Filed pursuant to Rule
253(g)(2)
File
No. 024-10563
Offering Circular
December 18, 2017
HC GOVERNMENT REALTY TRUST, INC.
1819 Main Street, Suite 212
Sarasota, Florida 34236
(941) 955-7900
Minimum Offering Amount: $3,000,000 in Shares of Common
Stock
Maximum Offering Amount: $30,000,000 in Shares of Common
Stock
Explanatory Note
This offering circular is part of the post-qualification amendment
we filed in order to update the financial statements contained
herein in accordance with Rule 252(f)(2)(i) of Regulation A. In
addition to updating the financial statements presented herein,
this amendment updates portfolio, financial and statistical data.
All material terms of this offering otherwise remain the
same.
HC
Government Realty Trust, Inc., a Maryland corporation referred to
herein as our company, was formed to primarily source, acquire, own
and manage built-to-suit and improved-to-suit, single-tenant
properties leased by the United States of America through the U.S
General Services Administration, or GSA Properties. We focus on
acquiring GSA Properties that fulfill mission critical or direct
citizen service functions primarily located across secondary or
smaller markets, within size ranges of 5,000-50,000 rentable square
feet, and in their first term after construction or retrofitted to
post-9/11 standards. We are externally managed and advised by
Holmwood Capital Advisors, LLC, a Delaware limited liability
company, or our Manager. Our management team has significant
commercial real estate experience and long-established
relationships with real estate owners, developers and operators
focused on GSA Properties, which we believe provides a competitive
advantage in sourcing acquisition opportunities that provide
attractive risk-adjusted returns.
We,
through subsidiaries, own a portfolio of 13 GSA Properties,
comprised of ten GSA Properties we own in fee simple and three
additional GSA Properties for which we have the rights to
all of the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership for federal income tax purposes.
We
intend to elect and qualify to be treated as a real estate
investment trust, or REIT, for U.S. federal income tax purposes
under the Internal Revenue Code of 1986, as amended, or the Code,
beginning with our taxable year ending December 31, 2017. Shares of
our common stock are subject to restrictions on ownership and
transfer that are intended, among other purposes, to assist us in
qualifying and maintaining our qualification as a REIT. Our
charter, subject to certain exceptions, limits ownership to no more
than 9.8% in value or number of shares, whichever is more
restrictive, of any class or series of our outstanding capital
stock.
We are
offering a minimum of 300,000 and a maximum of 3,000,000 shares of
our common stock at an offering price of $10.00 per share, for a
minimum offering amount of $3,000,000 and a maximum offering amount
of $30,000,000. The minimum purchase requirement is 150 shares, or
$1,500; however, we can waive the minimum purchase requirement in
our sole discretion. On May 18, 2017, we closed on the minimum
offering amount. As of the date of this offering circular, we have
issued 588,617 shares of common stock in this offering in exchange
for gross proceeds totaling $5,886,170. We intend to hold closings
on at least a monthly basis. The final closing will occur whenever
we have reached the maximum offering amount. Prior to each closing,
the proceeds for that closing will be kept in an escrow account or,
for subscribers purchasing through the Folio Investments, Inc.
platform, deposited in such subscriber’s account with Folio
Investments, Inc., or Folio, or deposited with such other clearing
firm for the benefit of such subscriber if and when such clearing
firm is engaged in this offering. See "Plan of Distribution -
Minimum Offering Amount and Minimum Purchase."
We have
engaged SANDLAPPER Securities, LLC, or our Dealer-Manager, a member
of the Financial Industry Regulatory Authority, or FINRA, as our
Dealer-Manager to offer our shares to prospective investors on a
best efforts basis, and our Dealer-Manager will have the right to
engage such other FINRA member firms as it determines to assist in
the offering. Cambria Capital, LLC will act as our principal
selling group member. We intend to apply for quotation of our
common stock on the OTCQX Marketplace by the OTC Markets Group,
Inc., or OTCQX.
The
sale of the offered shares began on November 7, 2016 and is
expected to continue until the earlier of (i) the date on which the
maximum shares offered hereby have been sold, or (ii) November 7,
2018. We may, however, terminate the offering at any time and for
any reason. At this time, there is no public trading market for
shares of our common stock.
|
|
Commissions and Expense
Reimbursements
(1)(2)
|
Proceeds
to
Company
(1)(2)
|
Proceeds to Other
Persons
|
Per Offered
Unit:
|
$10.00
|
$0.875
|
$9.125
|
$0
|
Maximum Offering
Amount:
|
$30,000,000
|
$2,625,000
|
$27,375,000
|
$0
|
|
(1)
|
This
table depicts underwriting discounts, commissions and expense
reimbursements of 8.75% of the gross offering proceeds. We will pay
our Dealer-Manager selling commissions of 6.0% of the gross
offering proceeds, a managing broker-dealer fee of 1.25%, a
non-accountable expense reimbursement of 1.0% of the gross offering
proceeds, and an accountable expense reimbursement of up to 0.50%
of the gross proceeds from this offering for fees to Folio for its
clearing and facilitation services. This table does not include an
accountable expense reimbursement of up to $30,000 for filing and
legal fees incurred by our Dealer-Manager because we are not able
to accurately estimate those fees. The $30,000 fee is only payable
if we sell the maximum offering amount. See “Plan of
Distribution” for more information.
|
|
(2)
|
We will
be responsible for paying organizational and offering expenses. To
date, our Manager or its affiliates have advanced approximately
$990,000 as organizational and offering costs. We anticipate
further organizational and offering expenses of approximately
$10,000 to be incurred. To the extent that organizational and
offering expenses, when combined with underwriting discounts,
commissions and expense reimbursements in connection with this
offering, exceed 15.0% of the gross proceeds from the offering, or
the O&O Cap, the Manager has agreed to repay an amount of
organizational and offering expenses which would bring such fees
and commissions paid in connection with this offering below the
O&O Cap.
|
Generally, no sale may be made to you in this offering if the
aggregate purchase price you pay is more than 10% of the greater of
your annual income or net worth. Different rules apply to
accredited investors and investors who are not 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 our common stock involves a number of risks. See
“Risk Factors,” beginning on page 18 of this offering
circular. Some of the more significant risks include those set
forth below.
|
●
|
We were
recently organized and do not have a significant operating history
or financial resources. There is no assurance that we will be able
to successfully achieve our investment objectives.
|
|
●
|
Investors
will not have the opportunity to evaluate or approve any
investments prior to our financing or acquisition
thereof.
|
|
●
|
We may
not be able to invest the net proceeds of this offering on terms
acceptable to investors, or at all.
|
|
●
|
Investors
will rely solely on our Manager to manage our company and our
investments. Our Manager will have broad discretion to invest our
capital and make decisions regarding investments. Investors will
have limited control over changes in our policies and day-to-day
operations, which increases the uncertainty and risks you face as
an investor. In addition, our board of directors may approve
changes to our policies without your approval.
|
|
●
|
There
are substantial risks associated with owning, financing, operating
and leasing real estate.
|
|
●
|
Our
ability to pay our intended initial annual dividend, which
represents approximately 379% of our estimated cash available for
distribution for the twelve months ending June 30, 2018, assuming
we sell the maximum offering amount, depends on our future
operating cash flow, and we expect to be required to fund a portion
of our intended initial annual dividend through borrowings or
equity issuances, and we cannot assure you that we will be able to
obtain such funding on attractive terms or at all, in which case we
plan to use a portion of the remaining net proceeds from this
offering for such funding, which would make such amounts
unavailable for our acquisition of properties, or to fund such
dividend in the form of shares of common stock or to eliminate or
otherwise reduce such dividend.
|
|
●
|
The
purchase price of the shares of our common stock has been
determined primarily by our capital needs and bears no relationship
to any established criteria of value such as book value or earnings
per share, or any combination thereof. Further, the price of the
shares is not based on our past earnings. There has been no prior
public market for our shares; therefore, the offering price is not
based on any market value.
|
|
●
|
Real
estate-related investments, including joint ventures, and
co-investments, involve substantial risks.
|
|
|
|
|
●
|
Shares
of our common stock will have limited transferability and
liquidity. Prior to this offering, there was no active market for
our common stock. Although we intend to apply for quotation of our
common stock on the OTCQX, 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,
our common stock will not be quoted on the OTCQX until after the
termination of this offering, if at all. Therefore, purchasers in
the initial closing will be required to wait until at least after
the final termination date of this offering for such
quotation.
|
|
●
|
Some of our leases permit the occupying agency to vacate the
property and for our tenant to discontinue paying rent prior to the
lease expiration date.
|
|
|
|
|
●
|
Our
company will pay substantial fees and expenses to our Manager and
its affiliates. These fees will increase investors’ risk of
loss, and will reduce the amounts available for investments. Some
of those fees will be payable regardless of our profitability or
any return to investors.
|
|
●
|
The tax
protection agreement with Holmwood could limit our ability to sell,
refinance or otherwise dispose of our Contribution Properties (as
defined herein) or make any such sale or other disposition more
costly.
|
|
●
|
Substantial
actual and potential conflicts of interest exist between our
investors and our interests or the interests of our Manager, and
our respective affiliates, including conflicts arising out of (a)
allocation of personnel to our activities, (b) allocation of
investment opportunities between us.
|
|
●
|
An
investor could lose all or a substantial portion of its
investment.
|
|
●
|
There
is no public trading market for our common stock, and we are not
obligated to effectuate a liquidity event by a certain date or at
all. It will thus be difficult for an investor to sell its shares
of our common stock. Although we intend to apply for quotation
of our common stock on the OTCQX, 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, our common stock will not be quoted on the OTCQX until
after the termination of this offering, if at all.
|
|
●
|
We may
fail to qualify or maintain our qualification as a REIT for federal
income tax purposes. We would then be subject to corporate level
taxation and we would not be required to pay any distributions to
our stockholders.
|
An investment in the offered shares 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.
Prospective investors should
carefully consider and review the RISK FACTORS beginning on page
13.
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS
UPON THE MERITS OF OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED
OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR
COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION
MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION
FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISION HAS
NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED
ARE EXEMPT FROM REGISTRATION.
This
Offering Circular Uses the Form 1-A Disclosure Format.
Offering Circular
Dated December 18, 2017.
TABLE OF CONTENTS
SUMMARY
|
1
|
RISK
FACTORS
|
18
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
50
|
DILUTION
|
51
|
DISTRIBUTION
POLICY
|
53
|
PLAN OF
DISTRIBUTION
|
57
|
USE OF
PROCEEDS
|
62
|
DESCRIPTION
OF OUR BUSINESS
|
63
|
DESCRIPTION
OF OUR PROPERTIES
|
70
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
82
|
DIRECTORS,
EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES
|
87
|
COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
|
92
|
SECURITY
OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
|
95
|
OUR
MANAGER AND RELATED AGREEMENTS
|
96
|
COMPENSATION
TO OUR MANAGER AND AFFILIATES
|
99
|
POLICIES
WITH RESPECT TO CERTAIN ACTIVITIES
|
102
|
INTEREST
OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
|
105
|
SECURITIES
BEING OFFERED
|
111
|
IMPORTANT
PROVISIONS OF MARYLAND CORPORATE LAW AND OUR CHARTER AND
BYLAWS
|
119
|
ADDITIONAL
REQUIREMENTS AND RESTRICTIONS
|
124
|
THE
OPERATING PARTNERSHIP AGREEMENT
|
126
|
MATERIAL
FEDERAL INCOME TAX CONSIDERATIONS
|
136
|
ERISA
CONSIDERATIONS
|
162
|
REPORTS
|
164
|
LEGAL
MATTERS
|
165
|
INDEPENDENT
AUDITORS
|
166
|
ADDITIONAL
INFORMATION
|
167
|
PART
F/S
|
F-1
|
SUMMARY
This summary highlights the information contained elsewhere in this
offering circular. Because it is a summary, it may not contain all
the information that you should consider before investing in our
shares. To fully understand this offering, you should carefully
read this entire offering circular, including the more detailed
information set forth under the caption “Risk Factors.”
Unless the context otherwise requires or indicates, references in
this offering circular to “us,” “we,”
“our” or “our company” refer to HC
Government Realty Trust, Inc., a Maryland corporation, together
with its consolidated subsidiaries, including HC Government Realty
Holdings, L.P., a Delaware limited partnership, which we refer to
as our operating partnership. We refer to Holmwood Capital, LLC, a
Delaware limited liability company, as Holmwood, and Holmwood
Capital Advisors, LLC, a Delaware limited liability company, as our
Manager. As used in this offering circular,
an affiliate of,
or person affiliated with, a specified person,
is a person that directly, or indirectly through one or
more intermediaries, controls or is controlled by, or is under
common control with, the person specified.
We have entered into (a) the Management Agreement between us and
our Manager, or the Management Agreement, (b) the Limited
Partnership Agreement of HC Government Realty Holdings, L.P., or
the Limited Partnership Agreement and (c) the Contribution
Agreement between HC Government Realty Holdings, L.P. and Holmwood
Capital, LLC, or the Contribution Agreement. Unless the context
otherwise requires or indicates, the information set forth in this
offering circular assumes that the value of each unit of limited
partnership interest in our operating partnership, or OP Unit,
issued to persons contributing interests in our Contribution
Properties (as defined below) is equivalent to the public offering
price per share of our common stock in this offering.
Our Company
HC
Government Realty Trust, Inc. was formed in 2016 as a Maryland
corporation, and we intend to elect and qualify to be taxed as a
REIT for federal income tax purposes beginning with our taxable
year ending December 31, 2017. We focus on acquiring primarily in
GSA Properties that fulfill mission critical or direct citizen
service functions primarily located across secondary and smaller
markets, within size ranges of 5,000-50,000 rentable square feet,
and in their first term after construction or retrofit to post-9/11
standards. Leases associated with the GSA Properties in which our
company invests are full faith and credit obligations of the United
States of America and are administered by the U.S. General Services
Administration or directly through the occupying federal agencies,
or, collectively, the GSA. Our principal objective is the creation
of value for stockholders by utilizing our relationships and
knowledge of GSA Properties, specifically, the acquisition,
management and disposition of GSA Properties. As of the date of
this offering circular, we wholly own ten properties and have
all of the rights to the profits,
losses, any distributed cash flow and all of the other benefits and
burdens of ownership for federal income taxes of three additional
GSA Properties, all of them leased in their entirety to U.S.
Government agency tenants. Our portfolio consists of (i) three
properties acquired by our company, through subsidiaries, on June
10, 2016 using proceeds from the issuance of shares of our 7.00%
Series A Cumulative Convertible Preferred Stock, or the Series A
Preferred Stock, secured financing in the amount of $7,225,000 from
CorAmerica Loan Company, LLC, or CorAmerica, $2,019,789 in
unsecured seller financing, and $1,000,000 of unsecured loans from
Holmwood, or the Holmwood Loan, (ii) one property acquired by our
company, through a subsidiary, on March 31, 2017 using secured
financing in the amount of $10,875,000 and unsecured financing from
two principals of our predecessor, Holmwood in the aggregate amount
of $3,400,000, (iii) seven properties contributed to us as of the
initial closing by Holmwood, including three properties from which
we received all of the rights to the
profits, losses, any distributed cash flow and all of the other
benefits and burdens of ownership for federal income tax purposes
rather than a fee simple interest, each pursuant to the
Contribution Agreement, (iv) one
property acquired by our company, through a subsidiary, on July 25,
2017, for a purchase price of $4,709,458, and financed by senior
debt financing and equity and (v) one property acquired by
our company, through a subsidiary, in November 2017, for a purchase
price of $8,225,000, and financed by senior mortgage debt and
equity.
The GSA-leased real estate asset class
possesses a number of positive attributes that we believe will
offer our stockholders significant benefits, including a highly
creditworthy and very stable tenant base, long-term lease
structures and low risk of tenant turnover. GSA leases are backed
by the full faith and credit of the U.S. Government, and the GSA
has never experienced a financial default in its history. Payment
for rents under GSA leases are funded through the Federal
Buildings Fund and are not subject to direct federal
appropriations, which can fluctuate with federal budget and
political priorities. In addition to presenting reduced risk of
default, GSA leases typically have long initial terms of ten to 20
years with renewal leases having terms of five to ten years, which
limit operational risk. Upon renewal of a GSA lease, base rent is
typically reset based on a number of factors, including inflation
and the replacement cost of the building at the time of renewal,
which we generally expect will increase over the life of the
lease.
GSA-leased
properties generally provide attractive investment opportunities
and require specialized knowledge and expertise. Each U.S.
Government agency has its own customs, procedures, culture, needs
and mission, which translate into different requirements for its
leased space. Furthermore, the sector is highly fragmented, with a
significant amount of non-institutional owners who lack our
infrastructure and experience in GSA-leased properties, and there
is no national broker or clearinghouse for GSA-leased properties.
We believe this fragmentation results, in part, from the U.S.
Government’s and GSA’s contracting policies, including
policies of preference for small, female and minority owned
businesses. As of August 2015, the largest owner of GSA-leased
properties owned approximately 3.5% of the GSA-leased market by RSF
and the ten largest owners of GSA-leased properties collectively
owned approximately 17% of the GSA-leased market by
RSF.1 Long-term relationships and
specialized institutional knowledge regarding the agencies, their
space needs and the hierarchy and importance of a property to its
tenant agency are crucial to understanding which agencies and
properties present the greatest likelihood of long-term tenancy,
and to identifying and acquiring attractive investment properties.
