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

August 13, 2021

Subject to Completion

 

RED OAK CAPITAL FUND V, LLC

625 Kenmoor Avenue SE, Suite 200

Grand Rapids, Michigan 49546

(616) 734-6099

 

7.50% Senior Secured Bonds (A Bonds)

8.00% Senior Secured Bonds (A R-Bonds)

7.50% Senior Secured Bonds (B Bonds)

8.00% Senior Secured Bonds (B R-Bonds)

 

$75,000,000 Aggregate Maximum Offering Amount (75,000 Bonds)

$10,000 Minimum Purchase Amount (10 Bonds)

 

Explanatory Note

 

This Post-Qualification Amendment No. 1 amends the Offering Circular of Red Oak Capital Fund V, LLC qualified on August 13, 2020 to, among other things, increase the maximum offering amount to $75,000,000 (75,000 Bonds), provide for the additional B Bonds and B R-Bonds, extend the offering termination date to December 31, 2022, update information related to our investment policies and our Sponsor and update the financial statements of the company.

 

Red Oak Capital Fund V, LLC, a Delaware limited liability company, or the “Company,” is offering a maximum of $75,000,000 in the aggregate, its 7.50% senior secured bonds due 2026, or the “A Bonds,” its 8.00% senior secured bonds due 2026, or the “A R-Bonds,” its 7.50% senior secured bonds due 2027, or the “B Bonds,” and its 8.00% senior secured bonds due 2027, or the “B R-Bonds,” and collectively, the “Bonds,” pursuant to this offering circular. Sales of the A Bonds and A R-Bonds are complete, and the Company is now offering only the B Bonds and the B R-Bonds. As the context requires, references to “Bonds” that are currently being offered shall be deemed to refer only to the B Bonds and B R-Bonds. All other references to “Bonds” shall be deemed to refer to all four series of Bonds collectively. The purchase price per Bond is $1,000, with a minimum purchase amount of $10,000, or the “minimum purchase;” however, the Company, in the Manager’s sole discretion, reserves the right to accept smaller purchase amounts. The A Bonds and B Bonds will bear interest at a rate equal to 7.50%, and A R-Bonds and B R-Bonds will bear interest at a rate equal to 8.00% per year, payable to the record holders of the Bonds quarterly in arrears on January 25th, April 25th, July 25th, and October 25th of each year. The A Bonds and A R-Bonds will mature on December 31, 2026. The B Bonds and B R-Bonds will mature on December 2027. Other than the maturity date and related redemption dates, the terms of the A Bonds are identical to those of the B Bonds, and the terms of the A R-Bonds are identical to those of the B R-Bonds. Upon maturity, and subject to the terms and conditions described in this offering circular, the Bonds will be automatically renewed for at the same interest rate for an additional five years, unless redeemed upon maturity at our or your election.

 

 

The Bonds are secured by a senior blanket lien on all of our assets, or the “collateral,” and will rank pari passu in right of payment with all our other senior secured indebtedness from time to time outstanding, senior in right of payment to our future indebtedness from time to time outstanding that is expressly subordinated to the Bonds, senior to all of our unsecured indebtedness to the extent of the value of the Bonds’ security interest in the collateral owned by us, and structurally junior to all the indebtedness of our subsidiaries.

 

The Bondholders will have the right to have their Bonds redeemed (i) beginning January 1, 2024 (in the case of the A Bonds and A R-Bonds) or January 1, 2025 (in the case of the B Bonds and B R-Bonds) and (ii) in the case of a holder’s death, bankruptcy or total permanent disability, each subject to notice, discounts and other provisions contained in this offering circular. See “Description of Bonds – Redemption Upon Death, Disability or Bankruptcy” and “Description of Bonds – Bondholder Redemption” for more information.

 

The Bonds will be offered to prospective investors on a best efforts basis by Crescent Securities Group, Inc., or our “managing broker-dealer,” a Texas corporation and a member of the Financial Industry Regulatory Authority, or “FINRA.” “Best efforts” means that our managing broker-dealer is not obligated to purchase any specific number or dollar amount of Bonds, but it will use its best efforts to sell the Bonds. Our managing broker-dealer may engage additional broker-dealers, or “selling group members,” who are members of FINRA to assist in the sale of the Bonds. 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 recommence the sale of the Bonds as of the date on which the Post-Qualification Amendment is declared qualified by the United States Securities and Exchange Commission, or the “SEC” and terminate the offering on December 31, 2022 or the date upon which our Manager determines to terminate the offering, in its sole discretion. Notwithstanding the previous sentence, our Manager has the right to extend this offering beyond December 31, 2022 for one additional six-month period. As of the date of this Offering Circular, the Company has issued and sold $36,703,000 in principal amount of Bonds, consisting of $34,258,000 and $2,445,000 of A Bonds and A R-Bonds, respectively.

 

	Price to Investors	Managing Broker-Dealer Fee, Commissions and Expense Reimbursements(1)(2)	Proceeds to Company	Proceeds to Other Persons
Per A Bond and B Bond(3)	$1,000	$89.50	$910.50	$0
Per A R-Bond and B R-Bond(3)	$1,000	$29.50	$970.50	$0
Maximum Offering Amount of A Bonds and B Bonds(3)(4)	$75,000,000	$6,712,500	$68,287,500	$0
Maximum Offering Amount of A R-Bonds and B R-Bonds (3)(5)	$75,000,000	$2,212,500	$72,787,500	$0

_________

 

 

 

 

 

 

Generally, no sale may be made to you in the 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. We are not an investment company and are not required to register under the Investment Company Act of 1940; therefore, investors will not receive the protections of such act.

 

THE SEC 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 SEC; HOWEVER, THE COMMISION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

FORM 1-A DISCLOSURE FORMAT IS BEING FOLLOWED.

 

 

 

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TABLE OF CONTENTS

 

OFFERING CIRCULAR SUMMARY	1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS	7
RISK FACTORS	8
USE OF PROCEEDS	23
PLAN OF DISTRIBUTION	25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
GENERAL INFORMATION AS TO OUR COMPANY	34
INVESTMENT POLICIES OF OUR COMPANY	36
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS	41
ERISA CONSIDERATIONS	44
DESCRIPTION OF BONDS	45
LEGAL PROCEEDINGS	51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	52
BOARD OF MANAGERS AND EXECUTIVE OFFICERS	53
EXECUTIVE COMPENSATION	56
COMPENSATION OF OUR MANAGER AND ITS AFFILIATES	57
LIMITATIONS ON LIABILITY	58
INDEPENDENT AUDITORS	59
LEGAL MATTERS	60
WHERE YOU CAN FIND ADDITIONAL INFORMATION	61
INDEX TO FINANCIAL STATEMENTS	F-1

 

 

ABOUT THIS OFFERING CIRCULAR

 

The information in this offering circular may not contain all of the information that is important to you. You should read this entire offering circular and the exhibits carefully before deciding whether to invest in the Bonds. See “Where You Can Find Additional Information” in this offering circular.

 

Unless the context otherwise indicates, references in this prospectus supplement to the terms “company,” “we,” “us,” and “our,” refer to Red Oak Capital Fund V, LLC, a Delaware limited liability company; our “Manager” refers to Red Oak Capital GP, LLC, a Delaware limited liability company, our sole member and manager; and our “Sponsor” refers to Red Oak Capital Holdings, LLC, a Delaware limited liability company, and its subsidiaries.

 

 

 

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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 the Bonds. You should carefully read this entire offering circular, including the information under the heading “Risk Factors” and all information included in this offering circular.

 

Our Company. Red Oak Capital Fund V, LLC, a Delaware limited liability company was formed on March 23, 2020 to originate senior loans collateralized by commercial real estate in the U.S. Our business plan is to originate, acquire and manage commercial real estate loans and securities and other commercial real estate-related debt instruments. While the commercial real estate debt markets are complex and continually evolving, we believe they offer compelling opportunities when approached with the capabilities and expertise of our Manager, a wholly owned subsidiary of our Sponsor. Our Manager intends to actively participate in the servicing and operational oversight of our assets rather than subrogate those responsibilities to a third party.

 

Our investment objective is to preserve and protect our capital while producing attractive risk-adjusted returns generated from current income on our portfolio. Our investment strategy is to originate loans and invest in debt and related instruments supported by commercial real estate in the U.S. Through our Manager, we draw on our Sponsor’s and its affiliates’ established sourcing, underwriting and structuring capabilities in order to execute our investment strategy.

 

The Company does not intend to act as a land or real estate developer and currently has no intent to invest in, acquire, own, hold, lease, operate, manage, maintain, redevelop, sell, or otherwise use any undeveloped real property or developed real property, unless such actions are necessary or prudent based upon borrower default in accordance with the terms of the debt instruments held by the Company.

 

Our principal executive offices are located at 625 Kenmoor Avenue SE, Suite 200, Grand Rapids, Michigan 49546, and our telephone number is (616) 734-6099. For more information on our Sponsor, its website www.redoakcapitalholdings.com. The information on, or otherwise accessible through, our Sponsor’s website does not constitute a part of this offering circular.

 

Our Sponsor and Management. On April 21, 2021, our company’s previous sponsor, Red Oak Capital Group, LLC (“ROCG”), completed an interest exchange (the “Exchange”) whereby our current sponsor, Red Oak Capital Holdings, LLC, acquired all of the equity interests in our Manager from ROCG (former 90% owner of our Manager) and Mr. Raymond Davis (former 10% owner of our Manager).  As consideration in the Exchange, each of ROCG and Mr. Davis received non-voting equity interests in our Sponsor.  Prior to the Exchange, ROCG was ROGP’s sole manager, and ROCG was managed by a board of managers appointed by Mr. Kevin Kennedy and Mr. Joseph Elias, the sole equity holders in ROCG. Our Sponsor’s sole manager is Red Oak Holdings Management, LLC (“ROHM”), and ROHM also holds all of the voting equity in our Sponsor.  ROHM’s board of managers is comprised of Mr. Gary Bechtel, Mr. Jason Anderson, Mr. Kevin Kennedy, Mr. Joseph Elias and Mr. Raymond Davis.  The ROHM board members also collectively own all of the voting equity in ROHM and have the exclusive right to vote in the election of the ROHM board members.  As a result of the Exchange, Messrs. Kennedy and Elias no longer have sole control of our company via their voting interests in ROCG.  However, all of the executive officers remain the same and the members of the ROHM board of managers are the same as the members of the ROCG board with the addition of Mr. Davis.  See “Board of Managers and Executive Officers” in this offering circular for more information.

 

Our Sponsor is a Grand Rapids, Michigan based commercial real estate finance company specializing in the acquisition, origination, processing, underwriting, operational management, and servicing of commercial real estate debt instruments. Its senior management includes partners who retain licenses in mortgage lending, real estate brokerage and the securities industry. Combined, this incorporates over 50 years of experience in commercial loan originations, lending and analyses, regulatory compliance, and real estate portfolio management. Our Sponsor has significant experience in the marketing and origination of project transactions in which to properly and efficiently evaluate suitable investments for our Company.

 

 

The Offering. We are offering to investors the opportunity to purchase up to an aggregate of $75,000,000 of Bonds. See “Plan of Distribution - Who May Invest” for further information. The offering will continue through December 31, 2022 or the date upon which our Manager terminates the offering, in its sole discretion, or the “offering termination.” Notwithstanding the previous sentence, our Manager has the right to extend this offering beyond December 31, 2022 for an additional six-month period. Our company will conduct closings in this offering on the 20th of each month or, if the 20th is not a business day, the next succeeding business day, assuming there are funds to close, or the “closing dates,” and each, a “closing date,” until the offering termination. Once a subscription has been submitted and accepted by the 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 a closing date and accepted by the Company prior to such closing, any such subscriptions will be closed on that closing date. If subscriptions are received on a closing date but not accepted by the Company prior to such closing, any such subscriptions will be closed on the next closing date. It is expected that settlement will occur on the same day as each closing date. On each closing date, offering proceeds for that closing will be disbursed to us and Bonds will be issued to investors, or the “Bondholders.” If the Company is dissolved or liquidated after the acceptance of a subscription, the respective subscription payment will be returned to the subscriber. The offering is being made on a best-efforts basis through Crescent Securities Group, Inc., or our managing broker-dealer.

 

Issuer		Red Oak Capital Fund V, LLC, a Delaware limited liability company.
Securities Offered		Maximum – $75,000,000, aggregate principal amount of the Bonds.   As of the date of this Offering Circular, the Company has issued and sold $36,703,000 in principal amount of Bonds, consisting of $34,258,000 and $2,445,000 of A Bonds and A R-Bonds, respectively. The Company has completed sales of the A Bonds and A R-Bonds, and all future sales will be B Bonds or B R-Bonds.
Maturity Date		A Bonds and A R-Bonds – December 31, 2026 B Bonds and B R-Bonds – December 31, 2027   Upon maturity, and subject to the terms and conditions described in this offering circular, the Bonds will be automatically renewed at the same interest rate for an additional five years, unless redeemed upon maturity at our or your election. If the Bonds are not renewed and without the consent of the Bondholders, we may elect to extend the maturity date of the Bonds for an additional six months to facilitate the redemption of the Bonds. See “Description of Bonds – Maturity and Renewal” for more information.
Interest Rate		A Bonds and B Bonds – 7.50% per annum computed on the basis of a 360-day year. A R-Bonds and B R-Bonds – 8.00% per annum computed on the basis of a 360-day year.

Interest Payments		Paid to the record holders of the Bonds quarterly in arrears, each January 25th, April 25th, July 25th, and October 25th, for the preceding fiscal quarter ending March 31st, June 30th, September 30th, and December 31st, respectively, continuing until the Maturity Date. Interest will accrue and be paid on the basis of a 360-day year consisting of twelve 30-day months. Interest on each Bond will accrue and be cumulative from the end of the most recent interest period for which interest has been paid on such Bond, or if no interest has paid, from the date of issuance.
Contingent Interest Payment		Upon maturity or renewal, we will make a payment to the Bondholders as described herein, or the Contingent Interest Payment. The Contingent Interest Payment will be equal to the Spread times 20.0%.   “Spread” for a Bond shall equal the greater of (i) zero or (ii) such Bond’s Allocable Share of Revenue less such Bond’s Allocable Share of Expenses, each calculated for the period beginning with the date of issuance or the last Contingent Interest Payment for such Bond, whichever is more recent.   “Allocable Share of Revenue” for each Bond shall equal the total revenue from investments divided by the total number of outstanding Bonds.   “Allocable Share of Expenses” for each Bond shall equal Series Specific Expenses plus Expenses.   “Series Specific Expenses” shall be equal to offering expenses, asset management fees and interest expenses specific to A Bonds, A R-Bonds, B Bonds or B R-Bonds as applicable, divided by the total number of outstanding A Bonds, A R-Bonds, B Bonds or B R-Bonds respectively.   “Expenses” shall be equal to offering expenses and disposition fees allocable to all Bonds divided by the total number of outstanding Bonds.   While we intend to pay Bondholders the Contingent Interest Payment, there is no guaranty that we will do so. As the Contingent Interest Payment is determined by multiplying the Spread by a percentage, the Spread must be positive for the Contingent Interest Payment to be paid. The Contingent Interest Payment is dependent on revenue from our investments exceeding the expenses deducted to calculate the Spread. If the expenses exceed the revenue from our investments, the Bondholder will not receive a Contingent Interest Payment.
Offering Price		$1,000 per Bond.
Ranking		The Bonds are senior secured obligations and will rank:   ● pari passu in right of payment with all our other senior secured indebtedness from time to time outstanding; ● senior in right of payment to our future indebtedness, if any, from time to time outstanding that is expressly subordinated to the Bonds; ● senior to all of our unsecured indebtedness to the extent of the value of the Bonds’ security interest in the collateral owned by us; and ● structurally junior to all the indebtedness of our subsidiaries.
Security		The Bonds will be secured by a senior blanket lien on all assets of our Company, including all of our assets acquired with proceeds from the offering.

Use of Proceeds		We estimate that the net proceeds we will receive from this offering, without taking into account any sales of A R-Bonds or B R-Bonds, will be approximately $66,787,500 if we sell the maximum offering amount, after deducting selling commissions and fees payable to our managing broker-dealer and selling group members, and payment of the O&O Fee to our Manager. As sales of A R-Bonds and B R-Bonds are without selling commissions, the net proceeds from the offering will depend upon the sales mix of the Bonds.   We plan to use substantially all of the net proceeds from this offering to originate and make commercial mortgage loans and acquire other senior secured real estate debt investments consistent with our investment strategies. We may also use a portion of the net proceeds to pay fees to our Manager or its affiliates, for working capital and for other general corporate purposes. See “Use of Proceeds” for additional information.
Certain Covenants		The indenture will limit the indebtedness incurred by us, directly or indirectly (including debt of our subsidiaries), to 25% of the outstanding principal of any loans or other assets owned, directly or indirectly, by us. For purposes of complying with the 25% limitation described above, the following will not be considered indebtedness: (i) any principal owed on the Bonds, and (ii) any financing secured by a first mortgage lien on any real estate we acquire.
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 price that is equal to all accrued and unpaid interest, to but not including the date on which the Bonds are redeemed, plus any Contingent Interest Payment due to such Bondholder, plus (i) 1.02 times the then outstanding principal amount of the Bonds if such Bonds are at least four years from maturity; (ii) 1.015 times the then outstanding principal amount of the Bonds if such Bonds are at least three years, but no more than four years, from maturity; (iii) 1.01 times the then outstanding principal amount of the Bonds if such Bonds are at least two years, but no more than three years, from maturity; and (iv) the then outstanding principal amount of the Bonds if no more than two years from maturity.
Bondholder Redemption		The Bonds are redeemable at the election of the Bondholder beginning January 1, 2024 (in the case of the A Bonds and A R-Bonds) or January 1, 2025 (in the case of the B Bonds or B R-Bonds). In order to be redeemed, the Bondholder must provide written notice to us at our principal place of business. 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: (i) $880 plus any accrued but unpaid interest on the Bond if the notice is received on or after January 1, 2024 and on or before January 1, 2026 (in the case of the A Bonds and A R-Bonds) or on or after January 1, 2025 and on or before January 1, 2027 (in the case of the B Bonds and B R-Bonds) and (ii) $900 plus any accrued but unpaid interest on the Bond if the notice is received on or after January 1, 2026 and before December 31, 2026 (in the case of the A Bonds and A R-Bonds on or after January 1, 2027 and before December 31, 2027 (in the case of the B Bonds and B R-Bonds). Our obligation to redeem Bonds in any given year pursuant to this Redemption is limited to 15% of the outstanding principal balance of the Bonds, in the aggregate, on January 1st of the applicable year. In addition, we have the right to reserve up to one-third of this 15% limit for Bonds redeemed as a result of a Bondholder’s right upon death, disability or bankruptcy which may reduce the number of Bonds to be redeemed pursuant to the Bondholder Redemption. Bond redemptions pursuant to the Bondholder Redemption will occur in the order that notices are received.
Redemption Upon Death, Disability or Bankruptcy		Within 60 days of the death, total permanent disability or bankruptcy of a Bondholder who is a natural person, the estate of such Bondholder, such Bondholder, or legal representative of such Bondholder may request that we repurchase, in whole but not in part and without penalty, the Bonds held by such Bondholder by delivering to us a written notice requesting such Bonds be redeemed. Any such request shall specify the particular event giving rise to the right of the holder or beneficial holder to have his or her Bonds redeemed. If a Bond held jointly by natural persons who are legally married, then such request may be made by (i) the surviving Bondholder upon the death of the spouse, or (ii) the disabled or bankrupt Bondholder (or a legal representative) upon total permanent disability or bankruptcy of the spouse. In the event a Bond is held together by two or more natural persons that are not legally married, neither of these persons shall have the right to request that the Company repurchase such Bond unless each Bondholder has been affected by such an event.

 

		Upon receipt of redemption request in the event of death, total permanent disability, or bankruptcy of a Bondholder, we will designate a date for the redemption of such Bonds, which date shall not be later than after 120 days we receive facts or certifications establishing to the reasonable satisfaction of the Company supporting the right to be redeemed. On the designated date, we will redeem such Bonds at a price per Bond that is equal to all accrued and unpaid interest, to but not including the date on which the Bonds are redeemed, plus any Contingent Interest Payment due to such Bondholder, plus the then outstanding principal amount of such Bond.

