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 and may be
obtained.
Preliminary Offering Circular
February 19, 2021
Subject to Completion
MCI INCOME FUND V, LLC
2101 Cedar Springs, Suite 700
Dallas, Texas 75201
(888) 418-3730
7.00% Senior Secured Bonds (Class A
Bonds)
7.50% Senior Secured Bonds (Class B
Bonds)
$50,000,000 Aggregate Maximum Offering Amount (50,000
Bonds)
$10,000 Minimum Purchase Amount (10 Bonds)
MCI Income
Fund V, LLC, a Delaware limited liability company, or the Company,
is offering a maximum of $50,000,000 in the aggregate, its 7.00%
senior secured bonds, or the “Class A
Bonds” and its 7.50% senior secured bonds, or the
“Class B Bonds” and collectively, the
“Bonds,” pursuant to this offering circular. 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 Class A Bonds
and Class B Bonds will be offered serially, over a maximum period
of three years, starting from the date of qualification of the
Offering Statement of which this Offering Circular is a part. Each
series of Bonds beginning with Series A-1 for Class A Bonds and
Series B-1 for Class B Bonds will correspond to a particular
closing for the applicable class of Bonds every 12 months. The
Class A Bonds and Class B Bonds will bear interest at
a rate equal to 7.00% and 7.50 % per year, respectively, payable to
the record holders of the Bonds quarterly in arrears on January
25th, April 25th, July 25th and October 25th of each year,
beginning on the first such date that corresponds to the first full
quarter after the initial closing in the offering.
The first interest
payment on a Bond will be paid on the 15th day of the month
following the issuance of such Bond. Each series of Class A and
Class B Bonds will mature on June 30th of the fourth year
following the initial year of issuance of the applicable series of
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 two additional three-year terms, unless redeemed
upon maturity at our or your election.
The
Bonds will be 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)
during their term 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 International Asset Advisors, 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 commence the sale of the Bonds as of the
date on which the offering statement is declared qualified by the
United States Securities and Exchange Commission, or the
“SEC” and terminate the offering on June 30, 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 June 30, 2022 for two consecutive six-month
periods.
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Price to
Investors
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Managing
Broker-Dealer Fee, Commissions and Expense
Reimbursements(1)(2)
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Proceeds
to
Company
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Proceeds to
Other Persons
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Per
Class A Bond(3)
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$1,000
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$90
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$910.00
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$0
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Per
Class B Bond(3)
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$1,000
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$30
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$970.00
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$0
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Maximum Offering
Amount of Class A Bonds (3)(4)
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$50,000,000
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$4,500,000
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$45,500,000
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$0
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Maximum Offering
Amount of Class B Bonds (3)(5)
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$50,000,000
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$1,500,000
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$48,500,000
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$0
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_________
(1)
This includes (a) selling commissions of 6.00% of gross offering
proceeds on the sale of Class A Bonds, (b) a managing
broker-dealer fee of up to 0.5% of the gross proceeds of the
offering, (c) a wholesaling fee of up to 1.50% of gross proceeds
from the certain sales of the Bonds,
and (d) a nonaccountable expense reimbursement of up to
1.00% of gross offering
proceeds on the sale of Class A Bonds. The
Class B Bonds will be sold solely to certain
purchasers, including those purchasing through a registered
investment advisor. See “Plan of Distribution
– Eligibility to Purchase Class B
Bonds.” We will not
pay selling commissions on the sale of Class B Bonds;
however, we will pay a managing broker-dealer fee and a wholesaling
fee, and may pay nonaccountable expense reimbursements of up to
1.00% on such sales. See
“Use of
Proceeds” and “Plan of
Distribution” for more information.
(2) The
table above does not include an organizational and offering fee, or
O&O Fee, of 2.00% of offering proceeds ($1,000,000 at the
maximum offering amount) payable to our Manager. Our Manager will
be entitled to retain as compensation any amount by which the
O&O Fee exceeds 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. In no event will the O&O
Fee payable to our Manager exceed 2.00% of the offering
proceeds.
(3) All
figures are rounded to the nearest dollar.
(4) The
table above shows amounts payable to our managing broker-dealer if
we sell the maximum offering amount comprised solely of
Class A Bonds.
(5) The
table above shows amounts payable to our managing broker-dealer if
we sell the maximum offering amount comprised solely of
Class B Bonds. We will pay our managing broker-dealer
the same amount for sales of Class B
Bonds.
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 8 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
COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE
SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.
FORM 1-A DISCLOSURE FORMAT IS BEING
FOLLOWED.
TABLE OF CONTENTS
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Contents
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F-1
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3
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 MCI Income Fund
V, LLC, a Delaware limited liability company; our
“Manager” refers to Megatel Capital Investments, LLC, a
Delaware limited liability company, our sole member and manager;
and our “Sponsor” refers to our Manager, and its
subsidiaries.
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. MCI Income Fund V, LLC, a Delaware limited
liability company was formed on November 4, 2020 to invest
substantially all of the proceeds from this offering available for
investment, after the payment of fees and expenses, in a secured
Master Credit Facility between the company and Megatel Homes, LLC,
a Texas limited liability company;
Megatel Holdings, LLC, a Texas limited liability company; and
Megatel Homes III, LLC, a Texas limited liability company;
including any wholly-owned subsidiaries of such entities and
affiliates that may now or hereafter be joined thereunder pursuant
to a joinder agreement, collectively, and any
of which may be referred to herein as,
Megatel. We will make loans to Megatel under the Master
Credit Facility, or the Loans. Each loan will be
secured by a specific project and the Master Credit Facility and
related Loan Policies and Procedures outline the specific
documentation that will be needed for each Loan and for each draw
to be allowed.We will underwrite the Loans using our
underwriting criteria and will set the terms of the Loans,
including the interest rates. We will seek to set interest rates
that reflect the market interest rates for loans of the same or
similar type and purpose, while supporting our obligations,
including the obligations under our Bonds. The Loan terms will
be set pursuant to the Loan Policies and Procedures, included as
part of the Master Credit Facility.
Megatel
will seek to use the proceeds from our loans for the acquisition
of: (A) parcels of real property (including but not limited to
raw/unentitled land and/or finished lots) (i) for development into
single-family residential lots, (ii) for the construction of
single-family homes to be marketed and sold to homebuyers, (iii)
for the construction of condominiums to be marketed and sold to
homebuyers, and (iv) for the development and/or construction of
multi-family residential communities, (v) for the development
and/or construction of storage facilities, retail, and/or other
commercial real estate assets, or mixed-use properties; (B) the
acquisition of existing single-family homes to be redeveloped,
renovated, and/or repositioned for marketing and sale; (C) the
acquisition of existing multi-family properties to be redeveloped,
renovated, and/or repositioned for marketing and sale, and/or (D)
the acquisition of existing commercial properties to be
redeveloped, renovated, and/or repositioned for marketing and sale
and/or (E) the acquisition of
ownership interests in a Megatel special purpose entity.
Megatel will use the loan proceeds to carry out all aspects of the
acquisition of such assets, including, but not limited to,
placement of earnest money deposits to be applied to the purchase
of assets.
Our investment objective is to preserve and
protect our capital while producing attractive risk-adjusted
returns generated from current income on our
portfolio.
Our principal executive offices are located at
2101 Cedar Springs Road, Suite 700, Dallas, Texas 75201 and our
telephone number is (888) 418-3730 For more information on our
Sponsor, its website is www.MCIinvest.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. Our Sponsor and Manager is a Dallas, Texas based
commercial real estate finance company specializing in the
underwriting, operational management and servicing of commercial
real estate debt instruments to our affiliate Megatel. Our Sponsor,
Megatel and us are under common ownership. The owners are
established real estate professionals. Our Sponsor and Megatel have
significant experience in the marketing and origination of project
transactions in which to properly and efficiently evaluate suitable
investments for our Company.
4
The Offering. We are offering to
investors the opportunity to purchase up to an aggregate of
$50,000,000 of Class A Bonds and Class B
Bonds. See “Plan of Distribution - Who
May Invest” for further information. The offering will
terminate on the
earliest of: (i) the date we sell the Maximum
Offering Amount; (ii) the second anniversary of the date of
qualification of this offering statement; or (iii) such
date upon which we determine to
terminate the offering, in our sole
discretion. Notwithstanding the
previous sentence, we have the right to extend this
offering beyond the second
anniversary of the date of qualification for an
additional year. Our company will conduct
closings in this offering on the first and third
Thursday of each month 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
International Asset Advisors, or our managing
broker-dealer.
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Issuer
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MCI
Income Fund V, LLC, a Delaware limited liability
company.
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Securities Offered
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Maximum
– $50,000,000, aggregate principal amount of the
Bonds.
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Maturity Date
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The Class A Bonds
and Class B Bonds will each be offered serially, over a maximum
period of three years (subject to extension) starting from the date
of qualification of the Offering Statement of which this Offering
Circular is a part. Each series of Class A and Class B Bonds
will mature on June 30th of the fourth year
following the initial year of issuance of the applicable series of
Bonds.
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 two
additional three-year terms, unless redeemed upon maturity at our
or your election. The Class A Bonds
and Class B Bonds will each be offered serially, over a maximum
period of three years (subject to extension) starting from the date
of qualification of the Offering Statement of which this Offering
Circular is a part. Each series of Class A and Class B Bonds
will mature on June 30th of the fourth year
following the initial year of issuance of the applicable series of
Bonds. If the Bonds are not renewed, we will pay the
principal remaining on the Bonds in 10 equal payments with 10% per
quarter. If the Bonds have not covered the initial costs and
expenses of the Offering, then the principal remaining on the Bonds
will be paid back in 20 equal payments with 5% per quarter until
such time as the Bonds have covered the initial costs and expenses
of the Offering, at which point the redemption will be at 10% per
quarter. See “Description
of Bonds – Maturity and Renewal” for more information.
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Interest Rate
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Class
A Bonds – 7.00% per annum computed on the basis of a 365-day
year.
Class
B Bonds – 7.50% per annum computed on the basis of a 365-day
year.
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Interest Payments
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Commencing on the
15th day
of the month, or the next business day, if the 15th is a weekend or a
holiday, following the issuance of such Bond and continuing monthly
until its maturity date. Interest will
accrue and be paid on the basis of a 365-day year. 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.
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Liquidity Event
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Upon a
change of control event, related to our potential merger with or
into Megatel, or such other entity, to effectuate the initial
public offering of Megatel, we intend to either redeem the Bonds,
continue the Bond obligations pursuant to their terms or to allow
Bondholders to make an election to redeem for such equity
consideration as is negotiated with Megatel upon advice of its
legal and financial advisors, which is expected to be at a premium
to the redemption amount.
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Offering Price
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$1,000
per Bond.
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Ranking
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The
Bonds will be 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.
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5
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Security
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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. The Company will make the Loans pursuant to the
Company’s loan policies and procedures which are part of the
Company’s Master Credit Facility. Each loan will be
secured by a specific project and the Master Credit Facility and
related Loan Policies and Procedures outline the specific
documentation that will be needed for each Loan and for each draw
to be allowed.
