeding our original estimates;

 

●	failure to complete a property redevelopment or improvement on schedule or in conformity with building plans and specifications;

 

●	the lack of available construction financing on favorable terms or at all;

 

●	the lack of available permanent financing upon completion of a property redevelopment or improvement initially financed through construction loans on favorable terms or at all;

 

●	failure to obtain, or delays in obtaining, necessary zoning, land use, building, occupancy and other required governmental permits and authorizations;

 

●	liability for injuries and accidents occurring during the construction process and for environmental liabilities, including those that may result from off-site disposal of construction materials;

 

●	our inability to comply with any build-to-suit tenant’s procurement standards and processes in place from time to time; and

 

●

circumstances beyond our control, including: work stoppages, labor disputes, shortages of qualified trades people, such as carpenters, roofers, electricians and plumbers, changes in laws relating to union organizing activity, lack of adequate utility infrastructure and services, our reliance on local subcontractors, who may not be adequately capitalized or insured, and shortages, delay in availability, or fluctuations in prices of, building materials.

 

Any of these circumstances could give rise to delays in the start or completion of, or could increase the cost of, redeveloping or improving one or more of the properties we expect to acquire. We cannot assure you that we will be able to recover any increased costs by raising our lease rates. Additionally, due to the amount of time required for planning, constructing and leasing of redevelopment properties, we may not realize a significant cash return for several years. Furthermore, any of these circumstances could hinder our growth and materially and adversely affect us. In addition, new redevelopment or improvement activities, regardless of whether or not they are ultimately successful, typically require substantial time and attention from management.

 

General Risks Related to Real Estate-Related Investments

 

If we make or invest in mortgage loans as part of our plan to acquire the underlying property, our mortgage loans may be affected by unfavorable real estate market conditions, including interest rate fluctuations, which could decrease the value of those loans and the return on your investment.

 

If we make or invest in mortgage loans, we will be at risk of defaults by the borrowers on those mortgage loans as well as interest rate risks. To the extent we incur delays in liquidating such defaulted mortgage loans; we may not be able to obtain sufficient proceeds to repay all amounts due to us under the mortgage loan. Further, we will not know whether the values of the properties securing the mortgage loans will remain at the levels existing on the dates of origination of those mortgage loans. If the values of the underlying properties fall, our risk will increase because of the lower value of the security associated with such loans.

 

Investments in real estate-related securities will be subject to specific risks relating to the particular issuer of the securities and may be subject to the general risks of investing in subordinated real estate securities, which may result in losses to us.

 

We may invest in real estate related securities of both publicly traded and private real estate companies. Issuers of real estate related equity securities generally invest in real estate or real estate related assets and are subject to the inherent risks associated with real estate related investments discussed in this Offering Circular, including risks relating to rising interest rates.

 

 

Real estate-related securities are often unsecured and also may be subordinated to other obligations of the issuer. As a result, investments in real estate-related securities are subject to risks of: (1) limited liquidity in the secondary trading market in the case of unlisted or thinly traded securities; (2) subordination to the prior claims of banks and other senior lenders to the issuer; (3) the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets; (4) the possibility that earnings of the issuer may be insufficient to meet its debt service and distribution obligations and (5) the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic slowdown or downturn. These risks may adversely affect the value of outstanding real estate-related securities and the ability of the issuers thereof to repay principal and interest or make distribution payments.

 

Investments in real estate-related securities may be illiquid, and we may not be able to adjust our portfolio in response to changes in economic and other conditions.

 

If we invest in certain real estate-related securities that we may purchase in connection with privately negotiated transactions, they will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. As a result, our ability to vary our long-term stabilized portfolio in response to changes in economic and other conditions may be relatively limited. The subordinated and bridge loans we may purchase will be particularly illiquid investments due to their short life. Moreover, in the event of a borrower’s default on an illiquid real estate security, the unsuitability for securitization and potential lack of recovery of our investment could pose serious risks of loss to our investment portfolio.

 

Delays in restructuring or liquidating non-performing real estate-related securities could reduce our ability to honor our obligations under the Bonds.

 

If we invest in real estate-related securities, they may become non-performing after acquisition for a wide variety of reasons. Such non-performing real estate investments may require a substantial amount of workout negotiations and/or restructuring, which may entail, among other things, a substantial reduction in the interest rate and a substantial write down of such loan or asset. However, even if a restructuring is successfully accomplished, upon maturity of such real estate security, replacement “takeout” financing may not be available. We may find it necessary or desirable to foreclose on some of the collateral securing one or more of our investments. Intercreditor provisions may substantially interfere with our ability to do so. Even if foreclosure is an option, the foreclosure process can be lengthy and expensive. Borrowers often resist foreclosure actions by asserting numerous claims, counterclaims and defenses, including, without limitation, lender liability claims and defenses, in an effort to prolong the foreclosure action. In some states, foreclosure actions can take up to several years or more to litigate. At any time during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure action and further delaying the foreclosure process. Foreclosure litigation tends to create a negative public image of the collateral property and may result in disrupting ongoing leasing and management of the property. Foreclosure actions by senior lenders may substantially affect the amount that we may receive from an investment.