Our portfolio is
diversified among U.S. Government tenant agencies, including a
number of the U.S. Government’s largest and most essential
agencies, such as the Drug Enforcement Administration, the Federal
Bureau of Investigation, the Social Security Administration and the
Department of Transportation.
We
intend to operate as an UPREIT, and own our properties through our
subsidiary, HC Government Realty Holdings, L.P., a Delaware limited
partnership. While we focus on investments in GSA Properties, we
may also develop programs in the future to invest in state and
local government, single-tenant and majority occupied properties
and properties majority leased to the United States of America and
other similar mission critical properties. We are externally
managed and advised by Holmwood Capital Advisors, LLC, a Delaware
limited liability company, our Manager. Our Manager will make all
investment decisions for us. Our Manager is owned by Messrs. Robert
R. Kaplan and Robert R. Kaplan, Jr., individually, by Stanton
Holdings, LLC, which is controlled by Mr. Edwin M. Stanton, and by
Baker Hill Holding LLC, which is controlled by Mr. Philip
Kurlander, all in equal proportions. The officers of our Manager
are Messrs. Edwin M. Stanton, President, Robert R. Kaplan, Jr.,
Vice President, Philip Kurlander, Treasurer, and Robert R. Kaplan,
Secretary.
We
believe our Manager’s and its principals’ and executive
officers’ extensive knowledge of U.S. Government properties
and lease structures allows us to execute transactions efficiently.
Additionally, we believe that our ability to identify and implement
building improvements increases the likelihood of lease renewal and
enhances the value of our portfolio. Our Manager’s
experienced management team brings specialized insight into the
mission and hierarchy of tenant agencies so that we are able to
gain a deep understanding of the U.S. Government’s long-term
strategy for a particular agency and its resulting space needs.
This allows us to target properties for use by agencies that will
have enduring criticality and the highest likelihood of lease
renewal. Lease duration and the likelihood of renewal are further
increased as properties are tailored to meet the specific needs of
individual U.S. Government agencies, such as specialized
environmental and security upgrades.
Our
Manager and its principals and executive officers have a network of
relationships with real estate owners, investors, operators and
developers of all sizes and investment formats, across the United
States and especially in relation to GSA Properties. We believe
these relationships provide us with a competitive advantage,
greater access to off-market transactions, and flexibility in our
investment choices to source and acquire GSA
Properties.
In
addition to the dedication and experience of our Manager’s
management team, we rely on the network of professional and
advisory relationships our Manager and its principals and executive
officers has cultivated, including BB&T Capital Markets, a
division of BB&T Securities, LLC, or BB&T Capital Markets.
Our Manager has engaged BB&T Capital Markets to provide
investment banking advisory services, including REIT financial and
market analysis, offering structure analysis.
We
believe in the long-term there will be a consistent flow of
properties in our target markets for purposes of acquisition,
leasing and managing which we expect will enable us to continue our
platform into the foreseeable future. We acquire GSA Properties
located across secondary and smaller markets throughout the United
States. We do not anticipate making acquisitions outside of the
United States or its territories.
We
primarily make direct acquisitions of GSA Properties, but we may
also invest through indirect investments in real property, such as
those that may be obtained in a joint venture which may or may
not be managed or affiliated with our Manager or its affiliates,
whereby we own less than a 100% of the beneficial interest therein;
provided, that in such event, we will acquire at least 50 percent of
the outstanding voting securities in the investment, or otherwise
comply with SEC staff guidance regarding majority-owned
subsidiaries, for the investment to meet the definition of
“majority-owned subsidiary” under the Investment
Company Act. While our Manager does not intend for these
types of investments to be a primary focus, we may make such
investments in our Manager’s sole discretion.
Management
We are
externally managed by Holmwood Capital Advisors, LLC, our
Manager. Our Manager makes all investment decisions for us. Our
Manager and its affiliated companies specialize in sourcing,
acquiring, owning and managing built-to-suit and improved-to-suit,
single-tenant GSA Properties. Our Manager and its principals and
executive officers have a significant track record of sourcing,
acquiring, owning and managing GSA Properties, having aggregated
close to $3 billion in acquisitions of GSA Properties and other
government leased assets. Our Manager’s senior management
team has significant relationships with institutional and regional
developers and owners, brokers, lenders, attorneys and developers
of GSA Properties and other professionals, all of which our company
expects to be a source of future investment opportunities. This
offering represents an opportunity for outside investors to take
advantage of this principals’ expertise through a pooled
investment vehicle. For more information on the experience of Mr.
Stanton, our Chief Executive Officer, please see "Directors,
Executive Officers, and Significant Employees - Material Prior
Business Developments of Mr. Stanton."
Our
Manager oversees our overall business and affairs, and will have
broad discretion to make operating decisions on behalf of us and to
make investments. Our stockholders will not be involved in our
day-to-day affairs. Summary background information regarding the
management of our Manager appears in the section entitled
“Our Manager and Related Agreements.”
Our
Manager is overseen by our board of directors, or our
board. Our board is currently comprised of Mr.
Kurlander, Mr. Stanton, Mr. Kaplan, Mr. William Robert Fields, Mr.
Scott A. Musil, Mr. Leo Kiely and Mr. John F. O’Reilly, the
latter four of which are our independent directors.
Our Competitive Strengths and Strategic Opportunities
We
believe the experience of our Manager and its affiliates,
principals and executive officers, as well as our investment
strategies, distinguish us from other real estate companies. We
believe that we are benefitted by the alignment of the following
competitive strengths and strategic opportunities:
High Quality Portfolio Leased to Mission-Critical U.S. Government
Agencies
●
We own a portfolio
of 13 GSA Properties, comprised of ten GSA Properties we own in fee
simple and three additional GSA Properties for which we have all of
the rights to the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership for federal income tax purposes, each of which is
leased to the United States. As of the date of this offering
circular, based upon net operating income, the weighted average age
of our portfolio was approximately 8.99 years, and the weighted
average remaining lease term was approximately 9.27 years if none
of the early termination rights are exercised and 6.08 if all of
the early termination rights are exercised.
●
All of our
portfolio properties are leased to U.S. Government agencies that
serve mission-critical or citizen service functions.
●
These properties
generally meet our investment criteria, which target GSA Properties
across secondary or smaller markets, within size ranges of
5,000-50,000 rentable square feet, and in their first term after
construction or retrofitted to post-9/11 standards.
Aligned Management Team
●
Upon
completion of this offering, assuming we sell the maximum amount
pursuant to this offering, our senior management team will own
approximately 31.20% of our common stock on a fully diluted basis,
which will help to align their interests with those of our
stockholders. This amount does not include equity issuable to our
Manager in payment of acquisition fees, which will equal 1% of
acquisition costs for each property we acquire.
●
A
significant portion of our Manager’s fees will be accrued and
eventually paid in stock, which will be issued upon the earlier of
listing on a national exchange or March 31, 2020, which will also
align the interests of our Manager with those of our
stockholders.
Asset Management
●
Considerable
experience in developing, financing, owning, managing, and leasing
federal government-leased properties across the U.S. (transactions
involving approximately $3 billion of GSA Properties and other
government leased assets).
●
Relationships with
real estate owners, developers, brokers and lenders should allow
our company to source off-market or limited-competitive acquisition
opportunities at attractive cap rates.
●
In-depth knowledge
of the GSA procurement process, GSA requirements, and GSA
organizational dynamics. The GSA build-to-suit lease process is
detailed and requires significant process-specific expertise as
well as extensive knowledge of GSA building requirements and
leases.
●
Strong
network of professional and advisory relationships, including
BB&T Capital Markets, financial advisor to our
Manager.
Property Management
●
Significant
experience in property management and management of third party
property managers, focusing on the day-to-day management of the
owned properties, including cleaning, repairs, landscaping,
collecting rents, handling compliance with zoning and
regulations.
Credit Quality of Tenant
●
Leases
are full faith and credit obligations of the United States and, as
such, are not subject to the risk of annual
appropriations.
●
Historically, high
lease retention rates for GSA Properties in first term (average of
93% for single-tenant properties, 95% for single-tenant,
built-to-suit properties.2
●
Based
on 2014 GSA statistics, since 2001 average duration of occupancy
for federal agencies in the same leased building is approximately
25 years. From 2001 through 2010, the GSA exercised the right to
terminate prior to the end of the full lease term at a rate of
1.73%, according to Colliers International research.3
●
Leases
typically include inflation-linked rent increases associated with
certain property operating costs, which the Company believes will
mitigate expense variability.
Fragmented Market for Assets Within Company Acquisition
Strategy
●
Our
Manager has observed that the market of owners and developers of
targeted assets appears highly fragmented with the majority of
ownership distributed among small regional owners and
developers.
●
Based
on our research, newly constructed, first-generation, GSA-leased
Properties currently trade at an average cap rate of 6.75% compared
to 4.5% - 5.5% for all investment grade-rated, single tenant,
triple net lease properties4 and less than 2.5% for 10-year U.S.
Treasury bonds.5
Large Inventory of Targeted Assets
●
Over
1,300 GSA Properties in our targeted size are spread throughout
U.S.6
●
Company strategy
of mitigating lease renewal risk by owning specialized, mission
critical and customer service functioned properties, portfolio
diversification by agency and location and through careful
acquisition of staggered lease expirations.
Our Strategy
We
believe there is a significant opportunity to acquire and build a
portfolio consisting of high-quality GSA Properties at attractive
risk-adjusted returns. We seek primarily to acquire “citizen
service” properties, or properties that are “mission
critical” to an agency function. Further, we primarily target
properties located within secondary or smaller markets, within size
ranges of 5,000-50,000 rentable square feet, and in their first
term after construction or retrofitted to post-9/11
standards.
We
target GSA Properties that are LEED® certified or energy star rated. Of
our portfolio of 13 properties, five properties are
LEED® certified and
another property is in the LEED® certification process.
We
believe this subset of GSA Properties is highly fragmented and
often overlooked by larger investors, which can provide
opportunities for us to buy at more attractive pricing to other
properties within the asset class. We also believe selection based
on agency function, building use and location in these smaller
markets will help to mitigate risk of non-renewal. While we intend
to focus on this subset of GSA Properties, we are not limited in
the properties in which we may invest. We have the flexibility to
expand our investment focus as market conditions may dictate and,
as determined in the sole discretion of our Manager, subject to
broad investment guidelines, or our Investment Guidelines, and
Investment Policies, as defined below, adopted by our board of
directors, as may be amended by the board of directors from time to
time.
Our
board has adopted certain investment policies, or our Investment
Policies: as more specifically described in “Policies with
Respect to Certain Activities - Investment Policies.” Our
Investment Policies provide our Manager with substantial discretion
with respect to the selection, acquisition and management of
specific investments, subject to the limitations in the Management
Agreement. Our Manager may revise the Investment Policies, which
are described herein, without the approval of our board of
directors or stockholders; provided, however, that our Manager may
not acquire properties falling outside our Investment Guidelines
without the approval of our board of directors. Our board may also
adjust our Investment Policies and will review them at least
annually to determine whether the policies are in the best
interests of our stockholders.
Growth Strategy
Value-Enhancing Asset Management
●
Our
Manager focuses on the efficient management of our properties and
on improvements to our properties that enhance their value for a
tenant agency and improve the likelihood of lease
renewal.
●
We
also seek to reduce operating costs at all of our properties, often
by implementing energy efficiency programs that help the U.S.
Government achieve its conservation and efficiency
goals.
●
Our
Manager’s asset management team also conducts frequent audits
of each of our properties in concert with the GSA and the tenant
agency so as to keep each facility in optimal condition, allowing
the tenant agency to better perform its stated mission and helping
to position us as a GSA partner of choice.
Rental Revenue Growth
●
We
intend to renew leases at our GSA properties at higher rental rates
upon expiration.
●
Upon
lease renewal, GSA rental rates are typically reset based on a
number of factors, including inflation, the replacement cost of the
building at the time of renewal and enhancements to the property
since the date of the prior lease.
●
During
the term of a GSA lease, we work in close partnership with the GSA
to implement improvements at our properties to enhance the U.S.
Government tenant agency’s ability to perform its stated
mission, thereby increasing the importance of the building to the
tenant agency and the probability of an increase in rent upon lease
renewal.
Reduce Property-Level Operating Expenses
●
We
manage our properties to increase our income, through
property-level expense reduction.
●
We
manage our properties in a cost-efficient manner so as to eliminate
any excess spending and streamline our operating
costs.
●
When
we acquire a property, we review all property-level operating
expenditures to determine whether and how the property can be
managed more efficiently.
Our Portfolio and Pipeline
We currently own,
through wholly-owned subsidiaries of our operating partnership, a
portfolio of 13 GSA Properties, including three GSA Properties for
which we own all of the rights to the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership for federal income tax purposes rather than a fee simple
interest. We refer to these 13 properties as our portfolio. The
Company has entered into a separate purchase and sale agreement to
acquire an additional property, which is expected to close in
February 2018. We refer to this property as our pipeline. The
following table presents an overview of our
portfolio.
Our Portfolio
and Pipeline
|
|
Current
Occupant
|
|
|
|
Early
Termination and Expiration Date2
|
|
Effective Annual
Rent per Leased Square Foot
|
Effective Annual
Rent % of Portfolio
|
Our Portfolio
|
|
|
|
|
|
|
|
|
|
“Port Saint Lucie
Property”
650 NW Peacock Boulevard, Port
Saint Lucie, Florida 34986
|
|
U.S.
Drug Enforcement Administration, or DEA
|
24,858
|
8.34 %
|
100 %
|
5/31/2022
5/31/2027
|
$566,514
|
$22.79
|
6.68%
|
“Jonesboro
Property”
1809 LaTourette Drive, Jonesboro,
Arkansas 72404
|
|
U.S. Social Security
Administration, or SSA
|
16,439
|
5.52%
|
100%
|
1/11/2022
1/11/2027
|
$618,734
|
$37.64
|
7.29%
|
“Lorain
Property”
221 West 5th Street, Lorain, Ohio
44052
|
|
SSA
|
11,607
|
3.90%
|
100%
|
3/31/2021
3/31/2024
|
$440,763
|
$37.97
|
5.19%
|
“Port Canaveral
Property”
200 George King Boulevard, Cape
Canaveral, Florida 32920
|
|
U.S. Customs and Border Protection,
or CBP
|
14,704
|
4.94%
|
100%
|
7/15/2022
7/15/2027
|
$649,476
|
$44.18
|
7.65%
|
“Johnson City
Property”
2620 Knob Creek Road, Johnson City,
Tennessee 37604
|
|
U.S. Federal Bureau of
Investigation, or FBI
|
10,115
|
3.40%
|
100%
|
8/20/2022
8/20/2027
|
$393,454
|
$38.90
|
4.64%
|
“Fort Smith
Property”4624 Kelley Highway, Ft. Smith, Arkansas
72904
|
|
U.S. Citizenship and Immigration
Services, or CIS
|
13,816
|
4.64%
|
100%
|
No Early
Termination
10/30/2029
|
$423,184
|
$30.63
|
4.99%
|
“Silt Property”2300
River Frontage Road, Silt, Colorado 81652
|
|
U.S. Bureau of Land Management, or
BLM
|
18,813
|
6.31%
|
100%
|
9/30/2024
9/30/2029
|
$386,605
|
$20.55
|
4.56%
|
“Lakewood
Property”12305 West Dakota Avenue, Lakewood, Colorado
80228
|
|
US Department of Transportation, or
DOT
|
19,241
|
6.46%
|
100%
|
No Early
Termination
6/20/2024
|
$461,996
|
$24.01
|
5.44%
|
“Moore
Property”
200 NE 27th Street, Moore, OK
73160
|
|
SSA
|
17,058
|
5.73%
|
100%
|
4/9/2022
4/9/2027
|
$526,517
|
$34.09
|
6.20%
|
“Lawton Property”1610
SW Lee Boulevard, Lawton, OK 73501
|
|
SSA
|
9,298
|
3.12%
|
100%
|
8/17/2020
8/16/2025
|
$282,285
|
$30.36
|
3.33%
|
“Norfolk
Property”
5850 Lake Herbert Drive, Norfolk,
VA 23502
|
|
SSA
|
53,917
|
18.10%
|
100%
|
No Early
Termination
6/26/2027
|
$1,297,153
|
$24.06
|
15.29%
|
“Montgomery
Property”
3391 Atlanta Highway, Montgomery,
AL 36109
|
|
CIS
|
21,116
|
7.09%
|
75.90%
|
12/8/2026
12/8/2031
|
$446,793
|
$27.86
|
5.27%
|
“San Antonio
Property”
1015 Jackson
Keller Road,
San Antonio, TX
78213
|
|
U.S.