Optional Redemption		The Bonds may be redeemed at our option at no penalty within 18 months of maturity. We may extend maturity on the Bonds for six months in order to facilitate redemption of the Bonds in our sole discretion. If the Bonds are renewed for an additional term, we may redeem the Bonds at any time during such renewal period. Any redemption will occur at a price equal to the then outstanding principal amount of the Bonds, plus any Contingent Interest Payment due to such Bondholder, plus any accrued but unpaid interest. For the specific terms of the Optional Redemption, please see “Description of Bonds – Optional Redemption” for more information.
Default		The indenture governing the Bonds will contain events of default, the occurrence of which may result in the acceleration of our obligations under the Bonds in certain circumstances. Events of default, other than payment defaults, will be subject to our company’s right to cure within a certain number of days of such event of default. Our company will have the right to cure any payment default within 60 days before the trustee may declare a default and exercise the remedies under the indenture. See “Description of Bonds - Event of Default” for more information.
Form		The Bonds are evidenced by global bond certificates deposited with a nominee holder. The nominee holder is the Depository Trust Company, or DTC, or its nominee, Cede & Co., for those purchasers purchasing through a DTC participant and Great Lakes Fund Solutions Inc., or Great Lakes Fund Solutions, for those purchasers not purchasing through a DTC participant. See “Description of Bonds - Book-Entry, Delivery and Form” for more information.
Bond Service Reserve		Our company is required to keep 3.75% of gross offering proceeds in a reserve account with the trustee until September 23, 2021, which is one (1) year following our initial closing date, which reserve may be used to pay our company’s bond service obligations during such time, and the remainder of which, if any, will be released to our company on or about September 23, 2021 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 is payable in U.S. dollars or other legal tender, coin, or currency of the U.S.
Future Issuances		We may, from time to time, without notice to or consent of the Bondholders, increase the aggregate principal amount of any series of the Bonds outstanding by issuing additional bonds in the future with the same terms of such series of Bonds, except for the issue date and offering price, and such additional bonds shall be consolidated with the applicable series of Bonds and form a single series.

Securities Laws Matters:		The Bonds being offered are not being registered under the Securities Act in reliance upon exemptions from the registration requirements of the Securities Act and such state securities laws and may not be transferred or resold except as permitted under the Securities Act and applicable state securities laws pursuant to registration or exemption therefrom. In addition, the Company does not intend to be registered as an investment company under the Investment Company Act of 1940 nor does the Manager plan to register as an investment adviser under the Investment Advisers Act of 1940, as amended.
Trustee, Registrar and Paying Agent		We have designated UMB Bank, N.A., or UMB Bank, as paying agent for the Bonds and Great Lakes Fund Solutions as sub-paying agent in respect of Bonds registered to it. UMB Bank also acts as trustee under the indenture and registrar for the Bonds. The Bonds are issued in book-entry form only, evidenced by global certificates, as such, payments are being made to DTC, its nominee or to Great Lakes Fund Solutions.
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 the Bonds involves certain risks. You should carefully consider the risks above, as well as the other risks described under “Risk Factors” beginning on page 8 of this offering circular before making an investment decision.

 

 

 

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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.

 

 

 

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RISK FACTORS

 

An investment in the 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 the 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 the Bonds. To the best of our knowledge, we have included all material risks to investors in this section.

 

Risks Related to the Bonds and to this Offering

 

The collateral securing the Bonds may be diluted under certain circumstances.

 

The indenture governing the Bonds permits us to incur, subject to certain limitations, additional indebtedness secured by liens on the collateral that rank pari passu with the liens securing the Bonds, including additional Bonds under the indenture. The rights of Bondholders would be diluted by any increase in indebtedness secured by the collateral.

 

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

 

The Bonds are our obligations exclusively and not of any of our subsidiaries. We do not currently have any subsidiaries, but we are not precluded from acquiring or forming subsidiaries by the indenture or otherwise. If acquired or formed, our company’s subsidiaries are not expected to be guarantors of the Bonds and the Bonds are not required to be guaranteed by any subsidiaries our company may acquire or form 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 are subordinated to other indebtedness of that subsidiary, including secured indebtedness to the extent of the assets securing such indebtedness.

 

The Bonds will limit but do not eliminate our company’s or its subsidiaries’ ability to incur additional debt or take other action that could negatively impact Bondholders.

 

The indenture contains limited provisions that would directly limit our company’s ability or the ability of its subsidiaries to incur indebtedness, including indebtedness that would be senior to the Bonds. The indenture will limit the indebtedness incurred by us, directly or indirectly (including debt of our subsidiaries), to 25% of the outstanding principal of any loans or other assets owned, directly or indirectly, by us. For purposes of complying with the 25% limitation described above, the following will not be considered indebtedness: (i) any principal owed on the Bonds, and (ii) any financing secured by a first mortgage lien on any real estate acquired by us or any of our subsidiaries.

 

The Bonds are protected by limited restrictive covenants, which in turn may allow us to engage in a variety of transactions that may impair our ability to fulfill our obligations under the Bonds.

 

The indenture governing the Bonds will contain limited financial covenants and will not restrict us from paying dividends, incurring debt, directly or indirectly (including debt of our subsidiaries), of up to 25% of any loans or other assets owned by us, directly or indirectly, or issuing other securities. Because the indenture will contain limited covenants or other provisions designed to afford the Bondholders protection in the event of a highly leveraged transaction involving us including as a result of a takeover, recapitalization, highly leveraged transaction, or similar restructuring involving us, except to the extent described under “Description of Bonds – Certain Covenants,” we may engage in transactions that may impair our ability to fulfill our obligations under the Bonds.

 

Some significant restructuring transactions that may adversely affect you may not constitute a “Change of Control/Repurchase Event” under the indenture, in which case we would not be obligated to offer to repurchase the Bonds.

 

Some restructuring transactions that result in a change in control may not qualify as a repurchase event under the Indenture; therefore, Bondholders will not have the right to repurchase their Bonds, even though the Company is under new management. These transactions are limited to those which cause a non-affiliate of the Company to gain voting control. For example, if our sole member determined to cause the Company to become Manager-Managed by a third-party, the change in control would not qualify as a repurchase event under the Indenture. Upon the occurrence of a transaction which results in a change in control of the company, Bondholders will have no voting rights with respect to such a transaction. In the event of any such transaction, Bondholders would not have the right to require us to repurchase their Bonds, even though such a transaction could increase the amount of our indebtedness, or otherwise adversely affect the Bondholders.

 

 

It may be difficult to realize the value of the collateral securing the Bonds.

 

The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. We cannot assure you that the fair market value of the collateral as of the date of this document exceeds the principal amount of the Bonds. The value of the assets pledged as collateral could be impaired in the future as a result of changing economic conditions, our failure to implement our business strategy, competition, unforeseen liabilities, and other future events. Accordingly, there may not be sufficient collateral to pay all or any of the amounts due on the Bonds. Any claim for the amount, if any, realized by Bondholders from the sale of the collateral and the obligations under the Bonds will rank pari passu in right of payment with all of our other senior secured indebtedness. Additionally, in the event that a bankruptcy case is commenced by or against us, if the value of the collateral is less than the amount of principal and accrued and unpaid interest on the Bonds and all other senior secured obligations, interest may cease to accrue on the Bonds from and after the date the bankruptcy petition is filed.

 

The security interest of the trustee is subject to practical problems generally associated with the realization of security interests in collateral. For example, the trustee may need to obtain the consent of a third party to obtain access to collateral or enforce a security interest in a contract. We cannot assure you that the trustee will be able to obtain any such consent. We also cannot assure you that the consents of any third parties will be given when required to facilitate a foreclosure on such assets. Accordingly, the trustee may not have the ability to foreclose upon those assets and the value of the collateral may significantly decrease.

 

Our investment objectives may become more difficult to reach depending on the amount of funds raised in this offering.

 

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 less Bonds than we anticipate. Such a result may negatively impact our liquidity. In that event, our investment costs may 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 governing the Bonds provides that in case an event of default occurs 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.

 

The Bonds will have limited transferability and liquidity.

 

Prior to this offering, there was 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.

 

Our limited operating history makes it difficult for you to evaluate this investment.

 

We commenced active operations upon the first closing of our offering of Bonds on September 23, 2020. As such, we have limited operating history and may not be able to continue 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 investments that would have changed your decision as to whether to invest in the Bonds.

 

We will continue to seek to invest substantially all of the offering proceeds available for investment, after the payment of commissions, fees, and expenses, in the origination of loans and investing in debt and related instruments supported by commercial real estate in the U.S. We have established criteria for evaluating potential investments. However, you will be unable to evaluate the transaction terms or data concerning the investments before we make investments. You will be relying entirely on the ability of our Manager, through our Sponsor and its management team, to identify suitable investments and propose transactions for our Manager to oversee and approve. These factors increase the risk that we may not generate the returns that you seek by investing in the Bonds.

 

The inability to retain or obtain key personnel 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 our Sponsor’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, our Manager or our Sponsor, our Sponsor may be unable to find suitable replacements, and our operating results could suffer. Competition for highly skilled personnel is intense, and our Sponsor may be unsuccessful in attracting and retaining such skilled personnel. If our Sponsor loses or is unable to obtain the services of highly skilled personnel, our ability to implement our investment strategies could be delayed or hindered, and our ability to pay obligations on the Bonds may be materially and adversely affected.

 

We rely on Crescent Securities Group, Inc., our managing broker-dealer, to sell the Bonds pursuant to this offering. If our managing broker-dealer is not able to market the Bonds effectively, we may be unable to raise sufficient proceeds to meet our business objectives.

 

We have engaged Crescent Securities Group, Inc., to act as our managing broker-dealer for this offering, and we rely on our managing broker-dealer 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, 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.

 

Under certain circumstances, we may redeem all or a portion of the Bonds. See “Description of Bonds - Optional Redemption” for more information. If redeemed, 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 Contingent Interest Payment.

 

As the Contingent Interest Payment is determined by multiplying the Spread by a percentage, the Spread must be positive for the Contingent Interest Payment to be paid. As the Spread is contingent upon the revenue of our investments, the Contingent Interest Payment is dependent on our investments providing revenue in excess of the expenses deducted to calculate the Spread. If it is not, the Bondholder will not receive a Contingent Interest Payment.

 

We may have to liquidate some of our investments at inopportune times to redeem Bonds in the event of the death, disability or bankruptcy of a Bondholder and redeem Bonds pursuant to the Bondholder Redemption.

 

The Bonds carry an early redemption right, or the Bondholder Redemption, and a redemption right in the event of death, disability, or bankruptcy of the Bondholder. As a result, one or more Bondholders may elect to have their Bonds redeemed prior to maturity. In such an event, we may not have access to the necessary cash to redeem such Bonds, and we may be required to liquidate certain assets in order to make such redemptions. Our investments are not intended to liquid, and as a result any such liquidation may be at a price that represent a discount to the actual value of such investment.

 

 

Risks Related to Our Corporate Structure

 

Because we are dependent upon our Sponsor and its affiliates to conduct our operations, any adverse changes in the financial health of our Sponsor 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 our Sponsor, as the sole owner of our Manager, and its affiliates to manage our operations and acquire and manage our portfolio of real estate assets. Our Manager, a wholly owned and controlled subsidiary of our Sponsor, makes all decisions with respect to our management. Our Manager and our Sponsor depend upon the fees and other compensation that it receives from us in connection with the acquisition, management, and sale of our investments to conduct its operations. Any adverse changes in the financial condition of our Manager or our Sponsor or our relationship with our Manager or our Sponsor 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 the Bonds. In addition, our Sponsor, through our Manager, may change our major operational policies without your approval.

 

Our Sponsor, as the sole owner of our Manager, determines our major policies, including our policies regarding financing, growth, debt capitalization, and distributions. Our Sponsor, as the sole owner of our Manager, 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.

 

Our Sponsor, as the sole owner of our Manager, 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 Bonds unless you are willing to entrust all aspects of the day-to-day management and the selection and management of investments to our Sponsor. Specifically, our Sponsor is controlled by ROHM, which is controlled by its board of managers consisting of Mr. Gary Bechtel, Mr. Jason Anderson, Mr. Kevin Kennedy, Mr. Joseph Elias and Mr. Raymond Davis, and as a result, they are able to exert significant control over our operations. ROHM’s board of managers has exclusive control over the operations of our Sponsor, our Manager and us. As a result, we are dependent on ROHM’s board of managers to properly choose investments and manage our company. Our Manager has appointed an Investment Committee composed of three members who are nominated, appointed, and removed by the Manager, and all loan origination decisions require the unanimous approval of the Investment Committee members. The Investment Committee’s members are Mr. Gary Bechtel, Mr. Joseph Elias, and Mr. Jason Anderson. You will have no control over the Investment Committee and the Manager may choose to alter the composition of, or eliminate, the Investment Committee in its sole discretion. In addition, our Sponsor may, or may cause our Manager to, retain independent contractors to provide various services for us, and you should note that such contractors will have no fiduciary duty to you 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 will have the right to remove our Manager, and currently our Manager is our sole member. Bondholders will have no rights in our management and 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.

 

Our Manager, our Sponsor 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 this offering circular.

 

 

Risks Related to Conflicts of Interest

 

Our Manager and our Sponsor, its executive officers and its affiliates face conflicts of interest relating to the making of investments, 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 our Sponsor, its executive officers, and its affiliates to identify suitable investment opportunities. We may be making investments at the same time as other entities that are affiliated with our Sponsor. Such programs also rely on our Sponsor, its executive officers, and its affiliates for investment opportunities. Our Sponsor has sponsored similar privately offered programs and may in the future, or concurrently, sponsor similar private and public programs that have investment objectives similar to ours. Therefore, our Sponsor, its executive officers and its affiliates could be subject to conflicts of interest between our company and other programs. Many investment opportunities would be suitable for us as well as other programs. Our Sponsor could direct attractive investment opportunities to other entities. Although we are subject to the Sponsor’s allocation policy, which is described further below and which specifically addresses some of these conflicts, there is no assurance that this policy will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that results in the allocation of a particular investment opportunity to us or is otherwise favorable to us. Such events could result in our investing in assets that provide less attractive returns, impairing our ability to honor our obligations under the terms of the Bonds and the value of your investment. See “Investment Policies of Our Company – Investment Allocation Policy” for more information.

 

Payment of fees to our Manager will reduce cash available for investment and fulfillment of our obligations with respect to the Bonds.

 

Our Manager performs services for us in connection with the selection, acquisition, and disposition of our investments. It is paid fees for these services, which reduces the amount of cash available for investment and for payment of our obligations with respect to the Bonds. Although customary in the industry, the fees to be paid to our Manager were not determined in an arm’s-length negotiation. We cannot assure you that a third party unaffiliated with our Sponsor would not be willing to provide such services to us at a lower price. If the maximum offering amount is raised and used to acquire assets, we estimate that we will pay our Manager approximately $1,312,500 annually in asset management fees, or 1.75% of the outstanding principal amount of the all of the Bonds. The Manager will also receive 1.00% of the proceeds received from the repayment of the principal amount of any of our debt investments or any other disposition of the underlying real estate. In addition to this, our Manager will receive the O&O Fee of 2.00% of offering proceeds ($1,500,000 at the maximum offering amount), from which the Manager will pay organizational and offering expenses. In no event will the O&O Fee payable to our Manager exceed 2.00% of the offering proceeds. See “Compensation of our Manager and its Affiliates” for more information.

 

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

 

Our Manager will receive an annual asset management fee of 1.75% of the outstanding principal amount of the Bonds and disposition fee equal to 1.00% of the proceeds received from the repayment of the principal amount of any of our debt investments or any other disposition of the underlying real estate. These fees will be paid regardless of our success and the performance of the Bonds.

 

Our Sponsor may, or may cause, our Manager to increase the fees payable to it and/or its affiliates with the consent of a majority of the Bonds.

 

Our Sponsor will have the power to contractually bind our Manager and us. As a result, our Sponsor may agree to increase the fees payable to it and/or its affiliates with the affirmative consent of a majority of the Bonds, so fees may be increased without the consent of any particular Bondholder.

 

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

 

Our Sponsor or its affiliates receive fees from us. These fees could influence our Manager’s, being wholly owned and controlled by our Sponsor, advice to us, as well as the judgment of the affiliates of our Sponsor 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 our Sponsor, which might entitle affiliates of our Sponsor to fees in connection with its services for the seller. See “Compensation of our Manager and its Affiliates” 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 related to the Bonds or result in a decline in the value of your investment.

 

 

If the competing demands for the time of our Manager and our Sponsor, its affiliates, and its 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 our Sponsor, as the sole owner of our Manager, and its affiliates for the day-to-day operation of our business. The amount of time that our Sponsor 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. Our Sponsor and its affiliates, including its 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 activities expand, our Sponsor will attempt to hire additional employees who would devote substantially all of their time to our business. There is no assurance that our Sponsor or our Manager will devote adequate time to our business. If our Sponsor 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.

 

Our Sponsor will source all of our investments, and existing or future entities or programs sponsored and managed by our Sponsor may compete with us for, or may participate in, some of those investments, which could result in conflicts of interest.

 

Although we are subject to the Sponsor’s allocation policy which specifically addresses some of the conflicts relating to our investment opportunities described above, there is no assurance that this policy will be adequate to address all of the conflicts that may arise or will address such conflicts in a manner that results in the allocation of a particular investment opportunity to us or is otherwise favorable to us. The Sponsor’s allocation policy provides that in the event a lending opportunity becomes available that is suitable for multiple funds managed by the Sponsor, the Investment Committee, after consultation with counsel, may allocate participation in the lending opportunity to the various funds managed by the Sponsor based on an examination of a variety of factors. The Sponsor may determine that a lending opportunity is appropriate for a particular account, but not for another. In addition, the Sponsor or its employees may make investments declined by our Sponsor for us. The investment allocation policy may be amended by the Sponsor at any time without our consent. As the investment programs of the various entities managed by the Sponsor change and develop over time, additional issues and considerations may affect the Sponsor’s allocation policy and its expectations with respect to the allocation of lending opportunities. For more information on the Sponsor’s investment allocation policy, please see “Investment Policies of Our Company – Investment Allocation Policy.”

 

An affiliate of our Sponsor may acquire property in connection with the foreclosure of any of our loans.

 

An affiliate of our Sponsor will have the ability to acquire property from our company following a foreclosure of any of our loans. In the case of a purchase by an affiliate of our Sponsor following a foreclosure, the affiliate would purchase the property at a price equal to the amounts due under the foreclosed loan. The Sponsor cannot guarantee this price is the highest price it could receive for the sale of the foreclosed property. As a result, the Sponsor, through its affiliate, may acquire these properties at a discount to fair market value.

 

Risks Related to Our Lending and Investment Activities

 

Our loans and investments expose us to risks associated with debt-oriented real estate investments generally.

 

We seek to invest primarily in debt instruments relating to real estate-related assets. As such, we are subject to, among other things, risk of defaults by borrowers in paying debt service on outstanding indebtedness and to other impairments of our loans and investments. Any deterioration of real estate fundamentals generally, and in the U.S. in particular, could negatively impact our performance by making it more difficult for borrowers of our mortgage loans, or borrower entities, to satisfy their debt payment obligations, increasing the default risk applicable to borrower entities, and/or making it more difficult for us to generate attractive risk-adjusted returns. Changes in general economic conditions will affect the creditworthiness of borrower entities and/or the value of underlying real estate collateral relating to our investments and may include economic and/or market fluctuations, changes in environmental, zoning and other laws, casualty or condemnation losses, regulatory limitations on rents, decreases in property values, changes in the appeal of properties to tenants, changes in supply and demand, fluctuations in real estate fundamentals, the financial resources of borrower entities, energy supply shortages, various uninsured or uninsurable risks, natural disasters, political events, terrorism and acts of war, changes in government regulations, changes in real property tax rates and/or tax credits, changes in operating expenses, changes in interest rates, changes in inflation rates, changes in the availability of debt financing and/or mortgage funds which may render the sale or refinancing of properties difficult or impracticable, increased mortgage defaults, increases in borrowing rates, negative developments in the economy and/or adverse changes in real estate values generally and other factors that are beyond our control.

 

We cannot predict the degree to which economic conditions generally, and the conditions for real estate debt investing in particular, will improve or decline. Any declines in the performance of the U.S. and global economies or in the real estate debt markets could have a material adverse effect on our business, financial condition, and results of operations.

 

 

Commercial real estate-related investments that are secured by real property are subject to delinquency, foreclosure, and loss, which could result in losses to us.

 

Commercial real estate debt instruments (e.g., mortgages) that are secured by commercial property are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things:

 

 

Specifically, changes in federal, state, and local laws and regulations may affect certain income producing properties more than others. Any change to the federal, state, and local regulations applicable to this industry may negatively affect the ability of the property owner to produce income and materially diminish the value of the property used to secure the loan. In addition, we are exposed to the risk of judicial proceedings with our borrowers and entities we invest in, including bankruptcy or other litigation, as a strategy to avoid foreclosure or enforcement of other rights by us as a lender or investor.

 

In the event that any of the properties or entities underlying or collateralizing our loans or investments experiences any of the foregoing events or occurrences, the value of, and return on, such investments could be reduced, which would adversely affect our results of operations and financial condition.

 

The continuing spread of a coronavirus and its variants (also known as the COVID-19 virus) may adversely affect our investments and operations.