 

Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if we are subject to registration under the Investment Company Act, we will not be able to continue our business.

 

Neither we, nor any of our subsidiaries intend to register as an investment company under the Investment Company Act. We expect that our subsidiaries’ investments in real estate will represent the substantial majority of our total asset mix, which would not subject us to the Investment Company Act. In order to maintain an exemption from regulation under the Investment Company Act, we intend to engage, through our wholly-owned and majority-owned subsidiaries, primarily in the business of buying real estate, and these investments must be made within a year after this offering ends. If we are unable to invest a significant portion of the proceeds of this offering in properties within one year of the termination of this offering, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns, which would reduce the cash available for fulfilling our obligations under the Bonds.

 

We expect that most of our assets will be held through wholly-owned or majority-owned subsidiaries of our company. We expect that most of these subsidiaries will be outside the definition of investment company under Section 3(a)(1) of the Investment Company Act as they are generally expected to hold at least 60% of their assets in real property or in entities that they manage or co-manage that own real property. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. We believe that we, and our subsidiaries, will not fall within either definition of investment company as we intend to invest primarily in real property, through our wholly-owned or majority-owned subsidiaries, the majority of which we expect to have at least 60% of their assets in real property or in entities that they manage or co-manage that own real property. As these subsidiaries would be investing either solely or primarily in real property, they would be outside of the definition of “investment company” under Section 3(a)(1) of the Investment Company Act. We are organized as a holding company that conducts its businesses primarily through its subsidiaries. Both we and our operating partnership intend to conduct our operations so that they comply with the 40% test. We will monitor our holdings to ensure continuing and ongoing compliance with this test. In addition, we believe that neither we nor our subsidiaries will be considered an investment company under Section 3(a)(1)(A) of the 1940 Act because neither we nor the operating partnership will engage primarily or hold itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through wholly-owned or majority-owned subsidiaries, we will be primarily engaged in the non-investment company businesses of these subsidiaries.

  

 

 

In the event that we, or our subsidiaries, were to acquire assets that could make either our company or the respective subsidiary fall within the definition of investment company under Section 3(a)(1) of the Investment Company Act, we believe that we would still qualify for an exclusion from registration pursuant to Section 3(c)(6). Section 3(c)(6) excludes from the definition of investment company any company primarily engaged, directly or through majority-owned subsidiaries, in one or more of certain specified businesses. These specified businesses include the business described in Section 3(c)(5)(C) of the Investment Company Act. It also excludes from the definition of investment company any company primarily engaged, directly or through majority-owned subsidiaries, in one or more of such specified businesses from which at least 25% of such company’s gross income during its last fiscal year is derived, together with any additional business or businesses other than investing, reinvesting, owning, holding, or trading in securities. Although the SEC staff has issued little interpretive guidance with respect to Section 3(c)(6), we believe that we and subsidiaries may rely on Section 3(c)(6) if 55% of the assets of our operating partnership consist of, and at least 55% of the income of our subsidiaries is derived from, qualifying real estate assets owned by wholly-owned or majority-owned subsidiaries of our operating partnership.

 

To ensure that neither we, nor our subsidiaries, are required to register as an investment company, each entity may be unable to sell assets they would otherwise want to sell and may need to sell assets they would otherwise wish to retain. In addition, we or our subsidiaries may be required to acquire additional income or loss-generating assets that we might not otherwise acquire or forego opportunities to acquire interests in companies that we would otherwise want to acquire. Although we and our subsidiaries intend to monitor our portfolio periodically and prior to each acquisition or disposition, any of these entities may not be able to maintain an exclusion from registration as an investment company. If we or our subsidiaries are required to register as an investment company but fail to do so, the unregistered entity would be prohibited from engaging in our business, and criminal and civil actions could be brought against such entity. In addition, the contracts of such entity would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of the entity and liquidate its business.

 

Risks Associated with Debt Financing

 

We use debt financing to acquire properties and otherwise incur other indebtedness, which increases our expenses and could subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.

 

We are permitted to acquire real properties and other real estate-related investments including entity acquisitions by assuming either existing financing secured by the asset or by borrowing new funds. In addition, we may incur or increase our mortgage debt, if any, by obtaining loans secured by some or all of our assets to obtain funds to acquire additional investments or to pay our Bond Service Obligations under our Bonds. If we mortgage a property and have insufficient cash flow to service the debt, we risk an event of default which may result in our lenders foreclosing on the properties securing the mortgage.

 

High levels of debt or increases in interest rates could increase the amount of our loan payments, which could reduce our ability to honor our obligations under the terms of the Bonds.

 

Our policies do not limit us from incurring debt. High debt levels could cause us to incur higher interest charges, result in higher debt service payments, and may be accompanied by restrictive covenants. Interest we pay reduces cash available to honor our obligations under the terms of the Bonds. Additionally, with respect to any variable rate debt, increases in interest rates may increase our interest costs, which would reduce our cash flow and our ability to honor our obligations under the terms of the Bonds. In addition, if we need to repay debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments and could result in a loss. In addition, if we are unable to service our debt payments, our lenders may foreclose on our interests in the real property that secures the loans we have entered.

  

 

  *** Included with the legal opinion provided pursuant to item (12)