Immigration and Customs Enforcement, or
ICE
|
38,756
|
13.01%
|
100%
|
|
$ 1,085,323
|
$ 28.00
|
12.79%
|
Total - Our
Portfolio
|
|
|
269,738
|
90.53%
|
98.11%
|
|
$7,578,870
|
$28.81
|
89.31%
|
Our Pipeline
|
|
|
|
|
|
|
|
|
“Sarasota
Property”
7525 Commerce
Court,
Sarasota, FL
34243
|
United States Department of
Agriculture, or USDA
|
28,210
|
9.47%
|
100%
|
1/31/2028
1/31/2038
|
$906,952
|
$32.15
|
10.69%
|
|
|
28,210
|
9.47%
|
100%
|
|
$906,952
|
$32.15
|
10.69%
|
Total - Our
Portfolio and Pipeline
|
|
297,948
|
100%
|
98.29%
|
|
$8,485,822
|
$29.14
|
100%
|
Our Portfolio
Through
our operating partnership, we acquired the Lakewood Property, Moore
Property and Lawton Property, on June 10, 2016. The
total contract purchase price for these properties was $10,226,786,
comprised of: (a) $1,925,000 in cash pursuant to a deposit made to
the seller on April 1, 2016; (b) the defeasance of the
seller’s senior secured debt on the properties at closing;
and (c) issuance of a note to the seller in an amount equal to
$2,019,789, or the Standridge Note. On December 8,
2017, the Standridge Note was amended. As a result of the
amendment, the Standridge Note will mature on the earlier of
January 5, 2018, the date on which we complete a public securities
offering (including this offering), or the date on which the
Lakewood Property, Moore Property and Lawton Property are conveyed
or refinanced by us. In conjunction with the amendment, we, through
our operating partnership, made a prepayment on the Standridge Note
in the amount of $1,502,091.82, or the Prepayment Amount. On
January 5, 2018, we expect the Standridge Note to have a principal
balance of $445,101. The Standridge Note bears interest at 7.0% and
is pre-payable at any time prior to the maturity date without
penalty. The Standridge Note is unsecured but is guaranteed by
Messrs. Kaplan, Kaplan, Jr., Kurlander and Stanton, and Baker Hill
Holding LLC. The Prepayment Amount was financed in large part by
four promissory notes payable to an affiliate and three additional
parties in the aggregate amount of $1,500,000, or the Promissory
Notes. The Promissory Notes carry an interest rate of 8.0%, mature
on June 11, 2018 and may be prepaid at any time without penalty. We
intend to pay off the Standridge Note and the Promissory Notes
incurred in connection with financing the Prepayment Amount with
proceeds from this offering. See “Interest of Management and
Others in Certain Transactions” for more
information.
In
addition to the Standridge Note, we acquired the Lakewood Property,
Moore Property and Lawton Property using proceeds from our Series A
Preferred Stock offering, secured financing in the aggregate amount
of $7,225,000 from CorAmerica, and the $1,000,000 Holmwood
Loan. We paid off the Holmwood Loan with proceeds from
the initial closing of this offering.
On
March 31, 2017, our operating partnership acquired the Norfolk
Property. The purchase price for the building was $14,500,000,
excluding acquisition costs. The acquisition was financed by first
mortgage debt of $10,875,000 and the proceeds from unsecured loans
to our operating partnership from two principals of our predecessor
and a third-party aggregating $3,400,000. The Company incurred an
acquisition fee of $145,000 payable to the Manager in connection
with the acquisition of the Norfolk Property.
We
acquired, through the contribution to us by Holmwood, (i) all of
the membership interests in the four single-member limited
liability companies that own the Silt Property, Fort Smith
Property, Johnson City Property and Port Canaveral Property, or the
LLC Interests, and (ii) all of the rights the profits, losses, any distributed cash flow and
all of the other benefits and burdens of ownership for federal
income taxes of the three single member limited liability
companies that own the Port Saint Lucie Property, Jonesboro
Property and Lorain Property, or the Affected Properties, and
together with the other properties contributed by Holmwood, the
Contribution Properties. A condition of the closing of the
transactions contemplated by the Contribution Agreement was the
receipt of the consent to the transfer of the LLC Interests from
each of the lenders secured by the Contribution Properties. As of
May 26, 2017, the date of the contribution, we had received the
consent of the lenders secured by the properties underlying
the LLC Interests; however, we had not yet received the consent
from LNR Partners, LLC, or LNR, special servicer on the loan
secured by the Affected Properties.
Our
management determined it to be in our best interests to use an
alternate method in the interim that is intended to allow our
company to enjoy the financial benefits of the Affected Properties
intended by the Contribution Agreement, while remaining in
compliance with the Starwood Loan (as defined in “Description
of Our Properties – Description of Indebtedness”)
covenants. On May 26, 2017, our Operating Partnership and
Holmwood entered into the Second Amendment to revise certain terms
of the Contribution Agreement. Pursuant to the Second Amendment, at
the closing of the Contribution, Holmwood retained the limited
liability company interests owning the Affected Properties as its
sole and exclusive property; however, Holmwood assigned all of its
right, title and interest in and to any and all profits, losses and
distributed cash flows, if any, from each wholly-owned subsidiary
owning the Affected Properties, as well as all of the other
benefits and burdens of ownership solely for federal income tax
purposes, or the Profits Interests, to our Operating Partnership.
Upon (i) the receipt of consent to the contribution from LNR, (ii)
the sale of the Affected Properties, subject to certain consents,
or (iii) the payment of defeasance of all loans, secured by
existing mortgage liens on the Affected Properties, the LLC
Interests associated with such Affected Properties shall be deemed
to have been contributed and transferred to our operating
partnership on such date.
In
exchange for the Contribution Properties, our operating partnership
(i) issued 1,078,416 OP Units to Holmwood equal to the agreed value
of Holmwood’s equity in the Contribution Properties as of the
closing of the contribution, divided by $10.00; and (ii) assumed
all of the indebtedness secured by the Contribution Properties and
assumed Holmwood’s corporate credit line. The purchase
price for these properties was determined by our Manager and
Holmwood. By agreement, the value of the Silt Property
was agreed to be Holmwood’s purchase price, and the values of
the remaining Contribution Properties were determined by using
prevailing market capitalization rates, as determined by our
Manager, and the 2016 pro forma net operating income of each
remaining Contribution Property.
Our
Contribution Agreement required us to enter into an agreement as of
the closing of the contribution granting Holmwood registration and
qualification rights covering the resale of the shares of common
stock into which its OP Units will be convertible, subject to
conditions set forth in our operating partner’s limited
partnership agreement. In addition, as of the closing of the
contribution, we entered into a tax protection agreement with
Holmwood under which we will agreed to (i) indemnify Holmwood for any taxes
incurred as a result of a taxable sale of the Contribution
Properties for a period of ten years after the closing; and
(ii) indemnify Holmwood if a reduction in our nonrecourse
liabilities secured by the Contribution Properties results in an
incurrence of taxes, provided that we may offer Holmwood the
opportunity to guaranty a portion of our operating
partnership’s other nonrecourse indebtedness in order to
avoid the incurrence of tax on Holmwood.
On July 25, 2017, the Company acquired the
Montgomery Property for a purchase price of $4,709,458 excluding
acquisition costs. The acquisition was financed by senior debt
financing and equity. The
Company incurred an acquisition fee of $47,095 payable to the
Manager in connection with the acquisition of the Montgomery
Property.
In November 2017,
the Company acquired the San Antonio Property for a purchase price
of $8,225,000 excluding acquisition costs. The acquisition was
financed by senior debt financing and equity. The Company incurred
an acquisition fee of $82,250 payable to the Manager in connection
with the acquisition of the San Antonio
Property.
Our Pipeline
The
Company has entered into a separate purchase and sale agreement to
acquire a property leased to the United States of America and
occupied by United States Department of Agriculture. The contract
purchase price is $11,000,000 and is expected to close in February
2018. The acquisition is intended to be financed by senior debt
financing and equity from the proceeds of this
offering.
Summary Risk Factors
An
investment in our common stock involves a number of risks. See
“Risk Factors,” beginning on page 18 of this offering
circular. Some of the more significant risks include those set
forth below.
|
●
|
We were
recently organized and do not have a significant operating history
or financial resources. There is no assurance that we will be able
to successfully achieve our investment objectives.
|
|
●
|
Investors
will not have the opportunity to evaluate or approve any
investments prior to our financing or acquisition
thereof.
|
|
●
|
We may
not be able to invest the net proceeds of this offering on terms
acceptable to investors, or at all.
|
|
●
|
Investors
will rely solely on our Manager to manage our company and our
investments. Our Manager will have broad discretion to invest our
capital and make decisions regarding investments. Investors will
have limited control over changes in our policies and day-to-day
operations, which increases the uncertainty and risks you face as
an investor. In addition, our board of directors may approve
changes to our policies without your approval.
|
|
●
|
There
are substantial risks associated with owning, financing, operating
and leasing real estate.
|
|
●
|
Our
ability to pay our intended initial annual dividend, which
represents approximately 379% of our estimated cash available for
distribution for the twelve months ending June 30, 2018, assuming
we sell the maximum offering amount, depends on our future
operating cash flow, and we expect to be required to fund a portion
of our intended initial annual dividend through borrowings or
equity issuances, and we cannot assure you that we will be able to
obtain such funding on attractive terms or at all, in which case we
plan to use a portion of the remaining net proceeds from this
offering for such funding, which would make such amounts
unavailable for our acquisition of properties, or to fund such
dividend in the form of shares of common stock or to eliminate or
otherwise reduce such dividend.
|
|
●
|
The
purchase price of the shares of our common stock has been
determined primarily by our capital needs and bears no relationship
to any established criteria of value such as book value or earnings
per share, or any combination thereof. Further, the price of the
shares is not based on our past earnings. There has been no prior
public market for our shares; therefore, the offering price is not
based on any market value.
|
|
●
|
Real
estate-related investments, including joint ventures, and
co-investments, involve substantial risks.
|
|
|
|
|
●
|
Shares
of our common stock will have limited transferability and
liquidity. Prior to this offering, there was no active market for
our common stock. Although we intend to apply for quotation of our
common stock on the OTCQX, 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,
our common stock will not be quoted on the OTCQX until after the
termination of this offering, if at all. Therefore, purchasers in
the initial closing will be required to wait until at least after
the final termination date of this offering for such
quotation.
|
|
●
|
Some of our leases permit the occupying agency to vacate the
property and for our tenant to discontinue paying rent prior to the
lease expiration date.
|
|
|
|
|
●
|
Our
company will pay substantial fees and expenses to our Manager and
its affiliates. These fees will increase investors’ risk of
loss, and will reduce the amounts available for investments. Some
of those fees will be payable regardless of our profitability or
any return to investors.
|
|
●
|
The tax
protection agreement with Holmwood could limit our ability to sell,
refinance or otherwise dispose of our Contribution Properties or
make any such sale or other disposition more costly.
|
|
●
|
Substantial
actual and potential conflicts of interest exist between our
investors and our interests or the interests of our Manager, and
our respective affiliates, including conflicts arising out of (a)
allocation of personnel to our activities, (b) allocation of
investment opportunities between us.
|
|
●
|
An
investor could lose all or a substantial portion of its
investment.
|
|
●
|
There
is no public trading market for our common stock, and we are not
obligated to effectuate a liquidity event by a certain date or at
all. It will thus be difficult for an investor to sell its shares
of our common stock. Although we intend to apply for quotation
of our common stock on the OTCQX, 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, our common stock will not be quoted on the OTCQX until
after the termination of this offering, if at all.
|
|
●
|
We may
fail to qualify or maintain our qualification as a REIT for federal
income tax purposes. We would then be subject to corporate level
taxation and we would not be required to pay any distributions to
our stockholders.
|
Compensation to Our Manager
Type
|
|
Description
|
|
|
|
|
|
Offering Stage
|
Organizational
and Offering Costs
|
|
Our
Manager or its affiliates may advance organizational and offering
costs incurred on our behalf, and we will reimburse such advances,
but only to the extent that such reimbursements do not exceed
actual expenses incurred by our Manager or its affiliates. To date,
our Manager or its affiliates have advanced approximately $990,000
as organizational and offering costs. We anticipate incurring
further organizational and offering expenses of approximately
$10,000. To the extent that organizational and offering expenses,
when combined with underwriting discounts, commissions and expense
reimbursements in connection with this offering, exceed 15.0% of
the gross proceeds from the offering, or the O&O Cap, the
Manager has agreed to repay an amount of organizational and
offering expenses which would bring such fees and commissions paid
in connection with this offering below the O&O
Cap.
|
|
|
|
|
|
Operational Stage
|
Asset
Management Fee
|
|
We will
pay our Manager an annual asset management fee equal to 1.5% of our
stockholders’ equity payable quarterly in arrears in cash.
For purposes of calculating the asset management fee, our
stockholders’ equity means: (a) the sum of (1) the net
proceeds from (or equity value assigned to) all issuances of our
company’s equity and equity equivalent securities (including
common stock, common stock equivalents, preferred stock and OP
Units issued by our operating partnership) since inception
(allocated on a pro rata daily basis for such issuances during the
fiscal quarter of any such issuance), plus (2) our company’s
retained earnings at the end of the most recently completed
calendar quarter (without taking into account any non-cash equity
compensation expense incurred in current or prior periods), less
(b) any amount that our company has paid to repurchase our common
stock issued in this or any subsequent offering.
Stockholders’ equity also excludes (1) any unrealized gains
and losses and other non-cash items (including depreciation and
amortization) that have impacted stockholders’ equity as
reported in our company’s financial statements prepared in
accordance with GAAP, and (2) one-time events pursuant to changes
in GAAP, and certain non-cash items not otherwise described above,
in each case after discussions between our Manager and our
independent director(s) and approval by a majority of our
independent directors. Assuming that we raise the
maximum offering amount, we anticipate we will receive $26,375,000
in net proceeds from this offering. We have previously received
$3,612,500 in net proceeds from our Series A Preferred Stock
offering. In addition, we issued 1,078,416 OP Units at the initial
closing of this offering as compensation for the Contribution
Properties, valued at $10,784,160, based on the price per share in
this offering. Accordingly, we estimate that our Manager would
receive an annual asset management fee of approximately $611,575 if
we were to raise no additional equity and no additional adjustments
were made.
|
|
|
|
Property
Management Fee
|
|
We
anticipate that our Manager’s wholly-owned subsidiary,
Holmwood Capital Management, LLC, a Delaware limited liability
company, or the Property Manager, will manage some or all of our
company’s portfolio earning market-standard property
management fees based on a percentage of rent pursuant to a
property management agreement executed between the Property Manager
and our subsidiary owning the applicable property. We cannot
estimate the property management fees that will be payable to the
Property Manager at this time.
|
|
|
|
Acquisition
Fee
|
|
We will
pay an acquisition fee, payable in vested equity in our company,
equal to 1% of the gross purchase price, as adjusted pursuant to
any closing adjustments, of each investment made on our behalf by
our Manager following the initial closing of this offering;
provided, however that all
acquisition fees for investments prior to the earlier of (a) the
initial listing of our common stock on the New York Stock Exchange,
NYSE MKT, NASDAQ Stock Exchange, or any other national securities
exchange, or a Listing Event, or (b) March 31, 2020, shall be
accrued and paid simultaneously with the Listing Event, or on March
31, 2020, as applicable. Assuming that we raise the maximum
offering amount, resulting in $26,375,000 in net proceeds, that we
pay off the Standridge Note and the Promissory Notes with proceeds
from this offering on January 5, 2018 and June 11, 2018,
respectively, and that we buy properties using our target leverage
of 80%, and given that we paid off the Holmwood Loan and Citizens
Loan at the initial closing of the offering, we anticipate that
acquisition fees of approximately $1,164,892 in vested equity of
our company will be paid to our Manager as a result of this
offering. To date, we owe our Manager acquisition fees of $274,345
from our acquisition of the Norfolk Property, the Montgomery
Property, and the San Antonio Property.
|
|
|
|
Leasing
Fee
|
|
Our
Manager will be entitled to a leasing fee equal to 2.0% of all
gross rent due during the term of any new lease or lease renewal,
excluding reimbursements by the tenant for operating expenses and
taxes and similar pass-through obligations paid by the tenant for
any new lease or lease renewal entered into or exercised during the
term of the Management Agreement. The Leasing Fee is due to our
Manager within thirty (30) days of the commencement of rent payment
under the applicable new lease or lease renewal. The Leasing Fee is
payable in addition to any third-party leasing commissions or fees
incurred by us. We cannot estimate the leasing fees that will be
payable to our Manager at this time.
|
|
|
|
Equity
Grants
|
|
Commencing
with the initial closing of this offering, our Manager shall
receive a grant of our company’s equity securities, or a
Grant, which may be in the form of restricted shares of common
stock, restricted stock units underlain by common stock, long-term
incentive units of our operating partnership, or LTIP Units, or
such other equity security as may be determined by the mutual
consent of the board of directors (including a majority of the
independent directors) and our Manager, at each closing of an
issuance of our company’s common stock or any shares of
common stock issuable pursuant to outstanding rights, options or
warrants to subscribe for, purchase or otherwise acquire shares of
common stock that are “in-the-money” on such date in a
public offering, such that following such Grant our Manager shall
own equity securities equivalent to 3.0% of the then issued and
outstanding common stock of our company, on a fully diluted basis,
solely as a result of such Grants. For the avoidance of doubt, only
equity securities owned pursuant to a Grant shall be included in
our Manager’s 3.0% ownership described in the preceding
sentence, and no other equity securities owned by our Manager or
any member of our Manager shall be included in such calculation.