 

The World Health Organization has declared the spread of the COVID-19 virus a global pandemic, and the President of the United States has declared a national state of emergency in the United States in response to the outbreak. Considerable uncertainty still surrounds the COVID-19 virus, including new variants of the virus, and its potential effects, and the extent of and effectiveness of any responses taken on a national and local level. However, measures taken to limit the impact of this coronavirus, including social distancing and other restrictions on travel, congregation and business operation have resulted in significant negative short term economic impacts over the past year. The long-term impact of this coronavirus on the U.S. and world economies remains uncertain but may continue to result in long term infrastructure and supply chain disruption, as well as dislocation and uncertainty in the financial markets that could significantly and negatively impact the global, national, and regional economies, the length and breadth of which cannot currently be predicted. Our investments include commercial mortgage loans secured by hospitality properties which depend, in part, on tourism. If tourism were to not recover as anticipated, it could have a significant effect on these properties. Tourism could not recover as anticipated as a result of a variety of factors related to the COVID-19 virus, including restrictions on travel by corporations or governmental entities and any additional restrictions imposed due to increased health risks from variants of the virus. In addition, hospitality properties that depend on revenue from conferences or business travel may continue to be particularly affected.

 

Our investments also include commercial mortgage loans secured by retail properties. In the event of a large-scale quarantine in the United States or specific areas within the United States as a result of the COVID-19 virus, or its variants, individual stores and shopping malls may be closed for an extended period of time or consumers may move to more on-line shopping.

 

To the extent the COVID-19 virus results in a world-wide economic downturn, there may be widespread corporate downsizing and an increase in unemployment. This could negatively impact our commercial mortgage loans secured by office, multifamily and industrial properties, and our ability to make payments of interest and principal to our Bondholders. Further, increased shutdowns and economic turmoil may result in delays in the deployment of funds raised in this offering.

 

Fluctuations in interest rates and credit spreads could reduce our ability to generate income on our loans and other investments, which could lead to a significant decrease in our results of operations, cash flows and the market value of our investments.

 

Our primary interest rate exposures relate to the yield on our loans and other investments and the financing cost of our debt. Changes in interest rates and credit spreads may affect our net income from loans and other investments, which is the difference between the interest and related income we earn on our interest-earning investments and the interest and related expense we incur in financing these investments. Interest rate and credit spread fluctuations resulting in our interest and related expense exceeding interest and related income would result in operating losses for us. Changes in the level of interest rates and credit spreads also may affect our ability to make loans or investments, the value of our loans and investments and our ability to realize gains from the disposition of assets. Increases in interest rates and credit spreads may also negatively affect demand for loans and could result in higher borrower default rates.

 

Our operating results depend, in part, on differences between the income earned on our investments, net of credit losses, and our financing costs. The yields we earn on our floating-rate assets and our borrowing costs tend to move in the same direction in response to changes in interest rates. However, one can rise or fall faster than the other, causing our net interest margin to expand or contract. In addition, we could experience reductions in the yield on our investments and an increase in the cost of our financing. Although we seek to match the terms of our liabilities to the expected lives of loans that we acquire or originate, circumstances may arise in which our liabilities are shorter in duration than our assets, resulting in their adjusting faster in response to changes in interest rates. For any period during which our investments are not match-funded, the income earned on such investments may respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may immediately and significantly decrease our results of operations and cash flows and the market value of our investments. In addition, unless we enter into hedging or similar transactions with respect to the portion of our assets that we fund using our balance sheet, returns we achieve on such assets will generally increase as interest rates for those assets rise and decrease as interest rates for those assets decline.

 

 

We operate in a competitive market for lending and investment opportunities which may intensify, and competition may limit our ability to originate or acquire desirable loans and investments or dispose of assets we target and could also affect the yields of these assets and have a material adverse effect on our business, financial condition, and results of operations.

 

We operate in a competitive market for lending and investment opportunities, which may intensify. Our profitability depends, in large part, on our ability to originate or acquire our target assets on attractive terms. In originating or acquiring our target assets, we compete for opportunities with a variety of lenders and investors, including REITs, specialty finance companies, public and private funds (including funds managed by affiliates of our Sponsor), commercial and investment banks, commercial finance and insurance companies and other financial institutions. Some competitors may have a lower cost of funds and access to funding sources that are not available to us, such as the U.S. Government. Many of our competitors are not subject to the operating constraints associated with maintaining an exclusion from regulation under the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of loans and investments, offer more attractive pricing or other terms and establish more relationships than us. Furthermore, competition for originations of and investments in our target assets may lead to decreasing yields, which may further limit our ability to generate desired returns. Also, as a result of this competition, desirable loans and investments in our target assets may be limited in the future and we may not be able to take advantage of attractive lending and investment opportunities from time to time, thereby limiting our ability to identify and originate or acquire loans or make investments that are consistent with our investment objectives. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition, and results of operations.

 

Prepayment rates may adversely affect our financial performance and the value of certain of our assets.

 

Our business is currently focused on originating mortgage loans or other debt instruments secured by commercial real estate assets. Our borrowers may be able to repay their loans prior to their stated maturities. In periods of declining interest rates and/or credit spreads, prepayment rates on loans generally increase. If general interest rates or credit spreads decline at the same time, the proceeds of such prepayments received during such periods may not be reinvested for some period of time or may be reinvested by us in assets yielding less than the yields on the assets that were prepaid.

 

Prepayment rates on loans may be affected by a number of factors including, but not limited to, the then-current level of interest rates and credit spreads, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the servicing of the loans, possible changes in tax laws, other opportunities for investment, and other economic, social, geographic, demographic, and legal factors beyond our control. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or other such risks.

 

Difficulty in redeploying the proceeds from repayments of our existing loans and investments may cause our financial performance and our ability to fulfill our obligations relative to the Bonds.

 

As our loans and investments are repaid, we will look to redeploy the proceeds we receive into new loans and investments, repay borrowings, pay interest on the Bonds, or redeem outstanding Bonds. It is possible that we will fail to identify reinvestment options that would provide returns or a risk profile that is comparable to the asset that was repaid. If we fail to redeploy the proceeds we receive from repayment of a loan in equivalent or better alternatives, our financial performance, and our ability to fulfill our obligations related to the Bonds will suffer.

 

If we are unable to successfully integrate new assets and manage our growth, our results of operations and financial condition may suffer.

 

We may be unable to successfully and efficiently integrate newly-acquired assets into our existing portfolio or otherwise effectively manage our assets or our growth effectively. In addition, increases in our portfolio of assets and/or changes in the mix of our assets may place significant demands on our Manager’s administrative, operational, asset management, financial and other resources. Any failure to manage increases in size effectively could adversely affect our results of operations, financial condition, and ability to fulfill our obligations related to the Bonds.

 

The lack of liquidity in certain of our assets may adversely affect our business.

 

The illiquidity of certain of our assets may make it difficult for us to sell such investments if the need or desire arises. Certain assets such as mortgages and other loans are relatively illiquid investments due to their short life, their potential unsuitability for securitization and the greater difficulty of recovery in the event of a borrower’s default. In addition, certain of our investments may become less liquid after our investment as a result of periods of delinquencies or defaults or turbulent market conditions, which may make it more difficult for us to dispose of such assets at advantageous times or in a timely manner. Moreover, many of the loans and securities we invest in are not registered under the relevant securities laws, resulting in limitations or prohibitions against their transfer, sale, pledge, or their disposition except in transactions that are exempt from registration requirements or are otherwise in accordance with such laws. As a result, many of our investments are illiquid, and if we are required to liquidate all or a portion of our portfolio quickly, for example as a result of margin calls, we may realize significantly less than the value at which we have previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment to the extent that we or our Manager (and/or its affiliates) has or could be attributed as having material, non-public information regarding the borrower entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations, financial condition, and ability to fulfill our obligations related to the Bonds.

 

 

We are subject to additional risks associated with priority loan participations.

 

Some of our loans may be participation interests in which we share the rights, obligations, and benefits of the loan with other lenders. From time to time these participations may be structured so that other participants have a priority to payments of interest and principal over us, or, in other words, our rights to payments of interest and principal will be subordinate to the satisfaction of the priority rights of those participants. In such cases, if a borrower defaults on a participation loan, or if the borrower is in bankruptcy, our interest in the participation loan will be satisfied only after the interests of the other lenders in the participation loan are satisfied. In those instances, our risk of loss is greater than the risk associated with those participants with priority over our other loans. If the underlying collateral is insufficient to payoff the other participating lenders, then we may experience losses that would have a material adverse effect on our operations.

 

Any distressed loans or investments we make, or loans and investments that later become distressed, may subject us to losses and other risks relating to bankruptcy proceedings.

 

While our loans and investments focus primarily on “performing” real estate-related interests, our loans and investments may also include making distressed investments from time to time (e.g., investments in defaulted, out-of-favor or distressed loans and debt securities) or may involve investments that become “sub-performing” or “non-performing” following our acquisition thereof. Certain of our investments may include properties that typically are highly leveraged, with significant burdens on cash flow and, therefore, involve a high degree of financial risk. During an economic downturn or recession, loans or securities of financially or operationally troubled borrowers or issuers are more likely to go into default than loans or securities of other borrowers or issuers. Loans or securities of financially or operationally troubled issuers are less liquid and more volatile than loans or securities of borrowers or issuers not experiencing such difficulties. The market prices of such securities are subject to erratic and abrupt market movements and the spread between bid and ask prices may be greater than normally expected. Investment in the loans or securities of financially or operationally troubled borrowers or issuers involves a high degree of credit and market risk.

 

In certain limited cases (e.g., in connection with a workout, restructuring and/or foreclosing proceedings involving one or more of our investments), the success of our investment strategy will depend, in part, on our ability to effectuate loan modifications and/or restructure and improve the operations of our borrower entities. The activity of identifying and implementing successful restructuring programs and operating improvements entails a high degree of uncertainty. There can be no assurance that we will be able to identify and implement successful restructuring programs and improvements with respect to any distressed loans or investments we may have from time to time.

 

These financial or operating difficulties may never be overcome and may cause borrower entities to become subject to bankruptcy or other similar administrative proceedings. There is a possibility that we may incur substantial or total losses on our investments and in certain circumstances, become subject to certain additional potential liabilities that may exceed the value of our original investment therein. For example, under certain circumstances, a lender that has inappropriately exercised control over the management and policies of a debtor may have its claims subordinated or disallowed or may be found liable for damages suffered by parties as a result of such actions. In any reorganization or liquidation proceeding relating to our investments, we may lose our entire investment, may be required to accept cash or securities with a value less than our original investment and/or may be required to accept different terms, including payment over an extended period of time. In addition, under certain circumstances, payments to us may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, preferential payment, or similar transaction under applicable bankruptcy and insolvency laws. Furthermore, bankruptcy laws and similar laws applicable to administrative proceedings may delay our ability to realize value from collateral for loan positions held by us, may adversely affect the economic terms and priority of such loans through doctrines such as equitable subordination or may result in a restructuring of the debt through principles such as the “cramdown” provisions of the bankruptcy laws.

 

Loans on properties in transition will involve a greater risk of loss than conventional mortgage loans.

 

We may invest in transitional loans to borrowers who are typically seeking relatively short-term capital to be used in an acquisition or rehabilitation of a property. The typical borrower in a transitional loan has usually identified an undervalued asset that has been under-managed and/or is located in a recovering market. If the market in which the asset is located fails to improve according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the transitional loan, and we bear the risk that we may not recover some or all of our investment.

 

In addition, borrowers usually use the proceeds of a conventional mortgage to repay a transitional loan. Transitional loans therefore are subject to the risk of a borrower’s inability to obtain permanent financing to repay the transitional loan. In the event of any default under transitional loans that may be held by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the transitional loan. To the extent we suffer such losses with respect to these transitional loans, it could adversely affect our results of operations and financial condition.

 

Risks of cost overruns and noncompletion of renovations of properties in transition may result in significant losses.

 

The renovation, refurbishment or expansion of a property by a borrower involves risks of cost overruns and noncompletion. Estimates of the costs of improvements to bring an acquired property up to standards established for the market position intended for that property may prove inaccurate. Other risks may include rehabilitation costs exceeding original estimates, possibly making a project uneconomical, environmental risks, delays in legal and other approvals and rehabilitation and subsequent leasing of the property not being completed on schedule. If such renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged reduction of net operating income and may not be able to make payments on our investment on a timely basis or at all, which could result in significant losses.

 

 

There are increased risks involved with our lending activities to renovation or rehabilitation projects.

 

Lending to projects involving renovations or rehabilitations, which include our investment in loans that fund such projects, may expose us to increased lending risks. Lending to projects involving renovations or rehabilitations generally is considered to involve a higher degree of risk of non-payment and loss than other types of lending due to a variety of factors, including the difficulties in estimating costs and anticipating delays and, generally, the dependency on timely, successful completion and the lease-up and commencement of operations post-completion. In addition, since such loans generally entail greater risk than mortgage loans collateralized by income-producing property, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with such loans. Further, as the lender under a such a loan, we may be obligated to fund all or a significant portion of the loan at one or more future dates. We may not have the funds available at such future date(s) to meet our funding obligations under the loan. In that event, we would likely be in breach of the loan unless we are able to raise the funds from alternative sources, which we may not be able to achieve on favorable terms or at all.

 

If a borrower fails to complete the project or experiences cost overruns, there could be adverse consequences associated with the loan, including a decline in the value of the property securing the loan, a borrower claim against us for failure to perform under the loan documents if we choose to stop funding, increased costs to the borrower that the borrower is unable to pay, a bankruptcy filing by the borrower, and abandonment by the borrower of the collateral for the loan.

 

Changes to, or the elimination of, LIBOR may adversely affect interest expense related to our loans and investments.

 

Regulators and law-enforcement agencies from a number of governments, including entities in the U.S., have been conducting civil and criminal investigations into whether the banks that contributed to the British Bankers’ Association, or the BBA, in connection with the calculation of daily LIBOR may have underreported or otherwise manipulated or attempted to manipulate LIBOR. Several financial institutions have reached settlements with the U.S. Commodity Futures Trading Commission, the U.S. Department of Justice Fraud Section and the U.K. Financial Services Authority in connection with investigations by such authorities into submissions made by such financial institutions to the bodies that set LIBOR and other interbank offered rates. In such settlements, such financial institutions admitted to submitting rates to the BBA that were lower than the actual rates at which such financial institutions could borrow funds from other banks. Additional investigations remain ongoing with respect to other major banks and no assurance can be made that there will not be further admissions or findings of rate setting manipulation or that improper manipulation of LIBOR or other similar inter-bank lending rates will not occur in the future.

 

Based on a review conducted by the Financial Conduct Authority of the U.K., or the FCA, and a consultation conducted by the European Commission, proposals have been made for governance and institutional reform, regulation, technical changes and contingency planning. In particular: (a) new legislation has been enacted in the United Kingdom pursuant to which LIBOR submissions and administration are now “regulated activities” and manipulation of LIBOR has been brought within the scope of the market abuse regime; (b) legislation has been proposed which if implemented would, among other things, alter the manner in which LIBOR is determined, compel more banks to provide LIBOR submissions, and require these submissions to be based on actual transaction data; and (c) LIBOR rates for certain currencies and maturities are no longer published daily. In addition, pursuant to authorization from the FCA, ICE Benchmark Administration Limited (formerly NYSE Euronext Rate Administration Limited), or the IBA, took over the administration of LIBOR from the BBA on February 1, 2014. Any new administrator of LIBOR may make methodological changes to the way in which LIBOR is calculated or may alter, discontinue or suspend calculation or dissemination of LIBOR.

 

In a speech on July 27, 2017, Andrew Bailey, the Chief Executive of the FCA, announced the FCA’s intention to cease sustaining LIBOR after 2021. The FCA has statutory powers to require panel banks to contribute to LIBOR where necessary. The FCA has decided not to ask, or to require, that panel banks continue to submit contributions to LIBOR beyond the end of 2021. The FCA has indicated that it expects that the current panel banks will voluntarily sustain LIBOR until the end of 2021. On March 5, 2021, the FCA and IBA announced that most LIBOR settings will no longer be published after the end of 2021 and a majority of U.S. dollar LIBOR settings will no longer be published after June 30, 2023. It is possible that the FCA may compel the IBA to publish a subset of LIBOR settings after these dates on a “synthetic” basis, but any such publications would be considered non-representative of the underlying market. Various financial industry groups have begun planning for that transition, but there are obstacles to converting certain securities and transactions to a new benchmark, and neither the effect of the transition process nor its ultimate success can yet be known. We cannot make assurances that LIBOR will survive in its current form, or at all. We cannot predict the effect of the FCA’s decision not to sustain LIBOR, or, if changes are ultimately made to LIBOR, the effect of those changes. Any such changes could increase our financing costs, which could impact our results of operations, cash flows and the market value of our investments.

 

Our success depends on the availability of attractive investments and our Manager’s ability to identify, structure, consummate, leverage, manage and realize returns on our investments.

 

Our operating results are dependent upon the availability of, as well as our Manager’s ability, and by extension, our Sponsor’s and its affiliates’, ability, to identify, structure, consummate, leverage, manage and realize returns on our investments. In general, the availability of favorable investment opportunities and, consequently, our returns, will be affected by the level and volatility of interest rates and credit spreads, conditions in the financial markets, general economic conditions, the demand for investment opportunities in our target assets and the supply of capital for such investment opportunities. We cannot assure you that our Manager will be successful in identifying and consummating investments that satisfy our rate of return objectives or that such investments, once made, will perform as anticipated.

 

 

Real estate valuation is inherently subjective and uncertain.

 

The valuation of real estate and therefore the valuation of any collateral underlying our loans is inherently subjective due to, among other factors, the individual nature of each property, its location, the expected future rental revenues from that particular property and the valuation methodology adopted. In addition, where we invest in loans for renovation or rehabilitation projects, initial valuations will assume completion of the project. As a result, the valuations of the real estate assets against which we will make or acquire loans are subject to a large degree of uncertainty and are made on the basis of assumptions and methodologies that may not prove to be accurate, particularly in periods of volatility, low transaction flow or restricted debt availability in the commercial or residential real estate markets. This is true regardless of whether we internally perform such valuation or hire a third party to do so.

 

Our loans and investments may be concentrated in terms of geography, asset types, and sponsors.

 

We are not required to observe specific diversification criteria. Therefore, our investments may be concentrated in certain property types that may be subject to higher risk of default or foreclosure or secured by properties concentrated in a limited number of geographic locations.

 

To the extent that our assets are concentrated in any one region or type of asset, downturns generally relating to such type of asset or region may result in defaults on a number of our investments within a short time period, which could adversely affect our results of operations and financial condition. In addition, because of asset concentrations, even modest changes in the value of the underlying real estate assets could have a significant impact on the value of our investment. As a result of any high levels of concentration, any adverse economic, political or other conditions that disproportionately affects those geographic areas or asset classes could have a magnified adverse effect on our results of operations and financial condition, and the value of our bondholders’ investments could vary more widely than if we invested in a more diverse portfolio of loans.

 

As of the date of this offering circular, our company originated two loans to a single sponsor with an aggregate original principal loan amount of approximately $16.4 million. These loans represent a significant portion of our company’s current outstanding loans. Any default by this sponsor on one or both of these outstanding loans would likely have a material adverse effect on our operations and financial condition.

 

The due diligence process that our Manager undertakes in regard to investment opportunities may not reveal all facts that may be relevant in connection with an investment and if our Manager incorrectly evaluates the risks of our investments we may experience losses.

 

Before making investments for us, our Manager conducts due diligence that it deems reasonable and appropriate based on the facts and circumstances relevant to each potential investment. When conducting due diligence, our Manager may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of potential investment. Our Manager’s loss estimates may not prove accurate, as actual results may vary from estimates. If our Manager underestimates the asset-level losses relative to the price we pay for a particular investment, we may experience losses with respect to such investment.

 

Moreover, investment analyses and decisions by our Manager may frequently be required to be undertaken on an expedited basis to take advantage of investment opportunities. In such cases, the information available to our Manager at the time of making an investment decision may be limited, and they may not have access to detailed information regarding such investment. Therefore, we cannot assure you that our Manager will have knowledge of all circumstances that may adversely affect such investment.

 

Insurance on loans and real estate securities collateral may not cover all losses.

 

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, which may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors also might result in insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received with respect to a property relating to one of our investments might not be adequate to restore our economic position with respect to our investment. Any uninsured loss could result in the corresponding nonperformance of or loss on our investment related to such property.

 

 

The impact of any future terrorist attacks and the availability of affordable terrorism insurance expose us to certain risks.

 

Terrorist attacks, the anticipation of any such attacks, and the consequences of any military or other response by the U.S. and its allies may have an adverse impact on the U.S. financial markets and the economy in general. We cannot predict the severity of the effect that any such future events would have on the U.S. financial markets, the economy or our business. Any future terrorist attacks could adversely affect the credit quality of some of our loans and investments. Some of our loans and investments will be more susceptible to such adverse effects than others, particularly those secured by properties in major cities or properties that are prominent landmarks or public attractions. We may suffer losses as a result of the adverse impact of any future terrorist attacks and these losses may adversely impact our results of operations.

 

In addition, the enactment of the Terrorism Risk Insurance Act of 2002, or TRIA, and the subsequent enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2015 and the Terrorism Risk Insurance Program Reauthorization Act of 2019, which the latter extended TRIA through the end of 2027, requires insurers to make terrorism insurance available under their property and casualty insurance policies and provides federal compensation to insurers for insured losses. However, this legislation does not regulate the pricing of such insurance and there is no assurance that this legislation will be extended beyond 2020. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties that we invest in are unable to obtain affordable insurance coverage, the value of those investments could decline and in the event of an uninsured loss, we could lose all or a portion of our investment.