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Use of Proceeds
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We estimate that the net proceeds we will receive from this
offering, without taking into account any sales of
Class B Bonds, will be approximately $44,500,000 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 Class B 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 the Loans. We may also use a portion
of the net proceeds to pay fees to our Manager or its affiliates,
for working capital, bond payment obligations and for other general
corporate purposes. See “Use of
Proceeds” for additional
information.
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Certain Covenants
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The
indenture will limit the indebtedness incurred by us, directly or
indirectly (including debt of our subsidiaries). For purposes of
complying with the limitation on indebtedness described above, the
following will not be considered indebtedness: (i) any principal
owed on the Bonds, (ii) the Loans, and (iii) any financing on any
real estate we acquire through foreclosure on a Loan.
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Redemption Generally
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The
Bonds will be redeemable subject to certain requirements and limits
as described below. All Bond redemptions will be subject to an
aggregate limit of 5.0% during each three-year term of the Bonds,
and 1.0% per year.
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Bondholder Redemption
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The
Bonds will be redeemable at the election of the Bondholder subject
to certain limits below. To be redeemed, the Bondholder must
provide written notice to us at our principal place of business
between June 15 and June 30 of the fourth year following the initial year of
issuance of the applicable series of Bonds. If
no notice is given, then the Bonds will be extended for an
additional three-year term, upon same terms. Bondholders will be
able to provide written notice to us at our principal place of
business between June 15 and June 30 of the seventh year following the initial year of
issuance of the applicable series of Bonds. If
no notice is given, then the Bonds will be extended for the final
additional three-year term, upon same terms. We will have 120 days
from the date of any such redemption notice is provided to begin
redeeming the Bondholder’s Bonds at a price per Bond equal to
$880 plus any accrued but unpaid interest on the Bond. Bond
redemptions validly received (not postmarked) will be redeemed
pro-rata if more redemptions are received than can be
accommodated.
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Redemption Upon Death, Disability or
Bankruptcy
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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.
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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. For redemption requests due to
death, on the designated date, we will redeem such Bonds at a price
per Bond equal to $910 plus any accrued and unpaid interest, to but
not including the date on which the Bonds are redeemed. For other
requests, 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
the then outstanding principal amount of such
Bond.
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6
[Remainder of page intentionally left blank]
7
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This
offering circular contains certain forward-looking statements that
are subject to various risks and uncertainties. Forward-looking
statements are generally identifiable by use of forward-looking
terminology such as "may," "will," "should," "potential," "intend,"
"expect," "outlook," "seek," "anticipate," "estimate,"
"approximately," "believe," "could," "project," "predict," or other
similar words or expressions. Forward-looking statements are based
on certain assumptions, discuss future expectations, describe
future plans and strategies, contain financial and operating
projections or state other forward-looking information. Our ability
to predict results or the actual effect of future events, actions,
plans or strategies is inherently uncertain. Although we believe
that the expectations reflected in our forward-looking statements
are based on reasonable assumptions, our actual results and
performance could differ materially from those set forth or
anticipated in our forward-looking statements. Factors that could
have a material adverse effect on our forward-looking statements
and upon our business, results of operations, financial condition,
funds derived from operations, cash flows, liquidity and prospects
include, but are not limited to, the factors referenced in this
offering circular, including those set forth below.
When
considering forward-looking statements, you should keep in mind the
risk factors and other cautionary statements in this offering
circular. Readers are cautioned not to place undue reliance on any
of these forward-looking statements, which reflect our views as of
the date of this offering circular. The matters summarized below
and elsewhere in this offering circular could cause our actual
results and performance to differ materially from those set forth
or anticipated in forward-looking statements. Accordingly, we
cannot guarantee future results or performance. Furthermore, except
as required by law, we are under no duty to, and we do not intend
to, update any of our forward-looking statements after the date of
this offering circular, whether as a result of new information,
future events or otherwise.
RISK FACTORS
An investment in 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 will be
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.
8
The Bonds will limit 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). For
purposes of complying with the limitation on indebtedness described
above, the following will not be considered indebtedness: (i) any
principal owed on the Bonds, (ii) the Loans, and (iii) any
indebtedness on real property that we acquire through foreclosure
on a Loan.
We are not limited in the amount of distributions we may make to
our Manager.
Neither the
Indenture nor the forms of Bonds contain any covenant limiting the
ability of our Manager to cause us to make distributions of cash
from us to our Manager in respect of its 100% membership interest
in us. We anticipate that distributions of cash will be made from
us to our Manager, in amounts as determined by our Manager, as our
sole member, and that such amounts will be at least sufficient to
pay all expenses and liabilities of our sole member, As our Manager
will conduct all of our operations through its personnel, we
believe such distributions to be necessary; however, amounts
distributed to our Manager will not be available to us to make
payments of interest or principal or to fund redemption requests on
the Bonds.
The Bonds will be 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, 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.
Upon the occurrence of a “Change of
Control/Repurchase Event” (as defined under
“Description
of Bonds – Certain Covenants”), you will have the right, at your option,
to require us to repurchase your Bonds for cash. However, the
definition of Change of Control/Repurchase Event contained in the
indenture will be limited to certain transactions. As a result, the
Change of Control/Repurchase Event provision of the indenture will
not afford protection to Bondholders in the event of other
transactions that could adversely affect the Bonds. 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.
If we sell substantially less than all of the Bonds we are
offering, the costs we incur to comply with the rules of the
Securities and Exchange Commission, or the SEC, regarding financial
reporting and other fixed costs (such as those relating to the
offering) will be a larger percentage of our revenue and may reduce
our financial performance and our ability to fulfil our obligations
under the Bonds.
We expect to incur
significant costs in maintaining compliance with the financial
reporting for a Tier II Regulation A issuer and that our management
will spend a significant amount of time assessing the effectiveness
of our internal control over financial reporting. We do not
anticipate that these costs or the amount of time our management
will be required to spend will be significantly less if we sell
substantially less than all of the Bonds we are
offering.
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 will be 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.
In
addition, some of the Loans may contain terms that will make a
default under their terms difficult and therefore may limit the
remedies available upon a default under the Bond obligations. The
Loans may be of a longer term than the term of the Bonds. The
ability of the Trustee to foreclose on the Loans may be limited and
may not be able to create value with regards to the collateral for
long periods of time.
9
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 lack of operating history makes it difficult for you to
evaluate this investment.
We are
a recently formed entity with no operating history and may not be
able to successfully operate our business or achieve our investment
objectives. We may not be able to conduct our business as described
in our plan of operation.
You will not have the opportunity to evaluate our investments
before we make them, and we may make investments that would have
changed your decision as to whether to invest in the
Bonds.
As of
the date of this offering circular, we own no assets. We are not
able to provide you with information to evaluate our future
investments. We will seek to invest substantially all of the
offering proceeds available for investment, after the payment of
commissions, fees and expenses, in the origination of the Loans. We have
established criteria for funding the Loans. However, you will be
unable to evaluate the transaction terms or data concerning the
Loans. You will be relying entirely on the ability of our Manager
and its affiliates, and their management teams, to perform on the
Loans and successfully use the proceeds of the Loans to operate,
manage and sell the underlying real estate investments. These
factors increase the risk that we may not generate the returns that
you seek by investing in the Bonds.
10
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 International Asset Advisors, 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 International Asset Advisors, 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.
Redemption requests of Bonds at the option of the Bondholder will
be limited by the redemption limits and to the extent they are
accepted, will be subject to financial penalties for early
redemption.
While the Bonds
carry an early redemption right and a redemption right in the event
of death, disability or bankruptcy of the Bondholder, redemptions
are subject to a 5.0% aggregate redemption limit during each
three-year term of the Bonds and 1.0% per year. As a result,
requests for redemption from Bondholders may be rejected by the
Company. Additionally, with respect to redemptions at the option of
the Bondholders outside of the notice period, except for death,
disability or bankruptcy, Bonds will be redeemed at a price of $880
per Bond plus any accrued but unpaid interest, which will adversely
affect Bondholders seeking to redeem Bonds outside of notice
periods, prior to maturity.
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 premium on a
Liquidity Event.
As the
Liquidity Event is contingent on a lot of factors and may not occur
at all, the premium expected to be offering in conversion to equity
in the new public entity, may not occur.
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 Manager and its affiliates to
conduct our operations, any adverse changes in the financial health
of our Manager, Megatel 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 Manager, Megatel and its affiliates to manage our
operations and acquire and manage the Loans and the underlying real
estate investment. Our Manager makes all decisions with respect to
our management. Our Manager depends upon the fees and other
compensation that it receives from us in connection with the
origination and management of the Loans to conduct its operations.
Any adverse changes in the financial condition of our Manager or
Megatel or our relationship with our Manager or Megatel could
hinder its ability to successfully manage our operations and our
portfolio of investments.
11
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 company, our Manager, and Megatel are all under
common ownership.
Our
Manager, which is under common ownership with Megatel and us,
determines our major policies, including our policies regarding
financing, growth, debt capitalization, and distributions. 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
“LLC Agreement.” See “General Information as to
Our Company – LLC Agreement” herein for a
detailed summary of our operating agreement.
Our
Manager is responsible for the day-to-day operations of our company
and the selection and management of the Loans 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 Manager.
Specifically, our Manager is controlled by Messrs. Zach and Aaron
Ipour, and as a result, they will be able to exert significant
control over our operations. Our Manager has exclusive
control over the operations of our Manager and us. As a result, we
are dependent on our Manager to properly choose investments and
manage our company. In addition, our Manager may, or may cause our
Company 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 under common ownership.
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 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 - LLC 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, our main borrower, Megatel, and us face conflicts of
interest relating to the funding of loans and decisions underlying
those loans, 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 Manager, its executive officers and its affiliates to
underwrite the Loans. We may be funding Loans at the same time as
other entities that are affiliated with our Manager. Such programs
also rely on our Manager, its executive officers and its affiliates
for investment opportunities. Our Manager 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 Manager, 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 Manager could direct attractive investment opportunities to
other entities. Although we are subject to the Investment
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
Allocation Policy" section 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,
funding and management of our Loans. 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. In addition to this, our Manager will receive the O&O
Fee of 2.00% of offering proceeds ($1,000,000 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.
12
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 or generate fees and
profits from the Loans. These fees could influence our
Manager’s, being under common ownership with Megatel and us,
advice to us, as well as the judgment of the affiliates of our
Manager who serve as our officers. Among other matters, the
compensation arrangements could affect their judgment with respect
to certain Loans, or the making of investments in other programs
sponsored by our Manager or Megatel, which might entitle affiliates
of our Manager 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, our
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 Manager,
and its affiliates for the day-to-day operation of our business.
The amount of time that our Manager 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 Manager
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 Manager will attempt to hire additional
employees who would devote substantially all of their time to our
business. There is no assurance that our Manager will devote
adequate time to our business. If our Manager 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
Manager will source all of our investments, and existing or future
entities or programs sponsored and managed by our Manager 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 investment 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 investment allocation policy
provides a methodology in the event a lending opportunity becomes
available that is suitable for multiple funds managed by the
Manager, to allocate participation in the lending opportunity to
the various funds managed by the Manager based on an examination of
a variety of factors. As the investment programs of the various
entities managed by the Manager change and develop over time,
additional issues and considerations may affect the investment
allocation policy and its expectations with respect to the
allocation of lending opportunities.