Any Grant shall be subject to vesting over a five-year period with
vesting occurring on a quarterly basis, provided, that, the only
vesting requirement shall be that the Management Agreement (or any
amendment, restatement or replacement hereof with our Manager
continuing to provide the same general services as provided
hereunder to our company) remains in effect, and, further provided,
that, if the Management Agreement is terminated for any reason
other than a termination for cause as described in the Management
Agreement, then the vesting of any Grant shall accelerate such that
the Grant shall be fully vested as of such termination date. We
anticipate making Grants to our Manager of equity securities
equivalent to 146,224 shares of our common stock, on a fully
diluted basis, pursuant to this requirement. if we sell the maximum
offering amount; however, any Grant may be issued in such other
form of our company’s equity securities as determined by the
Management Agreement. To date, we have made Grants of 71,645 LTIPs
to our Manager as a result of this offering.
|
|
|
|
Accountable
Expense Reimbursement
|
|
Our
Manager will be entitled to receive an accountable expense
reimbursement for documented expenses of our Manager and its
affiliates incurred on behalf of either our company or our
operating partnership that are reasonably necessary for the
performance by our Manager of its duties and functions hereunder;
provided, that such expenses are in amounts no greater than those
that which would be payable to third party professionals or
consultants engaged to perform such services pursuant to agreements
negotiated on an arm’s-length basis, and excepting only those
expenses that are specifically the responsibility of our Manager.
The accountable expense reimbursement will be reimbursed monthly to
our Manager. The accountable expense reimbursement in any
given year will not exceed the greater of 2.0% of the average book
value of our assets and 25.0% of our net income. We cannot estimate
the total accountable expense reimbursement that will be payable to
our Manager or its affiliates at this time. To date, we have paid
$276,779 to our Manager as accountable expense
reimbursements.
|
|
|
Termination and Liquidation Stage
|
Termination
Fee1
|
|
Subject
to certain limitations contained in the Management Agreement, as
amended, we will pay our Manager a termination fee equal to three
times the sum of the asset management fees, acquisition fees and
leasing fees earned, in each case, by our Manager during the
24-month period prior to such termination, calculated as of the end
of the most recently completed fiscal quarter prior to the date of
termination; provided, however, that if the Listing Event has not
occurred and no accrued acquisition fees have been paid, then all
accrued acquisition fees will be included in the above calculation
of the termination fee. The termination fee will be payable upon
termination of the Management Agreement (i) by us without cause or
(ii) by our Manager if we materially breach the Management
Agreement. The termination fee is payable in cash, vested equity of
our company, or a combination thereof, in the discretion of our
board. We cannot estimate the termination fee that would be payable
to our Manager at this time.
|
|
|
|
Property
Management
Termination
Fee1
|
|
Each
property management agreement provides or is expected to provide
for a termination fee to be paid to the Property Manager if the
Property Manager is terminated without cause or in the event of a
sale of the subject property. Each property management agreement
will or is expected to expire in 2050, and no termination fee will
be due to the Property Manager if a property management agreement
is not renewed prior to its expiration. The termination fee under
each property management agreement equals or is expected to equal
the aggregate property management fee paid to the Property Manager
for the three full calendar months immediately prior to termination
multiplied by four. We cannot estimate the property management
termination fee that would be payable to our Property Manager at
this time.
|
1 The termination of the Management Agreement or a property
management agreement may be, but will not necessarily be, a part of
the termination and liquidation of our company. For example, if a
Listing Event occurs, we will be required to pay the Termination
Fee, but our company would not be in its termination and
liquidation stage.
Conflicts of Interest
Our
officers and directors, and the owners and officers of our Manager
and its affiliates are currently not involved in the ownership and
advising of other real estate entities and programs. However, there
are no restrictions on the ability of our officers and directors,
and the owners and officers of our Manager and its affiliates to be
involved in the ownership and advising of other real estate
entities and programs, including those sponsored by the affiliates
of Holmwood or in which one or more affiliates or Holmwood is a
manager or participant. These possible interests may arise in the
future and may give rise to conflicts of interest with respect to
our business, our investments and our investment opportunities. In
particular, but without limitation:
|
●
|
Our
Manager, its officers and their respective affiliates may face
conflicts of interest relating to the purchase and leasing of real
estate investments, and such conflicts may not be resolved in our
favor. This could limit our investment opportunities, impair our
ability to make distributions and reduce the value of your
investment in us. Our Management Agreement provides that if
our Manager or any of its affiliates sponsors or manages any new
real estate entity or program with similar investment objectives to
our company and has investment funds available at the same time as
our company, our Manager must inform the board of directors of the
method to be applied by our Manager in allocating investment
opportunities among our company and competing investment entities
and shall provide regular updates to the board of directors of the
investment opportunities provided by our Manager to competing
programs in order for the board of directors to evaluate that our
Manager is allocating such opportunities in accordance with such
method.
|
|
●
|
The
purchase price for the Contribution Properties and any additional
properties we acquire from entities owned or sponsored by
affiliates of our Manager, may be higher than we would pay if the
transaction was the result of arm’s-length negotiations with
a third party.
|
|
●
|
Our
Manager will have considerable discretion with respect to the terms
and timing of our acquisition, disposition and leasing
transactions.
|
|
●
|
Our
Manager and its affiliates, including our officers, some of whom
are also our directors, may face conflicts of interest caused by
their ownership of our Manager and their roles with other programs,
which could result in actions that are not in the long-term best
interests of our stockholders.
|
|
●
|
If the
competing demands for the time of our Manager, its affiliates and
our officers result in them spending insufficient time on our
business, we may miss investment opportunities or have less
efficient operations, which could reduce our profitability and
result in lower distributions to you.
|
We do
not have a policy that expressly restricts any of our directors,
officers, stockholders or affiliates, including our Manager and its
officers and employees, from having a pecuniary interest in an
investment in or from conducting, for their own account, business
activities of the type we conduct. We have not adopted any specific
conflicts of interest policies, and, therefore, other than in
respect of the restrictions placed on our Manager in the Management
Agreement, we will be reliant upon the good faith of our Manager,
officers and directors in the resolution of any
conflict.
We are
party to the Contribution Agreement with Holmwood pursuant to which
it contributed the Contribution Properties. In exchange, our
operating partnership: (i) issued 1,078,416 OP Units to Holmwood
equal to the agreed value of Holmwood’s equity in the
Contribution Properties as of the closing of the contribution,
divided by $10.00; and (ii) assumed all of the indebtedness secured
by the Contribution Properties and assumed Holmwood’s
corporate credit line. We will be entitled to indemnification
and damages in the event of the breach of any representation,
warranty, covenant or agreement made by Holmwood pursuant to the
Contribution Agreement. We entered into the tax protection
agreement with Holmwood and an agreement regarding registration and
qualification rights for Holmwood’s OP Units.
We have
entered into property management agreements with the Property
Manager for the management of our portfolio. We expect to enter
into property management agreements with the Property Manager for
management of any additional properties we acquire. We pay or
expect to pay the Property Manager property management fees at
market-standard rates and will be required to pay the Property
Manager a termination fee if we terminate the Property Manager for
any reason other than for cause.
These
agreements, including any consideration payable by us under each
such agreement, were not negotiated at arm’s length, and the
terms of these agreements may not be as favorable to us as if they
were so negotiated. To the extent that any breach, dispute or
ambiguity arises with respect to any of these agreements, we may
choose not to enforce, or to enforce less vigorously, our rights
under these agreements due to our ongoing relationships with
Holmwood, members of our senior management team, and the Property
Manager.
Financing Policy
We
anticipate that with respect to investments either acquired with
debt financing or refinanced, the debt financing amount generally
would be up to approximately 80% of the acquisition price of a
particular investment, provided, however, we are not restricted in
the amount of leverage we may use to finance an investment.
Particular investments may be more highly leveraged. Further, our
Manager expects that any debt financing for an investment will be
secured by that investment or the interests in an entity that owns
that investment. Our portfolio is currently 74.75%
leveraged.
Distribution Policy
In
order to qualify as a REIT, we must distribute to our stockholders
at least 90% of our annual taxable income (excluding net capital
gains and income from operations or sales through a taxable REIT
subsidiary, or TRS). We intend to make regular cash distributions
to our stockholders out of our cash available for distribution,
typically on a quarterly basis. Our board of directors will
determine the amount of distributions to be distributed to our
stockholders on a quarterly basis. The board of directors’
determination will be based on a number of factors, including funds
available from operations, our capital expenditure requirements and
the annual distribution requirements necessary to maintain our REIT
qualification under the Code. As a result, our distribution rate
and payment frequency may vary from time to time. Generally, our
policy will be to pay distributions from cash flow from operations.
However, our distributions may be paid from sources other than cash
flow from operations, such as from the proceeds of this offering,
borrowings, advances from our Manager or from our Manager’s
deferral of its fees and expense reimbursements, as necessary. We
intend to target an initial annual dividend on our common stock of
$0.55 per share, or an annual dividend rate of 5.5% based on the
price set forth on the cover page of this offering circular. Our
estimated initial annual dividend per share represents
approximately of our estimated cash available for distribution if
we raise the maximum offering amount. These estimates do not take
into account any increased rental or other revenues, or increased
costs, resulting from the acquisition of properties using our
unallocated net proceeds. As a result, we will need to increase our
operating cash flow in the future, or find another source of cash,
which may include remaining net proceeds from this offering, to pay
our estimated initial annual dividend. There can be no assurances
that we will find another source of cash or financing for the
payment of dividends. If this occurs, we estimate that $1,797,813
of the offering proceeds will be used to fund initial annual
dividends if the maximum offering amount is raised. To date, we
have paid $379,134 in distributions, resulting in a quarterly
distribution of $0.55 per share. These distributions have been paid
from offering proceeds.
REIT Status
We
intend to elect to be treated as a REIT for federal income tax
purposes beginning with our taxable year ending December 31, 2017.
As long as we maintain our qualification as a REIT, we generally
will not be subject to federal income or excise tax on income that
we currently distribute to our stockholders. Under the Code, a REIT
is subject to numerous organizational and operational requirements,
including a requirement that it annually distribute at least 90% of
its REIT taxable income (determined without regard to the deduction
for dividends paid and excluding net capital gain) to its
stockholders. If we fail to maintain our qualification as a REIT in
any year, our income will be subject to federal income tax at
regular corporate rates, regardless of our distributions to
stockholders, and we may be precluded from qualifying for treatment
as a REIT for the four-year period immediately following the
taxable year in which such failure occurs. Even if we qualify for
treatment as a REIT, we may still be subject to state and local
taxes on our income and property and to federal income and excise
taxes on our undistributed income. Moreover, if we establish TRSs,
such TRSs generally will be subject to federal income taxation and
to various other taxes.
Restriction on Ownership and Transfer of Our Common
Stock
Our
charter contains a restriction on ownership of our shares that
generally prevents any one person from owning more than 9.8% in
value of the outstanding shares of our capital stock or more than
9.8% in value or in number of shares, whichever is more
restrictive, of the outstanding shares of our common stock, unless
otherwise excepted (prospectively or retroactively) by our board of
directors. Our charter also contains other restrictions designed to
help us maintain our qualification as a REIT. See “Securities
Being Offered — Restrictions on Ownership and
Transfer.”
Background and Corporate Information
We were
incorporated on March 11, 2016 under the laws of the State of
Maryland for the purpose of raising capital and acquiring a
portfolio of real estate assets, primarily GSA Properties. Our
principal executive offices are located at 1819 Main Street, Suite
212, Sarasota, Florida 34236. Our telephone number is (941)
955-7900.
Reporting Requirements under Tier 2 of Regulation A
Following this Tier
2 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 (i) an annual report with the SEC on Form
1-K, (ii) a semi-annual report with the SEC on Form 1-SA, (iii)
current reports with the SEC on Form 1-U, and (iv) a notice under
cover of Form 1-Z. The necessity to file current reports will be
triggered by certain corporate events. 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.
Capitalization
The
table that follows demonstrates our capitalization structure
immediately after this offering, assuming we sell the maximum
amount under this offering.
Class of Stock
|
Total
No. of Shares Issued and Outstanding
|
|
|
Common
Stock
|
3,362,224
shares1
|
|
|
Series
A Preferred Stock
|
144,500
shares2
|
|
|
OP
Units
|
1,078,416 OP
Units3
|
|
|
Fully
Diluted Common Stock
|
4,874,140
shares4
|
1
This number
includes 200,000 shares issued and outstanding prior to this
offering, 3,000,000 shares issued in connection with this offering,
16,000 restricted shares issued to our independent directors, and
it assumes that we make grants to our Manager of equity securities
equivalent to 146,224 shares of common stock, on a fully diluted
basis, in connection with this offering.
2
Series A Preferred
Stock will automatically be converted into common stock upon the
initial listing of our common stock on the New York Stock Exchange,
NYSE MKT, NASDAQ Stock Exchange, or any other national securities
exchange, or a Listing Event, at a ratio of three shares of common
stock for every one share of Series A Preferred Stock held,
assuming there are no accrued but unpaid preferred dividends on
such holder’s shares of Series A Preferred
Stock.
4
Holders of OP
Units have the right to require our operating partnership to redeem
their OP Units. Our operating partnership has the discretion to
redeem such OP Units for either cash or common stock of our
company.
4
This number
includes (i) all issued and outstanding shares of common stock,
(ii) all common stock converted from Series A Preferred Stock and
OP Units, assuming a Listing Event has occurred, there are no
accrued but outstanding preferred returns and our operating
partnership chooses to redeem all OP Units in exchange of common
stock of our company.
The Offering
Common
stock offered by us:
|
3,000,000
shares ($30,000,000)
|
|
|
Common
stock currently outstanding:
|
804,617
|
|
|
Common
stock to be outstanding after
this
offering (assuming the
maximum
offering amount is sold):
|
3,362,224
shares
|
|
|
Offering
Termination Date
|
This
offering will remain open until the earlier of sale of the maximum
offering amount or November 7, 2018.
|
|
|
Dividend
rights
|
Our
common stock ranks, with respect to dividend rights and rights upon
our liquidation, winding-up or dissolution:
|
|
●
|
on
parity with our common stock previously issued and currently
outstanding or any other common stock issued and outstanding in the
future; and
|
|
●
|
junior
to any other class or series of our capital stock, the terms of
which expressly provide that it will rank senior to the common
stock, including the 7.00% Series A Cumulative Convertible
Preferred Stock, or the Series A Preferred Stock, and subject to
payment of or provision for our debts and other
liabilities.
|
|
|
Voting
rights
|
Each
share of our common stock entitles its holder to one vote per
share. Holders of common stock will vote together, as a group, with
holders of Series A Preferred Stock, on matters to which the
holders of common stock are entitled to vote.
|
|
|
Use of
Proceeds
|
We
estimate that the net proceeds of this offering will be
approximately $26,375,000, after deducting sales commissions of
6.0% of the offering proceeds payable to the Dealer-Manager, which
it may re-allow and pay to participating broker-dealers, who sell
shares pursuant to this offering, or the offered shares, after
deducting a managing broker-dealer fee of 1.25% which it may
re-allow, in part, to participating broker-dealers, after deducting
a non-accountable due diligence, marketing and expense
reimbursement fee of 1.0% of the offering proceeds payable to the
Dealer-Manager, which it may also re-allow and pay to the
participating broker-dealers, and after deducting an estimated
expense reimbursement payable to us, and after deducting an
accountable expense reimbursement of up to 0.50% of the gross
proceeds from this offering for fees to Folio for its clearing and
facilitation services. If we raise the maximum offering amount, we
will also pay to our Dealer-Manager an accountable expense
reimbursement of up to $30,000 for filing and legal fees incurred
by our Dealer-Manager. Specified sales may be made net of selling
commissions, accountable expense allowance and non-accountable
expense allowance. To date, we have issued 588,617 shares of common
stock in connection with this offering and received gross proceeds
from this offering totaling $5,886,170. See “Plan of
Distribution.” We intend to use the proceeds of this offering
primarily for acquisitions of GSA Properties, the repayment of
outstanding debt, and general working capital and corporate
purposes.
|
Tier 2, Regulation A Offering This is a Tier 2, Regulation A
offering where the offered securities will not be listed on a
registered national securities exchange upon qualification. This
offering is being conducted pursuant to an exemption from
registration under Regulation A of the Securities Act of 1933, as
amended. After qualification, we intend to apply for these
qualified securities to be eligible for quotation on the OTCQX.
There is no guarantee that we will be able to list or that a market
will develop.
Generally,
if you are not an "accredited investor" as defined in Rule 501 (a)
of Regulation D (17 CFR §230.501 (a)) no sale may be made to
you in this offering if the aggregate purchase price you pay is
more than 10% of the greater of your annual income or net worth.
Different rules apply to accredited investors and investors who are
not 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. See
“Plan of Distribution – Investment
Limitations.”
RISK
FACTORS
Prospective investors should be aware that an
investment in our common stock involves a high, and sometimes speculative,
degree of risk, and is suitable only for persons or entities who
are able to evaluate the risks of the investment.