 

We may need to foreclose on certain of the loans we originate or acquire, which could result in losses that harm our results of operations and financial condition.

 

We may find it necessary or desirable to foreclose on certain of the loans we originate or acquire, and the foreclosure process may be lengthy and expensive. If we foreclose on an asset, we may take title to the property securing that asset, and if we do not or cannot sell the property, we would then come to own and operate it as “real estate owned.” Owning and operating real property involves risks that are different (and in many ways more significant) than the risks faced in owning an asset secured by that property. In addition, we may end up owning a property that we would not otherwise have decided to acquire directly at the price of our original investment or at all, and the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us.

 

Whether or not we have participated in the negotiation of the terms of any such loans, we cannot assure you as to the adequacy of the protection of the terms of the applicable loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests. Furthermore, claims may be asserted by lenders or borrowers that might interfere with enforcement of our rights. Borrowers may resist foreclosure actions by asserting numerous claims, counterclaims and defenses against us, including, without limitation, lender liability claims and defenses, even when the assertions may have no basis in fact, in an effort to prolong the foreclosure action and seek to force the lender into a modification of the loan or a favorable buy-out of the borrower’s position in the loan. In some states, foreclosure actions can take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process and could potentially result in a reduction or discharge of a borrower’s debt. Foreclosure may create a negative public perception of the related property, resulting in a diminution of its value. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Furthermore, any costs or delays involved in the foreclosure of the loan or a liquidation of the underlying property will further reduce the net sale proceeds and, therefore, increase any such losses to us.

 

If we foreclose on certain of the loans we originate or acquire, then we are subject to the general risks of owning real estate.

 

Fluctuations in vacancy rates, rent schedules and operating expenses can adversely affect operating results or render the sale or refinancing of a property difficult or unattractive. No assurance can be given that certain assumptions as to the future levels of occupancy, cost of tenant improvements or future costs of operating a property will be accurate since such matters will depend on events and factors beyond the control of the Manager. Such factors include continued validity and enforceability of the leases, vacancy rates for similar properties, financial resources of tenants and rent levels near the properties, adverse changes in local population trends, market conditions, neighborhood values, local economic and social conditions, supply and demand for property, competition from similar properties, interest rates and real estate tax rates, governmental rules, regulations and fiscal policies, the enactment of unfavorable real estate laws, rent control, environmental or zoning law, and hazardous material law, uninsured losses, effects of inflation, and other risks. Properties may not perform in accordance with expectations which could result in losses that harm our results of operations and financial conditions. There is no certainty that we will be able to sell or refinance such properties on favorable terms, or at all.

 

Properties obtained through the foreclosure on one of our loans we originate or acquire may involve substantial risks.

 

Properties obtained through a foreclosure may be distressed, poorly managed or in need of repositioning or other improvements. We may underestimate the amount of time, difficulty and cost of leasing vacant space. Additionally, we may underestimate the costs of improvements required to bring a property up to standards suitable for its intended use or its intended market position. No assurance can be given that the Manager will manage such properties in a way that is profitable to the Company.

 

 

The properties underlying our investments may be subject to unknown liabilities, including environmental liabilities, that could affect the value of these properties and as a result, our investments.

 

Collateral properties underlying our investments may be subject to unknown or unquantifiable liabilities that may adversely affect the value of our investments. Such defects or deficiencies may include title defects, title disputes, liens, servitudes or other encumbrances on the mortgaged properties. The discovery of such unknown defects, deficiencies and liabilities could affect the ability of our borrowers to make payments to us or could affect our ability to foreclose and sell the underlying properties, which could adversely affect our results of operations and financial condition.

 

Furthermore, to the extent we foreclose on properties with respect to which we have extended loans, we may be subject to environmental liabilities arising from such foreclosed properties. Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.

 

If we foreclose on any properties underlying our investments, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, therefore the discovery of material environmental liabilities attached to such properties could adversely affect our results of operations and financial condition.

 

We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses.

 

In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or stockholders. We cannot assure prospective investors that such claims will not arise or that we will not be subject to significant liability if a claim of this type did arise.

 

Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.

 

Some of our investments, including the Bonds issued in our securitization transactions for which we are required to retain a portion of the credit risk, may be rated by rating agencies. Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value and liquidity of our investments could significantly decline, which would adversely affect the value of our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.

 

Investments in non-conforming and non-investment grade rated loans or securities involve increased risk of loss.

 

Many of our investments may not conform to conventional loan standards applied by traditional lenders and either will not be rated (as is typically the case for private loans) or will be rated as non-investment grade by the rating agencies. Private loans often are not rated by credit rating agencies. Non-investment grade ratings typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans, the borrowers’ credit history, the underlying properties’ cash flow or other factors. As a result, these investments should be expected to have a higher risk of default and loss than investment-grade rated assets. Any loss we incur may be significant and may adversely affect our results of operations and financial condition. There are no limits on the percentage of unrated or non-investment grade rated assets we may hold in our investment portfolio.

 

We must manage our portfolio so that we do not become an investment company that is subject to regulation under the Investment Company Act.

 

We conduct our operations so that we avail ourselves of the statutory exclusion provided in Section 3(c)(5)(C) for companies engaged primarily in investment in mortgages and other liens on or interests in real estate. In order to qualify for this exclusion, we must maintain, on the basis of positions taken by the SEC’s Division of Investment Management, or the “Division,” in interpretive and no-action letters, a minimum of 55% of the value of our total assets in mortgage loans and other related assets that are considered “mortgages and other liens on and interests in real estate,” which we refer to as “Qualifying Interests,” and a minimum of 80% in Qualifying Interests and real estate-related assets. In the absence of SEC or Division guidance that supports the treatment of other investments as Qualifying Interests, we will treat those other investments appropriately as real estate-related assets or miscellaneous assets depending on the circumstances.

 

In August 2011, the SEC staff commenced an advance notice rulemaking initiative, indicating that it is reconsidering its interpretive policy under Section 3(c)(5)(C) and whether to advance rulemaking to define the basis for the exclusion. We cannot predict the outcome of this reconsideration or potential rulemaking initiative and its impact on our ability to rely on the exclusion. To the extent that the SEC or its staff provides more specific guidance regarding any of the matters bearing upon the requirements of Section 3(c)(5)(C) of the Investment Company Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC or its staff could further inhibit our ability to pursue the strategies we have chosen.

 

 

Because registration as an investment company would significantly affect our ability to engage in certain transactions or be structured in the manner we currently are, we intend to conduct our business so that we will continue to satisfy the requirements to avoid regulation as an investment company. If we do not meet these requirements, we could be forced to alter our investment portfolio by selling or otherwise disposing of a substantial portion of the assets that do not satisfy the applicable requirements or by acquiring a significant position in assets that are Qualifying Interests. Any such investments may not represent an optimum use of capital when compared to the available investments we and our subsidiaries target pursuant to our investment strategy and present additional risks to us. We continue to analyze our investments and may make certain investments when and if required for compliance purposes. Altering our portfolio in this manner may have an adverse effect on our investments if we are forced to dispose of or acquired assets in an unfavorable market.

 

If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties, that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company. In order to comply with provisions that allow us to avoid the consequences of registration under the Investment Company Act, we may need to forego otherwise attractive opportunities and limit the manner in which we conduct our operations. Therefore, compliance with the requirements of the Investment Company Act may hinder our ability to operate solely on the basis of maximizing profits.

 

Rapid changes in the values of our other real estate-related investments may make it more difficult for us to maintain our exclusion from regulation under the Investment Company Act.

 

If the market value or income potential of real estate-related investments declines, we may need to alter the mix of our portfolio of assets in order to maintain our exclusion from the Investment Company Act regulation. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-qualifying assets that we may own. We may have to make investment decisions that we otherwise would not make absent the Investment Company Act considerations.

 

The Manager is not registered and does not intend to register as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). If the Manager is required to register as an investment adviser under the Advisers Act, it could impact our operations and possibly reduce your investment return.

 

The Manager is not currently registered as an investment adviser under the Advisers Act and does not expect to register as an investment adviser because the Company does not believe that it meets the registration requirements under the Advisers Act. In order to fall under the Advisers Act, the Manager must: (i) be in the business of (ii) providing advice or analyses on securities (iii) for compensation. First, the Company does not believe the Manager advises on “securities” because its investments in first-position mortgages are not securities under the Advisers Act. Second, the Company believes that any investments in securities will be solely incidental to its investment strategy and therefore, the Manager would not be considered to be “in the business of” providing advice on securities. Third, whether an adviser has sufficient regulatory assets under management to require registration under the Advisers Act depends on the nature of the assets it manages. In calculating regulatory assets under management, the Manager must include the value of each “securities portfolio” it manages. The Manager expects that our assets will not constitute a securities portfolio so long as a majority of our assets consist of assets that we believe are not securities. However, the SEC will not affirm our determination of what portion of our investments are not securities. As a result, there is a risk that such determination is incorrect and, as a result, our investments are a securities portfolio. In such event, the Manager may be acting as an investment adviser subject to registration under the Advisers Act but not be registered. If our investments were to constitute a securities portfolio, then the Manager may be required to register under the Advisers Act, which would require it to comply with a variety of regulatory requirements under the Advisers Act on such matters as record keeping, disclosure, compliance, limitations on the types of fees it could earn and other fiduciary obligations. As a result, the Manager would be required to devote additional time and resources and incur additional costs to manage our business, which could possibly reduce your investment return.

 

 

 

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USE OF PROCEEDS

 

We estimate that the net proceeds we will receive from this offering, without taking into account any sales of A R-Bonds or B R-Bonds, will be approximately $66,787,500 if we raise the maximum offering amount, after deducting selling commissions and fees payable to our managing broker-dealer and selling group members, and payment of the O&O Fee to our Manager. As sales of A R-Bonds and B R-Bonds are without selling commissions, the net proceeds from the offering will depend upon the sales mix of the Bonds. As of the date of this Offering Circular, the Company has issued and sold $36,703,000 in principal amount of Bonds, consisting of $34,258,000 and $2,445,000 of A Bonds and A R-Bonds, respectively.

 

We plan to use substantially all of the net proceeds from this offering to originate and make commercial mortgage loans and acquire other senior secured real estate debt investments consistent with our investment strategies. We may also use a portion of the net proceeds to pay fees to our Manager or its affiliates, for working capital and for other general corporate purposes, as described in more detail below. The table below demonstrates our anticipated uses of offering proceeds, but the table below does not require us to use offering proceeds as indicated. Our actual use of offering proceeds will depend upon market conditions, among other considerations. The numbers in the table are approximate. The table below does not take into account any sales of A R-Bonds or B R-Bonds, which will be sold solely to certain purchasers, including purchasing through a registered investment advisor, without selling commissions.

 

We originate senior loans collateralized by commercial real estate in the U.S. We also may originate or acquire other real estate and real estate-related debt assets. The allocation of our capital among our target assets will depend on prevailing market conditions and may change over time in response to different prevailing market conditions, including with respect to interest rates and general economic and credit market conditions. In addition, we also may use the net proceeds from this offering to invest in assets other than our target assets, subject to our exclusion from regulation under the Investment Company Act. Until appropriate investments can be identified, our Manager may invest the net proceeds from this offering in money market funds, bank accounts, overnight repurchase agreements with primary federal reserve bank dealers collateralized by direct U.S. government obligations and other instruments or investments reasonably determined by our Manager that are consistent with our exclusion from regulation under the Investment Company Act. These investments are expected to provide a lower net return than we seek to achieve from our target assets.

 

Maximum Offering Amount

	A Bonds and B Bonds (9)
	Amount	Percent
Gross offering proceeds	$75,000,000	100.00%
Less offering expenses:
Selling commissions(1)	$4,500,000	6.00%
Managing broker-dealer fee(2)	$712,500	0.95%
Wholesaling fee(3)	$750,000	1.00%
Expense Reimbursement(4)	$750,000	1.00%
O&O Fee(5)	$1,500,000	2.00%
Net Proceeds	$66,787,500	89.05%
Less asset management fee(6)	$1,312,500	1.75%
Working capital(7)	$600,000	0.80%
Amount available for investment (8)	$64,875,000	86.50%

 

 

 

 

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PLAN OF DISTRIBUTION

 

Who May Invest

 

As a Tier II, Regulation A offering, investors must comply with the 10% limitation to investment in the offering, as prescribed in Rule 251. The only investor in this offering exempt from this limitation is an accredited investor, an “Accredited Investor,” as defined under Rule 501 of Regulation D. If you meet one of the following tests you qualify as an Accredited Investor:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Under Rule 251 of Regulation A, non-accredited, non-natural investors are subject to the investment limitation and may only invest funds which do not exceed 10% of the greater of the purchaser’s revenue or net assets (as of the purchaser’s most recent fiscal year end). A non-accredited, natural person may only invest funds which do not exceed 10% of the greater of the purchaser’s annual income or net worth (please see below on how to calculate your net worth).

 

NOTE: For the purposes of calculating your net worth, Net Worth is defined as the difference between total assets and total liabilities. This calculation must exclude the value of your primary residence and may exclude any indebtedness secured by your primary residence (up to an amount equal to the value of your primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the donor or grantor is the fiduciary and the fiduciary directly or indirectly provides funds for the purchase of the Bonds.

 

Determination of Suitability

 

The Selling Group Members and registered investment advisors recommending the purchase of Bonds in this offering have the responsibility to make every reasonable effort to determine that your purchase of Bonds in this offering is a suitable and appropriate investment for you based on information provided by you regarding your financial situation and investment objectives. In making this determination, these persons have the responsibility to ascertain that you:

 

 

Relevant information for this purpose will include at least your age, investment objectives, investment experience, income, net worth, financial situation, and other investments as well as any other pertinent factors. The Selling Group Members and registered investment advisors recommending the purchase of Bonds in this offering must maintain, for a six-year period, records of the information used to determine that an investment in Bonds is suitable and appropriate for you.

 

 

The Offering

 

We are offering a maximum offering amount of $75,000,000 of the Bonds to the public through our managing broker-dealer at a price of $1,000.00 per Bond.

 

Our Manager has arbitrarily determined the selling price of the Bonds and such price bears no relationship to our book or asset values, or to any other established criteria for valuing issued or outstanding Bonds.

 

The Bonds are being offered on a “best efforts” basis, which means generally that our managing broker-dealer is required to use only its best efforts to sell the Bonds and it has no firm commitment or obligation to purchase any of the Bonds. The offering will continue until the offering termination. We will conduct closings on the 20th of each month or, if the 20th is not a business day, the next succeeding business day, assuming there are funds to close, until the offering termination. Once a subscription has been submitted and accepted by the 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 a closing date and accepted by the Company prior to such closing, any such subscriptions will be closed on that closing date. If subscriptions are received on a closing date but not accepted by the Company prior to such closing, any such subscriptions will be closed on the next closing date. It is expected that settlement will occur on the same day as each closing date. On each closing date, offering proceeds for that closing will be disbursed to us and the Bonds purchased will be issued to the investors in the offering. If the Company is dissolved or liquidated after the acceptance of a subscription, the respective subscription payment will be returned to the subscriber. The offering is being made on a best-efforts basis through Crescent Securities Group, Inc., our managing broker-dealer.

 

Managing Broker-Dealer and Compensation We Will Pay for the Sale of the Bonds

 

Our managing broker-dealer will receive (a) selling commissions of 6.00% of gross offering proceeds on the sale of A Bonds and B Bonds, and (b) a managing broker-dealer fee of up to 0.95% of the gross proceeds of the offering, and (c) a nonaccountable expense reimbursement of up to 1.00% of gross offering proceeds on the sale of A Bonds and B Bonds. In addition, we may pay a wholesaling fee of up to 1.00% of gross proceeds of the offering. We are not required to pay the wholesaling fee, but we may agree to pay the wholesaling fee to our managing broker-dealer for sales made by certain selling group members. Our managing broker-dealer may reallow all or a portion of selling commissions and the wholesaling fee to selling group members. Sales of the A R-Bonds have been completed. The B R-Bonds will be sold solely to certain purchasers, including those purchasing through a registered investment advisor. See “Plan of Distribution – B R-Bond Eligibility.” We will not pay selling commissions on the sale of B R-Bonds; however, we will pay a managing broker-dealer fee and a wholesaling fee and may pay nonaccountable expense reimbursements of up to 1% on such sales. Kevin Kennedy, an officer and member of the board of managers of our Sponsor, and Raymond Davis, an officer of our Manager, are registered as associated persons of our managing broker-dealer. As a result, they may be paid all or a part of any selling commission resulting from Bonds sold directly by them or through certain selling group members. Total underwriting compensation to be received by or paid to participating FINRA member broker-dealers, including commissions, managing broker-dealer fee, and wholesaling fee will not exceed 8.95% of proceeds raised with the assistance of those participating FINRA member broker-dealers.

 

Set forth below are tables indicating the estimated compensation and expenses that will be paid in connection with the offering to our managing broker-dealer. The tables below do not take into account any sales of A R-Bonds or B R-Bonds.

 

	Per A Bond or B Bond	Maximum Offering Amount
Offering:
Price to investor:	$1,000.00	$75,000,000
Less selling commissions:	$60.00	$4,500,000
Less managing broker-dealer fee:	$9.50	$712,500
Less expense reimbursement	$10.00	$750,000
Less wholesaling fee:	$10.00	$750,000
Remaining Proceeds:	$910.50	$68,287,500

 

We have agreed to indemnify our managing broker-dealer, the selling group members and selected registered investment advisors, against certain liabilities arising under the Securities Act. However, the SEC takes the position that indemnification against liabilities arising under the Securities Act is against public policy and is unenforceable.

 

In accordance with the rules of FINRA, the table above sets forth the nature and estimated amount of all items that will be viewed as “underwriting compensation” by FINRA that are anticipated to be paid by us in connection with the offering. The amounts shown assume we sell all the Bonds offered hereby and that all Bonds are sold in the offering with the maximum wholesaling fee, which is the distribution channel with the highest possible selling commissions and fees.

 

It is illegal for us to pay or award any commissions or other compensation to any person engaged by you for investment advice as an inducement to such advisor to advise you to purchase the Bonds; however, nothing herein will prohibit a registered broker-dealer or other properly licensed person from earning a sales commission in connection with a sale of the Bonds.

 

 

Eligibility to Purchase B R-Bonds

 

Sales of A R-Bonds have been completed. We may only sell B R-Bonds and pay no selling commissions in connection with the sale of such Bonds in this offering to:

 

 

For purposes of the foregoing, “immediate family members” means such person’s spouse, parents, children, brothers, sisters, grandparents, grandchildren and any such person who is so related by marriage such that this includes “step-” and “-in-law” relations as well as such persons so related by adoption. All sales must be made through a registered broker-dealer participating in this offering, and investment advisors must arrange for the placement of sales accordingly. The net proceeds to us will not be affected by eliminating selling commissions and the wholesaling fees payable in connection with sales to or through the persons described above. Purchasers purchasing net of all of the selling commissions and wholesaling fees will receive Bonds in principal amount of $1,000 per Bond purchased.

 

Either through this offering or subsequently on any secondary market, affiliates of our company may buy the Bonds if and when they choose. There are no restrictions to these purchases. Affiliates that become Bondholders will have rights on parity with all other Bondholders.

 

How to Invest

 

Subscription Agreement

 

All investors will be required to complete and execute a subscription agreement in the form attached hereto as Exhibit B. The subscription agreement is available from your registered representative or financial adviser and should be delivered to Crescent Securities Group, Inc., Attn: Red Oak Capital Fund V, LLC, 8750 N Central Expy Suite 750, Dallas TX, 75231, together with payment in full by check, ACH or wire of your subscription purchase price in accordance with the instructions in the subscription agreement. All checks should be made payable to “Red Oak Capital Fund V, LLC.” We will hold closings on the 20th of each month or, if the 20th is not a business day, the next succeeding business day, assuming there are funds to close. Once a subscription has been submitted and accepted by the 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 a closing date and accepted by the Company prior to such closing, any such subscriptions will be closed on that closing date. If subscriptions are received on a closing date but not accepted by the Company prior to such closing, any such subscriptions will be closed on the next closing date. It is expected that settlement will occur on the same day as each closing date. If the Company is dissolved or liquidated after the acceptance of a subscription, the respective subscription payment will be returned to the subscriber.

 

By completing and executing your subscription agreement or order form you will also acknowledge and represent that you have received a copy of this offering circular, you are purchasing the Bonds for your own account and that your rights and responsibilities regarding your Bonds are governed by the indenture and the form of bond certificate each included as an exhibit to this offering circular.

 

 

Book-Entry, Delivery and Form

 

The Bonds are issued to investors in book-entry only format and are represented by global bond certificates, or certificates, deposited with a nominee holder. The nominee holders are: (i) DTC or its nominee Cede & Co. for purchasers purchasing through DTC participants; and (ii) Great Lakes Fund Solutions for purchasers not purchasing through a DTC Participant

 

We have gained eligibility for the Bonds to be issued and held through the book-entry systems and procedures of DTC and intend for all Bonds purchased through DTC participants to be held via DTC’s book-entry systems and to be represented by certificates registered in the name of Cede & Co. (DTC’s nominee). For investors not purchasing through a DTC participant, the certificates representing their Bonds will be registered in the name of, and held by, Great Lakes Fund Solutions. We may, in our sole discretion, alter the nominee for Bonds sold without a DTC participant.