13
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 the Loans. As such, we are subject to,
among other things, risk of defaults on the Loans in paying debt
service on the Loans and the underlying real estate 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 Loans 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.
The
Loans are limited on a portfolio basis to an aggregate 90% of the
appraised value of the underlying real estate investment, on an as
built, best and highest use valuation.
Real estate-related investments that are secured by real property
are subject to delinquency, foreclosure and loss, which could
result in losses to us.
Real
estate debt instruments (e.g., mortgages) that are secured by real
property are subject to risks of delinquency and foreclosure and
risks of loss. 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 or the value of the
underlying real estate. If the net operating income of the property
is reduced, or the value of the underlying real estate diminishes,
the borrower’s ability to repay the loan may be impaired. Net
operating income of a real property can be affected by, among other
things:
● tenant
mix and tenant bankruptcies;
● success
of tenant businesses;
● property
management decisions, including with respect to capital
improvements, particularly in older building
structures;
● property
location and condition;
● competition
from other properties offering the same or similar
services;
● changes
in laws that increase operating expenses or limit rents that may be
charged;
● any
need to address environmental contamination at the
property;
● changes
in global, national, regional, or local economic conditions and/or
specific industry segments;
● declines
in global, national, regional or local real estate
values;
● declines
in global, national, regional or local rental or occupancy
rates;
● changes
in interest rates, foreign exchange rates, and in the state of the
credit and securitization markets and debt and equity capital
markets, including diminished availability or lack of debt
financing for commercial real estate;
● changes
in real estate tax rates, tax credits and other operating
expenses;
● changes
in governmental rules, regulations and fiscal policies, including
income tax regulations and environmental legislation;
● acts
of God, terrorism, social unrest and civil disturbances, which may
decrease the availability of or increase the cost of insurance or
result in uninsured losses; and
● adverse
changes in zoning laws.
14
Specifically,
changes in federal, state and local laws and regulations may affect
certain income producing properties more than others. For example,
we may provide loans secured by property used in the production,
sale and/or testing of cannabis-related products. 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 new strain of coronavirus (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 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 already resulted in
significant negative short term economic impacts. The long-term
impact of this coronavirus on the U.S. and world economies remains
uncertain, but can 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 are mortgage loans secured by real estate
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, real estate values may be
impacted.
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
Loans secured by residences, multifamily and other properties, and
our ability to make payments of interest and principal to our
Bondholders. Further, continuing shutdowns and economic turmoil may
result in delays in the deployment of funds raised in this
offering.
Fluctuations in interest rates or the accrual of interest payment
obligations 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 the Loans
and the value of the underlying real estate investment and the cost
of debt. Changes in interest rates and credit spreads may affect
our net income from the Loans and the value and performance of the
underlying real estate investments. In addition, some of the Loans
may allow for balloon payments, accrual of interest features,
extension of maturities and other features that could result in
reduction in interest and principal payments on the Loans which
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.
15
We operate in a competitive market for lending and investment
opportunities which may intensify, and competition may limit our
ability to originate or acquire Loans 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 Loans on
attractive terms. In originating or acquiring our Loans, 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 Loans secured by 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 Loans
may cause our financial performance and our ability to fulfill our
obligations relative to the Bonds.
As
the Loans are repaid, we will look to redeploy the proceeds we
receive into new Loans, 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.
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 or real estate assets we acquire through
foreclosure are relatively illiquid investments. 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, the Loans 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, 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.
16
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; provided that we will
retain a senior lien interest in the underlying collateral.
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 we make, or Loans that later become
distressed, may subject us to losses and other risks relating to
bankruptcy proceedings.
While
the Loans focus primarily on “performing” real
estate-related interests, the Loans 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.
17
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 the 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.
18
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. The FCA’s
intention is that after 2021, it will no longer be necessary for
the FCA to ask, or to require, banks to submit contributions to
LIBOR. The FCA does not intend to sustain LIBOR through using its
influence or legal powers beyond that date. It is possible that the
IBA and the panel banks could continue to produce LIBOR on the
current basis after 2021, if they are willing and able to do so,
but 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 Loans.
Our
operating results are dependent upon the availability of, as well
as our Manager’s ability, to identify, structure, consummate,
leverage, manage and realize returns on our Loans. 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 ground up construction, 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.
We
expect our assets to be concentrated in the Dallas/Fort Worth area
and mostly related to residential real estate. These types of
investments 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
Bondholder’s investments could vary more widely than if we
invested in a more diverse portfolio of loans.
19
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 Loan. 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 and in a conflict situation because of
the common ownership with Megatel, our likely borrower. 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 extended
TRIA through the end of 2020 and 2027, respectively, 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.
20
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’s
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.
21
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.
22
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
secured 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.
23
USE OF PROCEEDS
We estimate
that the net proceeds we will receive from this offering, without
taking into account any sales of Class B Bonds, will
be approximately $44,500,000 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 Class B Bonds are without selling
commissions, the net proceeds from the offering will depend upon
the sales mix of the Bonds.
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 Class B Bonds, which will be sold solely
to certain purchasers, including purchasing through a registered
investment advisor, without selling commissions.
Maximum Offering Amount
|
|
Class A Bonds
(6)
|
|
|
|
Amount
|
Percent
|
|
Gross offering
proceeds
|
$50,000,000
|
100.00%
|
|
Less offering
expenses:
|
|
|
|
Selling
commissions(1)
|
$3,000,000
|
6.00%
|
|
Managing
broker-dealer fee(2)
|
$250,000
|
0.50%
|
|
Wholesaling
fee(3)
|
$750,000
|
1.50%
|
|
Expense Reimbursement(4)
|
$500,000
|
1.00%
|
|
O&O Fee(5)
|
$1,000,000
|
2.00%
|
|
|
|
|
|
Net
Proceeds
|
$44,500,000
|
89.00%
|
|
|
|
|
|
Amount available
for investment
|
$44,500,000
|
89.00%
|
(1) We
will pay (a) selling commissions of 6.00% of gross offering
proceeds on the sale of Class A Bonds. Our managing
broker-dealer may reallow selling commissions to selling group
members, in whole or in part.
(2) We
will pay a managing broker-dealer fee of up to 0.50% of the gross
offering proceeds on the sale of Class A
Bonds.
(3) We
may pay a wholesaling fee of up to 1.50% of gross proceeds on the
sale of Class A Bonds. 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, which it may reallow, in whole or in part, to those
selling group members.
(4)
We will pay a nonaccountable expense
reimbursement of 1.00% of gross offering proceeds on the sale of
Class A Bonds to the Managing
Broker-Dealer.
(5) We
will pay our Manager the O&O Fee of 2.00% of gross proceeds
from the offering. To the extent actual 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. If
actual organization and offering expenses are less than 2.00% of
the gross proceeds from the offering, the Manager will be entitled
to retain any excess of the O&O Fee over actual organization
and offering expenses as compensation for its services in
organizing our company and this offering. In no event will the
O&O Fee payable to our Manager exceed 2.00% of the offering
proceeds.
(6)
This assumes we sell the maximum offering amount comprised solely
of Class A Bonds.
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:
24
(i) You
are a natural person who has had individual income in excess of
$200,000 in each of the two most recent years, or joint income with
your spouse in excess of $300,000 in each of these years, and have
a reasonable expectation of reaching the same income level in the
current year;
(ii)
You are a natural person and your individual net worth, or joint
net worth with your spouse, exceeds $1,000,000 at the time you
purchase the Bonds (please see below on how to calculate your net
worth);
(iii)
You are an executive officer or general partner of the issuer or a
manager or executive officer of the general partner of the
issuer;
(iv)
You are an organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended, the Code, a corporation,
a Massachusetts or similar business trust or a partnership, not
formed for the specific purpose of acquiring the Bonds, with total
assets in excess of $5,000,000;
(v) You
are a bank or a savings and loan association or other institution
as defined in the Securities Act, a broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934, as
amended, the Exchange Act, an insurance company as defined by the
Securities Act, an investment company registered under the
Investment Company Act of 1940, as amended, the Investment Company
Act, or a business development company as defined in that act, any
Small Business Investment Company licensed by the Small Business
Investment Act of 1958 or a private business development company as
defined in the Investment Advisers Act of 1940;
(vi)
You are an entity (including an Individual Retirement Account
trust) in which each equity owner is an accredited
investor;
(vii)
You are a trust with total assets in excess of $5,000,000, your
purchase of the Bonds is directed by a person who either alone or
with his purchaser representative(s) (as defined in Regulation D
promulgated under the Securities Act) has such knowledge and
experience in financial and business matters that he is capable of
evaluating the merits and risks of the prospective investment, and
you were not formed for the specific purpose of investing in the
Bonds; or
(viii)
You are a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such
plan has assets in excess of $5,000,000.
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:
●
meet the minimum income and net worth standards set forth under
“Plan of
Distribution – Who May Invest ”
above;
●
can reasonably benefit from an investment in the Bonds based on
your overall investment objectives and portfolio
structure;
●
are able to bear the economic risk of the investment based on your
overall financial situation;
●
are in a financial position appropriate to enable you to realize to
a significant extent the benefits described in this offering
circular of an investment in the Bonds; and
●
have apparent understanding of:
●
the fundamental risks of the investment;
●
the risk that you may lose your entire investment;
●
the lack of liquidity of the Bonds;
●
the restrictions on transferability of the Bonds; and
●
the tax consequences of your investment.
25
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 $50,000,000 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
International Asset Advisors, 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 Class
A Bonds, and (b) a managing broker-dealer fee of up to 0.50% 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 Class A Bonds.
In addition, we may pay a wholesaling fee of up to 1.50% 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, managing broker-dealer fee and the wholesaling
fee to selling group members. The Class B Bonds will
be sold solely to certain purchasers, including those purchasing
through a registered investment advisor. See “Plan of Distribution
– Series Class B-Bond
Eligibility.” We will not
pay selling commissions on the sale of Class B Bonds;
however, we will pay a managing broker-dealer fee and a wholesaling
fee, and may pay nonaccountable expense reimbursements of up to
1.0% on such sales. 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 10% of
proceeds raised with the assistance of those participating FINRA
member broker-dealers.
26
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 Class B
Bonds.
|
|
Per A
Bond
|
Maximum Offering
Amount
|
|
Offering:
|
|
|
|
Price to
investor:
|
$1,000.00
|
$50,000,000
|
|
Less selling
commissions:
|
$60
|
$3,000,000
|
|
Less managing
broker-dealer fee:
|
$5
|
$250,000
|
|
Less expense
reimbursement
|
$10
|
$500,000
|
|
Less wholesaling
fee:
|
$15
|
$750,000
|
|
Remaining
Proceeds:
|
$910
|
$45,500,000
|
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 Class B Bonds
We may
only sell Class B Bonds and pay no selling commissions
in connection with the sale of such Bonds in this offering
to:
●
registered principals or representatives of our managing
broker-dealer and selling group members (and immediate family
members of any of the foregoing persons);
● our
employees and officers or those of our Manager or our Sponsor, or
the affiliates of any of the foregoing entities (and the immediate
family members of any of the foregoing persons);
● clients
of an investment advisor registered under the Investment Advisers
Act of 1940 or under applicable state securities laws (other than
any registered investment advisor that is also registered as a
broker-dealer, with the exception of clients who have
“wrap” accounts which have asset-based fees with such
dually registered investment advisor/broker-dealer);
or
● persons
investing in a bank trust account with respect to which the
authority for investment decisions made has been delegated to the
bank trust department.