An investment in our shares 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 carefully read
this offering circular prior to making a decision to purchase
shares.
It is impossible to accurately predict the
results to an investor from an investment in our common
stock because of general
risks associated with the ownership and operation of real estate,
the risks associated with the types of properties our company
intends to acquire, and certain tax risks, among other risks. These
risks may be exacerbated by the additional risks associated with
the specific properties that our company acquires and the ownership
structure of the investment. Such specific risks include, but are
not limited to, high vacancy rates, tenants in possession but not
paying rent, tenants paying rent but who have “gone
dark,” properties that need substantial capital improvements
and/or repositioning in their local markets, properties that are
not generating income, and risks relating to joint venture and
co-investor structures. In addition, prospective investors must
rely solely upon our Manager to identify investment opportunities
and to negotiate any debt financing. Prospective investors who are
unwilling to rely solely on our Manager should not invest in our
shares.
Each
prospective investor should consider carefully, among other risks,
the following risks, and should consult with his own legal, tax,
and financial advisors with respect thereto prior to investing in
shares of our company’s common stock.
Risks Related to Our Business and Investments
Investors will not have the
opportunity to evaluate our investments beyond our portfolio and
our pipeline. Our portfolio consists only of 13 properties,
and we have another property in our pipeline. We cannot
provide prospective investors with any specific information as to
the identification, location, operating histories, lease terms or
other relevant economic and financial data regarding additional
investments we will make with the net proceeds of this offering,
and there is no guarantee that we will acquire the property in our
pipeline. Our success is totally dependent on our ability to make
investments consistent with our investment goals, and a failure to
do so is likely to materially and adversely affect returns to our
stockholders.
You will not have the
opportunity to evaluate our investments before we
make them. Because we have not identified all of the
specific assets that we will acquire with the proceeds raised in
this offering, we are not able to provide you with information that
you may want to evaluate before deciding to invest in our shares.
Our board of directors has approved our Investment Policies as
described herein and our Investment Guidelines which require our
Manager to not engage in any activity that will, or reasonably
could be expected to cause our company (or our operating
partnership) to: (i) fail to qualify as a REIT under the Code and
the applicable Treasury Regulations promulgated thereunder, as
amended, or (ii) be regulated as an investment company under the
Investment Company Act of 1940. Any change to such
Investment Guidelines will require the approval of a majority of
the independent directors of our company. Otherwise, our
Manager has very broad authority to amend the Investment Policies
described herein without the approval of the board of directors or
shareholders. Our Manager and board of directors have absolute
discretion in implementing the Investment Policies and Investment
Guidelines, subject to the restrictions on investment objectives
and policies set forth in our articles of incorporation.
Because you cannot evaluate our investment of the net proceeds of
this offering in advance of purchasing shares of our common stock,
this offering may entail more risk than other types of offerings.
This additional risk may hinder your ability to achieve your own
personal investment objectives related to portfolio
diversification, risk-adjusted investment returns and other
objectives.
Our primary business
currently is limited to the ownership and operation of GSA
Properties. Our current strategy is to acquire, own, operate
and manage GSA Properties. Consequently, we are subject to risks
inherent in investments in one sector of the real estate industry.
This strategy limits asset diversification of our investment
portfolio. Furthermore, because investments in real estate are
inherently illiquid, it is difficult to limit our risk in response
to economic, market and other conditions. See “Risks Related
to the Real Estate Industry and Investments in Real Estate –
Real estate investments are not as liquid as other types of assets,
which may reduce economic returns to our stockholders.”
Our growth depends on
successfully identifying and consummating acquisitions of
additional GSA Properties and any delay or failure on our part to
identify, finance and consummate acquisitions on favorable terms
could materially and adversely affect us. Our ability to
expand by acquiring additional GSA Properties is integral to our
growth strategy and requires us first to identify suitable
acquisition candidates. Our growth strategy is to focus primarily
on acquiring additional GSA Properties. There are a limited number
of GSA Properties that fit this strategy, and we will have fewer
opportunities to grow our portfolio than other entities that
purchase properties that are primarily leased to the GSA and also
to state government or non-government tenants. Also, because of the
strong credit quality of our federal government tenant base, we
face significant competition for acquisitions of GSA Properties
from many investors, including publicly traded REITs, high net
worth individuals, commercial developers, real estate companies and
institutional investors with more substantial resources and access
to capital than we have. This competition may require us to accept
less favorable terms (including higher purchase prices) in order to
consummate a particular GSA Property. In addition, we may identify
a portfolio of GSA Properties that are owned by one potential
seller. It is not uncommon for a seller of a portfolio of GSA
Properties to be unwilling to allow the carve-out of one or more
such GSA Properties from the portfolio if for due diligence or
other reasons, we do not wish to pursue or complete the purchase of
one or more of such GSA Properties in the portfolio. As a result,
we may be required to purchase an under-performing or otherwise
deficient GSA Property in order to obtain the valuable properties
in a GSA portfolio or forego the entire opportunity. Accordingly,
and for all of these reasons and others, we cannot assure you that
we will be able to identify GSA Properties or portfolios of GSA
Properties available for sale or negotiate and consummate their
acquisition on favorable terms, or at all, obtain the most
efficient form of financing, or any financing at all, for such
acquisitions or have sufficient resources internally to fund such
acquisition, without external financing. If we are unable to
identify and consummate sufficient acquisitions of GSA Properties,
we may be forced to alter our primary strategy of investing in GSA
Properties. See “Risks Related to Our Debt Financing –
Our ability to obtain financing on reasonable terms would be
impacted by negative capital market conditions”. Any delay or
failure on our part to identify, negotiate, finance and consummate
such additional acquisitions on favorable terms could materially
and adversely affect us.
We may not be able to
successfully integrate additional investments into our business,
which could materially and adversely affect our investment
returns. We will not have operational experience with any
additional investments, and many of our additional acquisitions may
be in geographic markets in which we do not currently operate.
Accordingly, to the extent we acquire any such properties, we will
not possess the same level of familiarity with them, and they may
fail to perform in accordance with our expectations as a result of
our inability to operate them successfully, our failure to
integrate them successfully into our business or our inability to
assess their true value in calculating their purchase prices or
otherwise, which could have a material adverse effect on
us.
We must obtain the consent
of the GSA in order to assume the rights and obligations of the
landlord under the leases of GSA Properties we acquire, and we will
need to collect the rent from the former owners of those GSA
Properties until that consent is obtained. The leases
associated with GSA Properties we acquire will require that we
obtain the consent of the GSA in order to transfer the rights and
obligations of the landlord from the respective sellers to us. The
consent process is time-consuming and not obligatory on the part of
the GSA. The GSA will continue to pay rent to the former owners of
those properties until the applicable consent is obtained. By
virtue of our purchase agreements and the documents to be executed
by sellers when we acquire GSA Properties, we will require the
sellers to assign us the rights to any rent that they receive from
the GSA from the time we acquire a GSA Property until the
GSA’s consent is obtained. If one or more former owners of
our GSA Properties improperly retain rent payments or become
subject to bankruptcy, receivership or other insolvency
proceedings, we may be unable to recover the rent payable under the
applicable GSA Property lease in a timely manner, or at all, which
could materially and adversely affect us.
An increase in the amount
of federal government-owned real estate relative to federal
government-leased real estate may materially and adversely affect
us. If the federal government were to increase its owned
real estate relative to its leased real estate, there would be
fewer opportunities to acquire and own GSA Properties. In addition,
agencies that occupy one or more of our GSA Properties may relocate
to federal government-owned real estate which would likely
materially and adversely affect our ability to renew the lease or
leases affected. Furthermore, it may become more difficult for us
to locate GSA Properties in order to grow our business. Any of
these matters could materially and adversely affect
us.
The federal
government’s “green lease” policies may
materially and adversely affect us. In recent years, the
federal government has instituted “green lease”
policies which allow a government occupant to require
LEED® certification in
selecting new premises or renewing leases at existing premises.
Obtaining such certifications and labels may be costly and time
consuming, and our failure to do so may result in our competitive
disadvantage in purchasing additional GSA Properties, or retaining
existing, federal government occupants. Of the properties in our
portfolio, five out of the 13 are LEED® certified and one is in the
LEED® certification in
process and one is energy star rated. Obtaining such certification
for the remaining properties in our portfolio and GSA Properties
that we may acquire in the future could result in increased costs
not projected by us. The failure to obtain any such certification
or satisfy any other “green lease” policies could
materially and adversely affect us.
Generally, we will be
required to pay for all maintenance, repairs, base property taxes,
utilities and insurance; amounts recoverable under the leases of
our GSA Properties for increased operating costs may be less than
the actual costs we incur. Federal government leases
generally require the landlord to pay for maintenance, repairs,
base property taxes, utilities and insurance. Although the GSA is
typically obligated to pay the landlord adjusted rent for changes
in certain operating costs (e.g., the costs of cleaning
services, supplies, materials, maintenance, trash removal,
landscaping, water, sewer charges, heating, electricity, repairs
and certain administrative expenses but not including insurance),
the amount of any adjustment is based on a cost of living index
rather than the actual amount of our costs. As a result, to the
extent the amount payable to us based upon the cost of living
adjustments does not cover our actual operating costs, our
operating results could be adversely affected. Furthermore, the
federal government typically is obligated to reimburse us for
increases in real property taxes above a base amount but only if we
provide the proper documentation in a timely manner.
Notwithstanding federal government reimbursement obligations, we
remain primarily responsible for the payment of all such costs and
taxes. See “Our Business and Properties – Description
of GSA Leases.”
GSA Properties may have a
higher risk of terrorist attack. Because our primary tenant will be the
federal government, our GSA Properties may have a higher risk of
terrorist attack than similar properties that are leased to
non-government tenants. Terrorist attacks may negatively affect our
GSA Properties in a manner that materially and adversely affects
us. We cannot assure you that there will not be further terrorist
attacks against or in the United States or against the federal
government. These attacks may directly impact the value of our GSA
Properties through damage, destruction, loss or increased security
costs. Certain losses resulting from these types of events are
uninsurable and others may not be covered by our current terrorism
insurance. Additional terrorism insurance may not be available at a
reasonable price or at all.
There are some risks which
are unique to specific properties. Because our GSA
Properties are built-to-suit for various federal government
agencies and are dispersed across the United States, individual GSA
Properties may have unique risks which are not characteristic of
the portfolio as a whole.
Our Manager may not be
successful in identifying and consummating suitable investment
opportunities. Our investment strategy requires us, through
our Manager, to identify suitable investment opportunities
compatible with our investment criteria. Our Manager may not be
successful in identifying suitable opportunities that meet our
criteria or in consummating investments, including those identified
as part of our investment pipeline, on satisfactory terms or at
all. Our ability to make investments on favorable terms may be
constrained by several factors including, but not limited to,
competition from other investors with significant capital,
including publicly-traded REITs and institutional investment funds,
which may significantly increase investment costs; and/or the
inability to finance an investment on favorable terms or at all.
The failure to identify or consummate investments on satisfactory
terms, or at all, may impede our growth and negatively affect our
cash available for distribution to our stockholders.
If we cannot obtain
additional capital, our ability to make acquisitions will be
limited. We are subject to risks associated with debt and capital
stock issuances, and such issuances may have consequences to
holders of shares of our common stock. Our ability to make
acquisitions will depend, in large part, upon our ability to raise
additional capital. If we were to raise additional capital through
the issuance of equity securities, we could dilute the interests of
holders of shares of our common stock. Our board of directors may
authorize the issuance of classes or series of preferred stock
which may have rights that could dilute, or otherwise adversely
affect, the interest of holders of shares our common
stock.
Further, we expect
to incur additional indebtedness in the future, which may include a
corporate credit facility. Such indebtedness could also have other
important consequences to holders of the notes and holders of our
common and preferred stock, including subjecting us to covenants
restricting our operating flexibility, increasing our vulnerability
to general adverse economic and industry conditions, limiting our
ability to obtain additional financing to fund future working
capital, capital expenditures and other general corporate
requirements, requiring the use of a portion of our cash flow from
operations for the payment of principal and interest on our
indebtedness, thereby reducing our ability to use our cash flow to
fund working capital, acquisitions, capital expenditures and
general corporate requirements, and limiting our flexibility in
planning for, or reacting to, changes in our business and our
industry.
Lack of diversification in
number of investments increases our dependence on individual
investments. If we acquire other property interests that are
similarly large in relation to our overall size, our portfolio
could become even more concentrated, increasing the risk of loss to
stockholders if a default or other problem arises. Alternatively,
property sales may reduce the aggregate amount of our property
investment portfolio in value or number. As a result, our portfolio
could become concentrated in larger assets, thereby reducing the
benefits of diversification by geography, property type, tenancy or
other measures.
We may never reach
sufficient size to achieve diversity in our portfolio. We
are presently a comparatively a small company primarily focusing on
sourcing, acquiring, leasing and managing GSA Properties, resulting
in a portfolio that lacks tenant diversity and has limited
geographic diversity. While we intend to endeavor to grow and
geographically diversify our portfolio through additional property
acquisitions, we may never reach a significant size to achieve true
geographic diversity.
We have limited operating
history and capitalization. We were organized in March 2016
for the purpose of engaging in the activities set forth in this
offering circular. We have limited history of operations and,
accordingly, limited performance history to which a potential
investor may refer in determining whether to invest in us. While
are engaged in this offering to raise capital, we will nonetheless
have limited capitalization. Our prospects must be considered in
light of the risks, expenses and difficulties frequently
encountered by new ventures, including our reliance on our Manager
and its key personnel and affiliates and other factors. We are
confident that our Manager will select profitable, relatively risk
averse investments. However, there is no assurance that any
attempts by our Manager to reduce the potential risks for our
company to incur losses will be successful. A significant financial
reversal for our Manager or its affiliates could adversely affect
the ability of our Manager to satisfy its obligation to manage our
company.
Additionally, because we are a newly formed company with no
previous operating history, it may be more difficult for us to
raise reasonably priced capital than more established companies,
many of which have established financing programs and, in some
cases, have investment grade credit ratings. Accordingly, we will
not be able to retain sufficient cash flow from operations to meet
our debt service requirements and repay our debt, satisfy our
operational requirements, pay dividends to our stockholders
(including those necessary for our qualification as a REIT) and
successfully execute our growth strategy. We will need to raise
additional capital for these purposes, and we cannot assure you
that a sufficient amount of capital will be available to us on
favorable terms, or at all, when needed, which would materially and
adversely affect us. A significant portion of net proceeds from
this offering may be used to repay debt secured by our portfolio of
properties and to fund the aggregate purchase price later acquired
properties and, as a result, will not be available for these
purposes.
The market for real estate
investments, and particularly GSA Properties, is highly
competitive. Identifying attractive real estate investment
opportunities, particularly with GSA Properties, is difficult and
involves a high degree of uncertainty. Furthermore, the historical
performance of a particular property or market is not a guarantee
or prediction of the property’s or market’s future
performance. There can be no assurance that we will be able to
locate suitable acquisition opportunities, achieve its investment
goal and objectives, or fully deploy for investment the net
proceeds of this offering.
Because
of the recent growth in demand for real estate investments, there
may be increased competition among investors to invest in the same
asset classes as our company. This competition may lead to an
increase in the investment prices or otherwise less favorable
investment terms. If this situation occurs with a particular
investment, our return on that investment is likely to be less than
the return it could have achieved if it had invested at a time of
less investor competition for the investment. For this and other
reasons, our Manager is under no restrictions concerning the timing
of investments.
Investments that are not
single-tenant, GSA Properties, as permitted under our Investment
Policies, may increase risk. If we make investments that are
not single-tenant, GSA Properties, as permitted under our
Investment Policies, some or all of the leases from those
investments will not be backed by the full faith and credit of the
United States of America. This may increase the risk of default and
non-payment under those leases, and consequently, may negatively
affect your investment in us.
We are required to make a
number of judgments in applying accounting policies, and different
estimates and assumptions in the application of these policies
could result in changes to our reporting of financial condition and
results of operations. Various estimates are used in the
preparation of our financial statements, including estimates
related to asset and liability valuations (or potential
impairments) and various receivables. Often these estimates require
the use of market data values that may be difficult to assess, as
well as estimates of future performance or receivables
collectability that may be difficult to accurately predict. While
we have identified those accounting policies that are considered
critical and have procedures in place to facilitate the associated
judgments, different assumptions in the application of these
policies could result in material changes to our financial
condition and results of operations.
We utilize, and intend to
continue to utilize, leverage, which may limit our financial
flexibility in the future. We make acquisitions and operate
our business in part through the utilization of leverage pursuant
to loan agreements with various financial institutions. These loan
agreements contain financial covenants that restrict our
operations. These financial covenants, as well as any future
financial covenants we may enter into through further loan
agreements, could inhibit our financial flexibility in the future
and prevent distributions to stockholders.
We may incur losses as a
result of ineffective risk management processes and
strategies. We seek to monitor and control our risk exposure
through a risk and control framework encompassing a variety of
separate but complementary financial, credit, operational,
compliance and legal reporting systems, internal controls,
management review processes and other mechanisms. While we employ a
broad and diversified set of risk monitoring and risk mitigation
techniques, those techniques and the judgments that accompany their
application cannot anticipate every economic and financial outcome
or the specifics and timing of such outcomes. Thus, we may, in the
course of our activities, incur losses due to these
risks.