 

So long as nominees, as described above, are the registered owners of the certificates representing the Bonds, such nominees will be considered the sole owners and holders of the Bonds for all purposes and the indenture. Owners of beneficial interests in the Bonds will not be entitled to have the certificates registered in their names, will not receive or be entitled to receive physical delivery of the Bonds in definitive form and will not be considered the owners or holders under the indenture, including for purposes of receiving any reports delivered by us or the trustee pursuant to the indenture. Accordingly, each person owning a beneficial interest in a Bond registered to DTC or its nominee must rely on either the procedures of DTC or its nominee on the one hand, and, if such entity is not a participant, on the procedures of the participant through which such person owns its interest, in order to exercise any rights of a Bondholder. Purchasers owning a beneficial interest in a Bond registered to Great Lakes Fund Solutions, or another nominee holder as selected by our company, will rely on the procedures of Great Lakes Fund Solutions or such nominee holder in order exercise its rights a Bondholder.

 

As a result:

 

 

 

The Depository Trust Company

 

We have obtained the information in this section concerning DTC and its book-entry systems and procedures from sources that we believe to be reliable. The description of the clearing system in this section reflects our understanding of the rules and procedures of DTC as they are currently in effect. DTC could change its rules and procedures at any time.

 

DTC acts as securities depositary for the Bonds registered in the name of its nominee, Cede & Co. DTC is:

 

 

 

DTC holds securities that its direct participants deposit with DTC. DTC facilitates the settlement among direct participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in direct participants’ accounts, thereby eliminating the need for physical movement of securities certificates.

 

Direct participants of DTC include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is owned by a number of its direct participants. Indirect participants of DTC, such as securities brokers and dealers, banks, and trust companies, can also access the DTC system if they maintain a custodial relationship with a direct participant.

 

Purchases of Bonds under DTC’s system must be made by or through direct participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each beneficial owner is in turn to be recorded on the records of direct participants and indirect participants. Beneficial owners will not receive written confirmation from DTC of their purchase, but beneficial owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the direct participants or indirect participants through which such beneficial owners entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in the Bonds.

 

Conveyance of notices and other communications by DTC to direct participants, by direct participants to indirect participants and by direct participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

 

Great Lakes Fund Solutions Inc.

 

All Bonds not purchased through a DTC participant will be registered in the name of Great Lakes Fund Solutions. Direct purchasers of Bonds registered through Great Lakes Fund Solutions will receive a credit for Bonds on Great Lakes Fund Solutions records. Beneficial owners registered through Great Lakes Fund Solutions will receive written confirmation from UMB Bank, our Bond registrar, upon closing of their purchases. Transfers of Bonds registered to Great Lakes Fund Solutions will be accomplished by entries made on the books of UMB Bank at the behest of Great Lakes Fund Solutions acting on behalf of its beneficial holders.

 

Book-Entry Format

 

Under the book-entry format, UMB Bank, as our paying agent, will pay interest or principal payments to Cede & Co., as nominee of DTC, and to Great Lakes Fund Solutions. DTC will forward all payments it receives to the direct participants, who will then forward the payment to the indirect participants or to you as the beneficial owner. Great Lakes Fund Solutions will forward payments directly to beneficial owners of Bonds registered to Great Lakes Fund Solutions. You may experience some delay in receiving your payments under this system. Neither we, the trustee, nor any paying agent or sub-paying agent has any direct responsibility or liability for the payment of principal or interest on the Bonds to owners of beneficial interests in the certificates.

 

DTC is required to make book-entry transfers on behalf of its direct participants and is required to receive and transmit payments of principal, premium, if any, and interest on the Bonds. Any direct participant or indirect participant with which you have an account is similarly required to make book-entry transfers and to receive and transmit payments with respect to the Bonds on your behalf. We and the trustee under the indenture have no responsibility for any aspect of the actions of DTC or any of its direct or indirect participants or of Great Lakes Fund Solutions. In addition, we and the trustee under the indenture have no responsibility or liability for any aspect of the records kept by DTC or any of its direct or indirect participants or Great Lakes Fund Solutions relating to or payments made on account of beneficial ownership interests in the Bonds or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. We also do not supervise these systems in any way.

 

The trustee will not recognize you as a Bondholder under the Indenture, and you can only exercise the rights of a Bondholder indirectly through DTC and its direct participants or through Great Lakes Fund Solutions, as applicable. DTC has advised us that it will only take action regarding a Bond if one or more of the direct participants to whom the Bond is credited directs DTC to take such action and only in respect of the portion of the aggregate principal amount of the Bonds as to which that participant or participants has or have given that direction. DTC can only act on behalf of its direct participants. Your ability to pledge Bonds, and to take other actions, may be limited because you will not possess a physical certificate that represents your Bonds.

 

If the global bond certificate representing your Bonds is held by DTC, conveyance of notices and other communications by the trustee to the beneficial owners, and vice versa, will occur via DTC. The trustee will communicate directly with DTC. DTC will then communicate to direct participants. The direct participants will communicate with the indirect participants, if any. Then, direct participants and indirect participants will communicate to beneficial owners. Such communications will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

 

If the global bond certificate representing your Bonds is held by Great Lakes Fund Solutions, conveyance of notices and other communications by the trustee to the beneficial owners, and vice versa, will occur via Great Lakes Fund Solutions. The trustee will communicate directly with Great Lakes Fund Solutions, which will communicate directly with the beneficial owners.

 

 

The Trustee

 

UMB Bank has agreed to be the trustee under the indenture. The indenture contains certain limitations on the rights of the trustee, should it become one of our creditors, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any claim as security or otherwise. The trustee will be permitted to engage in other transactions with us and our affiliates.

 

The indenture provides that in case an event of default specified 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.

 

Resignation or Removal of the Trustee.

 

The trustee may resign at any time or may be removed by the holders of a majority of the principal amount of then-outstanding Bonds. In addition, upon the occurrence of contingencies relating generally to the insolvency of the trustee, we may remove the trustee, or a court of competent jurisdiction may remove the trustee, upon petition of a holder of certificates. However, no resignation or removal of the trustee may become effective until a successor trustee has been appointed.

 

We are offering the Bonds pursuant to an exemption to the Trust Indenture Act of 1939, or the Trust Indenture Act. As a result, investors in the Bonds will not be afforded the benefits and protections of the Trust Indenture Act. However, in certain circumstances, the indenture makes reference to the substantive provisions of the Trust Indenture Act.

 

Registrar and Paying Agent

 

We have designated UMB Bank as paying agent for the Bonds and Great Lakes Fund Solutions as sub-paying agent in respect of Bonds registered to it. UMB Bank will also act as registrar for the Bonds. The Bonds will be issued in book-entry form only, evidenced by global certificates, as such, payments will be made to DTC, its nominee or to Great Lakes Fund Solutions.

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

We commenced active operations upon the first closing of our offering of Bonds on September 23, 2020. Through December 31, 2020, we had received approximately $13,000,000 in net proceeds from our offering of Bonds and have not yet invested in any first mortgage loans. As of the date of this Offering Circular, we have received approximately $30.8 million in net proceeds and have invested $27.1 million in four first mortgage loans. We intend to continue to sell the Bonds through December 31, 2022, or the date upon which our Manager determines to terminate the offering, in its sole discretion. Notwithstanding the previous sentence, our Manager has the right to extend this offering beyond December 31, 2022 for one additional six-month period.

 

We intend to make reserve allocations as necessary to (i) aid our objective of preserving capital for our investors by supporting the maintenance and viability of assets we acquire in the future and (ii) meet the necessary covenants of the Bonds. If reserves and any other available income become insufficient to meet our covenants and cover our operating expenses and liabilities, it may be necessary to obtain additional funds by borrowing, restructuring property loans or liquidating our investment in one or more assets. There is no assurance that such funds will be available, or if available, that the terms will be acceptable to us. Additionally, our ability to borrow additional funds will be limited by the restrictions placed on our and our subsidiaries' borrowing activities by our indenture.

 

Results of Operations – For the Period Ended December 31, 2020

 

We operate on a calendar year. Set forth below is a discussion of our operating results for the period ended December 31, 2020.

 

As of December 31, 2020, the Company had not deployed any capital into senior secured loans.

 

For the period ending December 31, 2020, our total revenues from operations amounted to $5 from interest income. Operating costs for the same period, including organization fees of $284,500 and bond interest expense of $137,145 amounted to $484,203. Net loss for the period amounted to $484,198.

 

As of the issuance date of this report, the Company has approximately $12,200,000 remaining net proceeds from the issuance of the bonds. We are working diligently through our expanding pipeline of potential senior secured loans in order to deploy our cash on hand as well as the proceeds from future closings of our Bonds offering, which will be held on or about the 20th of each month through December 31, 2021 or the date upon which our Manager determines to terminate the offering, in its sole discretion.

 

Results of Operations – Period from January 1, 2019 through December 31, 2019

 

We had not commenced operations as of December 31, 2019.

 

Liquidity and Capital Resources

 

As of December 31, 2020, we had sold $13,429,000 and $796,000 of A Bonds and A R-Bonds, respectively, pursuant to our offering of Bonds. As of the date of this Offering Circular, we had sold $34,258,000 and $2,445,000 of A Bonds and A R-Bonds, respectively, pursuant to our offering of Bonds. Our principal demands for cash will continue to be for acquisition costs, including the purchase price or principal amount of any property loans, securities or other assets we acquire, the payment of our operating and administrative expenses, and all continuing debt service obligations, including our debt service on the Bonds. Generally, we will fund additional acquisitions from the net proceeds of the Bonds offering. We intend to acquire additional assets with cash and/or debt.

  

 

The Company had cash on hand of $12,280,743 and bond service reserves of $533,439. The bond service reserves required pursuant to the Indenture related to the Bonds, which requires 3.75% of the gross proceeds from the Offering to be placed into a reserve account held by the bond trustee for the purpose of paying our bond service obligations through September 23, 2021.

 

We expect to use debt financing in addition to our Bonds as a source of capital. We have a limit of 25% of the aggregate Bond principal raised on the amount of additional debt that can be employed in the operations of the business.

 

We anticipate that adequate cash will be generated from operations to fund our operating and administrative expenses, and all continuing debt service obligations, including the debt service obligations of the Bonds. However, our ability to finance our operations is subject to some uncertainties. Our ability to generate working capital is dependent upon the performance of the mortgagor related to each of our assets and the economic and business environments of the various markets in which our underlying collateral properties are located. Our ability to liquidate our assets is partially dependent upon the state of real estate markets and the ability of mortgagors to obtain financing at reasonable commercial rates. In general, we intend to pay debt service from cash flow obtained from operations. If cash flow from operations is insufficient then we may exercise the option to partially leverage the asset to increase liquidity. If we have not generated sufficient cash flow from our operations and other sources, such as from borrowings, we may use funds out of our Bond Service Reserve. Moreover, our Manager may change this policy, in its sole discretion, at any time to facilitate meeting its cash flow obligations.

 

Potential future sources of capital include secured or unsecured financings from banks or other lenders, establishing additional lines of credit, proceeds from the sale of assets and undistributed cash flow, subject to the limitations previously described. Note that, currently, we have not identified any additional source of financing, other than the proceeds from our Bonds offering, and there is no assurance that such sources of financing will be available on favorable terms or at all.

 

Trend Information

 

In the third and fourth quarter of 2020, we sold $13,429,000 and $796,000 of A Bonds and A R-Bonds, respectively. In the first and second quarter of 2021, we sold $17,915,000 and $1,534,000 of A Bonds and A R-Bonds, respectively. The sale of the Bonds has been growing from the second half of 2020 to the first half of 2021, and we expect the average closings to increase in the second half of 2021 and through December 31, 2022 or the termination of the Offering, whichever occurs first. As Bonds are sold, we intend to use the net proceeds from the Offering to continue to issue senior secured loans on commercial real estate and thereby increase cash flows.

 

As of the date of this Offering Circular, we have deployed approximately $27.1 million in commercial real estate loan investments with approximately $7 million of proceeds from our Bond offering available to invest in additional loan investments. We anticipate the deployment of capital to increase into the second half of 2021. As we issue additional senior secured loans on commercial real estate, the Company’s cash flows increase.

 

As a result of the global outbreak of a new strain of coronavirus, COVID-19, economic uncertainties have arisen that continue to have an adverse impact on economic and market conditions. The global impact of the outbreak has been rapidly evolving, and the outbreak presents material uncertainty and risk with respect to our future financial results and capital raising efforts. We are unable to quantify the impact COVID-19 may have on us at this time. Although we have not experienced a significant increase in the number of late payments or defaulting borrowers as of the date of this report, we may experience adverse effects in the performance of our existing loans as a result of COVID-19 which may materially alter our ability to pay our debt service obligations and fees.

 

 

 

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GENERAL INFORMATION AS TO OUR COMPANY

 

Our Company

 

Red Oak Capital Fund V, LLC, a Delaware limited liability company was formed on March 23, 2020 to originate senior loans collateralized by commercial real estate in the U.S. Our business plan is to originate, acquire and manage commercial real estate loans and securities and other commercial real estate-related debt instruments. While the commercial real estate debt markets are complex and continually evolving, we believe they offer compelling opportunities when approached with the capabilities and expertise of our Manager, a wholly owned subsidiary of our Sponsor. Our Manager intends to actively participate in the servicing and operational oversight of our assets rather than subrogate those responsibilities to a third party.

 

Our investment objective is to preserve and protect our capital while producing attractive risk-adjusted returns generated from current income on our portfolio. Our investment strategy is to originate loans and invest in debt and related instruments supported by commercial real estate in the U.S. Through our Manager, we draw on our Sponsor’s and its affiliates’ established sourcing, underwriting and structuring capabilities in order to execute our investment strategy.

 

The Company does not intend to act as a land or real estate developer and currently has no intent to invest in, acquire, own, hold, lease, operate, manage, maintain, redevelop, sell, or otherwise use any undeveloped real property or developed real property, unless such actions are necessary or prudent based upon borrower default in accordance with the terms of the debt instruments held by the Company.

 

Our principal executive offices are located at 625 Kenmoor Avenue SE, Suite 200, Grand Rapids, Michigan 49546, and our telephone number is (616) 734-6099. For more information on our Sponsor, its website is www.redoakcapitalholdings.com. The information on, or otherwise accessible through, our Sponsor’s website does not constitute a part of this offering circular.

 

Outstanding Loans

 

On March 19, 2021, the Company executed a Commercial Loan Agreement as the lender providing a $1,730,000 senior secured loan (the “Willow Run Loan”) to Willow Run, L.L.C., a Kentucky limited liability company. Descriptions of the Willow Run Loan are incorporated by reference herein to that Current Report on Form 1-U filed with the SEC on March 25, 2021, located at:

  https://www.sec.gov/Archives/edgar/data/0001817069/000165495421003284/roc_1u.htm.

 

On March 26, 2021, the Company executed a Commercial Loan Agreement as the lender providing a $ 6,775,000 senior secured loan (the “Benning Loan”) to 4559 Benning Rd SE LLC, a District of Columbia limited liability company. Descriptions of the Benning Loan are incorporated by reference herein to that Current Report on Form 1-U filed with the SEC on April 1, 2021, located at:

https://www.sec.gov/Archives/edgar/data/0001817069/000165495421003786/redoakv_1u.htm.

 

On May 4, 2021, the Company executed a Commercial Loan Agreement as the lender providing a $9,628,000 senior secured loan (the “Wheeler Road Loan”) to 4303-4313 Wheeler RD SE LLC, a District of Columbia limited liability company. Descriptions of the Wheeler Road Loan are incorporated by reference herein to that Current Report on Form 1-U filed with the SEC on May 10, 2021, located at:

https://www.sec.gov/Archives/edgar/data/1817069/000165495421005335/redoakv_1u.htm

 

On July 23, 2021, the Company executed a Commercial Loan Agreement as the lender providing a $9,000,000 senior secured loan (the “Oaks Loan”) to KCSL, LLC, a Delaware limited liability company, and 3592 Procyon, LLC, a Delaware limited liability company. Descriptions of the Oak Loan are incorporated by reference herein to that Current Report on Form 1-U filed with the SEC on July 29, 2021, located at:

https://www.sec.gov/Archives/edgar/data/1817069/000165495421008288/rocfv_1u.htm

 

 

Our Sponsor and Management.

 

On April 21, 2021, our company’s previous sponsor, ROCG, completed an interest exchange (the “Exchange”) whereby our current sponsor, Red Oak Capital Holdings, LLC, acquired all of the equity interests in our Manager from ROCG (former 90% owner of our Manager) and Mr. Raymond Davis (former 10% owner of our Manager).  As consideration in the Exchange, each of ROCG and Mr. Davis received non-voting equity interests in our Sponsor.  Prior to the Exchange, ROCG was ROGP’s sole manager, and ROCG was managed by a board of managers appointed by Mr. Kevin Kennedy and Mr. Joseph Elias, the sole equity holders in ROCG. Our Sponsor’s sole manager is ROHM, and ROHM also holds all of the voting equity in our Sponsor.  ROHM’s board of managers is comprised of Mr. Gary Bechtel, Mr. Jason Anderson, Mr. Kevin Kennedy, Mr. Joseph Elias and Mr. Raymond Davis.  The ROHM board members also collectively own all of the voting equity in ROHM and have the exclusive right to vote in the election of the ROHM board members.  As a result of the Exchange, Messrs. Kennedy and Elias no longer have sole control of our company via their voting interests in ROCG.  However, all of the executive officers remain the same and the members of the ROHM board of managers are the same as the members of the ROCG board with the addition of Mr. Davis.  See “Board of Managers and Executive Officers” in this offering circular for more information.

 

Our Sponsor is a Grand Rapids, Michigan based commercial real estate finance company specializing in the acquisition, origination, processing, underwriting, operational management, and servicing of commercial real estate debt instruments. Combined, this incorporates over 50 years of experience in commercial loan originations, lending and analyses, regulatory compliance, and real estate portfolio management. Our Sponsor has significant experience in the marketing and origination of project transactions in which to properly and efficiently evaluate suitable investments for our Company.

 

Operating Agreement

 

Management and Membership

 

Our management is entrusted solely to our Manager, which is also our sole member. Only our Manager, as our sole member, has the right to remove itself as our manager.

 

Under our operating agreement, our Manager, as the manager and sole member, has complete and absolute control over us.

 

Indemnification

 

Our operating agreement limits the liability of our Manager. See “Limitations on Liability” in this offering circular for more information.

 

 

 

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INVESTMENT POLICIES OF OUR COMPANY

 

Investment Strategy

 

Our investment approach is to originate short-term, high-yielding senior loans collateralized by income producing commercial real estate assets to established and qualified real estate investors and operators at reasonable loan-to-value ratios which will be vetted through our underwriting process. We intend to focus on transactions that meet our underwriting risk parameters, but do not meet the typical conforming standards of traditional banks and lenders. We intend to follow the guidelines below while originating commercial loans:

 

Lien Position: We intend to originate loans where we will have a first/senior lien position. We do not intend to make junior or mezzanine loans. Notwithstanding such senior lien position, we may hold participation interests in loans where the other participant(s) have priority in the right of payment of principal and interest.

 

Concentration: We intend for senior secured commercial real estate loans originated by us to generally range between $1,000,000 and $10,000,000. We will consider loans larger than $10,000,000 in a “club” or co-invest structure. We expect no loan or co-investment will exceed 20% of our capital, unless we are in our first 24 months of active operations or our Manager determines that such an investment is in our best interest.

 

Assets Classes: We intend to originate loans secured by income producing commercial properties including, but not limited to, multifamily, office, retail, hospitality, industrial, mixed-use, self-storage, manufactured housing and or any combination thereof. We do not intend to originate loans to special purpose or raw land classes of real estate without an exception to our credit policy.

 

Geography: We intend to originate loans generally secured by assets located in the top 200 Metropolitan Statistical Areas, or “MSAs,” within the United States, which is defined as one or more adjacent counties that have at least one urban core area of at least a population of 75,000, plus adjacent territory that has a high degree of social and economic integration as measured by commuting ties. We do not intend to originate loans secured by assets in regions classified as agricultural, rural, or outside of the U.S. or its immediate territories.

 

Natural Disasters: We do not intend to originate loans to known geographic regions that have been recently hit by a natural disaster.

 

Zoning: We intend to originate loans in which the underlying collateral has approval or maintains a zoning status of conforming or conforming with variance.

 

Borrower Structure and Guarantee: We intend for the borrower of record to be a fully registered, active corporation or limited liability company. We do not intend to lend to individuals. We intend for full or partial recourse from both the entity and its key principals to be standard for each loan.

 

We intend to record a security interest in all real property used as collateral for the loan, as well as a UCC-1 filing on all chattel and other borrower assets.