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.
27
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
Phoenix American
Financial Services, Inc., Attn: MCI Income 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 “MCI Income Fund V, LLC.” We will hold
closings on the first and third Thursday of each month
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 will be 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 purchased through a
participant in the Depository Trust Company, or DTC,
will be evidenced by global bond certificates
deposited with a nominee holder, either DTC or its
nominee Cede & Co. Bonds purchased directly will be registered
in book-entry form only on the books and records of
UMB Bank, N.A. in the name
of Phoenix American Financial Services, Inc. as
record holder of such Bonds for
the benefit of such direct
purchasers.
We
intend to gain eligibility for the Bonds to be issued and held
through the book-entry systems and procedures of DTC
prior to the
initial closing of the offering 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 ownership of such Bonds
will be reflected on the books and records of UMB
Bank,
N.A. in the name of Phoenix American Financial Services, Inc. as
record holder of such Bonds for the benefit of such direct
purchasers.
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. A Purchaser
owning a Bond directly registered with Phoenix
American will directly exercise its rights as a
Bondholder.
As a
result:
●
all references in this offering circular to actions by Bondholders
will refer to actions taken by DTC upon instructions from its
direct participants; and
●
all references in this offering circular to payments and notices to
Bondholders will refer either to (i) payments and notices to DTC or
Cede & Co. for distribution to you in accordance with DTC
procedures, or (ii) payments and notices to Bondholders through UMB
Bank in accordance with their applicable procedures.
28
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
will act as securities depositary for the Bonds registered in the
name of its nominee, Cede & Co. DTC is:
●
a limited-purpose trust company organized under the New York
Banking Law;
●
a "banking organization" under the New York Banking
Law;
●
a member of the Federal Reserve System;
●
a "clearing corporation" under the New York Uniform Commercial
Code; and
●
a "clearing agency" registered under the provisions of Section 17A
of the Exchange Act.
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.
UMB Bank, N.A.
All
Bonds purchased by investors prior to DTC eligibility or not
through a DTC participant will be registered on the books and
records of UMB Bank. Direct purchasers of Bonds will receive a
credit for Bonds on UMB Bank's records. Beneficial owners
purchasing this way will receive written confirmation from UMB
Bank, as our Bond registrar, upon closing of their purchases.
Transfers of such Bonds will be accomplished by entries made on the
books and records of our Bond registrar.
Phoenix American Financial Services, Inc.
All Bonds not purchased through a DTC
participant will be registered in book-entry form only on
the books and records of UMB Bank, N.A. in the name of Phoenix
American Financial Services, Inc. as record holder of such Bonds
for the benefit of such direct purchasers. Beneficial owners registered through Phoenix
American will receive written confirmation from Phoenix American
Financial Services, Inc. upon closing of their purchases. Transfers
of Bonds registered to Phoenix American will be accomplished by
entries made on the books of UMB Bank, N.A. at the
direction of Phoenix American acting on behalf of its beneficial
holders.
Book-Entry Format
Under
the book-entry format, UMB Bank, N.A., as our paying
agent, will pay interest or principal payments to Cede &
Co., as nominee of DTC, or directly to Phoenix
American. 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.
Phoenix
American will forward payments directly to beneficial owners of
Bonds registered to Phoenix American.You may
experience some delay in receiving your payments under this system.
Neither we, the trustee, nor the 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 Phoenix American. 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 Phoenix American
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.
29
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 Phoenix
American, 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 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 Phoenix American, conveyance of notices and
other communications by the trustee to the beneficial owners, and
vice versa, will occurvia
Phoenix American. The trustee will communicate directly with
Phoenix American, 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, N.A. as paying agent and
Phoenix American Financial Services, Inc., a California corporation
as co-paying agent in respect of Bonds registered to it as
record holder. UMB Bank, N.A. will also
act as trustee under the
indenture and registrar for the Bonds.
As such, UMB Bank,
N.A. will make payments on the Bonds to DTC or to Phoenix American
(who will forward such payments to the applicable
Bondholders). The Bonds will be issued in book-entry
form only, evidenced by global certificates, as
such, payments are being made to
DTC, its nominee or to Phoenix American.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
As of
the date of this offering circular, we have not yet commenced
active operations. Offering Proceeds will be applied to invest in
the Loans, and the payment or reimbursement of selling commissions
and other fees, expenses and uses as described throughout this
offering circular.
30
Further, we have
not entered into any arrangements creating a reasonable probability
that we will own a specific property loan or other asset. The
number of additional property loans and other assets that we will
acquire will depend upon the number of Bonds sold and the resulting
amount of the net proceeds available for investment in additional
property loans and other assets.
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. If necessary,
we can use the proceeds of this offering to meet our
obligation.
Results of Operations
Having not commenced active operations, we have
not acquired any property loans or other assets, our management is
not aware of any material trends or uncertainties, favorable or
unfavorable, other than national economic conditions affecting our
targeted assets, the residential real estate industry and real
estate generally, which may be reasonably anticipated to have a
material impact on the capital resources and the revenue or income
to be derived from the operation of our assets.
Liquidity and Capital Resources
We are
offering and selling to the public in this offering up to
$50,000,000 of bonds .Our principal demands for cash will be for
the acquisitions of or origination of loans for: (A) parcels of
real property (including but not limited to raw/unentitled land
and/or finished lots) (i) for development into single-family
residential lots, (ii) for the construction of single-family homes
to be marketed and sold to homebuyers, (iii) for the construction
of condominiums to be marketed and sold to homebuyers, and (iv) for
the development and/or construction of multi-family residential
communities, (v) for the development and/or construction of storage
facilities, retail, and/or other commercial real estate assets, or
mixed-use properties; (B) the acquisition of existing single-family
homes to be redeveloped, renovated, and/or repositioned for
marketing and sale; (C) the acquisition of existing multi-family
properties to be redeveloped, renovated, and/or repositioned for
marketing and sale, and/or (D) the acquisition of existing
commercial properties to be redeveloped, renovated, and/or
repositioned for marketing and sale and/or (E) the acquisition of
ownership interests in a special purpose entities owned,
controlled, or affiliated with us. We do not intend to directly own
real property interests or ownership interests in special purpose
entities; rather, we intend to own the loans which are secured by
interests in the underlying real property and/or ownership in the
special purpose entity. In addition, we will use offering proceeds
for the payment of certain operating and administrative expenses we
incur, and all continuing service obligations (if any), including
our debt service on the Bonds. Generally, we will fund additional
funding of Loans from the net proceeds of this offering. As we are
dependent on the capital raised in this offering to conduct our
business, our investment activity over the next twelve (12) months
will be dictated by the capital raised in this offering. We expect
to originate Loans and meet our business objectives regardless of
the amount of capital raised in this offering.
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 liquidate our assets
is partially dependent upon the state of real estate. 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 offering proceeds. Moreover, our Manager may
change this policy, in its sole discretion, at any time to
facilitate meeting its cash flow obligations. See "Description of Bonds -
Certain Covenants" in this offering circular for more
information.
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 of this offering, and there is
no assurance that such sources of financing will be available on
favorable terms or at all.
31
GENERAL INFORMATION AS TO OUR
COMPANY
Our Company
MCI Income Fund V, LLC, a Delaware limited
liability company was formed in November 2020. Our principal
executive offices are located at 2101 Cedar Springs Road, Suite
700, Dallas, Texas 75201, and our telephone number is (888)
418-3730. For more information on our Sponsor or Manager, its
website is www.MCIinvest.com.
The information on, or otherwise accessible through, our
Sponsor’s website does not constitute a part of this offering
circular.
32
Organizational Chart
33
BUSINESS PLAN
We will
seek to invest substantially all of the offering proceeds available
for investment, after the payment of fees and expenses, in the
Loans pursuant to the Master Credit Facility between the Company,
Megatel Homes, LLC, a Texas limited liability company, Megatel Holdings, LLC, a Texas limited liability
company; and Megatel Homes III, LLC, a Texas limited liability
company; including any wholly-owned subsidiaries of such entities
and affiliates that may now or hereafter be joined thereunder
pursuant to a joinder agreement.
We will
make Loans to Megatel under the Master Credit Facility, or the
Loans, pursuant to our Loan Policies and Procedures, (which are
attached as an exhibit to the Master Credit Facility and may be
amended by the Manager in its sole and absolute discretion).
Each loan will be
secured by a specific project and the Master Credit Facility and
related Loan Policies and Procedures outline the specific
documentation that will be needed for each Loan and for each draw
to be allowed. We will underwrite the Loans using our
underwriting criteria and will set the terms of the Loans,
including the interest rates. We will seek to set interest rates
that reflect the market interest rates for loans of the same or
similar type and purpose, while supporting our obligations,
including the obligations under the Bonds. The Loan terms will
be set pursuant to the Loan Policies and Procedures, included as
part of the Master Credit Facility. Megatel will seek
to use the proceeds from such Loans for the acquisition of (A)
parcels of real property (including but not limited to
raw/unentitled land and/or finished lots) (i) for development into
single-family residential lots, (ii) for the construction of
single-family homes to be marketed and sold to homebuyers, (iii)
for the construction of condominiums to be marketed and sold to
homebuyers, and (iv) for the development and/or construction of
multi-family residential communities, (v) for the development
and/or construction of storage facilities, retail, and/or other
commercial real estate assets, or mixed-use properties; (B) the
acquisition of existing single-family homes to be redeveloped,
renovated, and/or repositioned for marketing and sale; (C) the
acquisition of existing multi-family properties to be redeveloped,
renovated, and/or repositioned for marketing and sale; (D) the
acquisition of existing commercial properties to be redeveloped,
renovated, and/or repositioned for marketing and sale, and/or (E)
the acquisition of ownership interests
in a Megatel affiliated special purpose entity that will hold title
to an existing commercial property and through which Megatel will
indirectly own the underlying real property via Megatel’s
ownership interests in the special purpose
entity.
Megatel
will use Loan proceeds to carry out all aspects of the acquisition
of such assets, including, but not limited to, placement of earnest
money deposits to be applied to the purchase of assets. In
connection with the placement of earnest money deposits,
Megatel’s right to receive a refund of earnest money deposits
may be subordinate to pre-existing third party liens.
Megatel’s inability to secure the refund of the earnest money
deposits in the event that an acquisition does not close may in
turn negatively affect Megatel’s ability to repay our
Loans.
The
Loans will either be first, second or other subordinated position
and secured by liens or other security. Loans may also include the
purchase and assignment of a lien held by another lender, including
other MCI-managed securities offerings.