We are dependent on
information systems and third parties, and systems failures could
significantly disrupt our business, which may, in turn, negatively
affect the market price of our common stock and our ability to make
distributions to our stockholders. Our business is dependent
on communications and information systems, some of which are
provided by third parties. Any failure or interruption of our
systems could cause delays or other problems, which could have a
material adverse effect on our operating results and negatively
affect the market price of our common stock and our ability to make
distributions to our stockholders.
Inflation may adversely
affect our financial condition and results of operations.
Inflation might have both positive and negative impacts upon us.
Inflation might cause the value of our real estate to increase.
Inflation might also cause our costs of equity and debt capital and
operating costs to increase. An increase in our capital costs or in
our operating costs will result in decreased earnings unless it is
offset by increased revenues. Our federal government-leases
generally provide for annual rent increases based on a cost of
living index for the locality in which the particular property is
located, which should offset any increased costs as a result of
inflation, but it may not offset all increased costs.
To
mitigate the adverse impact of any increased cost of debt capital
in the event of material inflation, we may enter into interest rate
hedge arrangements in the future, but we have no present intention
to do so. The decision to enter into these agreements will be based
on the amount of our floating rate debt outstanding, our belief
that material interest rate increases are likely to occur and
requirements of our borrowing arrangements.
The acquisition of our
Contribution Properties did not include a fee interest in each of
the Contribution Properties. A condition of the closing of the transactions
contemplated by the Contribution Agreement, or the Contribution,
was the receipt of the consent to the transfer of the LLC Interests
from each of the lenders secured by the Contribution Properties. As
of May 26, 2017, the date of the Contribution, we had received the
consent of the lenders secured by the Silt Property, the Fort
Smith Property, the Johnson City Property and the Port Canaveral
Property; however, we had not yet received the consent from LNR
Partners, LLC, or LNR, special servicer on the loan, which is
secured by the Port Saint Lucie Property, the Jonesboro
Property and the Lorain Property, or the Starwood Loan, and those
properties being the Affected Properties.
Our
management determined it to be in our best interests to use an
alternate method in the interim that is intended to allow our
company to enjoy the financial benefits of the Affected Properties
intended by the Contribution Agreement, while remaining in
compliance with the Starwood Loan (as defined in “Description
of Our Properties – Description of Indebtedness”)
covenants. On May 26, 2017, our Operating Partnership and
Holmwood entered into the Second Amendment to revise certain terms
of the Contribution Agreement. Pursuant to the Second Amendment, at
the closing of the Contribution, Holmwood retained the limited
liability company interests owning the Affected Properties as its
sole and exclusive property; however, Holmwood assigned all of its
right, title and interest in and to any and all profits, losses and
distributed cash flows, if any, from each wholly-owned subsidiary
owning the Affected Properties, as well as all of the other
benefits and burdens of ownership solely for federal income tax
purposes, or the Profits Interests, to our Operating Partnership.
Upon (i) the receipt of consent to the Contribution from LNR, (ii)
the sale of the Affected Properties, subject to certain consents,
or (iii) the payment of defeasance of all loans, secured by
existing mortgage liens on the Affected Properties, the LLC
Interests associated with such Affected Properties shall be deemed
to have been contributed and transferred to our operating
partnership on such date.
While
we believe this arrangement provides our investors with the same
benefit had the limited liability company interests owning the
Affected Properties been transferred to us, there can be no
assurances that this will be the case. It is possible that LNR
could take the position that the assignment of the Profits
Interests did not comply with the Starwood Loan covenants, which
could lead to LNR declaring a default on the Starwood Loan,
resulting in litigation costs and, if LNR prevailed in the
litigation, the potential voidance of the assignment of Profits
Interests or a foreclosure of the Affected Properties.
Risks Related to our Management and Relationships with our
Manager
We are managed by an
external manager, Holmwood Capital Advisors, LLC. Our
Manager of our company is external to our company, and you will own
no rights in our Manager by purchasing the offered shares. Our
Manager has the right under our Management Agreement, subject to
the Investment Guidelines, to cause us to acquire and finance
investments without further approval of our board of directors and
is only required to meet the standards of care and other
requirements set forth in our Management Agreement.
We are dependent on our
Manager and its key personnel for our success. Currently, we
are advised by our Manager and, pursuant to the Management
Agreement, our Manager is not obligated to dedicate any specific
personnel exclusively to us, nor is its personnel obligated to
dedicate any specific portion of their time to the management of
our business. As a result, we cannot provide any assurances
regarding the amount of time our Manager will dedicate to the
management of our business. Moreover, each of our officers and
non-independent directors is also an officer and member of our
Manager or one of its affiliates and may not always be able to
devote sufficient time to the management of our business. Of our
officers and directors, only Mr. Stanton and Ms. Watson are
full-time employees of our Manager. Consequently, we may not
receive the level of support and assistance that we otherwise might
receive if we were internally managed.
In
addition, we offer no assurance that our Manager will remain our
manager or that we will continue to have access to our
Manager’s principals and professionals. The initial term of
our Management Agreement with our Manager only extends until March
31, 2018, with automatic one-year renewals thereafter, and may be
terminated earlier under certain circumstances. If the Management
Agreement is terminated or not renewed and no suitable replacement
is found to manage us, we may not be able to execute our business
plan, which could have a material adverse effect on our results of
operations and our ability to make distributions to our
stockholders.
The inability of our
Manager to retain or obtain key personnel could delay or hinder
implementation of our investment strategies, which could impair our
ability to make distributions and could reduce the value of your
investment. Our Manager is obligated to supply us with
substantially all of our senior management team, including our
chief executive officer, president, vice president, treasurer and
secretary. Subject to investment, leverage and other guidelines or
policies adopted by our board of directors, our Manager has
significant discretion regarding the implementation of our
investment and operating policies and strategies. Accordingly, we
believe that our success will depend significantly upon the
experience, skill, resources, relationships and contacts of the
senior officers and key personnel of our Manager and its
affiliates. In particular, our success depends to a significant
degree upon the contributions of Messrs. Robert R. Kaplan, Robert
R. Kaplan, Jr., Philip Kurlander and Edwin M. Stanton and Ms.
Elizabeth Watson, who are senior officers of our Manager. We do not
have employment agreements with any of these key personnel and do
not have key man life insurance on any of them. Further, only Mr.
Stanton and Ms. Watson are full-time employees of our Manager,
while Messrs. Kaplan and Kaplan Jr. are practicing attorneys and
Dr. Kurlander is a healthcare professional and active investor. If
any of Messrs. Kaplan, Kaplan, Jr., Kurlander and Stanton or Ms.
Watson were to cease their affiliation with us or our Manager, our
Manager may be unable to find suitable replacements, and our
operating results could suffer. We believe that our future success
depends, in large part, upon our Manager’s ability to hire
and retain highly skilled managerial, operational and marketing
personnel. Competition for highly skilled personnel is intense, and
our Manager may be unsuccessful in attracting and retaining such
skilled personnel. If we lose or are unable to obtain the services
of highly skilled personnel, our ability to implement our
investment strategies could be delayed or hindered, and the value
of your investment may decline. For more information on the
experience of Mr. Stanton, our Chief Executive Officer, please see
"Directors, Executive Officers, and Significant Employees -
Material Prior Business Developments of Mr. Stanton."
Our Manager’s limited
operating history makes it difficult for you to evaluate this
investment. Our Manager has less than two years of 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.
Our Manager and its
affiliates may receive compensation regardless of
profitability. Our
Manager will be entitled to receive an annual asset management fee
of 1.5% of our stockholders’ equity per annum. In addition,
our Manager will receive a 1.0% acquisition fee of the gross
purchase price, as adjusted pursuant to any closing adjustments, on
acquisitions. These fees are capitalized expenses of our company
and are payable regardless of the profitability of our company or
whether any distributions are made to you; provided that the
acquisition fee is payable solely in equity and will be accrued
until a Listing Event, as defined herein, or on March 31, 2020,
whichever occurs first. For further detail, see “Compensation
to Our Manager”.
Termination of our
Management Agreement, even for poor performance, could be difficult
and costly, including as a result of termination fees, and may
cause us to be unable to execute our business plan.
Termination of our Management Agreement without cause, even for
poor performance, could be difficult and costly. We may generally
terminate our Manager for cause, without payment of any termination
fee, if (i) our Manager, its agents or assignees breaches any
material provision of the Management Agreement and such breach
shall continue for a period of 30 days after written notice
thereof specifying such breach and requesting that the same be
remedied in such 30-day period (or 45 days after written
notice of such breach if our Manager takes steps to cure such
breach within 30 days of the written notice), (ii) there
is a commencement of any proceeding relating to our Manager’s
bankruptcy or insolvency, including an order for relief in an
involuntary bankruptcy case or our Manager authorizing or filing a
voluntary bankruptcy petition, (iii) any “Manager Change
of Control,” as defined in the Management Agreement, which a
majority of the independent directors determines is materially
detrimental to us and our subsidiaries, taken as a whole, (iv) the
dissolution of our Manager, or (v) our Manager commits fraud
against us, misappropriates or embezzles our funds, or acts, or
fails to act, in a manner constituting gross negligence, or acts in
a manner constituting bad faith or willful misconduct, in the
performance of its duties under the Management Agreement;
provided, however, that if
any of the actions or omissions described in clause (v) above
are caused by an employee and/or officer of our Manager or one of
its affiliates and our Manager takes all necessary and appropriate
action against such person and cures the damage caused by such
actions or omissions within 30 days of our Manager actual
knowledge of its commission or omission, we will not have the right
to terminate the Management Agreement for cause and any termination
notice previously given will be deemed to have been rescinded and
nugatory.
Our
Property Manager is a wholly-owned subsidiary of our Manager, and
as a result it is likely that if we terminate our Management
Agreement that we will terminate each property management agreement
entered into by the Property Manager and our title holding
subsidiaries. Under each property management agreement, it is
anticipated that our Property Manager will be paid a termination
fee equal to four times its property management fees received for
the three complete calendar months immediately prior to
termination.
The
Management Agreement will continue in operation, unless terminated
in accordance with the terms hereof for an initial term through
March 31, 2018, or the Initial Term, and then will automatically
renew annually. After the Initial Term, the Management Agreement
will be deemed renewed automatically each year for an additional
one-year period, or an Automatic Renewal Term, unless our company
or our Manager elects not to renew. Upon the expiration of the
Initial Term or any Automatic Renewal Term and upon
180 days’ prior written notice to our Manager, our
company may, without cause, but solely in connection with the
expiration of the Initial Term or the then current Automatic
Renewal Term, and upon the affirmative vote of at least two-thirds
of the independent directors, decline to renew the Management
Agreement, any such nonrenewal, a Termination Without Cause. In the
event of a Termination Without Cause, we will be required to pay
our Manager a termination fee before or on the last day of the
Initial Term or such Automatic Renewal Term. Such termination fee
will be equal to three times the sum of asset management fees,
acquisition fees and leasing fees earned, in each case, by our
Manager during the 24-month period prior to such termination,
calculated as of the end of the most recently completed fiscal
quarter; provided however, that if the Listing Event has not
occurred and no acquisition fees have been paid, then all accrued
acquisition fees will be included in the calculation of the
termination fee. The termination fee is payable in vested equity of
our company, cash, or a combination thereof in the discretion of
our board. These provisions may substantially restrict our ability
to terminate the Management Agreement without cause and would cause
us to incur substantial costs in connection with such a
termination. Furthermore, in the event that our Management
Agreement is terminated, with or without cause, and we are unable
to identify a suitable replacement to manage us, our ability to
execute our business plan could be adversely affected.
Because we are dependent
upon our Manager and its affiliates to conduct our operations, any
adverse changes in the financial health of our Manager or its
affiliates or our relationship with them could hinder our operating
performance and the return on your investment. We are
dependent on our Manager and its affiliates to manage our
operations and acquire and manage our portfolio of real estate
assets. Under the direction of our board of directors, and subject
to our Investment Guidelines, our Manager makes all decisions with
respect to the management of our company. Our Manager depends upon
the fees and other compensation that it receives from us in
connection with managing our company to conduct its operations. Any
adverse changes in the financial condition of our Manager or its
affiliates, or our relationship with our Manager, could hinder its
ability to successfully manage our operations and our portfolio of
investments, which would adversely affect us and our
stockholders.
Our board of directors has
approved very broad Investment Guidelines for our Manager and will
not approve each investment and financing decision made by our
Manager unless required by our Investment Guidelines. Our
Manager is authorized to follow broad Investment Guidelines
established by our board of directors relative to implementing our
investment strategy. Our board of directors will periodically
review our Investment Guidelines and our portfolio of assets but
will not, and will not be required to, review all of our proposed
investments, except if our Manager proposes an investment outside
of the parameters of our Investment Guidelines. In addition, in
conducting periodic reviews, our board of directors may rely
primarily on information provided to them by our Manager.
Furthermore, transactions entered into by our Manager may be
costly, difficult or impossible to unwind by the time they are
reviewed by our board of directors. Our Manager has great latitude
within the parameters of our Investment Guidelines in determining
the types, amounts and geographic locations of assets in which to
invest on our behalf, which may result in making investments that
may result in returns that are substantially below expectations or
result in losses, which would materially and adversely affect our
business and results of operations, or may otherwise not be in the
best interests of our stockholders.
Our Manager and its
principals and executive officers have limited experience managing
a REIT. Our Manager and its principals and executive
officers have limited experience managing a REIT. We cannot assure
you that the past experience of our Manager and its principals and
executive officers will be sufficient to successfully operate our
company as a REIT, including the requirements to timely meet
disclosure requirements of the SEC, state requirements, and
requirements relative to maintaining our qualification as a
REIT.
Our Manager may fail to
identify acceptable investments. There can be no assurances
that our Manager will be able to identify, make or acquire suitable
investments meeting our investment criteria. There is no guarantee
that any investment selected by our Manager will generate operating
income or gains. While affiliates of our Manager have been
successful in the past in identifying and structuring favorable
real estate investments, there is no guarantee that our Manager
will be able to identify and structure favorable investments in the
future.
Risks Related to the Real Estate Industry and Investments in Real
Estate
Our real estate investments
are subject to risks particular to real property. Real
property investments are subject to varying risks and market
fluctuations. These events include, but are not limited
to:
|
●
|
|
adverse
changes in national, regional and local economic and demographic
conditions;
|
|
|
|
|
|
●
|
|
the
availability of financing, including financing necessary to extend
or refinance debt maturities;
|
|
●
|
|
the
ability to control operating costs (particularly at our properties
where we are not allowed to pass all or even a portion of those
costs through to our tenants);
|
|
●
|
|
increases
in tenant vacancies, difficulty in re-letting space and the need to
offer tenants below-market rents or concessions;
|
|
●
|
|
decreases
in rental rates;
|
|
●
|
|
increases
in interest rates, which could negatively impact the ability of any
non-government tenants to make rental payments;
|
|
●
|
|
an
increase in competition for, or a decrease in demand by, tenants,
especially the federal government and its agencies and
departments;
|
|
●
|
|
the
financial strength of tenants and the risk of any non-government
tenant bankruptcies and lease defaults;
|
|
●
|
|
an
increase in supply or decrease in demand of our property
types;
|
|
●
|
|
introduction
of a competitor’s property in or in close proximity to one of
our properties;
|
|
●
|
|
the
adoption on the national, state or local level of more restrictive
laws and governmental regulations, including more restrictive
zoning, land use or environmental regulations and increased real
estate taxes;
|
|
●
|
|
opposition
from local community or political groups with respect to the
construction or operations at a property;
|
|
●
|
|
adverse
changes in the perceptions of prospective tenants or purchasers of
the attractiveness, convenience or safety of a
property;
|
|
●
|
|
our
inability to provide effective and efficient management and
maintenance at our properties;
|
|
●
|
|
the
investigation, removal or remediation of hazardous materials or
toxic substances at a property;
|
|
●
|
|
our
inability to collect rent or other receivables;
|
|
●
|
|
the
effects of any terrorist activity;
|
|
●
|
|
underinsured
or uninsured natural disasters, such as earthquakes, floods or
hurricanes; and
|
|
●
|
|
our
inability to obtain adequate insurance on favorable
terms.
|
The
value of our properties and our performance may decline due to the
realization of risks associated with the real estate industry,
which could materially and adversely affect us.
Real estate investments are
not as liquid as other types of assets, which may reduce economic
returns to our stockholders. Real estate investments are not
as liquid as other types of investments. In addition, the
instruments that we purchase in connection with privately
negotiated transactions are not registered under the relevant
securities laws, resulting in a prohibition against their transfer,
sale, pledge or other disposition except in a transaction that is
exempt from the registration requirements of, or is otherwise in
accordance with, those laws. As a result, our ability to sell
under-performing assets in our portfolio or respond to changes in
economic and other conditions may be relatively
limited.