 

Loan-to-Value and Loan-to-Cost: We do not intend for the loan-to-value, or “LTV,” of the assets securing our loans to exceed 75% of the “stabilized” value in the case of a rehabilitation or sale price in the case of a purchase transaction. On occasion we may elect to exceed the 75% LTV if we believe the transaction circumstances warrant the additional risk and the Fund is properly compensated for this additional risk. We do not intend for the loan-to-cost, or “LTC,” to exceed 100% in the case of a rehabilitation project. The LTC is still subject to the maximum LTV of 75% as mentioned previously.

 

Term: We intend that the loans originated or purchased by the Company will have terms of 12-36 months with options for extension based on the transaction structure, which trigger additional borrower fees and higher interest rates.

 

Loan Fees & Interest Income: We intend to use all loan fees, origination fees, interest income and extension fees payable to us as a means to pay the debt service obligations on the Bonds. For clarity, the referenced fees and interest will not be stripped or taken by the Sponsor; rather they will be used to service debt obligations of the Company.

 

Interest Reserves: We intend for loans with insufficient current cash flow to include an interest reserve account of up to the entire term of the loan based on the projected income produced by the property.

 

 

Investment Objectives

 

The Company intends to originate senior secured short-term, high-yielding loans secured by a diversified set of income producing commercial real estate assets. We intend to target a total return equal to or in excess of 7.00% and 7.50% on a cumulative, non-compounding basis, to holders of A Bonds and A R-Bonds, respectively, by leveraging the opportunities in the following areas:

 

Experienced Management Team

 

The principals of our Sponsor and its affiliates have extensive transaction analysis and structuring experience, in fact when combined, they have over 30 years of experience as a licensed lender and over 130 years of cumulative commercial real estate lending, management and workout experience, with in excess of $30B of funded loans. There is a dedicated staff of trained originators, processors, underwriters and analysts who have field experience in the origination, closing and servicing of loans as well as implementing tactical strategies at the asset level to create maximum value.

 

Sourcing Deals

 

Our Sponsor is well known in the industry, and has cultivated extensive relationships with other lenders, mortgage bankers/brokers, and borrowers by establishing themselves as a key source for funding real estate investments which allows us to have a “first look” at these opportunities before transactions are brought to the open market. Our Sponsor takes an active role in maintaining its status as a key player through numerous types of outreach including email blasts, social media posting, conference attendance and monthly conference calls with thousands of commercial real estate broker attendees where the principals are able to showcase the type of transactions for which they are currently seeking. The network is constantly being expanded as the Company expands into other key markets and asset classes.

 

As detailed above, our Sponsor has an extensive network of contacts with expansive market reach to source meaningful deal flow. The principals of our Sponsor have an intimate knowledge of our market. Transactions that are generated by our origination personnel are initially vetted based on location, asset type, collateral value, and asset quality. Transactions that qualify then move through the credit process with strict adherence to multiple reviews in every phase of the process, including initial evaluation, due diligence, underwriting and closing. At the initial evaluation, exit strategies are modeled, discussed and defined with the borrowers and potential take out or refinance partners.

 

Cutting Edge Technology

 

We have a database of active and qualified commercial brokers throughout the U.S. Through existing relationships ranging from real estate educators to traditional lenders, we, through our Sponsor, have thousands of deal flow sources. Additionally, due to the demands of this network, our Sponsor utilizes a cutting-edge CRM database and developed a technology platform that assists in seeing increased deal flow which provides the ability be more selective of the transactions it pursues. These technologies substantially reduce the time and manual demands of our underwriting process.

 

 

Portfolio Management

 

Oversight

 

To properly manage risk and deploy capital, our Sponsor has created a multi-pronged approach to systematically reduce risk for our investors. One of these prongs is the ROCX Platform®, which will allow us to streamline the manual and time-consuming parts of the transaction analysis and underwriting process. With the help of this platform, we are able to scale to a higher volume of transactions without sacrificing the ability and human expertise necessary to ensure deal quality. Below is an illustration of the process that each borrower must go through in order to be approved for a loan from us.

 

Decision Tree

 

 

Our Sponsor performs a thorough analysis of potential loan opportunities through proprietary, institutional quality sizing and underwriting models utilizing industry standard benchmarks to determine the viability of these opportunities and their ability to generate appropriate returns for the Fund and the ability to be repaid on the successful completion of the borrower’s business plan.

 

 

Exceptions Documentation

 

For a potential loan opportunity to move through the application process, we require full documentation according to standards set on an asset class level. Approval is required from the lead underwriter for exceptions to this policy, and any such exception must be fully disclosed to and approved by the Investment Committee.

 

Aggregate Exception Tracking and Reporting

 

We will be tracking the aggregate level of exceptions which helps detect shifts in the risk characteristics of loan portfolios. When viewed on a case-by-case basis, underwriting exceptions may not appear to increase risk significantly, as exceptions are often well mitigated shortly after the transaction has taken place. However, when aggregated, even well mitigated exceptions can increase portfolio risk significantly. Aggregate exceptions will be analyzed regularly and reported to the Investment Committee quarterly. These analyses and reports will allow the Investment Committee to evaluate underwriting practices and assess the level of compliance.

 

Underwriting

 

We will employ a “bottom-up” approach to focus on the fundamentals of both the borrower and the underlying real estate in order to assess the quality of the overall deal. This approach allows us to seek investments where borrowers can capitalize on the expertise of our Sponsor and its principals in the market with an experienced understanding of the asset and proposed opportunities. Through the use of an institutional quality credit approach and modeling, the underwriter is able to concentrate on the higher risk areas of a transaction and propose the appropriate risk mitigation strategies.

 

Investment Committee

 

We have an Investment Committee composed of three members who are nominated, appointed, and can be removed by the Manager. The Investment Committee’s members are Mr. Gary Bechtel, Mr. Joseph Elias, and Mr. Jason Anderson. An Investment Committee Memorandum is created by an unaffiliated underwriter detailing the loan request, its metrics, the strengths, weakness and mitigants of the loan as well as the underwriter’s recommendations and submits to ICM for its review and approval. All loan origination decisions require the unanimous approval of the Investment Committee members.

 

Concentration Risk

 

Managing the loan portfolio includes reviewing any concentrations of risk. By segmenting the portfolio into groups with similar characteristics, management can evaluate them while considering the risk tolerances and develop strategies for diversifying the portfolio. Our Sponsor and its management team monitors these risk concentrations in the form of the geographic area, asset class, loan type and loan-to-value ranges. The Investment Committee monitors these risks by reviewing the segments quarterly and when approving newly originated loans.

 

Collections and Workout

 

An important part of risk mitigation and loss prevention is having a systemized monitoring process for the continual evaluation and analysis of asset performance and stability. Our Manager takes a proactive approach in this area by requiring the submission and review of financial reports of each asset from a borrower on a monthly basis. This allows for early intervention and develops a cooperative effort with borrowers to help avert and address potential financial difficulties. Nonetheless, there may be occasions where an asset is not performing as expected.

 

Short-term delinquencies (less than 30 days) on an asset are managed directly by the servicing department. Should an asset become 60 days delinquent, it is then placed into technical default status and referred to the collections department for review and implementation of loss prevention measures, which may include utilization of borrower reserves to maintain asset performance, attachment of financial accounts and income, and if necessary, management oversight or operational intervention of the underlying collateral.

 

Any asset in default status is referred to management for instituting a workout plan with the borrower in an effort to quickly analyze options, mitigate loss, and avoid foreclosure action. Should workout provisions fail, then through its legal team, the full protections afforded to us pursuant to the loan documents will be enforced, up to and including the foreclosure and sale of the underlying collateral and other assets, as necessary. All debt instruments contain provisions which preclude the borrower from filing for bankruptcy protection prior to us exercising our rights under the terms of default.

 

 

Investment Allocation Policy

 

In addition to the Company, the Sponsor sponsors and manages, Red Oak Capital Fund II, LLC, Red Oak Capital Fund III, LLC, Red Oak Capital Fund IV, LLC, Red Oak Capital Fund V, LLC, Red Oak Income Opportunity Fund, LLC and Red Oak Capital Special Institutional Fund, LLC (collectively, the “Existing Funds”), and is considering sponsoring several additional investment vehicles (collectively with the Existing Funds and the Company, the “Funds”). Each of the Funds has the same or a similar business model as the other Funds.

 

The Sponsor has established an Investment Committee comprised of three members, Mr. Gary Bechtel, Mr. Joseph Elias, and Mr. Jason Anderson. The Investment Committee has developed procedures to resolve conflicts of interest in the allocation of investments amongst the Sponsor’s Funds, which have similar business models to the Company. These procedures will be subject to review and revision by the Investment Committee to insure their effectiveness.

 

In the event a loan opportunity becomes available which is suitable for multiple Funds, assuming those Funds have sufficient available money available for investment, the Fund which has had the greatest number of days outstanding of net deployable capital shall first be offered the loan opportunity.

 

In determining whether or not the loan would be suitable for more than one Fund, the Investment Committee will examine a variety of factors including, but not limited to:

 

 

The Sponsor shall require the Investment Committee to document each investment allocation decision simultaneous with the approval of each investment opportunity, before deployment of capital, including the rationale for allocations, in a manner that evidences that certain offerings did not receive preferential treatment regarding limited capacity investment opportunities.

 

Generally, the Funds sponsored by the Sponsor will not be allocated participations in, or co-invest in, loans, subject to one or more participation funds, whose business model will be to solely acquire minority participation interests in commercial real estate loans made by other funds sponsored by the Sponsor (“Participation Funds”). When a lending opportunity is offered to a fund which is not a Participation Fund, it will generally be offered the opportunity to provide the entirety of the loan, subject to participation from a Participation Fund, at the discretion of the Investment Committee. In extremely limited circumstances, multiple funds sponsored by the Sponsor, which are not Participation Funds, may be offered an opportunity to participate in a loan, but only after consultation with legal counsel in consideration of applicable issues of corporate and securities law, among others.

 

Each Participation Fund shall establish its own investment committee (a “Participation Fund IC”) separate and apart from the Sponsor’s Investment Committee. A Participation Fund IC shall include at least three individuals including at least two who are not members of the Investment Committee.

 

Following the allocation of a loan opportunity to a Fund in accordance with the procedures above, the Investment Committee shall determine whether to seek a participation from a Participation Fund for such opportunity. It is anticipated that only one Participation Fund will be permitted to participate in any given loan opportunity. Following determination by the Investment Committee to seek participation, the Investment Committee shall present such participation opportunity to the applicable Participation Fund’s Participation Fund IC. The Participation Fund IC shall, in its sole discretion, determine whether and the extent to which the Participation Fund shall participate in the presented opportunity. The Participation Fund IC shall review and document its decision regarding each potential participation in a manner reflecting independent underwriting and analysis of the opportunity from that of the Investment Committee.

 

 

 

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

 

The following discussion is a summary of certain material U.S. federal income tax consequences relevant to the purchase, ownership, and disposition of the Bonds, but does not purport to be a complete analysis of all potential tax consequences. The discussion is based upon the Code, current, temporary, and proposed U.S. Treasury regulations issued under the Code, or collectively the Treasury Regulations, the legislative history of the Code, IRS rulings, pronouncements, interpretations and practices, and judicial decisions now in effect, all of which are subject to change at any time. Any such change may be applied retroactively in a manner that could adversely affect a Bondholder. This discussion does not address all of the U.S. federal income tax consequences that may be relevant to a holder in light of such Bondholder’s particular circumstances or to Bondholders subject to special rules, including, without limitation:

 

 

In addition, this discussion is limited to persons that purchase the Bonds in this offering for cash and that hold the Bonds as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address the effect of any applicable state, local, non-U.S., or other tax laws, including gift and estate tax laws.

 

As used herein, “U.S. Holder” means a beneficial owner of the Bonds that is, for U.S. federal income tax purposes:

 

If an entity treated as a partnership for U.S. federal income tax purposes holds the Bonds, the tax treatment of an owner of the entity generally will depend upon the status of the particular owner and the activities of the entity. If you are an owner of an entity treated as a partnership for U.S. federal income tax purposes, you should consult your tax advisor regarding the tax consequences of the purchase, ownership, and disposition of the Bonds.

 

We have not sought and will not seek any rulings from the IRS with respect to the matters discussed below. There can be no assurance that the IRS will not take a different position concerning the tax consequences of the purchase, ownership, or disposition of the Bonds or that any such position would not be sustained.

 

THIS SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE TAX ADVICE. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR SITUATIONS, POTENTIAL CHANGES IN APPLICABLE TAX LAWS AND THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, INCLUDING GIFT AND ESTATE TAX LAWS, AND ANY TAX TREATIES.

 

U.S. Holders

 

Interest

 

U.S. Holder generally will be required to recognize and include in gross income any stated interest as ordinary income at the time it is paid or accrued on the Bonds in accordance with such holder’s method of accounting for U.S. federal income tax purposes.

 

Sale or Other Taxable Disposition of the Bonds

 

A U.S. Holder will recognize gain or loss on the sale, exchange, redemption (including a partial redemption), retirement or other taxable disposition of a Bond equal to the difference between the sum of the cash and the fair market value of any property received in exchange therefore (less a portion allocable to any accrued and unpaid stated interest, which generally will be taxable as ordinary income if not previously included in such holder’s income) and the U.S. Holder’s adjusted tax basis in the Bond. A U.S. Holder’s adjusted tax basis in a Bond (or a portion thereof) generally will be the U.S. Holder’s cost therefore decreased by any payment on the Bond other than a payment of qualified stated interest. This gain or loss will generally constitute capital gain or loss. In the case of a non-corporate U.S. Holder, including an individual, if the Bond has been held for more than one year, such capital gain may be subject to reduced federal income tax rates. The deductibility of capital losses is subject to certain limitations.

 

 

Medicare Tax

 

Certain individuals, trusts and estates are subject to a Medicare tax of 3.8% on the lesser of (i) “net investment income”, or (ii) the excess of modified adjusted gross income over a threshold amount. Net investment income generally includes interest income and net gains from the disposition of Bonds unless such interest payments or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). U.S. Holders are encouraged to consult with their tax advisors regarding the possible implications of the Medicare tax on their ownership and disposition of Bonds in light of their individual circumstances.

 

Information Reporting and Backup Withholding

 

A U.S. Holder may be subject to information reporting and backup withholding when such holder receives interest and principal payments on the Bonds or proceeds upon the sale or other disposition of such Bonds (including a redemption or retirement of the Bonds). Certain holders (including, among others, corporations, and certain tax-exempt organizations) generally are not subject to information reporting or backup withholding. A U.S. Holder will be subject to backup withholding if such holder is not otherwise exempt and:

 

 

A U.S. Holder should consult its tax advisor regarding its qualification for an exemption from backup withholding and the procedures for obtaining such an exemption, if applicable. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability or may be refunded, provided the required information is furnished in a timely manner to the IRS.

 

Non-U.S. Holders are encouraged to consult their tax advisors.

 

 

 

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ERISA CONSIDERATIONS

 

The following is a summary of material considerations arising under ERISA and the prohibited transaction provisions of the Code that may be relevant to a prospective investor, including plans and arrangements subject to the fiduciary rules of ERISA and plans or entities that hold assets of such plans (“ERISA Plans”); plans and accounts that are not subject to ERISA but are subject to the prohibited transaction rules of Section 4975 of the Code, including IRAs, Keogh plans, and medical savings accounts (together with ERISA Plans, “Benefit Plans” or “Benefit Plan Investors”); and governmental plans, church plans, and foreign plans that are exempt from ERISA and the prohibited transaction provisions of the Code but that may be subject to state law or other requirements, which we refer to as Other Plans. This discussion does not address all the aspects of ERISA, the Code or other laws that may be applicable to a Benefit Plan or Other Plan, in light of their particular circumstances.

 

In considering whether to invest a portion of the assets of a Benefit Plan or Other Plan, fiduciaries should consider, among other things, whether the investment:

 

 

ERISA and the corresponding provisions of the Code prohibit a wide range of transactions involving the assets of the Benefit Plan and persons who have specified relationships to the Benefit Plan, who are “parties in interest” within the meaning of ERISA and, “disqualified persons” within the meaning of the Code. Thus, a designated plan fiduciary of a Benefit Plan considering an investment in our shares should also consider whether the acquisition or the continued holding of our shares might constitute or give rise to a prohibited transaction. Fiduciaries of Other Plans should satisfy themselves that the investment is in accord with applicable law.

 

Section 3(42) of ERISA and regulations issued by the Department of Labor, or DOL, provide guidance on the definition of plan assets under ERISA. These regulations also apply under the Code for purposes of the prohibited transaction rules. Under the regulations, if a plan acquires an equity interest in an entity which is neither a “publicly-offered security” nor a security issued by an investment company registered under the Investment Company Act, the plan’s assets would include both the equity interest and an undivided interest in each of the entity’s underlying assets unless an exception from the plan asset regulations applies

 

We do not believe the DOL’s plan assets guidelines apply to our Bonds or our company because our Bonds are debt securities and not equity interests in us.

 

If the underlying assets of our company were treated by the Department of Labor as “plan assets,” the management of our company would be treated as fiduciaries with respect to Benefit Plan Bondholders and the prohibited transaction restrictions of ERISA and the Code could apply to transactions involving our assets and transactions with “parties in interest” (as defined in ERISA) or “disqualified persons” (as defined in Section 4975 of the Code) with respect to Benefit Plan Bondholders. If the underlying assets of our company were treated as “plan assets,” an investment in our company also might constitute an improper delegation of fiduciary responsibility to our company under ERISA and expose the ERISA Plan fiduciary to co-fiduciary liability under ERISA and might result in an impermissible commingling of plan assets with other property.

 

If a prohibited transaction were to occur, an excise tax equal to 15% of the amount involved would be imposed under the Code, with an additional 100% excise tax if the prohibited transaction is not “corrected.” Such taxes will be imposed on any disqualified person who participates in the prohibited transaction. In addition, our Manager, and possibly other fiduciaries of Benefit Plan Bondholders subject to ERISA who permitted such prohibited transaction to occur or who otherwise breached their fiduciary responsibilities, could be required to restore to the plan any losses suffered by the ERISA Plan or any profits realized by these fiduciaries as a result of the transaction or beach. With respect to an IRA or similar account that invests in our company, the occurrence of a prohibited transaction involving the individual who established the IRA, or his or her beneficiary, would cause the IRA to lose its tax-exempt status. In that event, the IRA or other account owner generally would be taxed on the fair market value of all the assets in the account as of the first day of the owner’s taxable year in which the prohibited transaction occurred.

 

 

 

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DESCRIPTION OF BONDS

 

This description sets forth certain terms of the Bonds that we are offering pursuant to this offering circular. We refer you to the indenture for a full disclosure of all such terms, as well as any other capitalized terms used in this offering circular for which no definition is provided. As of the date of this Offering Circular, the Company has issued and sold $36,703,000 in principal amount of Bonds, consisting of $34,258,000 and $2,445,000 of A Bonds and A R-Bonds, respectively. The Company has completed sales of the A Bonds and A R-Bonds.

 

Because this section is a summary, it does not describe every aspect of the Bonds or the indenture. We urge you to read the indenture because that document and not this summary defines your rights as a Bondholders. Please review a copy of the indenture. The indenture is filed as an exhibit to the offering statement, of which this offering circular is a part, at www.sec.gov. You may also obtain a copy of the indenture from us without charge. See “Where You Can Find More Information” for more information. You may also review the indenture at the trustee’s corporate trust office at 928 Grand Blvd, 12th Floor, Kansas City, Missouri 64106.

 

Ranking

 

The Bonds are our direct, senior secured obligations and will rank:

 

Interest and Contingent Interest

 

The A Bonds and B Bonds will bear interest at a rate equal to 7.50% per year, and the A R-Bonds and B R-Bonds will bear interest at a rate equal to 8.00% per year, in each case payable to the record holders of the Bonds quarterly in arrears on January 25th, April 25th, July 25th, and October 25th of each year.

 

Interest will accrue and be paid on the basis of a 360-day year consisting of twelve 30-day months. Interest on each Bond will accrue and be cumulative from the end of the most recent interest period for which interest has been paid on such Bond, or if no interest has paid, from the date of issuance.

 

Upon maturity or renewal, we will make a payment to the Bondholders as described herein, or the Contingent Interest Payment. The Contingent Interest Payment will be equal to the Spread times 20.0%.

 

“Spread” for a Bond shall equal the greater of (i) zero or (ii) such Bond’s Allocable Share of Revenue less such Bond’s Allocable Share of Expenses, each calculated for the period beginning with the date of issuance or the last Contingent Interest Payment for such Bond, whichever is more recent.

 

“Allocable Share of Revenue” for each Bond shall equal the total revenue from investments divided by the total number of outstanding Bonds.

 

“Allocable Share of Expenses” for each Bond shall equal Series Specific Expenses plus Expenses.

 

“Series Specific Expenses” shall be equal to offering expenses, asset management fees and interest expenses specific to A Bonds, A R-Bonds, B Bonds or B R-Bonds as applicable, divided by the total number of outstanding A Bonds, A R-Bonds, B Bonds or B R-Bonds, respectively.

 

“Expenses” shall be equal to offering expenses and disposition fees allocable to all Bonds divided by the total number of outstanding Bonds.