We will
seek to fully secure repayment of the Loans by ensuring that the
aggregate amount of all Loans outstanding, on a portfolio basis,
shall not exceed 90% of the appraised value of the assets
underlying the Loans. The appraised value shall be based on the as
built, highest and best use valuation. Unless sooner paid in accordance with the Master
Credit Facility or in the event of a default resulting in earlier
repayment obligations, all our Loans then outstanding, shall be due
and payable on the Redemption Date subject to extension by
Megatel.
History of the Megatel Brand
Megatel
was formed in 2006. Its foundation was built based upon the
familiarity of its principals with development, building, and
construction. In its first year of formation, Megatel acquired
several foreclosed homes on the steps of the courthouse. These
first few homes were renovated and rehabilitated and sold for a
profit in 2007.
In the
immediate years that followed, the country was experiencing the
economic crisis that came to be known as the Great Recession. The
principals of Megatel believed that during this period of time
there were significant opportunities within the home building
marketplace, and they began searching for land and building
opportunities in the Dallas-Fort Worth area. The principals found
and ultimately purchased a sizable land opportunity with sufficient
sites to build 15 homes from a builder who had fallen into
bankruptcy. The initial home building on the newly purchased land
started slowly with three homes under construction at any given
time. As each home was built and then subsequently sold, the
principals would capitalize the next home to be constructed.
Megatel has seen exponential growth since its beginning, with
generally consistent growth patterns that resulted in more than
1,000 home starts in 2018.
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Executive Management Team
Megatel
and the Manager are led by co-Presidents Aaron Ipour and Zach
Ipour, each experienced real estate entrepreneurs in the
residential single-family home building industry since
2006.
Aaron Ipour
Aaron
Ipour, also known as Arash Afzalipour, is the co-founder and
co-president of Megatel, a full-service developer and builder of
single-family homes in Texas and Oklahoma. In 2006, Mr. Ipour
co-founded Megatel with his brother, Zach Ipour. From its
initial formation through 2007, Megatel concentrated on remodeling
and selling existing homes; and after successfully renovating and
selling approximately seven homes, Megatel transitioned into
building single-family homes. Since 2007, Mr. Ipour and his brother
have grown Megatel into a well-known and recognized builder of
quality single-family homes. Mr. Ipour is actively responsible for
Megatel’s corporate operations, which includes maintaining
the company’s production and institutional relationships, as
well as managing all financial aspects of Megatel and its
affiliates. Mr. Ipour was also instrumental in the development of
Megatel’s luxury custom home brand, Oxbridge, which has been
prominently featured in both the Dallas area “D”
Magazine, and Luxe Interiors + Design Magazine.
In
addition to his role with Megatel, Mr. Ipour has been co-president
of MCI Mortgage, Inc. (f/k/a RCM Mortgage, Inc.), a residential
mortgage company and an affiliate of Megatel since 2013.
Aaron Ipour was born in 1972 and he holds a master’s degree
in Industrial Management with a Minor in Productivity and
Efficiency Management.
Zach Ipour
Zach
Ipour, also known as Armin Afzalipour, is the co-founder and
co-president of Megatel, a full-service developer and builder of
single-family homes in Texas and Oklahoma. In 2006, Mr. Ipour
co-founded Megatel with his brother, Aaron Ipour. From its
initial formation through 2007, Megatel concentrated on remodeling
and selling existing homes; and after successfully renovating and
selling approximately seven homes, Megatel transitioned into
building single-family homes. Since 2007, Mr. Ipour and his
brother have grown Megatel into a well-known and recognized builder
of quality single family homes. Mr. Ipour is actively responsible
for the organization’s field operations, including the sales
and building divisions. Mr. Ipour is also instrumental in the
growth of Megatel’s land acquisition, and development
division.
In
addition to his role with Megatel, Mr. Ipour has been co-president
of MCI Mortgage, Inc. (f/k/a RCM Mortgage, Inc.), a residential
mortgage company and an affiliate of Megatel since 2013. Zach Ipour
was born in 1979 and he holds a bachelor’s degree in Software
Engineering with a minor in Computer Programming.
Market Opportunity
Based
on research and findings of the current real estate and economic
trends, Megatel believes that there will be continual growth into
the foreseeable future for buyer demand of quality homes within its
primary and secondary building areas. Therefore, Megatel is
positioning itself and its affiliates to respond to the increased
demand and will therefore increase home building and land
development activities in its growth markets. Megatel also
continues to explore expansion into commercial asset opportunities,
particularly in the multifamily sector.
In
Zillow’s 2019 Consumer Housing Trends Report, Millennials
were identified as the largest share of homebuyers at 44 percent. A
Trulia study showed that while many Millennials plan to purchase a
home, they face significant obstacles such as the burden of student
debt, rising home values, and insufficient savings, all of which
have delayed these plans for many.
35
➢
Trends Driving Single-Family and Multi-Family
Construction
Megatel
anticipates the combination of population growth, migration
patterns, demographic trends, new employment opportunities, and job
growth will continue to drive the growing demand for housing,
whether home purchases or rental properties, in Megatel’s key
markets. Local economic conditions and changes in industry
conditions will also have an impact on real estate trends. Key
trends and drivers include the following:
●
Unemployment /
Employment Levels;
●
Job Growth and New
Employment Opportunities;
●
Growth in the
Formation of New Businesses;
●
Demographic Trends:
Population Increases and Decreases;
●
Migration
Patterns;
●
Increased Demand
for Quality of Life by Community Residents;
●
Buyer
(“investor”) sentiment;
●
Light Rail and
Infrastructure Development and Expansion – Ease of
Transportation Access; and
●
Transportation
Costs for Automobiles, including Parking and Commuting
Expenses.
Megatel Company Overview
The
corporate offices for Megatel, the Manager, and the Company are
located at 2101 Cedar Springs Road, Suite 700, Dallas, Texas 75201.
Megatel also establishes onsite management offices for home
building / construction activities as well as model homes for sales
offices at each community.
Competitive Advantages
The
principals of Megatel are experienced real estate developers,
builders, operators, managers, and administrators. Megatel has
developed efficient and disciplined systems in order to
successfully acquire and develop land and build and sell
single-family homes. Megatel’s competitive advantages include
the following:
Management Team – Key Management Team
Key
management for Megatel and its affiliates has in-depth knowledge
and experience operating real estate investment platforms,
including: land acquisition and development, land and home
construction, and financing home sales, as well as renovation and
rehabilitation of existing homes. The following biographies pertain
to the operational and production key management team
members.
Richard Wygle, Chief Financial Officer (MCI, Megatel Homes, LLC and
their Affiliates)
Richard
Wygle is the Chief Financial Officer for Megatel/MCI. In this
capacity, Mr. Wygle oversees the accounting functions for these
companies. Previously, Mr. Wygle served as the Chief
Financial Officer for Servitas/Collegiate Companies, a national
student housing developer/builder/property management company as
the Chief Financial Officer. During his tenure, he managed
the accounting function along with human resources and property
management. Mr. Wygle brings over 20 years of accounting
experience to Megatel/MCI. The majority of that has been
spent in Real Estate. In these rolls, he was responsible for
GAAP reporting to outside investors, making sure policy and
procedures were being followed and for helping maintain banking
relationships. Mr. Wygle graduated from West Texas
A&M University with a bachelor’s degree in
Accounting. He is a Certified Public Accountant and a
Certified Management Accountant.
Primary Focus on
Loans to Megatel for Land Acquisition, Development, Redevelopment,
Repositioning and Construction Efforts
We will
make Loans to Megatel for acquisition, construction, development,
redevelopment, and/or repositioning activities. Consequently, our
investment strategy is closely tied to the business practices and
financial prospects of Megatel. We believe that Megatel is a
reasonable lending risk based on our underwriting criteria, which
include Megatel’s competitive advantages, established
reputation, and successful business practices over time in the
industry. Megatel’s principals have focused on home
building for more than ten (10) years, with activities in land
acquisition and development occurring in more recent years. Our
investment strategy of making Loans to Megatel will allow Megatel
to continue its existing business practices, and it is expected to
facilitate Megatel’s future growth and
expansion.
36
Target Markets in Texas and Other Select Markets
Megatel
targets locations that have recognizable trends for positive
migration patterns and increased job growth. The principals of
Megatel have been building homes in Texas for more than ten years.
Additional select markets beyond Texas may be considered if key
indicators demonstrate trends for positive opportunities in asset
acquisition, development, and construction.
Established History of Home Building and Home Sales
Keeping
a hands-on management approach for more than ten years and having
an intimate knowledge of all areas of Megatel’s operations
has allowed it to continue to grow successfully. This disciplined
approach employed by Megatel for both land development and home
building has established it as one of the largest private
residential homebuilders in Dallas. In addition, construction teams
and builders are trained to work diligently to create the most
effective and efficient architectural designs in order to produce
maximum home values. In order to measure sales reception and
maximize home prices, sales teams are trained to closely monitor
competition within each market they are assigned.
Building and Selling Homes Outside of the Competitive
Box
Competitive edge is
gained by ensuring that homes, both inventory and build-to-suit
homes contain more features than those offered by competitors.
Typical production home builders are up-grade dependent, meaning
that significant margins are made through such upgrades. A Megatel
home base price includes the upgrades, such as wood or tile
flooring. If a Megatel home customer wishes to have a home built to
suit, any additional upgrade costs are merely passed through to the
buyer. In addition, Megatel does not furnish its model homes, thus
saving costs over and above competitors.
Proactive Management Approach
Megatel’s
principals and executive team maintain a proactive management
style, which involves anticipating situations that might lead to
issues and planning ahead to prevent potential problems. This style
of management includes managing the building and sales activities
through active communication and strategically monitoring
operations at the various communities, neighborhoods, and areas in
which it operates its business.
Strategic Financial Management
At a
fundamental level, financial management concerns managing an
organization's assets, liabilities, revenues, profitability and
cash flow. The Megatel executive team takes strategic financial
management a step further by ensuring that the organization remains
on track to meet short-term and long-term goals. Megatel’s
financial management activities involve defining its finances, from
land acquisition to development to home building, to objectives to
identify capital sources, analyze sales results and make decisions
on construction materials, to tracking the variances between actual
and budgeted results and identifying the reasons for any variance
all along the timeline.
Alternative Capital Sources
Megatel, through
the Manager, intends to develop a platform of investment products
that will provide investors with regular distributions from
available net cash flow from operations. It is anticipated that our
Loans will provide an income stream sufficient to meet the Bond
obligations.
Core Organization Values
➢
Integrity
Adherence
to a fundamental code of values, including: honesty, loyalty,
ethics and character, all which are supported by the firm’s
track record of quality construction and development and sales
throughout its history.
37
➢
Resourceful
Utilizing
key relationships in order to create and complete strategies for
each phase of development and construction.
➢
Market
Expertise
In
depth real estate experience coupled with market expertise and key
knowledge and awareness of the industry and market trends which are
critical to successful community development and residential home
building.
➢
Process
Knowledge
Experienced
and knowledgeable of the critical processes in order to effectively
and efficiently manage timelines and create positive
results.