Investments in real
estate-related assets can be speculative. Investments in
real estate-related assets can involve speculative risks and always
involve substantial risks. No assurance can be given that our
Manager will be able to execute the investment strategy or that
stockholders in our company will realize their investment
objectives. No assurance can be given that our stockholders will
realize a substantial return (if any) on their investment or that
they will not lose their entire investment in our company. For this
reason, each prospective purchaser of shares of our common stock
should carefully read this offering circular and all exhibits to
this offering circular. All such
persons or entities should consult with their attorney or business
advisor prior to making an investment.
Our investments are
anticipated to be concentrated in GSA Properties. We expect
to concentrate on investing in GSA Properties. If GSA Properties
experience a material adverse event, our company and our
stockholders would likely be significantly and adversely
affected.
Liability relating to
environmental matters may impact the value of the properties that
we may acquire or underlying our investments. 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 fail to disclose environmental issues, we could
also be liable to a buyer or lessee of a property.
There
may be environmental problems associated with our properties which
we were unaware of at the time of acquisition. The presence of
hazardous substances may adversely affect our ability to sell real
estate, including the affected property, or borrow using real
estate as collateral. The presence of hazardous substances, if any,
on our properties may cause us to incur substantial remediation
costs, thus harming our financial condition. In addition, although
our leases will generally require our tenants to operate in
compliance with all applicable laws and to indemnify us against any
environmental liabilities arising from a tenant’s activities
on the property, we nonetheless would be subject to strict
liability by virtue of our ownership interest for environmental
liabilities created by such tenants, and we cannot ensure the
stockholders that any tenants we might have would satisfy their
indemnification obligations under the applicable sales agreement or
lease. The discovery of material environmental liabilities attached
to such properties could have a material adverse effect on our
results of operations and financial condition and our ability to
make distributions to our stockholders.
Discovery of previously
undetected environmentally hazardous conditions, including mold or
asbestos, may lead to liability for adverse health effects and
costs of remediating the problem could adversely affect our
operating results. Under various U.S. federal, state and
local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the
cost of removal or remediation of hazardous or toxic substances on,
under or in such property. The costs of removal or remediation
could be substantial. Such laws often impose liability whether or
not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Environmental laws
also may impose restrictions on the manner in which property may be
used or businesses may be operated, and these restrictions may
require substantial expenditures. Environmental laws provide for
sanctions in the event of noncompliance and may be enforced by
governmental agencies or, in certain circumstances, by private
parties. Certain environmental laws and common law principles could
be used to impose liability for release of and exposure to
hazardous substances, including asbestos-containing materials into
the air, and third parties may seek recovery from owners or
operators of real properties for personal injury or property damage
associated with exposure to released hazardous substances. The cost
of defending against claims of liability, of compliance with
environmental regulatory requirements, of remediating any
contaminated property, or of paying personal injury claims related
to any contaminated property could materially adversely affect our
business, assets or results of operations and, consequently,
amounts available for distribution to our security
holders.
An environmental site assessment performed on
the Port Canaveral Property revealed chlorinated solvent
contamination in the soil, groundwater, and in the surrounding
area. An environmental site assessment performed on the Port
Canaveral Property revealed chlorinated solvent contamination in
the soil, groundwater, and in the surrounding area, including the
subject property, in 1995, which is related to a former sump. The
responsible party was identified as the Canaveral Port Authority.
Several site assessments, groundwater monitoring events, remedial
action plans and risk assessments have been performed at the site
since the contamination was first identified.
A Site
Wide Groundwater Monitoring Event Report, or the Groundwater
Report, was conducted on the property in September 2014. While the
Groundwater Report provides information that the risk associated
with the event is decreasing, we cannot be certain that will be the
case. As a result, we may be exposed to increased risk of financial
loss and our investment may underperform as a result.
We may invest in
real-estate related investments, including joint ventures and
co-investment arrangements. We primarily invest in
properties as sole owner. However, we may, in our Manager's sole
discretion subject to our Investment Guidelines, invest as a joint
venture partner or co-investor in an investment. In such event, we
generally anticipate owning a controlling interest in the joint
venture or co-investment vehicle. However, our joint venture
partner or co-investor may have a consent or similar right with
respect to certain major decisions with respect to an investment,
including a refinancing, sale or other disposition. Additionally,
we may rely on our joint venture partner or co-investor to act as
the property manager or developer, and, thus, our returns will be
subject to the performance of our joint venture partner or
co-investor. While our Manager does not intend for these types of
investments to be a primary focus of our company, our Manager may
make such investments in its sole discretion.
Adverse economic conditions
may negatively affect our results of operations and, as a result,
our ability to make distributions to our stockholders or to realize
appreciation in the value of our investments. Our operating
results may be adversely affected by market and economic
challenges, which may negatively affect our returns and
profitability and, as a result, our ability to make distributions
to our stockholders or to realize appreciation in the value of our
investments. These market and economic challenges include, but are
not limited to, the failure of the real estate market to attract
the same level of capital investment in the future that it attracts
at the time of our purchases or a reduction in the number of
companies seeking to acquire properties may result in the value of
our investments not appreciating or decreasing significantly below
the amount we pay for these investments.
The
length and severity of any economic slow-down or downturn cannot be
predicted. Our operations and, as a result, our ability to make
distributions to our stockholders and/or our ability to realize
appreciation in the value of our properties could be materially and
adversely affected to the extent that an economic slow-down or
downturn is prolonged or becomes severe.
We may be adversely
affected by unfavorable economic changes in the specific geographic
areas where our investments are concentrated. Adverse
conditions (including business layoffs or downsizing, industry
slowdowns, changing demographics and other factors) in the areas
where our investments are located and/or concentrated, and local
real estate conditions (such as oversupply of, or reduced demand
for, office, industrial, retail or multifamily properties) may have
an adverse effect on the value of our investments. A material
decline in the demand or the ability of tenants to pay rent for
office, industrial or retail space in these geographic areas may
result in a material decline in our cash available for distribution
to our stockholders.
We
depend on the U.S. Government and its agencies for substantially
all of our revenues and any failure by the U.S. Government and its
agencies to perform their obligations under their leases or renew
their leases upon expiration could have a material adverse effect
on our business, financial condition and results of
operations. Following the completion of this
offering, our tenants will account for all of our annualized lease
income. We expect that leases to agencies of the U.S. Government
will continue to be the primary source of our revenues for the
foreseeable future. Due to such concentration, any failure by the
U.S. Government to perform its obligations under its leases or a
failure to renew its leases upon expiration, could cause
interruptions in the receipt of lease revenue or result in
vacancies, or both, which would reduce our revenue until the
affected properties are leased, and could decrease the ultimate
value of the affected property upon sale and have a material
adverse effect on our business, financial condition and results of
operations. Further, because our portfolio of properties is, and
future investments are expected to be, built-to-suit properties,
the non-renewal of those leases may have a detrimental effect on
our ability to find a new tenant, repurpose such property, or sell
such property on beneficial terms.
We may not be able to
re-lease or renew leases at the investments held by us on terms
favorable to us or at all. We are subject to risks that upon
expiration or earlier termination of the leases for space located
at our investments the space may not be re-leased or, if re-leased,
the terms of the renewal or re-leasing (including the costs of
required renovations or concessions to tenants) may be less
favorable than current lease terms. Any of these situations may
result in extended periods where there is a significant decline in
revenues or no revenues generated by an investment. If we are
unable to re-lease or renew leases for all or substantially all of
the spaces at these investments, if the rental rates upon such
renewal or re-leasing are significantly lower than expected, if our
reserves for these purposes prove inadequate, or if we are required
to make significant renovations or concessions to tenants as part
of the renewal or re-leasing process, we will experience a
reduction in net income and may be required to reduce or eliminate
distributions to our stockholders.
Most of our federal
government leases include early termination provisions that permit
the federal government to terminate its lease with us prior to the
lease expiration date. For the foreseeable future, we expect
that all, or substantially all, of our rents will come from the
federal government. We anticipate that most of our federal
government leases, including the leases for ten of our 13
properties in our portfolio, will include early termination
provisions that permit the federal government to terminate its
lease with us after a specified date but before the lease
expiration date and with little or no liability as a result of any
such termination. As of December 6, 2017, the leases of our
properties in our portfolio have a weighted average remaining lease
term of 9.27 years, assuming no early termination rights are
exercised, and 6.08 years if all of the early termination rights
are exercised. Beginning April 30, 2021, early termination rights
will become exercisable with respect to federal government leases
of our properties in our portfolio that generate approximately
9.54% of our effective annual rent from our portfolio, and by
December 31, 2026, early termination rights with respect to federal
government leases for our properties in our portfolio that generate
approximately 77.30% of our effective annual rent from our
portfolio will become exercisable. For fiscal policy reasons,
security concerns or other reasons, some or all of these federal
government occupants may decide to vacate our properties at or
prior to the expiration of their lease term. Furthermore, these
properties are often built or modified to specialized needs of
particular agencies or departments of the federal government,
including law enforcement and defense/intelligence, at considerable
cost of development or modification. Typically, these additional
costs are recovered through enhanced rent rates designed to
recapture the cost over the full lease term. When we purchase
constructed properties, we will likely pay a price that reflects
these enhanced rent rates. Should the federal government occupant
of one of our facilities elect to vacate the property it occupies
at or prior to the expiration of the full lease term, it is
unlikely that we would be able to fully recover our costs by
finding a tenant or tenants outside of the federal government
itself that would be willing to pay these enhanced rates. It also
would be unlikely to market the property at a price that would be
likely to reflect the enhanced rent rates. Accordingly, if a
significant number of such vacancies occur, we could be materially
and adversely affected.
The bankruptcy, insolvency
or diminished creditworthiness of our tenants under their leases or
delays by our tenants in making rental payments could seriously
harm our operating results and financial condition. We lease
our properties to tenants, and we receive rents from our tenants
during the terms of their respective leases. A tenant’s
ability to pay rent is often initially determined by the
creditworthiness of the tenant. However, if a tenant’s credit
deteriorates, the tenant may default on its obligations under its
lease and the tenant may also become bankrupt. The bankruptcy or
insolvency of our tenants or other failure to pay is likely to
adversely affect the income produced by our real estate
investments. Any bankruptcy filings by or relating to one of our
tenants could bar us from collecting pre-bankruptcy debts from that
tenant or its property, unless we receive an order permitting us to
do so from the bankruptcy court. A tenant bankruptcy could delay
our efforts to collect past due balances under the relevant leases,
and could ultimately preclude full collection of these sums. If a
tenant files for bankruptcy, we may not be able to evict the tenant
solely because of such bankruptcy or failure to pay. A court,
however, may authorize a tenant to reject and terminate its lease
with us. In such a case, our claim against the tenant for unpaid,
future rent would be subject to a statutory cap that might be
substantially less than the remaining rent owed under the lease. In
addition, certain amounts paid to us within 90 days prior to the
tenant’s bankruptcy filing could be required to be returned
to the tenant’s bankruptcy estate. In any event, it is highly
unlikely that a bankrupt or insolvent tenant would pay in full
amounts it owes us under its lease. In other circumstances, where a
tenant’s financial condition has become impaired, we may
agree to partially or wholly terminate the lease in advance of the
termination date in consideration for a lease termination fee that
is likely less than the agreed rental amount. If a lease is
rejected by a tenant in bankruptcy, we would have only a general
unsecured claim for damages. Any unsecured claim we hold against a
bankrupt entity may be paid only to the extent that funds are
available and only in the same percentage as is paid to all other
holders of unsecured claims. We may recover substantially less than
the full value of any unsecured claims, which would harm our
financial condition. While the leases for our GSA Properties will
be full faith and credit obligations of the United States
government, there can be no certainty that we will not be adversely
affected by the bankruptcy, insolvency or diminished
creditworthiness of one of our tenants in a GSA
Property.
Lease defaults or
terminations or landlord-tenant disputes may adversely reduce our
income from our leased property portfolio. Lease defaults or
terminations by one or more of our significant tenants may reduce
our revenues unless a default is cured or a suitable replacement
tenant is found promptly. In addition, disputes may arise between
the landlord and tenant that result in the tenant withholding rent
payments, possibly for an extended period. These disputes may lead
to litigation or other legal procedures to secure payment of the
rent withheld or to evict the tenant. In other circumstances, a
tenant may have a contractual right to abate or suspend rent
payments. Even without such right, a tenant might determine to do
so. Any of these situations may result in extended periods during
which there is a significant decline in revenues or no revenues
generated by the property. If this were to occur, it could
adversely affect our results of operations.
Net leases may require us
to pay property-related expenses that are not the obligations of
our tenants. Under the terms of net leases, in addition to
satisfying their rent obligations, tenants are responsible for the
payment of real estate taxes, insurance and ordinary maintenance
and repairs. However, pursuant to leases we may assume or enter
into in the future, we may be required to pay certain expenses,
such as the costs of environmental liabilities, roof and structural
repairs, insurance, certain non-structural repairs and maintenance
and other costs and expenses for which insurance proceeds or other
means of recovery are not available. If one or more of our
properties incur significant expenses under the terms of the
leases, such property, our business, financial condition and
results of operations will be adversely affected and the amount of
cash available to meet expenses and to make distributions to our
stockholders may be reduced.
Net leases may not result
in fair market lease rates over time, which could negatively impact
our income and reduce the amount of funds available to make
distributions to our stockholders. A significant portion of
our rental income is expected to come from net leases, which
generally provide the tenant greater discretion in using the leased
property than ordinary property leases, such as the right to freely
sublease the property, to make alterations in the leased premises
and to terminate the lease prior to its expiration under specified
circumstances. Furthermore, net leases typically have longer lease
terms and, thus, there is an increased risk that contractual rental
increases in future years will fail to result in fair market rental
rates during those years. As a result, our income and distributions
to our stockholders could be lower than they would otherwise be if
we did not engage in net leases.
We could be adversely
affected by various facts and events related to our investments
over which we have limited or no control. We could be
adversely affected by various facts and events over which we have
limited or no control, such as (i) oversupply of space and changes
in market rental rates; (ii) economic or physical decline of the
areas where the investments are located; and (iii) deterioration of
the physical condition of our investments. Negative market
conditions or adverse events affecting our existing or potential
tenants, or the industries in which they operate, could have an
adverse impact on our ability to attract new tenants, re-lease
space, collect rent or renew leases, any of which could adversely
affect our financial condition. These will particularly affect any
investments made outside of GSA Properties.
We may be required to
reimburse tenants for overpayments of estimated operating
expenses. Under certain of our leases, tenants pay us as
additional rent their proportionate share of the costs we incur to
manage, operate and maintain the buildings and properties where
they rent space. These leases often limit the types and amounts of
expenses we can pass through to our tenants and allow the tenants
to audit and contest our determination of the operating expenses
they are required to pay. Given the complexity of certain
additional rent calculations, tenant audit rights under large
portfolio leases can remain unresolved for several years. If as a
result of a tenant audit it is determined that we have collected
more additional rent than we are permitted to collect under a
lease, we must refund the excess amount back to the tenant and,
sometimes, also reimburse the tenant for its audit costs. Such
unexpected reimbursement payments could materially adversely affect
our financial condition and results of operations.
An uninsured loss or a loss
that exceeds the policies on our investments could subject us to
lost capital or revenue on those properties. Under the terms
and conditions of the leases expected to be in force on our
investments, tenants are generally expected to be required to
indemnify and hold us harmless from liabilities resulting from
injury to persons, air, water, land or property, on or off the
premises, due to activities conducted on the investments, except
for claims arising from the negligence or intentional misconduct of
us or our agents. Additionally, tenants are generally expected to
be required, at the tenants’ expense, to obtain and keep in
full force during the term of the lease, liability and property
damage insurance policies. Insurance policies for property damage
are generally expected to be in amounts not less than the full
replacement cost of the improvements less slab, foundations,
supports and other customarily excluded improvements and insure
against all perils of fire, extended coverage, vandalism, malicious
mischief and special extended perils (“all risk,” as
that term is used in the insurance industry). Insurance policies
are generally expected to be obtained by the tenant providing
general liability coverage in varying amounts depending on the
facts and circumstances surrounding the tenant and the industry in
which it operates. These policies may include liability coverage
for bodily injury and property damage arising out of the ownership,
use, occupancy or maintenance of the properties and all of their
appurtenant areas. To the extent that losses are uninsured or
underinsured, we could be subject to lost capital and revenue on
those investments.
Acquired investments may
not meet projected occupancy. If the tenants in an
investment do not renew or extend their leases or if tenants
terminate their leases, the operating results of the investment
could be substantially and adversely affected by the loss of
revenue and possible increase in operating expenses not reimbursed
by the tenants. There can be no assurance that the investments will
be substantially occupied at projected rents. We will anticipate a
minimum occupancy rate for each investment, but there can be no
assurance that the investments will maintain the minimum occupancy
rate or meet our anticipated lease-up schedule. In addition,
lease-up of the unoccupied space may be achievable only at rental
rates less than those we anticipate.
Distributions may represent
a return of capital.
A portion of the distributed cash may constitute a return of each
stockholder’s capital investment in our company. Any such
distributions would constitute a return of capital. Accordingly,
such distributed cash will not constitute profit or earnings but
merely a return of capital.
We could be exposed to
environmental liabilities with respect to investments to which we
take title. In the course of our business, and taking title
to properties, we could be subject to environmental liabilities
with respect to such properties. In such a circumstance, we may be
held liable to a governmental entity or to third parties for
property damage, personal injury, investigation and clean-up costs
incurred by these parties in connection with environmental
contamination, or we may be required to investigate or clean up
hazardous or toxic substances or chemical releases at a property.