 

 

While we intend to pay Bondholders the Contingent Interest Payment, there is no guaranty that we will do so. As the Contingent Interest Payment is determined by multiplying the Spread by a percentage, the Spread must be positive for the Contingent Interest Payment to be paid. The Contingent Interest Payment is dependent on revenue from our investments exceeding the expenses deducted to calculate the Spread. If the expenses exceed the revenue from our investments, the Bondholder will not receive a Contingent Interest Payment.

 

Manner of Offering

 

The offering is being made on a best-efforts basis through our managing broker-dealer and selling group members. Neither our managing broker-dealer, nor any selling group member, will be required to purchase any of the Bonds.

 

Maturity and Renewal

 

The A Bonds and A R-Bonds will mature on December 31, 2026. The B Bonds and B R-Bonds will mature on December 31, 2027. We will provide notice of maturity within 180 days prior to maturity. The Bondholders may respond to such notice and elect to have its Bonds redeemed within 150 days prior to maturity. If a Bondholder does not elect to have its Bonds redeemed in its response to the notice and if the Company does not otherwise redeem the Bonds as otherwise described herein, immediately before maturity, the Bonds will be automatically renewed for five years from the maturity date and at the same interest rate. If a Bondholder elects to be redeemed, we may, at our option, extend the maturity of the Bonds held by such Bondholder for an additional six months to facilitate our redemption of those Bonds by providing written notice of such extension after the election by the Bondholder to be redeemed and at least 60 days prior to the maturity date.

 

For any Bonds offered hereby that mature after the three-year anniversary of the commencement of this offering, we expect that the renewal of such Bonds may require us to file a new offering statement. In such a case, the new offering statement must be declared qualified before we will be able to renew your Bond. In this event, if the new offering statement has not yet been filed or become effective, we will extend your period to elect to be redeemed until ten days following the date of our notice to you that the new offering statement has become effective, which notice will include a new offering circular.

 

THE REQUIRED INTEREST PAYMENTS AND PRINCIPAL PAYMENT ARE NOT A GUARANTY OF ANY RETURN TO YOU NOR ARE THEY A GUARANTY OF THE RETURN OF YOUR INVESTED CAPITAL. While our company is required to make interest payments and principal payment as described in the indenture and above, we do not intend to establish a sinking fund to fund such payments. Therefore, our ability to honor these obligations 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 these obligations, we may be forced to sell 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. If we cannot fund the above payments, Bondholders will have claims against us with respect to such violation.

 

Bondholder Redemption

 

The Bonds will be redeemable at the election of the Bondholder beginning January 1, 2024 (in the case of the A Bonds and A R-Bonds) or January 1, 2025 (in the case of the B Bonds and B R-Bonds). In order to be redeemed, the Bondholder must provide written notice to us at our principal place of business. 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: (i) $880 plus any accrued but unpaid interest on the Bond if the notice is received on or after January 1, 2024 and on or before January 1, 2026 (in the case of the A Bonds and A R-Bonds) or on or after January 1, 2025 and on or before January 1, 2027 (in the case of the B Bonds and B R-Bonds) and (ii) $900 plus any accrued but unpaid interest on the Bond if the notice is received on or after January 1, 2026 and before December 31, 2026 (in the case of the A Bonds and A R-Bonds) or on or after January 1, 2027 and before December 31, 2027 (in the case of the B Bonds and B R-Bonds). Our obligation to redeem Bonds in any given year pursuant to this Redemption is limited to 15% of the outstanding principal balance of the Bonds, in the aggregate, on January 1st of the applicable year. In addition, we have the right to reserve up to one-third of this 15% limit for Bonds redeemed as a result of a Bondholder’s right upon death, disability or bankruptcy which may reduce the number of Bonds to be redeemed pursuant to the Bondholder Redemption. Bond redemptions pursuant to the Bondholder Redemption will occur in the order that notices are received.

 

 

Redemption Upon Death, Disability or Bankruptcy

 

Within 60 days of the death, total permanent disability or bankruptcy of a Bondholder who is a natural person, the estate of such Bondholder, such Bondholder, or legal representative of such Bondholder may request that we repurchase, in whole but not in part and without penalty, the Bonds held by such Bondholder by delivering to us a written notice requesting such Bonds be redeemed. Any such request shall specify the particular event giving rise to the right of the holder to have his or her Bonds redeemed. If a Bond held jointly by natural persons who are legally married, then such request may be made by (i) the surviving Bondholder upon the death of the spouse, or (ii) the disabled or bankrupt Bondholder (or a legal representative) upon total permanent disability or bankruptcy of the spouse. In the event a Bond is held together by two or more natural persons that are not legally married, neither of these persons shall have the right to request that the Company repurchase such Bond unless each Bondholder has been affected by such an event.

 

Upon receipt of redemption request in the event of death, total permanent disability, or bankruptcy of a Bondholder, we will designate a date for the redemption of such Bonds, which date shall not be later than 120 days after we receive facts or certifications establishing to the reasonable satisfaction of the Company supporting the right to be redeemed. On the designated date, we will redeem such Bonds at a price per Bond that is equal to all accrued and unpaid interest, to but not including the date on which the Bonds are redeemed, plus any Contingent Interest Payment due to such Bondholder, plus the then outstanding principal amount of such Bond.

 

Optional Redemption

 

We may redeem the Bonds, in whole or in part, without penalty within 18 months of maturity. If the Bonds are renewed for an additional term, we may redeem the Bonds at any time during such renewal period. Any redemption of a Bond will be at a price equal to the then outstanding principal on the Bonds being redeemed, plus any accrued but unpaid interest on such Bonds, plus any Contingent Interest Payment due to such Bondholder. If we plan to redeem the Bonds, we are required to give notice of redemption not less than 5 days nor more than 60 days prior to any redemption date to each Bondholder’s address appearing in the securities register maintained by the trustee. In the event we elect to redeem less than all of the Bonds, the particular Bonds to be redeemed will be selected by the trustee by such method as the trustee shall deem fair and appropriate.

 

Merger, Consolidation or Sale

 

We may consolidate or merge with or into any other corporation, and we may sell, lease, or convey all or substantially all of our assets to any corporation, provided that the successor entity, if other than us:

 

 

and provided further that no event of default under the indenture shall have occurred and be continuing.

 

Except as described below under “- Certain Covenants – Offer to Repurchase Upon a Change of Control Repurchase Event,” the indenture does not provide for any right of acceleration in the event of a consolidation, merger, sale of all or substantially all of the assets, recapitalization or change in our stock ownership. In addition, the indenture does not contain any provision which would protect the Bondholders against a sudden and dramatic decline in credit quality resulting from takeovers, recapitalizations, or similar restructurings.

 

 

Certain Covenants

 

Offer to Repurchase Upon a Change of Control Repurchase Event

 

“Change of Control Repurchase Event” means (A) the acquisition by any person, including any syndicate or group deemed to be a “person” under Section 13(d)(3) of the Exchange Act, of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of purchases, mergers or other acquisition transactions of the membership units entitling that person to exercise more than 50% of the total voting power of all the membership units entitled to vote in meetings of our company (except that such person will be deemed to have beneficial ownership of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition); and (B) following the closing of any transaction referred to in subsection (A), neither we nor the acquiring or surviving entity has a class of common securities (or American Depositary Receipts representing such securities) listed on the New York Stock Exchange, or the NYSE, the NYSE Amex Equities, or the NYSE Amex, or the Nasdaq Stock Market, or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE Amex or the Nasdaq Stock Market.

 

If a Change of Control Repurchase Event occurs, unless we have exercised our option to redeem the Bonds as described under “Description of Bonds - Optional Redemption,” we must offer to repurchase the Bonds at a price that is equal to all accrued and unpaid interest, to but not including the date on which the Bonds are redeemed, plus any Contingent Interest Payment due to such Bondholder, plus (i) 1.02 times the then outstanding principal amount of the Bonds if such Bonds are at least four years from maturity; (ii) 1.015 times the then outstanding principal amount of the Bonds if such Bonds are at least three years, but no more than four years, from maturity; (iii) 1.01 times the then outstanding principal amount of the Bonds if such Bonds are at least two years, but no more than three years, from maturity; and (iv) the then outstanding principal amount of the Bonds if no more than two years from maturity.

 

25% Debt Limit

 

The indenture will limit the indebtedness incurred by us, directly or indirectly (including the debt of our subsidiaries), to 25% of the outstanding principal of any loans or other assets owned, directly or indirectly, by us. For purposes of complying with the 25% limitation described above, the following are not considered indebtedness: (i) any principal owed on the Bonds, and (ii) any financing secured by a first mortgage lien on any real estate we acquire.

 

Bond Reserve

 

Our company is required to keep 3.75% of gross offering proceeds in a reserve account with the trustee until September 23, 2021, which is one (1) year following our initial closing date, which reserve may be used to pay our company’s bond service obligations during such time, and the remainder of which, if any, will be released to our company on or about September 23, 2021 if our company is otherwise in compliance with all terms of the Bonds.

 

Reports

 

We will furnish the following reports to each Bondholder:

 

Reporting Requirements under Tier II of Regulation A. We are required to comply with certain ongoing disclosure requirements under Rule 257 of Regulation A. We are required to file: an annual report with the SEC on Form 1-K; a semi-annual report with the SEC on Form 1-SA; current reports with the SEC on Form 1-U; and a notice under cover of Form 1-Z. The necessity to file current reports will be triggered by certain corporate events, similar to the ongoing reporting obligation faced by issuers under the Exchange Act, however the requirement to file a Form 1-U is expected to be triggered by significantly fewer corporate events than that of the Form 8-K. Parts I & II of Form 1-Z will be filed by us if and when we decide to and are no longer obligated to file and provide annual reports pursuant to the requirements of Regulation A.

 

 

Annual Reports. As soon as practicable, but in no event later than one hundred twenty (120) days after the close of our fiscal year, ending December 31st, our Manager will cause to be mailed or made available, by any reasonable means, to each Bondholder as of a date selected by our Manager, an annual report containing financial statements of our company for such fiscal year, presented in accordance with GAAP, including a balance sheet and statements of operations, Company equity and cash flows, with such statements having been audited by an accountant selected by our Manager. Our Manager shall be deemed to have made a report available to each Bondholder as required if it has either (i) filed such report with the SEC via its Electronic Data Gathering, Analysis and Retrieval (EDGAR) system and such report is publicly available on such system or (ii) made such report available on any website maintained by our company and available for viewing by the Bondholders.

 

Payment of Taxes and Other Claims

 

We will pay or discharge or cause to be paid or discharged, before the same shall become delinquent: (i) all taxes, assessments and governmental charges levied or imposed upon us or upon our income, profits or assets; and (ii) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon our property; provided, however, that we will not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings or for which we have set apart and maintain an adequate reserve.

 

Prior to this offering, there has been no public market for the Bonds. We may apply for quotation of the Bonds on an alternative trading system or over the counter market beginning after the final closing of this offering. However, even if the Bonds are listed or quoted, no assurance can be given as to (1) the likelihood that an active market for the Bonds will develop, (2) the liquidity of any such market, (3) the ability of Bondholders to sell the Bonds or (4) the prices that Bondholders may obtain for any of the Bonds. No prediction can be made as to the effect, if any, that future sales of the Bonds, or the availability of the Bonds for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of the Bonds, or the perception that such sales could occur, may adversely affect prevailing market prices of the Bonds. See “Risk Factors — Risks Related to the Bonds and the Offering.”

 

Event of Default

 

The following are events of default under the indenture with respect to the Bonds:

 

Book-entry and other indirect Bondholders should consult their banks or brokers for information on how to give notice or direction to or make a request of the trustee and how to declare or rescind an acceleration of maturity.

 

Annually, within 120 days following December 31st while the Bonds are outstanding, we will furnish to the trustee a written statement of certain of our officers certifying that to their knowledge we are in compliance with the indenture, or else specifying any event of default and the nature and status thereof. We will also deliver to the trustee a written notification of any uncured event of default within 30 days after we become aware of such uncured event of default.

 

 

Remedies if an Event of Default Occurs

 

Subject to any respective cure period, if an event of default occurs and is continuing, the trustee or the Bondholders of not less than a majority in aggregate principal amount of the Bonds may declare the principal thereof, premium, if any, and all unpaid interest thereon to be due and payable immediately. In such event, the trustee will have the right force us to sell any real property held by us or any subsidiary of ours that we have the unilateral right to cause it to sell its assets. We will be required to contribute the proceeds of any such sale to the repayment of the Bonds. With respect to subsidiaries for which we do not have the unilateral right to sell their assets (for example, if we acquire a property in a joint venture), the trustee has the right to force us to sell our equity in such subsidiary in order to repay the Bonds.

 

At any time after the trustee or the Bondholders have accelerated the repayment of the principal, premium, if any, and all unpaid interest on the Bonds, but before the trustee has obtained a judgment or decree for payment of money due, the Bondholders of a majority in aggregate principal amount of outstanding Bonds may rescind and annul that acceleration and its consequences, provided that all payments and/or deliveries due, other than those due as a result of acceleration, have been made and all events of default have been remedied or waived.

 

The Bondholders of a majority in principal amount of the outstanding Bonds may waive any default with respect to that series, except a default:

 

The Bondholders of a majority in principal amount of the outstanding Bonds may direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee with respect to the Bonds, provided that (i) such direction is not in conflict with any rule of law or the indenture, (ii) the trustee may take any other action deemed proper by the trustee that is not inconsistent with such direction and (iii) the trustee need not take any action that might involve it in personal liability or be unduly prejudicial to the Bondholders not joining therein. Subject to the provisions of the indenture relating to the duties of the trustee, before proceeding to exercise any right or power under the indenture at the direction of the Bondholders, the trustee is entitled to receive from those Bondholders security or indemnity satisfactory to the trustee against the costs, expenses, and liabilities which it might incur in complying with any direction.

 

A Bondholder will have the right to institute a proceeding with respect to the indenture or for any remedy under the indenture, if:

 

However, the Bondholder has the right, which is absolute and unconditional, to receive payment of the principal of and interest on such Bond on the respective due dates (or any redemption date, subject to certain discounts) and to institute suit for the enforcement of any such payment and such rights shall not be impaired without the consent of such Bondholder.

 

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LEGAL PROCEEDINGS

 

There are currently no legal proceedings involving our company.

 

 

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

Security Ownership of Certain Beneficial Owners (more than 10%)

 

Title of Class		Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership Acquirable		Percent of Class
LLC Interests		Gary Bechtel*		N/A		20.00%
LLC Interests		Joseph Elias*		N/A		20.00%
LLC Interests		Kevin Kennedy*		N/A		20.00%
LLC Interests		Raymond Davis*		N/A		20.00%
LLC Interests		Jason Anderson*		N/A		20.00%
LLC Interests		All Executives and Managers*		N/A		100.00%

 

*625 Kenmoor Avenue SE, Suite 200, Grand Rapids, Michigan 49546

 

 

 

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BOARD OF MANAGERS AND EXECUTIVE OFFICERS

 

The following table sets forth information on our board of managers and executive officers of ROHM. We are managed by our Manager, a wholly owned subsidiary of our Sponsor which is controlled by ROHM. Consequently, we do not have our own separate board of managers or executive officers.

 

Name		Age		Position with our Company		Manager/Officer Since
Gary Bechtel		63		Chief Executive Officer*		August 2020
Jason Anderson		36		Chief Financial Officer*		March 2020
Joseph Elias		42		Chief Operations Officer*		March 2020
Kevin P. Kennedy		55		Chief Sales and Distribution Officer*		March 2020
Raymond T. Davis		54		Chief Business Development Officer		March 2020

 

* Member of the board of managers of ROHM, which controls our Sponsor, which controls our company through our Manager.

 

Executive Officers and Managers

 

Set forth below is biographical information for our Sponsor’s executive officers.

 

Gary Bechtel, Chief Executive Officer and a member of the board of managers of the manager of our Sponsor. Gary previously served as President of Money360 and was responsible for developing and executing Money360’s expansion strategy. Gary also served on Money360’s Credit Committee and Board of Directors. Prior to joining the Money360, he was Chief Lending/Originations Officer of CU Business Partners, LLC, the nation’s largest credit union service organization (CUSO). Previously, Gary held management or production positions with Grubb & Ellis Company, Meridian Capital, Johnson Capital, FINOVA Realty Capital, Pacific Southwest Realty Services and Hometown Commercial Capital. Gary began his career with the Alison Company and over the past thirty-four years has been involved in all aspects of the commercial real estate finance industry, as a lender and as an intermediary, including the origination, underwriting, structuring, placement and closing of over $10B in commercial debt transactions, utilizing various debt structures which have included permanent, bridge, equity, mezzanine and construction on transactions of $1M to $250M. These transactions were placed with a variety of capital sources that included life companies, commercial banks, credit unions and equity and mezzanine funds, on property types that included office, retail, industrial, multifamily, hospitality, self-storage and manufactured housing. He is or has been a member of the Mortgage Bankers Association of America, California Mortgage Bankers Association, National Association of Industrial and Office Properties, and International Council of Shopping Centers. Gary has spoken at numerous industry events and written articles and has been regularly quoted in a number of regional and national publications.

 Jason Anderson is Chief Financial Officer and a member of the board of managers of the manager of our Sponsor. He focuses on the creation and development of operational and accounting expertise. Jason has more than 12 years in the financial services industry. Under his tenure as a Shareholder, Director and Executive Committee Member at Strait Capital from 2009 to 2017, assets under administration increased from $40 million to nearly $4 billion. His expertise lies in architecting and delivering a full-fledge institutional operating platform for hedge funds, private equity groups, and family offices. Jason launched over 100 alternative investment vehicles while at Strait Capital. Jason has also served as Director of Anderson Capital Consulting LLC since 2017. He began his career as a hedge fund analyst specializing in distressed securities, mergers and acquisitions, and capital arbitrage strategies. While a university student, he was hand-picked to serve as an analyst for the $1+ Billion SMU Endowment Fund. Jason graduated Magna Cum Laude with a Bachelor of Business Administration in Finance and a Bachelor of Science in Economics with Business Honors and Department Distinction from Southern Methodist University. Jason has earned the Chartered Financial Analyst (CFA) designation.

 Joseph Elias is Chief Operations Officer and a member of the board of managers of the manager of our Sponsor. He is responsible for platform development and enhancement. Previously, Joe cofounded Loquidity in 2014, a commercial real estate crowdfunding platform where he served as COO, in which capacity he served until 2018. Joe possesses more than 14 years of executive technology operations experience with Fortune 50 companies and 17 years of experience in real estate finance and development. He has spent his career leading corporate transformation and achieving significant operational efficiencies by successfully integrating new technologies. This expertise combined with an entrepreneurial spirit, inspired him to develop innovative scalable solutions to transform the real estate investing landscape through the ROCX Platform. Prior to that, Joe served as a senior director at Comcast from 2003 to 2014, managing a $1 billion portfolio program. He and his team worked to implement new technology realizing an estimated $300 million in cost savings. Prior to Comcast, he was a project manager at General Motors. Joe operated multiple successful family businesses, managing millions of dollars’ worth of real estate assets in major Midwestern markets. Joe earned his Bachelor of Science in Management Information Systems from Wayne State University and holds an MBA from the Ross School of Business at the University of Michigan.

 Kevin P. Kennedy is Chief Sales and Distribution Officer and a member of the board of managers of the manager of our Sponsor. He is responsible for capital acquisition, platform distribution and broker dealer relationships. Kevin has 25 years of experience in investment management. Most recently, he was with BlackRock Investment Management Corporation from 1990 to 2016, where he served as Managing Director and Divisional Sales Director prior to leaving. His team was responsible for selling and marketing BlackRock’s active, passive and alternative investments. Prior to BlackRock, Kevin was a Director and Vice President for Merrill Lynch Investment Managers covering the Midwest region. He began his career with Merrill Lynch in 1990 as a trading liaison. He was instrumental in helping both firms raise billions in sales, increase revenue, new offerings, platform enhancements and sales team development. Kevin holds a Series 7, 24, 63, 65 and 66 securities licenses. He received his Bachelor of Arts degree from Duquesne University, in Pittsburg, PA.  He completed his Certified Investment Management Analyst certification (CIMA) designation from Wharton Executive Education-University of Pennsylvania in 2007.

 Raymond T. Davis is Chief Business Development Officer and a member of the board of managers of the manager of our Sponsor. Ray is responsible for the company’s long-term business strategy, including supporting our lending product development, and leading capital strategy, which includes concurrently developing strategic offerings with investment partners amongst the independent broker dealer community, family offices and pension funds. Ray has more than 20 years of management experience. Since 2014, Ray has focused is operational and strategic skills on implementing policy, process and operational enhancements for various investment funds and vehicles distributed in the independent broker dealer community. Ray has served both private companies and registered alternative investment funds in various senior roles. Ray attended Wayne State University.

 

Track Record of our Sponsor

 

The Sponsor has sponsored three prior public programs, Red Oak Capital Fund II, LLC, or ROCF II, Red Oak Capital Fund III, LLC, or ROCF III, and Red Oak Capital Fund IV, LLC, or ROCF IV.