➢
Quality
Products
Well-designed
and comprehensive architectural and building construction plans
that provide for superior quality and value in each and every
property constructed.
➢
Pride
in Management
Professionalism
in management and adherence to selecting only quality performance
minded vendors and providers of key building services.
➢
Emphasis
on Training and Education
Management
believes that training and education are imperative to success in
the competitive real estate industry. Megatel provides sales and
building teams with training upon initial hiring and continuing
education as products and/or materials change, and as services and
or approaches to sales and/or building shift to new
paradigms.
Short-Term and Long-Term Goals
It is
important for any organization to have a clear plan and to
understand its short-term and long-term goals. Highlighted
short-term and long-term goals include:
➢
Short-Term Goals
●
Continue developing
sales strategies for distributing equity products through the
broker-dealer and registered investment adviser channels via its
affiliate Megatel Capital Investment, LLC, the manager of its
affiliated securities offerings;
●
Continue developing
branding efforts for Megatel in its target markets;
●
Regularly review
and update Megatel’s business plan to support continued
organizational growth; and
●
Enhance the
organization’s risk management by continuing to review and
develop policies and procedures that will allow the company to grow
and retain the ability to deliver quality homes for
buyers.
➢
Long-Term Goals
●
Continue
organizational growth while retaining the ability to consistently
offer an exceptional quality product for homebuyers;
●
Develop innovative
strategies to advance Megatel’s investment efforts in land
and development opportunities;
●
Research and
conduct due diligence on potential commercial real estate
investment opportunities and expansion into other property
types;
●
Develop a strategy
and plans for mergers, acquisitions and/or co-investment with other
existing home builders in new regional areas, including
potentially: Florida, North Carolina, Georgia and Colorado (based
on job growth and migration patterns);
38
Liquidity Strategy
We may pursue a
liquidity event, with a focus on a merger, or Merger Event, with or
into Megatel in connection with a potential initial public offering
by Megatel, but which may instead involve another merger or other
transaction in which Bondholders may elect to receive shares of a
publicly traded company and/or cash. Such Merger Event may begin
prior to the Redemption Date. If, at any time prior to the
Redemption Date, the Company elects to pursue a Merger Event, each
Bondholder may make an election as to whether to (i) retain his or
her Bond, (ii) redeem his or her Bond pursuant to other available
redemption options outlined in this Offering Circular, or (iii)
convert his or her Bond into the resulting public security at a
value expected to provide members with a premium rate of return,
inclusive of any distributions previously received. We may also choose to seek to sell
all or substantially all our assets to effectuate a liquidity
event.
There
can be no assurance that we will complete a liquidity event within
the term of the Bonds or at all, as there can be no assurance that
a suitable transaction will be available or that market conditions
will permit a liquidity event. If we do not consummate a liquidity
event, Investors may have to hold their Bondholders for an extended
period of time, subject to Redemption.
Even if
we decide to liquidate, we are under no obligation to conclude our
liquidation within a set time frame because the timing of the sale
of our assets will depend on real estate and financial markets,
economic conditions of the areas in which our properties are
located, and federal income tax effects that may prevail in the
future. We cannot assure you that we will be able to liquidate all
of our assets. After commencing a liquidation, we would continue in
existence until all of our assets are liquidated.
In
light of the related party
nature of any potential merger with or into Megatel, in the
event of such a
potential transaction, we would engage
independent advisors,
including legal counsel and financial advisors, to represent
our interests and those of the Bondholders.
Investment Allocation Policy
To address certain conflicts among various affiliated entities, we
have entered into an amended and restated investment opportunity
agreement; known as the Investment Allocation Agreement, with MCI
Secured Income Fund, LLC, or MCI SIF; MCI Preferred Equity Fund,
LLC, or MCI PEF; MCI Preferred Income Fund II, LLC, or MCI PIF II;
and MCI Preferred Income Fund IV, LLC, or MCI PIF IV, and together
with us known as the MCI Funds, to delineate their respective
rights and obligations of each of the parties to the Investment
Allocation Agreement in connection with the opportunity to invest
in proposed investments that meet the investment criteria for one
or more of the parties of the Investment Allocation Agreement.
Utilizing the industry standard pro-rata allocation policy for such
investment opportunities, the Investment Allocation Agreement
provides that the first proposed investment opportunity that meets
the investment criteria for more than one of the parties of the
Investment Allocation Agreement will be given first to MCI SIF. If
MCI SIF has insufficient proceeds to make the proposed investment,
that investment opportunity will be offered to MCI PEF. If MCI PEF
has insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI PIF II. If MCI
PIF II has insufficient proceeds to make the proposed investment,
the investment opportunity will be offered to MCI PIF IV. If MCI
PIF IV has insufficient proceeds to make the proposed investment,
the investment opportunity will be offered to us.
The second proposed investment opportunity that meets the
investment criteria for more than one of the parties of the
Investment Allocation Agreement will be given to the MCI PEF. If
the MCI PEF has insufficient proceeds to make the proposed
investment, that investment opportunity will be offered to MCI PIF
II. If MCI PIF II has insufficient proceeds to make the proposed
investment, the investment opportunity will be offered to the MCI
PIF IV. If MCI PIF IV has insufficient proceeds to make the
proposed investment, the investment opportunity will be offered to
us. If we have insufficient proceeds to make the proposed
investment, the investment opportunity will be offered to the MCI
SIF.
The third proposed investment opportunity that meets the investment
criteria for one or more of the parties of the Investment
Allocation Agreement will be given to MCI PIF II. If MCI PIF II has
insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI PIF IV. If MCI
PIF IV has insufficient proceeds to make the proposed investment,
the investment opportunity will be offered to us. If we have
insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI SIF. If MCI SIF
has insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI PEF.
39
The fourth proposed investment opportunity that meets the
investment criteria for more than one of the parties of the
Investment Allocation Agreement will be given to the MCI PIF IV. If
MCI PIF IV has insufficient proceeds to make the proposed
investment, that investment opportunity will be given to us. If we
have insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI SIF. If MCI SIF
has insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI PEF. If MCI PEF
has insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI PIF
II.
The fifth proposed investment opportunity that meets the investment
criteria for more than one of the parties of the Investment
Allocation Agreement will be given to us. If we have insufficient
proceeds to make the proposed investment, that investment
opportunity will be given to the MCI SIF. If MCI SIF has
insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI PEF. If MCI PEF
has insufficient proceeds to make the proposed investment, the
investment opportunity will be offered to the MCI PIF II. If MCI
PIF II has insufficient proceeds to make the proposed investment,
the investment opportunity will be offered to the MCI PIF
IV.
Thereafter, the
investment opportunity pattern will continue to rotate between the
MCI SIF, MCI PEF, MCI PIF II, MCI PIF IV and us accordingly. The
order of presentation—to MCI SIF, then to MCI PEF, then to
MCI PIF II, then to MCI PIF IV, then to us—will not alter
regardless of whether one of the MCI Funds chooses to pass on any
particular investment opportunity. The Manager may factor in future
investments and future draws in its determination of whether an
offering has sufficient proceeds to accept a proposed investment.
An MCI Fund may choose to invest available proceeds in an
investment, and additional investment opportunities on the same
Project (as such term is defined in the Investment Allocation
Agreement) may be offered to other MCI Funds. The MCI Funds may
invest in the same Project so long the MCI Funds that so invest
maintain distinct and separate liens against the Project to fully
collateralize each investment made. More importantly, however, none
of the Company, the Manager, Megatel, nor any of their affiliates
intends to adopt any other policies or processes to mitigate the
potential conflicts of interest as of the date of this offering or
at any time in the future.
In addition to the compensation that the Manager and its affiliates
will receive in connection with the Offering of the Bonds or
directly in connection with the Master Credit Facility or
Megatel’s investments, the Manager or its affiliates may also
be paid fees or other compensation in connection with a transaction
for which funds from the Master Credit Facility have been utilized.
In this regard, the Manager may be less likely to exercise all of
our rights with regard to the Master Credit Facility in the same
manner as a third party in the event of a default on the terms of
the Master Credit Facility, to the potential detriment of the
Bondholders. The Manager will also be reimbursed for the offering
and organizational expenses it incurs in connection with this
offering.
None of the agreements or arrangements, including those relating to
compensation, among us, the Manager, Megatel, or their affiliates,
are the result of arm’s-length negotiations. A third-party
management team may be more risk-averse and prudent in making
investment decisions than a management team with an ownership stake
or other pecuniary interest in an investment entity.
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:
● a
broker-dealer or a dealer in securities or currencies;
● an S
corporation;
● a
bank, thrift or other financial institution;
● a
regulated investment company or a real estate investment
trust;
● an
insurance company
● a
tax-exempt organization;
● a
person subject to the alternative minimum tax provisions of the
Code;
● a
person holding the Bonds as part of a hedge, straddle, conversion,
integrated or other risk reduction or constructive sale
transaction;
● a
partnership or other pass-through entity;
● a
person deemed to sell the Bonds under the constructive sale
provisions of the Code;
● a U.S.
person whose “functional currency” is not the U.S.
dollar; or
● a U.S.
expatriate or former long-term resident.
40
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:
● an
individual who is a citizen or resident of the U.S.;
● a
corporation (or other entity treated as a corporation for U.S.
federal income tax purposes) created or organized in or under the
laws of the U.S., any state thereof or the District of
Columbia;
● an
estate, the income of which is subject to U.S. federal income tax
regardless of its source; or
● a
trust that (1) is subject to the primary supervision of a U.S.
court and the control of one or more U.S. persons that have the
authority to control all substantial decisions of the trust, or (2)
has a valid election in effect under applicable Treasury
Regulations to be treated as a U.S. person.
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
A 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.
41
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:
● such
holder fails to furnish its taxpayer identification number, or TIN,
which, for an individual is ordinarily his or her social security
number;
● the
IRS notifies the payor that such holder furnished an incorrect
TIN;
● in the
case of interest payments such holder is notified by the IRS of a
failure to properly report payments of interest or
dividends;
● in the
case of interest payments, such holder fails to certify, under
penalties of perjury, that such holder has furnished a correct TIN
and that the IRS has not notified such holder that it is subject to
backup withholding; or
● such
holder does not otherwise establish an exemption from backup
withholding.
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.
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.
42
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:
● will
be consistent with applicable fiduciary obligations;
● will
be in accordance with the documents and instruments covering the
investments by such plan, including its investment
policy;
● in
the case of an ERISA plan, will satisfy the prudence and
diversification requirements of Sections 404(a)(1)(B) and
404(a)(1)(C) of ERISA, if applicable, and other provisions of the
Code and ERISA;
● will
impair the liquidity of the Benefit Plan or Other
Plan;
● will
result in unrelated business taxable income to the plan;
and
● will
provide sufficient liquidity, as there may be only a limited or no
market to sell or otherwise dispose of our Bonds.
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.
43
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.
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 will be our direct, senior secured obligations and will
rank:
● pari
passu in right of payment with all our other senior secured
indebtedness from time to time outstanding;
● rank
senior in right of payment to our future indebtedness, if any, from
time to time outstanding that is expressly subordinated to the
Bonds;
● rank
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 of the indebtedness of our subsidiaries.
Interest
The
Class A Bonds and Class B Bonds will bear
interest at a rate equal to 7.00% and 7.50% per year, respectively,
payable to the record holders of the Bonds quarterly in arrears on
January 25th, April 25th, July 25th and October 25th of each year,
beginning on the first such date that corresponds to the first full
quarter after the initial closing in the offering.
Interest will
accrue and be paid on the basis of a 365-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.
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 Class A Bonds
and Class B Bonds will each be offered serially, over a maximum
period of three years (subject to extension) starting from the date
of qualification of the Offering Statement of which this Offering
Circular is a part.
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 two additional three-year terms, unless
redeemed upon maturity at our or your election. Each
such renewal would constitute a new offering for the purpose of the
registration requirements of the Securities Act and, as such, would
be required to be registered or conducted pursuant to an exemption
from registration. Any such subsequent offering conducted pursuant
to Regulation A would count against the aggregate dollar
limitations in Rule 251(a) of Regulation A.If the
Bonds are not renewed, we will pay the principal remaining on the
Bonds in 10 equal payments with 10% per
quarter. If the Bonds have not covered the initial costs and
expenses of the Offering, then the principal remaining on the Bonds
will be paid back in 20 equal payments with
5% per quarter until such time as the Bonds have
covered the initial costs and expenses of the Offering, at
which point the redemption will be at 10% per
quarter.
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.
44
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.
Redemption
Generally
The
Bonds will be redeemable subject to certain requirements and limits
as described below. All Bond redemptions will be subject to an
aggregate limit of 5.0% during each three-year term of the Bonds,
and 1.0% per year
Bondholder Redemption
The
Bonds will be redeemable at the election of the Bondholder subject
to certain limits below. To be redeemed, the Bondholder must
provide written notice to us at our principal place of business
between June 15 and June 30 of the fourth year following the initial year of
issuance of the applicable series of Bonds. If
no notice is given, then the Bonds will be extended for an
additional three-year term, upon same terms. Bondholders will be
able to provide written notice to us at our principal place of
business between June 15 and June 30 of the seventh year following the initial year of
issuance of the applicable series of Bonds. If
no notice is given, then the Bonds will be extended for the final
additional three-year term, upon same terms. We will have 120 days
from the date of any such redemption notice is provided to begin
redeeming the Bondholder’s Bonds at a price per Bond equal to
$880 plus any accrued but unpaid interest on the Bond. Bond
redemptions validly received (not postmarked) will be redeemed
pro-rata if more redemptions are received than can be
accommodated.
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. For redemption requests due to
death, on the designated date, we will redeem such Bonds at a price
per Bond equal to $910 plus any accrued and unpaid interest, to but
not including the date on which the Bonds are redeemed. For other
requests, 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
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 two six-month
periods in order to facilitate redemption of the Bonds in our sole
discretion. If the Bonds are renewed for any additional three-year
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 accrued but
unpaid interest. 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.
45
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:
● is
organized and existing under the laws of the United States of
America or any United States, or U.S., state or the District of
Columbia; and
● assumes
all of our obligations to perform and observe all of our
obligations under the Bonds and the indenture;
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 above
“Business
Plan – Liquidity Strategy,” 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.
Debt Limit
The
indenture will limit the indebtedness incurred by us, directly or
indirectly (including the debt of our subsidiaries). For purposes
of complying with the limitation on indebtedness described above,
the following will be not be considered indebtedness: (i) any
principal owed on the Bonds, (ii) the Loans, and (iii) any
indebtedness on any real property we may acquire through
foreclosure on any Loan.
Reports
We will
furnish the following reports to each Bondholder:
Reporting Requirements under Tier II
of Regulation A. After launching this Tier II, Regulation A
offering, we will be required to comply with certain ongoing
disclosure requirements under Rule 257 of Regulation A. We will be
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.
46
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:
● default
in the payment of any interest on the Bonds when due and payable,
which continues for 90 days, a cure period;
● default
in the payment of any principal of or premium on the Bonds when
due, which continues for 90 days, a cure period;
● default
in the performance of any other obligation or covenant contained in
the indenture or in this offering circular for the benefit of the
Bonds, which continues for 120 days after written notice, a cure
period;
● specified
events in bankruptcy, insolvency or reorganization of us;
and
● any
final and non-appealable judgment or order for the payment of money
in excess of $25,000,000 singly, or in the aggregate for all such
final judgments or orders against us is rendered against us and is
not be paid or discharged.
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 to step into our position in any of the Loans. If we
are able to foreclose on any of the Loans that are in default under
their terms, we may be forced to sell any real property held by us
or any subsidiary of ours. 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.
47
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:
● in the
payment of any amounts due and payable or deliverable under the
Bonds; or
● in an
obligation contained in, or a provision of, the indenture which
cannot be modified under the terms of the indenture without the
consent of each Bondholder
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:
● that
Bondholder previously gives to the trustee written notice of a
continuing event of default in excess of any cure
period,
● the
Bondholders of not less than a majority in principal amount of the
outstanding bonds have made written
request;
● such
Bondholder or Bondholders have offered to indemnify the trustee
against the costs, expenses and liabilities incurred in connection
with such request;
● the
trustee has not received from the Bondholders of a majority in
principal amount of the outstanding Bonds a direction inconsistent
with the request (it being understood and intended that no one or
more of such Bondholders shall have any right in any manner
whatever by virtue of, or by availing of, any provision of the
indenture to affect, disturb or prejudice the rights of any other
of such Bondholders, or to obtain or to seek to obtain priority or
preference over any other of such Bondholders or to enforce any
rights under the indenture, except in the manner herein provided
and for equal and ratable benefit of all Bondholders);
and
● the
trustee fails to institute the proceeding within 60
days.
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.
LEGAL PROCEEDINGS
There
are currently no legal proceedings involving our
company.
48
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners (5% or
more)
|
Title of
Class
|
|
Name and Address
of Beneficial Owner
|
|
Amount and
Nature of Beneficial Ownership Acquirable
|
|
Percent of
Class
|
|
LLC
Interests
|
|
Zach
Ipour*
|
|
N/A
|
|
50.00%
|
|
|
|
|
|
|
|
|
|
LLC
Interests
|
|
Aaron
Ipour*
|
|
N/A
|
|
50.00%
|
|
|
|
|
|
|
|
|
|
LLC
Interests
|
|
All
Executives and Managers*
|
|
N/A
|
|
100.00%
|
*2101 Cedar Springs Road, Suite
700, Dallas, Texas 75201
EXECUTIVE OFFICERS
The
following table sets forth information on our executive officers of
our Manager. Consequently, we do not have our own separate board of
managers or executive officers.
|
Name
|
|
Age
|
|
Position with
our Company
|
|
Manager/Officer
Since
|
|
|
|
|
|
|
|
|
|
Zach
Ipour
|
|
41
|
|
Co-Founder
and Co-President
|
|
Nov
2020
|
|
Aaron
Ipour
|
|
48
|
|
Co-Founder
and Co-President
|
|
Nov
2020
|
|
Richard
Wygle
|
|
56
|
|
Chief
Financial Officer*
|
|
Nov
2020
|
Track Record of our Sponsor
MCI has
sponsored three closed programs, MCI Secured Income Fund, LLC, or
MCI SIF; MCI Preferred Equity Fund, LLC, or MCI PEF; and MCI
Preferred Income Fund II, LLC, or MCI PIFII. MCI has one active
Regulation D private placement equity offering, MCI Preferred
Income Fund IV, LLC, or MCI PIFIV.
MCI SIF
commenced an offering of up to $50 million of secured promissory
notes pursuant to a private placement memorandum on April 17,
2015. The final closing in MCI SIF's offering occurred on
April 13, 2017, with approximately $8.9 million of notes being
sold.
MCI PEF
commenced an offering of up to $100 million of preferred equity
membership interests pursuant to a private placement memorandum on
January 12, 2016. The final closing in MCI PEF's offering
occurred on February 9, 2018, with approximately all $100 million
of preferred interests being sold.
MCI
PIFII commenced an offering of up to $200 million of preferred
equity membership interests pursuant to a private placement
memorandum on October 2, 2017. The final closing in MCI PIF
II's offering occurred on October 7, 2020, with approximately all
$200 million of preferred interests being sold.
MCI
PIFIV commenced an offering of up to $500 million of preferred
equity membership interests pursuant to a private placement
memorandum on August 1, 2019. The offering for MIC PIFIV is
ongoing.
.
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.
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 $50,000,000 in the aggregate is
raised.
49
|
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.
|
|
$1,000,000
|
|
|
|
|
|
|
|
Operating Stage:
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
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.
50
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 November 4, 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 Lane Gorman Trubitt, LLC, an independent public
accounting firm, as stated in their report appearing elsewhere
herein.
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.
WHERE YOU CAN FIND ADDITIONAL
INFORMATION
Our
Manager maintains a website, www.MCIInvest.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.
51
MCI INCOME FUND V,
LLC
DECEMBER 31,
2020
CONTENTS
Page
|
|
|
|
INDEPENDENT
AUDITORS’ REPORT
|
F-1
|
|
|
|
|
FINANCIAL
STATEMENTS
|
|
|
|
|
|
BALANCE
SHEET
|
F-2
|
|
|
|
|
STATEMENT OF
OPERATIONS AND CHANGES IN MEMBERS’
CAPITAL
|
F-3
|
|
|
|
|
STATEMENT OF CASH
FLOWS
|
F-4
|
|
|
|
|
NOTES TO FINANCIAL
STATEMENTS
|
F-5 to F-7
|
MCI
INCOME FUND V, LLC
FINANCIAL
STATEMENTS
DECEMBER
31, 2020
Independent Auditors’ Report
To the
Members
MCI
Income Fund V, LLC
Report on the Financial Statements
We have
audited the accompanying financial statements of MCI Income Fund V,
LLC (the “Company”), which comprise the balance sheet
as of December 31, 2020, and the related statements of operations
and changes in members’ capital and cash flows for the period
of November 4, 2020 (Inception) through 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 of material misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosure 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 the Company as
of December 31, 2020, and the results of its operations and its
cash flows for the period of November 4, 2020 (Inception) through
December 31, 2020, in accordance with accounting principles
generally accepted in the United States of America.
Emphasis-of-Matter – Risks and Concentrations
As
discussed in Note 5 to the financial statements, the World Health
Organization has characterized COVID-19 as a pandemic. While the
Company expects this matter to negatively impact its results, the
extent of the impact of the COVID-19 pandemic on the
Company’s operational and financial performance will depend
on future developments. Our opinion is not modified with respect to
that matter.