 

Investors should not consider the information below relating to the financial performance of ROCF II, ROCF III and ROCF IV to be a complete representation of the historical financial performance of these entities.  There are factors other than those included herein that investors should consider when reviewing the prior performance of these entities such as loan loss reserves that are recorded in the financial statements of ROCF II and ROCF III.  The Sponsor strongly encourages any investor to review the public filings made by each of these entities in conjunction with reviewing the information below.  These public filings may be found at the SEC's website as http://www.sec.gov. 

 

ROCF II commenced offering up to $50 million of bonds pursuant to an offering statement qualified with the SEC on September 4, 2018. The final closing in ROCF II’s offering occurred on August 1, 2019, with all $50 million of bonds being sold. ROCF II sold bonds in two series, one maturing on August 1, 2021 (“ROCF II Series A”) and the second maturing on August 1, 2024 (“ROCF II Series B”). In addition, each ROCF II A Bond will renew automatically for another two-year term and each ROCF II Series B Bond will renew automatically for another five-year term, at their respective maturities indefinitely, unless otherwise elected by the bondholder or ROCF II. As such, ROCF II has an indefinite life with no global liquidity event expected. Each successive maturity date should be viewed as a periodic liquidity event and the first such event has not yet been reached.

 

As of December 31, 2020, ROCF II issued approximately $3.1 million and $46.9 million of ROCF II Series A and ROCF II Series B, respectively. ROCF II had incurred approximately $4.8 million of debt issuance costs from the offering, of which $63,000 and $3,163,000 were incurred as commissions for ROCF II Series A and ROCF II Series B issuances, respectively.

 

ROCF II is managed by the Manager, an affiliate of our Sponsor, and pays an annual management fee to the Manager which is based on an annual rate of 2.00% of the gross principal outstanding of ROCF II A Bondholders and 1.75% of gross principal outstanding of ROCF II Series B bondholders. Through December 31, 2020, approximately $1,500,000 of management fees had been earned by the Manager.

 

ROCF II pays an acquisition fee to the Manager which is calculated as 0.50% of the gross mortgage loans receivable, inclusive of any closing costs. As of December 31, 2020, approximately $241,000 of acquisition fees had been earned by the Manager.

 

ROCF II pays organization fees to the Manager which are calculated as 2.00% of the gross proceeds of the sale of both ROCF II Series A and ROCF II Series B. As of December 31, 2020, approximately $1,000,000 of organization fees had been earned by the Manager.

 

As of December 31, 2020, net proceeds to ROCF II after debt issuance costs, organization and offering costs, acquisition fees, and management fees were approximately $43.4 million.

 

ROCF II held approximately $42.1 million of gross mortgage loans receivable as of December 31, 2020. This consisted of eleven mortgage loans where the interest rate ranged between 10% and 18% (averaging 15%) and where the maturities ranged from July 30, 2020 to November 6, 2021, based on twelve-month terms with two optional six-month extensions.

 

ROCF II has made all interest payments on its outstanding Bonds timely to the paying agent in accordance with the terms of ROCF II’s indenture and outstanding Bonds.

 

 

ROCF III commenced offering up to $50 million of bonds pursuant to an offering statement qualified with the SEC on September 18, 2019. The initial closing in ROCF III’s offering occurred on September 27, 2019. The final closing in ROCF III’s offering occurred on December 23, 2019, with all $50 million of bonds being sold. ROCF III sold bonds in two series, one maturing on December 31, 2022 (“ROCF III Series A”) and the second maturing on June 30, 2026 (“ROCF III Series B”). As with ROCF II, each ROCF III A Bond will renew automatically for another two-year term and each ROCF III Series B Bond will renew automatically for another five-year term, at their respective maturities indefinitely, unless otherwise elected by the bondholder or ROCF III. As such, ROCF III also has an indefinite life with no global liquidity event expected. Each successive maturity date should be viewed as a periodic liquidity event and the first such event has not yet been reached.

 

As of December 31, 2020, ROCF III issued approximately $4.4 million and $45.6 million of ROCF III Series A and ROCF III Series B, respectively. ROCF III had incurred approximately $4.5 million of debt issuance costs from the offering, of which $86,000 and $2,965,000 were incurred as commissions for ROCF III Series A and ROCF III Series B issuances, respectively.

 

ROCF III is managed by the Manager, an affiliate of our Sponsor, and pays an annual management fee to the Manager which is based on an annual rate of 1.75% of gross principal outstanding of all bonds. Through December 31, 2020, approximately $1,000,000 of management fees had been earned by the Manager.

 

ROCF III pays an acquisition fee to the Manager which is calculated as 0.50% of the gross mortgage loans receivable, inclusive of any closing costs. As of December 31, 2020, approximately $222,000 of acquisition fees had been earned by the Manager.

 

ROCF III pays organization fees to the Manager which are calculated as 2.00% of the gross proceeds of the sale of all bonds. As of December 31, 2020, approximately $1,000,000 of organization fees had been earned by the Manager.

 

As of December 31, 2020, net proceeds to ROCF III after debt issuance costs, organization and offering costs, acquisition fees, and management fees were approximately $44.2 million.

 

ROCF III held approximately $42.6 million of gross mortgage loans receivable as of December 31, 2020. This consisted of ten mortgage loans where the ranged between 11% and 17% (averaging 14%) and where the maturities ranged from February 28, 2021 to June 30, 2021, based on twelve-month terms with two optional six-month extensions.

 

ROCF III has made all interest payments on its outstanding Bonds timely to the paying agent in accordance with the terms of ROCF III’s indenture and outstanding Bonds.

 

ROCF IV commenced offering up to $50 million of bonds pursuant to an offering statement qualified with the SEC on January 29, 2020. The initial closing in ROCF IV’s offering occurred on February 21, 2020. The final closing in ROCF IV’s offering occurred on August 20, 2020, with all $50 million of bonds being sold.. ROCF IV sold bonds in four series, two maturing on June 30, 2023 (“ROCF IV Series A”) and the other two maturing on June 30, 2026 (“ROCF IV Series B”). As with ROCF II and ROCF III, each ROCF IV A Bond will renew automatically for another two-year term and each ROCF IV Series B Bond will renew automatically for another five-year term, at their respective maturities indefinitely, unless otherwise elected by the bondholder or ROCF IV. As such, ROCF IV also has an indefinite life with no global liquidity event expected. Each successive maturity date should be viewed as a periodic liquidity event and the first such event has not yet been reached.

 

As of December 31, 2020, ROCF IV issued approximately $2.25 million and $47.75 million of ROCF IV Series A and ROCF IV Series B, respectively. ROCF IV had incurred approximately $4.3 million of debt issuance costs from the offering, of which approximately $30,000 and $2,800,000 were incurred as commissions for ROCF IV Series A and ROCF IV Series B issuances, respectively.

 

ROCF IV is managed by the Manager, an affiliate of our Sponsor, and pays an annual management fee to the Manager which is based on an annual rate of 1.75% of gross principal outstanding of all bonds. Through December 31, 2020, approximately $600,000 of management fees had been earned by the Manager.

 

ROCF IV pays a disposition fee to the Manager which is calculated as 1.00% of the proceeds received from the repayment of the principal amount of any of our debt investments or any other disposition of the underlying real estate. As of December 31, 2020, approximately $28,000 of disposition fees had been earned by the Manager.

 

ROCF IV pays organization fees to the Manager which are calculated as 2.00% of the gross proceeds of the sale of all bonds. As of December 31, 2020, approximately $1,000,000 of organization fees had been earned by the Manager.

 

As of December 31, 2020, net proceeds to ROCF IV after debt issuance costs, organization and offering costs, disposition fees, and management fees were approximately $44.1 million.

 

ROCF IV held approximately $50.8 million of gross mortgage loans receivable as of December 31, 2020. This consisted of ten mortgage loans where the ranged between 8% and 12% (averaging 11%) and where the maturities ranged from April 24, 2021 to October 28, 2022, based on twelve to twenty-four month terms with some loans having two optional six-month extensions.

 

 

 

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EXECUTIVE COMPENSATION

 

Our company does not have executives. It is operated by our Manager. We will not reimburse our Manager for any portion of the salaries and benefits to be paid to its executive officers named in “Board of Managers and Executive Officers;” provided that, we may reimburse our Manager for expenses incurred by its executive officers while acting on behalf of our company (such as travel or entertainment expenses). See “Compensation of Our Manager and Its Affiliates” for a list of fees payable to Manager or its affiliates.

 

 

 

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COMPENSATION OF OUR MANAGER AND ITS AFFILIATES

 

The following is a description of compensation we may pay to our Manager and its affiliates or in connection with the proceeds of the offering. These compensation arrangements have been established by our Manager and its affiliates and are not the result of arm’s-length negotiations. Services for which our company engages our Manager or its affiliates and which are not described below will be compensated at the market rate. Fees payable to our Manager or its affiliates in excess of the rate set forth in this section will require the affirmative consent of a majority of the Bonds. Our Manager or an affiliate may elect to waive or defer certain of these fees in its sole discretion. This table assumes that the maximum offering amount of $75,000,000 in the aggregate is raised.

 

Form of Compensation		Description		Estimated Amount of Compensation
Offering and Organization Stage:
O&O Fee:		Our Manager will receive the O&O Fee equal to 2.00% of gross proceeds. The Manager will pay our actual organization and offering expenses out of the O&O Fee and will be entitled to retain as compensation the excess, if any, of the O&O fee over actual organization and offering expenses. To the extent organizational and offering expenses exceed 2.00% of the gross proceeds raised in the offering, our Manager will pay such amounts without reimbursement from us.		$1,500,000
Operating Stage:
Asset Management Fee:		Our Manager will be paid an annual asset management fee of 1.75% of the total principal amount of the Bonds outstanding. The asset management fee will be paid quarterly in advance.		$1,312,500 per year
Disposition Fee:		Our Manager will be paid a disposition fee of 1.00% of the proceeds received from the repayment of the principal amount of any of our debt investments or any other disposition of the underlying real estate.		Indeterminable at this time.
Accountable Expense Reimbursements		Our Manager will be entitled to receive an accountable expense reimbursement for documented expenses of our Manager and its affiliates incurred on behalf of our company that are reasonably necessary for the performance by our Manager of its duties and functions. The accountable expense reimbursement will be reimbursed monthly to our Manager.		Indeterminable at this time.

 

 

 

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LIMITATIONS ON LIABILITY

 

Our Manager and executive officers, if any are appointed by our Manager, will owe fiduciary duties to our company and our members in the manner prescribed in the Delaware Limited Liability Company Act and applicable case law. Neither our Manager nor any executive officer will owe fiduciary duties to our bondholders. Our Manager is required to act in good faith and in a manner that it determines to be in our best interests. However, nothing in our operating agreement precludes our Manager or executive officers or any affiliate of our Manager or any of their respective officers, directors, employees, members or trustees from acting, as a director, officer or employee of any corporation, a trustee of any trust, an executor or administrator of any estate, a member of any company or an administrative official of any other business entity, or from receiving any compensation or participating in any profits in connection with any of the foregoing, and neither our company nor any member shall have any right to participate in any manner in any profits or income earned or derived by our Manager or any affiliate thereof or any of their respective officers, directors, employees, members or trustees, from or in connection with the conduct of any such other business venture or activity. Our Manager, its executive officers, any affiliate of any of them, or any shareholder, officer, director, employee, partner, member or any person or entity owning an interest therein, may engage in or possess an interest in any other business or venture of any nature or description, provided that such activities do not compete with the business of our company or otherwise breach their agreements with our company; and no member or other person or entity shall have any interest in such other business or venture by reason of its interest in our company.

 

Our Manager or executive officers have no liability to our company or to any member for any claims, costs, expenses, damages, or losses suffered by our company which arise out of any action or inaction of any manager or executive officer if such manager or executive officer meets the following standards: (i) such manager or executive officer, in good faith, reasonably determined that such course of conduct or omission was in, or not opposed to, the best interests of our company, and (ii) such course of conduct did not constitute fraud, willful misconduct or gross negligence or any breach of fiduciary duty to our company or its members. These exculpation provisions in our operating agreement are intended to protect our Manager and executive officers from liability when exercising their business judgment regarding transactions we may enter into.

 

Insofar as the foregoing provisions permit indemnification or exculpation of our Manager, executive officers or other persons controlling us from liability arising under the Securities Act, we have been informed that in the opinion of the SEC this indemnification and exculpation is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

 

 

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INDEPENDENT AUDITORS

 

The financial statements of our company, which comprise the balance sheet as of December 31, 2020 and the related statements of operations, members’ equity, and cash flows for the period from March 23, 2020 (date of inception) through December 31, 2020 included in this offering circular and the related notes to those financial statements, have been audited by UHY LLP, an independent public accounting firm, as stated in their report appearing elsewhere herein.

 

 

 

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LEGAL MATTERS

 

Certain legal matters in connection with this offering, including the validity of the Bonds, will be passed upon for us by Kaplan Voekler Cunningham & Frank, PLC.

 

 

 

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WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

Our Sponsor maintains a website, www.redoakcapitalholdings.com, which contains additional information concerning us, our Manager, and our Sponsor. We will file, annual, semi-annual, and special reports, and other information, as applicable, with the SEC. You may read and copy any document filed with the SEC at the SEC’s public company reference room at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. The SEC also maintains a web site that contains reports, and informational statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

 

Our company has filed an offering statement of which this offering circular is a part with the SEC under the Securities Act. The offering statement contains additional information about us. You may inspect the offering statement without charge at the office of the SEC at Room 1580, 100 F Street, N.E., Washington, D.C. 20549, and you may obtain copies from the SEC at prescribed rates.

 

This offering circular does not contain all of the information included in the offering statement. We have omitted certain parts of the offering statement in accordance with the rules and regulations of the SEC. For further information, we refer you to the offering statement, which may be found at the SEC’s website at http://www.sec.gov. Statements contained in this offering circular and any accompanying supplement about the provisions or contents of any contract, agreement or any other document referred to are not necessarily complete. Please refer to the actual exhibit for a more complete description of the matters involved.

 

 

 

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PART F/S

 

INDEX TO FINANCIAL STATEMENTS

 

Independent Auditor’s Report	F-3
Financial Statements	F-4
Balance Sheet	F-4
Statement of Operations	F-5
Statement of Changes in Member’s Capital	F-6
Statement of Cash Flows	F-7
Notes to Financial Statements	F-8

 

RED OAK CAPITAL FUND V, LLC

 

FINANCIAL STATEMENTS

AND

INDEPENDENT AUDITOR’S REPORT

 

FOR THE PERIOD MARCH 23, 2020 (DATE OF FORMATION) THROUGH DECEMBER 31, 2020

 

 

INDEPENDENT AUDITOR’S REPORT

 

To the Managing Member

Red Oak Capital Fund V, LLC

 

 

We have audited the accompanying financial statements of Red Oak Capital Fund V, LLC (a Delaware limited liability corporation), which comprise the balance sheet as of December 31, 2020, and the related statements of operations, changes in member’s capital, and cash flows for the period from March 23, 2020 (date of formation) to December 31, 2020, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Red Oak Capital Fund V, LLC as of December 31, 2020, and the results of its operations, changes in member’s capital, and cash flows for the period from March 23, 2020 (date of formation) to December 31, 2020, in accordance with accounting principles generally accepted in the United States of America.

 

 

/s/ UHY LLP

Farmington Hills, Michigan

April 30, 2021

 

  

Assets
Current assets:
Cash and cash equivalents	$12,280,743
Restricted cash - bond service reserve	533,439
Total current assets	12,814,182
Total assets	$12,814,182
Liabilities and Member's Deficit
Current liabilities:
Bond interest payable	$115,958
Prepaid bond interest	129,217
Bond proceeds received in advance	30,000
Other current liabilities	895
Total current liabilities:	276,070
Long-term liabilities:
Series A Bonds payable, net	12,247,775
Series A R-bonds payable, net	774,435
Total long-term liabilities:	13,022,210
Total liabilities	13,298,280
Member's deficit:	(484,098)
Total liabilities and member's deficit	$12,814,182

Revenue:
Interest income	$5
Total revenue	$5
Expenses:
Bond interest expense	137,145
Management fees	27,880
Organization fees	284,500
General and administrative	34,678
Total expenses	484,203
Net income (loss)	$(484,198)

	Managing Member
Member's capital, March 23, 2020	$-
Capital contributions	100
Net income (loss)	(484,198)
Member's deficit, December 31, 2020	$(484,098)

Cash flows from operating activities:
Net income (loss)	$(484,198)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Amortization of debt issuance costs	21,187
Change in other operating assets and liabilities:
Net change in bond interest payable	115,958
Net change in prepaid bond interest	129,217
Net change in bond proceeds received in advance	30,000
Net change in other current liabilities	895
Net cash provided by (used in) operating activities	(186,941)
Cash flows from financing activities:
Member contributions	100
Proceeds from Series A Bonds	13,429,000
Proceeds from Series A R-Bonds	796,000
Payment of debt issuance costs	(1,223,977)
Net cash provided by (used in) financing activities	13,001,123
Net change in cash, cash equivalents, and restricted cash	12,814,182
Cash, cash equivalents, and restricted cash at beginning of period	-
Cash, cash equivalents, and restricted cash at end of period	$12,814,182

Cash and cash equivalents	$12,280,743
Restricted cash – bond service reserve	533,439
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$12,814,182

Series A Bonds payable	$13,429,000
Series A R-Bonds payable	796,000
Debt issuance costs	(1,202,790)
Total bonds payable, net	$13,022,210

 

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PART III - EXHIBITS

 

EXHIBIT INDEX

 

Exhibit Number		Exhibit Description
1(a)		Managing Broker-Dealer Agreement by and between Crescent Securities Group, Inc. and Red Oak Capital Fund V, LLC, as amended
(2)(a)		Certificate of Formation of Red Oak Capital Fund V, LLC*
(2)(b)		Limited Liability Company Agreement of Red Oak Capital Fund V, LLC*
(3)(a)		Indenture, dated as of July 31, 2020*
(3)(b)		First Supplemental Indenture, dated as of August 12, 2021
(3)(c)		Form of A Bond
(3)(d)		Form of A R-Bond
(3)(e)		Form of B Bond
(3)(f)		Form of B R-Bond
(3)(g)		Pledge and Security Agreement*
(3)(h)		First Amendment to Pledge and Security Agreement
(4)		Subscription Agreement
(6)(a)		Commercial Loan Agreement, dated March 19, 2021, by and between Willow Run, L.L.C. and Red Oak Capital Fund V, LLC, incorporated by reference to Exhibit 6.1 of the Company’s Form 1-U filed on March 25, 2021
(6)(b)		Commercial Promissory Note, dated March 19, 2021, issued by Willow Run, L.L.C.in favor of Red Oak Capital Fund V, LLC, incorporated by reference to Exhibit 6.2 of the Company’s Form 1-U filed on March 25, 2021
(6)(c)		Commercial Loan Agreement, dated March 26, 2021, by and between 4559 Benning Rd SE LLC and Red Oak Capital Fund V, LLC, incorporated by reference to Exhibit 6.1 of the Company’s Form 1-U filed on April 1, 2021
(6)(d)		Commercial Promissory Note, dated March 26, 2021, issued by 4559 Benning Rd SE LLC in favor of Red Oak Capital Fund V, LLC, incorporated by reference to Exhibit 6.2 of the Company’s Form 1-U filed on April 1, 2021
(6)(e)		Warrant Agreement, dated March 26, 2021, issued by 4559 Benning Rd SE LLC, incorporated by reference to Exhibit 6.3 of the Company’s Form 1-U filed on April 1, 2021
(6)(f)		Commercial Loan Agreement, dated as of April 30, 2021, by and between 4303-4313 Wheeler RD SE LLC and Red Oak Capital Fund V, LLC, incorporated by reference to Exhibit 6.1 of the Company’s Form 1-U filed on May 10, 2021
(6)(g)		Commercial Promissory Note, dated as of April 30, 2021, issued by 4303-4313 Wheeler RD SE LLC in favor of Red Oak Capital Fund V, LLC, incorporated by reference to Exhibit 6.2 of the Company’s Form 1-U filed on May 10, 2021
(6)(h)		Warrant Agreement, dated as of April 30, 2021, issued by 4303-4313 Wheeler RD SE LLC, incorporated by reference to Exhibit 6.3 of the Company’s Form 1-U filed on May 10, 2021
(6)(i)		Commercial Loan Agreement, dated as of July 23, 2021, by and KCSL, LLC,  3592 Procyon, LLC and Red Oak Capital Fund V, LLC, incorporated by reference to Exhibit 6.1 of the Company’s Form 1-U filed on July 29, 2021
(6)(j)		Commercial Promissory Note, dated as of July 23, 2021, issued by KCSL, LLC and  3592 Procyon, LLC in favor of Red Oak Capital Fund V, LLC, incorporated by reference to Exhibit 6.2 of the Company’s Form 1-U filed on July 29, 2021
(11)(a)		Consent of UHY LLP
(11)(b)		Consent of Kaplan, Voekler, Cunningham & Frank, PLC**
(12)		Opinion of Kaplan, Voekler, Cunningham & Frank, PLC regarding legality of the Bonds