Dallas,
Texas
February
16, 2021
F-1
|
MCI Income Fund V, LLC
|
|
|
Balance Sheet
|
|
|
December 31, 2020
|
|
|
|
|
|
Assets
|
|
|
Total
assets
|
$ -
|
|
|
|
|
Liabilities and
Members’
Capital
|
|
|
Total
liabilities
|
$ -
|
|
|
|
|
Total members’
capital
|
$ -
|
|
Total liabilities and members’
capital
|
$ -
|
F-2
MCI Income Fund V, LLC
Statement of Operations and
Changes in Members ’
Capital
For the period November 4, 2020 (Inception) through December 31,
2020
|
Revenue
|
|
|
Total
revenue
|
$ -
|
|
|
|
|
Expenses
|
|
|
Total
expenses
|
-
|
|
|
|
|
Net income (loss)
|
$ -
|
|
|
|
|
Members’
capital, November
4, 2020 (Inception)
|
$ -
|
|
|
|
|
Members’
capital, December
31, 2020
|
$ -
|
F-3
MCI Income Fund V, LLC
Statement of Cash Flows
For the period November 4, 2020 (Inception) through December 31,
2020
|
Cash flows from operating activities
|
|
|
Net income (loss)
|
$ -
|
|
|
|
|
Adjustments to reconcile net income (loss)
|
|
|
to net cash provided by (used in) operating
activities
|
-
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
-
|
|
|
|
|
Cash flows from financing activities
|
|
|
Net cash provided by (used in) financing
activities
|
-
|
|
|
|
|
Cash flows from investing activities
|
|
|
Net cash provided by (used in) investing
activities
|
-
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
Cash and cash equivalents, at November 4, 2020
(Inception)
|
-
|
|
|
|
|
Cash and cash equivalents, end of period
|
$ -
|
F-4
1.
NATURE OF
BUSINESS
MCI Income Fund V,
LLC (the “Company”), is a Delaware limited liability
company formed to originate loans collateralized by residential and
commercial real estate in the United States of America.
The Company’s plan is to
originate, acquire, and manage residential and commercial real
estate loans and securities. Megatel Capital Investments, LLC is
the Managing Member of the Company. The Company is
headquartered in Dallas, Texas.
The Company was formed on November 4, 2020 and has
not commenced operations. The Company anticipates raising a maximum
of $50 million of capital in the form of bonds pursuant to an
exemption from registration under the amendments to Regulation A
(“Regulation A+”) of the Jumpstart Our Business
Startups Act of 2020 (the “JOBS act”), which amended
section 3(b) of the Securities Act of 1933. The Company is in the
qualification process with the Securities and Exchange Commission,
“SEC” and expects to begin the issuance of bonds upon
approval. The Company’s term is indefinite as of December 31,
2020.
2.
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
A
summary of the significant accounting policies consistently applied
in the preparation of the accompanying financial statements
follows.
Member Liability
A
member is not personally liable or bound for the expenses,
liabilities or obligations of the Company beyond the amount of such
member’s capital contributions as defined in the company
agreement. No member shall be obligated to provide additional
capital contributions outside the “original capital
contribution” made upon admission to the Company or to make a
loan to the Company.
Cash and Cash Equivalents
The Company
considers all highly liquid investments with an original maturity
of three months or less when purchased, to be cash. The Company
maintains cash balances in financial institution transactional
accounts in Texas, which at times may exceed insured limits. The
Company is exposed to credit risk due to current market conditions
but has not experienced any loss in such accounts and does not
anticipate any loss as a result of such credit
risk.
Notes Receivable and Allowance for Losses
Notes receivable
are stated at unpaid principal balances. Interest on the notes
receivable is recognized over the term of the note and is
calculated using the simple-interest method on principal amounts
outstanding.
Notes receivable
are charged-off to expense when they are deemed uncollectible.
Management’s periodic evaluation of uncollectible notes
receivable is based on past loss experience, known and other risks
inherent in the portfolio, specific impaired notes receivable,
adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral, and current
economic conditions.
The Company
considers a note uncollectible when based on current information or
factors, it is probable that the Company will not collect the
principal and interest payments according to the note agreement.
Management considers many factors in determining whether a note is
impaired, such as payment history and value of collateral. As of
December 31, 2020, no notes receivable have been issued or
determined to be uncollectible by the Company.
Bonds Payable
The Company issued
bonds will be held as a liability upon the effective date of
closing. The bond interest will be expensed on an accrual
basis.
F-5
2.
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue is derived
from interest income earned on notes receivable from related
parties. Interest income is recognized on the accrual basis of
accounting, based on the terms of the note receivable agreement. As
of December 31, 2020, the Company has not issued any notes
receivable due from related parties and has not recognized any
interest income.
Expense Recognition
Operating and other
related expense are recorded on an accrual basis as
incurred.
Income Taxes
The Company has
elected to be taxed as a partnership. In lieu of corporation income
taxes, the members of the Company are responsible for their
pro-rata share of the Company’s taxable
income.
The Company
evaluates tax positions taken or expected to be taken in the course
of preparing the Company’s tax returns to determine whether
the tax positions are “more-likely-than-not” of being
sustained by the applicable tax authority. A tax position
that meets the more-likely-than-not recognition threshold is
measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon ultimate settlement.
Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognized in
the first subsequent financial reporting period in which that
threshold is met. Previously recognized tax positions that no
longer meet the more-likely-than-not recognition threshold should
be derecognized in the first subsequent financial reporting period
in which that threshold is no longer met. Management has evaluated
the Company’s tax positions and concluded that the Company
has taken no uncertain tax positions that require adjustment to the
financial statements to comply with the provisions of this
guidance. The Company recognizes accrued interest and penalties
associated with uncertain tax positions as part of the income tax
provision. No interest and penalties have been accrued as of
December 31, 2020.
Use of Estimates
In preparing the
Company’s financial statements, management is required to
make estimates and assumptions that affect the collectability of
the notes receivable – related parties and the accrued
interest on the notes payable, and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from these estimates. It is at least reasonably possible
that the estimates will change materially in the near
term.
Allocation of Net Income and Loss
The operating agreement provides detailed
provisions regarding the allocation of net income and losses among
the members of the Company. Generally, items of income and expense
are allocated among members in proportion to their applicable
membership interest. Members of the Company should refer to
the operating agreement for a complete description of the
membership provisions.
3.
BONDS
PAYABLE
After
the close of the initial bond issuance and first full quarter of
operations, the Company anticipates making monthly interest
payments to the A and B bondholders at a rate of 7.00% and 7.50%
per annum, respectively. The bonds will be secured by the
underlying liens from the loans made to related
parties.
F-6
3.
BONDS PAYABLE
(CONTINUED)
The bonds are expected to mature on June
30th
of the fourth year following the
initial year of issuance of the applicable series of
bonds.
The
bonds are expected to be redeemable beginning July 1, 2025 at a
rate of 10.0% per quarter unless the load from issuing the bonds
has not been fully recovered, then the bonds will redeem at 5% per
quarter.
As of December 31, 2020, the Company has not
issued any bonds
4.
MEMBERS’
EQUITY
The operations of
the Company are governed by the Company agreement. The common
member of the Company is MCI Holdings, LLC. The common member of
the Company is responsible for all management and decisions of the
Company. No members will be liable for additional calls in excess
of the original commitment.
5.
COMMITMENTS
AND CONTINGENCIES
The
managing member has incurred and will continue to incur
organizational and offering expenses which are reimbursable from
the Company, at 2% of total gross proceeds from the bond offerings.
Organizational and offering costs include all costs and expenses to
be paid by the Company in connection with the formation of the
Company and the offering, including the Company’s legal,
accounting, printing, mailing and filing fees, charges of our
escrow agent, reimbursement of our dealer manager and participating
broker-dealers for due diligence expenses, and other costs in
connection with administrative oversight of the offering and the
marketing process. The organizational and offering costs are not
represented on the Company’s financial statements due to
these being contingent upon a successful completion of the bond
offerings. The Company will begin to accrue organizational and
offering expenses when proceeds from the offering are received. The
Company will expense organization costs when incurred. As of
December 31, 2020, there have been approximately $25,000 of
organizational costs incurred by the managing
member.
The
Company has provided general indemnifications to the Managing
Member, any affiliate of the managing member and any person acting
on behalf of the managing member or that affiliate when they act,
in good faith, in the best interest of the Company. The Company is
unable to develop an estimate of the maximum potential amount of
future payments that could potentially result from any hypothetical
future claim but expects the risk of having to make any payments
under these general business indemnifications to be
remote.
Viral Pandemic
In December 2019, a novel strain of coronavirus
(“COVID-19”) was reported to have surfaced in China.
The Word Health Organization has declared COVID-19 to constitute a
“Public Health Emergency of International Concern” and
characterized COVID-19 as a pandemic. The U.S. government
has also implemented enhanced screenings, quarantine requirements,
and travel restrictions in connection with the COVID-19 outbreak.
Beginning in March 2020, various counties in which the Company
operates in had orders for individuals to stay in their homes
except for essential purposes (“Shelter-In-Place”). The
pandemic has created a general uncertainty to the overall economy
which could have an impact to the Company in their ability to
attract willing investors. The extent to which COVID-19 will impact
the Company will depend on future developments and public health
advancements, which are highly uncertain and cannot be predicted
with confidence as of December 31, 2020.
6.
SUBSEQUENT
EVENTS
Management has
evaluated subsequent events through February 16, 2021, which is the
date the financial statements were available to be
issued.
F-7
PART III - EXHIBITS
EXHIBIT INDEX
|
Exhibit
Number
|
|
Exhibit
Description
|
|
|
|
|
|
|
Managing
Broker-Dealer Agreement by and between International Asset
Advisors. and MCI Income Fund V, LLC*
|
|
|
|
|
|
|
|
Certificate
of Formation of MCI Income Fund V, LLC
|
|
|
|
|
|
|
|
Limited
Liability Company Agreement of MCI Income Fund V, LLC
|
|
|
|
|
|
|
|
Form of
Indenture
|
|
|
|
|
|
|
|
Form of
Class A Bond
|
|
|
|
|
|
|
|
Form of
Class B Bond*
|
|
|
|
|
|
|
|
Master
Credit Facility
|
|
|
|
|
|
|
|
Subscription
Agreement
|
|
|
|
|
|
|
|
Consent
of Lane Gorman Trubitt, LLC
|
|
|
|
|
|
|
(11)(b)
|
|
Consent
of Kaplan Voekler Cunningham & Frank, PLC***
|
|
|
|
|
|
|
Opinion
of Kaplan Voekler Cunningham & Frank, PLC regarding legality of
the Bonds*
|
* Previously filed
** To be filed by amendment
*** Included with the legal opinion provided pursuant to item
(12)
52
SIGNATURES
Pursuant
to the requirements of Regulation A, the issuer certifies that it
has reasonable grounds to believe that it meets all of the
requirements for filing on Form 1-A and has duly caused this
offering statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, Texas on
February 19 of 2021.
MCI INCOME FUND V, LLC,
a Delaware limited liability company
By: Megatel Capital
Investments, LLC,
a Delaware limited liability company
Its: Sole
Member
By:
/s/
Zach
Ipour
Name: Zach Ipour
Its:
Co-President (Principal Executive Officer)
By: /s/
Aaron
Ipour
Name: Aaron Ipour
Its:
Co-President
By: /s/
Richard
Wygle
Name: Richard Wygle
Its: Chief Financial Officer of
the Sole Member of the Manager
(Principal
Financial Officer and Principal Accounting Officer)
53