The costs associated with investigation or remediation activities
could be substantial. If we become subject to significant
environmental liabilities, our business, financial condition,
liquidity and results of operations could be materially and
adversely affected.
Properties may contain
toxic and hazardous materials. Federal, state and local laws impose
liability on a landowner for releases or the otherwise improper
presence on the premises of hazardous substances. This liability is
without regard to fault for, or knowledge of, the presence of such
substances. A landowner may be held liable for hazardous materials
brought onto the property before it acquired title and for
hazardous materials that are not discovered until after it sells
the property. Similar liability may occur under applicable state
law. If any hazardous materials are found within a property that is
in violation of law at any time, we may be liable for all cleanup
costs, fines, penalties and other costs. This potential liability
will continue after we sell the property and may apply to hazardous
materials present within the property before we acquired such
property. If losses arise from hazardous substance contamination
which cannot be recovered from a responsible party, the financial
viability of that property may be substantially affected. It is
possible that we will acquire a property with known or unknown
environmental problems which may adversely affect us.
Properties may contain
mold. Mold contamination has been linked to a number of
health problems, resulting in recent litigation by tenants seeking
various remedies, including damages and ability to terminate their
leases. Originally occurring in residential property, mold claims
have recently begun to appear in commercial properties as well.
Several insurance companies have reported a substantial increase in
mold-related claims, causing a growing concern that real estate
owners might be subject to increasing lawsuits regarding mold
contamination. No assurance can be given that a mold condition will
not exist at one or more of our investments, with the risk of
substantial damages, legal fees and possibly loss of tenants. It is
unclear whether such mold claims would be covered by the customary
insurance policies to be obtained for us.
Significant restrictions on
transfer and encumbrance of properties are
expected. The terms
of any debt financing for a property are expected to prohibit the
transfer or further encumbrance of that property or any interest in
that property except with the lender’s prior consent, which
consent each lender is expected to be able to withhold. The
relative illiquidity of the investments may prevent or
substantially impair our ability to dispose of an investment at
times when it may be otherwise advantageous for us to do so. If we
were forced to immediately liquidate some or all of our
investments, the proceeds are likely to result in a significant
loss, if such a liquidation is possible at all.
We will likely receive
limited representations and warranties from sellers.
Properties will likely be acquired with limited representations and
warranties from the seller regarding the condition of the property,
the status of leases, the presence of hazardous substances, the
status of governmental approvals and entitlements and other
significant matters affecting the use, ownership and enjoyment of
the property. As a result, if defects in a property or other
matters adversely affecting a property are discovered, we may not
be able to pursue a claim for damages against the seller of the
property. The extent of damages that we may incur as a result of
such matters cannot be predicted, but potentially could result in a
significant adverse effect on the value of our
investments.
We may experience delays in
the sale of a property. If a trading market does not develop
for our shares and we are not able to list on a registered national
securities exchange, we anticipate pursuing a merger, portfolio
sale or liquidate our properties within seven years of the
termination of this offering. However, it may not be possible to
sell any or all of our properties at a favorable price, or at all,
in such a time frame. If we are unable to sell our properties in
the time frames or for the prices anticipated, our ability to make
distributions to you may be materially delayed or reduced, you may
not be able to get a return of capital as expected or you may not
have any liquidity.
We may be subject to the
risk of liability and casualty loss as the owner of a
property. It is expected that our Manager will maintain or
cause to be maintained insurance against certain liabilities and
other losses for a property, but the insurance obtained will not
cover all amounts or types of loss. There is no assurance that any
liability that may occur will be insured or that, if insured, the
insurance proceeds will be sufficient to cover the loss. There are
certain categories of loss that may be or may become uninsurable or
not economically insurable, such as earthquakes, floods and
hazardous waste.
Further, if losses
arise from hazardous substance contamination that cannot be
recovered from a responsible party, the financial viability of the
affected property may be substantially impaired. It is expected
that lenders will require a Phase I environmental site assessment
to determine the existence of hazardous materials and other
environmental problems prior to making a Loan secured by a
property. However, a Phase I environmental site assessment
generally does not involve invasive testing, but instead is limited
to a physical walk through or inspection of a property and a review
of governmental records. It is possible that we will acquire a
property with known or unknown environmental problems that may
adversely affect our properties.
Risks Related to Our Taxation as a REIT
Our failure to qualify as a
REIT would result in higher taxes and reduced cash available for
stockholders. We intend to continue to operate in a manner
so as to qualify as a REIT for U.S. federal income tax purposes.
Our initial and continued qualification as a REIT depends on our
satisfaction of certain asset, income, organizational, distribution
and stockholder ownership requirements on a continuing basis. Our
ability to satisfy some of the asset tests depends upon the fair
market values of our assets, some of which are not able to be
precisely determined and for which we will not obtain independent
appraisals. If we were to fail to qualify as a REIT in any taxable
year, and certain statutory relief provisions were not available,
we would be subject to U.S. federal income tax, including any
applicable alternative minimum tax, on our taxable income at
regular corporate rates, and distributions to stockholders would
not be deductible by us in computing our taxable income. Any such
corporate tax liability could be substantial and would reduce the
amount of cash available for distribution. Unless entitled to
relief under certain Internal Revenue Code provisions, we also
would be disqualified from taxation as a REIT for the four taxable
years following the year during which we ceased to qualify as a
REIT. In addition, if we fail to qualify as a REIT, we will no
longer be required to make distributions. As a result of all these
factors, our failure to qualify as a REIT could impair our ability
to expand our business and raise capital, and it would adversely
affect the value of our common stock. Even if we qualify as a REIT,
we may be subject to the corporate alternative minimum tax on our
items of tax preference if our alternative minimum taxable income
exceeds our taxable income.
REIT distribution
requirements could adversely affect our liquidity. In order
to maintain our REIT status and to meet the REIT distribution
requirements, we may need to borrow funds on a short-term basis or
sell assets, even if the then-prevailing market conditions are not
favorable for these borrowings or sales. To qualify as a REIT, we
generally must distribute to our stockholders at least 90% of our
net taxable income each year, excluding capital gains. In addition,
we will be subject to corporate income tax to the extent we
distribute less than 100% of our net taxable income including any
net capital gain. We intend to make distributions to our
stockholders to comply with the requirements of the Internal
Revenue Code for REITs and to minimize or eliminate our corporate
income tax obligation to the extent consistent with our business
objectives. Our cash flows from operations may be insufficient to
fund required distributions as a result of differences in timing
between the actual receipt of income and the recognition of income
for federal income tax purposes, or the effect of non-deductible
capital expenditures, the creation of reserves or required debt
service or amortization payments. The insufficiency of our cash
flows to cover our distribution requirements could have an adverse
impact on our ability to raise short- and long-term debt or sell
equity securities in order to fund distributions required to
maintain our REIT status. In addition, we will be subject to a 4%
nondeductible excise tax on the amount, if any, by which
distributions paid by us in any calendar year are less than the sum
of 85% of our ordinary income, 95% of our capital gain net income
and 100% of our undistributed income from prior years.
Further, amounts
distributed will not be available to fund investment activities. We
expect to fund our investments by raising equity capital and
through borrowings from financial institutions and the debt capital
markets. If we fail to obtain debt or equity capital in the future,
it could limit our ability to grow, which could have a material
adverse effect on the value of our common stock.
The stock ownership limit
imposed by the Internal Revenue Code for REITs and our charter may
inhibit market activity in our stock and may restrict our business
combination opportunities. In order for us to maintain our
qualification as a REIT under the Internal Revenue Code, not more
than 50% in value of our outstanding stock may be owned, directly
or indirectly, by five or fewer individuals (as defined in the
Internal Revenue Code to include certain entities) at any time
during the last half of each taxable year. Additionally, at least
100 persons must beneficially own our capital stock during at least
335 days of a taxable year for each taxable year. Our charter, with
certain exceptions, authorizes our directors to take such actions
as are necessary and desirable to preserve our qualification as a
REIT. Unless exempted by the board of directors, no person may own
more than 9.8% of the aggregate value of the outstanding shares of
our stock or more than 9.8% in value or in number of shares,
whichever is more restrictive, of the outstanding shares of our
common stock. The board of directors may not grant such an
exemption to any proposed transferee whose ownership in excess of
9.8% of the value of our outstanding shares or more than 9.8% in
value or in number of shares, whichever is more restrictive, of the
outstanding shares of our common stock, would result in the
termination of our status as a REIT. These ownership limits could
delay or prevent a transaction or a change in our control that
might be in the best interest of our stockholders.
Dividends payable by REITs
do not qualify for the reduced tax rates available for some
dividends. The maximum tax rate applicable to
“qualified dividend income” payable to U.S.
stockholders that are taxed at individual rates is 20%. Dividends
payable by REITs, however, generally are not eligible for the
reduced rates on qualified dividend income. The more favorable
rates applicable to regular corporate qualified dividends could
cause investors who are taxed at individual rates to perceive
investments in REITs to be relatively less attractive than
investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares of
REITs, including our common stock.
The prohibited transactions
tax may subject us to tax on our gain from sales of property and
limit our ability to dispose of our properties. A
REIT’s net income from prohibited transactions is subject to
a 100% tax. In general, prohibited transactions are sales or other
dispositions of property other than foreclosure property, held
primarily for sale to customers in the ordinary course of business.
Although we intend to acquire and hold all of our assets as
investments and not for sale to customers in the ordinary course of
business, the IRS may assert that we are subject to the prohibited
transaction tax equal to 100% of net gain upon a disposition of
real property. Although a safe harbor to the characterization of
the sale of real property by a REIT as a prohibited transaction is
available, not all of our prior property dispositions qualified for
the safe harbor and we cannot assure you that we can comply with
the safe harbor in the future or that we have avoided, or will
avoid, owning property that may be characterized as held primarily
for sale to customers in the ordinary course of business.
Consequently, we may choose not to engage in certain sales of our
properties or may conduct such sales through a TRS, which would be
subject to federal and state income taxation. Additionally, in the
event that we engage in sales of our properties, any gains from the
sales of properties classified as prohibited transactions would be
taxed at the 100% prohibited transaction tax rate.
We may be unable to
generate sufficient revenue from operations, operating cash flow or
portfolio income to pay our operating expenses, and our operating
expenses could rise, diminishing our ability and to pay
distributions to our stockholders. As a REIT, we are
generally required to distribute at least 90% of our REIT taxable
income, determined without regard to the dividends paid deduction
and not including net capital gains, each year to our stockholders.
To qualify for the tax benefits accorded to REITs, we have and
intend to continue to make distributions to our stockholders in
amounts such that we distribute all or substantially all our net
taxable income each year, subject to certain adjustments. However,
our ability to make distributions may be adversely affected by the
risk factors described herein. Our ability to make and sustain cash
distributions is based on many factors, including the return on our
investments, the size of our investment portfolio, operating
expense levels, and certain restrictions imposed by Maryland law.
Some of the factors are beyond our control and a change in any such
factor could affect our ability to pay future dividends. No
assurance can be given as to our ability to pay distributions to
our stockholders. In the event of a downturn in our operating
results and financial performance or unanticipated declines in the
value of our asset portfolio, we may be unable to declare or pay
quarterly distributions or make distributions to our stockholders.
The timing and amount of distributions are in the sole discretion
of our board of directors, which considers, among other factors,
our earnings, financial condition, debt service obligations and
applicable debt covenants, REIT qualification requirements and
other tax considerations and capital expenditure requirements as
our board of directors may deem relevant from time to
time.
Although our use of TRSs
may partially mitigate the impact of meeting the requirements
necessary to maintain our qualification as a REIT, our ownership of
and relationship with our TRSs will be limited, and a failure to
comply with the limits would jeopardize our REIT qualification and
may result in the application of a 100% excise tax. A REIT
may own up to 100% of the stock of one or more TRSs. A TRS
generally may hold assets and earn income that would not be
qualifying assets or income if held or earned directly by a REIT.
Both the subsidiary and the REIT must jointly elect to treat the
subsidiary as a TRS. A corporation of which a TRS directly or
indirectly owns more than 35% of the voting power or value of the
stock will automatically be treated as a TRS. Overall, no more than
25% of the value of a REIT’s assets may consist of stock or
securities of one or more TRSs. In addition, the TRS rules limit
the deductibility of interest paid or accrued by a TRS to its
parent REIT to assure that the TRS is subject to an appropriate
level of corporate taxation. The rules also impose a 100% excise
tax on certain transactions between a TRS and its parent REIT that
are not conducted on an arm’s-length basis.
Any
TRSs that we own will pay U.S. federal, state and local income tax
on their taxable income, and their after-tax net income will be
available for distribution to us but will not be required to be
distributed to us. We will monitor the value of our investments in
TRSs for the purpose of ensuring compliance with the rule that no
more than 25% of the value of a REIT’s assets may consist of
TRS securities (which is applied at the end of each calendar
quarter). In addition, we will scrutinize all of our transactions
with any TRSs for the purpose of ensuring that they are entered
into on arm’s-length terms in order to avoid incurring the
100% excise tax described above. The value of the securities that
we hold in TRSs may not be subject to precise valuation.
Accordingly, there can be no assurance that we will be able to
comply with the 25% REIT subsidiaries limitation or to avoid
application of the 100% excise tax.
We may be subject to
adverse legislative or regulatory tax changes that could reduce the
market price of our common stock. At any time, the U.S.
federal income tax laws governing REITs or the administrative
interpretations of those laws may be amended. We cannot predict
when or if any new U.S. federal income tax law, regulation or
administrative interpretation, or any amendment to any existing
U.S. federal income tax law, regulation or administrative
interpretation, will be adopted, promulgated or become effective
and any such law, regulation, or interpretation may take effect
retroactively. We and our stockholders could be adversely affected
by any such change in the U.S. federal income tax laws, regulations
or administrative interpretations.
If our operating
partnership failed to qualify as a partnership for federal income
tax purposes, we would cease to qualify as a REIT and suffer other
adverse consequences. We believe that our operating
partnership will be treated as a partnership for federal income tax
purposes. As a partnership, our operating partnership will not be
subject to federal income tax on its income. Instead, each of its
partners, including us, will be allocated, and may be required to
pay tax with respect to, its share of our operating
partnership’s income. We cannot assure you, however, that the
IRS will not challenge the status of our operating partnership or
any other subsidiary partnership in which we own an interest as a
partnership for federal income tax purposes, or that a court would
not sustain such a challenge. If the IRS were successful in
treating our operating partnership or any such other subsidiary
partnership as an entity taxable as a corporation for federal
income tax purposes, we would fail to meet the gross income tests
and certain of the asset tests applicable to REITs and,
accordingly, we would likely cease to qualify as a REIT. Also, the
failure of our operating partnership or any subsidiary partnerships
to qualify as a partnership could cause it to become subject to
federal and state corporate income tax, which would reduce
significantly the amount of cash available for debt service and for
distribution to its partners, including us.
Risks Related to Conflicts of Interest
The tax protection
agreement with Holmwood could limit our ability to sell or
otherwise dispose of our Contribution Properties or make any such
sale or other disposition costlier. In connection with our
acquisition of the Contribution Properties, we entered into a tax
protection agreement that will provide that we will indemnify Holmwood for any taxes
incurred as a result of a taxable sale of the Contribution
Properties for a period of ten years after the closing of the
contribution. Therefore, although it may be in our
stockholders’ best interest that we sell or otherwise dispose
of one or more of our Contribution Properties these it may be
economically prohibitive, or at least costlier, for us to do so
because of these obligations.
Any sale by Holmwood or
members of our senior management team of ownership interests in us
and speculation about such possible sales may materially and
adversely affect the market price of our common
stock. Upon
completion of this offering, assuming we sell the maximum amount
pursuant to this offering, Holmwood and members of our senior
management team will own an aggregate of 200,000 shares of common
stock, an aggregate of 1,078,416 OP Units, an aggregate of 44,000
shares of Series A Preferred Stock, and our Manager will have been
granted 146,224 LTIPs, or such other form of our company’s
equity securities, as determined by the Management Agreement, which
collectively represents 31.20% of the outstanding shares of our
common stock on a fully diluted basis. This amount does not include
equity issuable to our Manager in payment of acquisition fees,
which will equal 1% of acquisition costs for each property we
acquire. Neither Holmwood nor members of our senior management team
are prohibited from selling any shares of our common stock or
securities convertible into, or exchangeable for, shares of our
common stock. Any sale by Holmwood or members of our senior
management team of ownership interests in us, or speculation by the
press, securities analysts, stockholders or others as to their
intentions, may materially and adversely affect the market price of
our common stock.
We may be assuming unknown
or unquantifiable liabilities, including environmental liabilities,
associated with our initial properties, and such liabilities could
materially and adversely affect us. We have assumed from
Holmwood existing liabilities in connection with our contribution
and, by extension, the Contribution Properties, some of which may
be unknown or unquantifiable. These liabilities may include
liabilities for undisclosed environmental conditions, tax
liabilities, claims of tenants or vendors and accrued but unpaid
liabilities. Holmwood is making limited representations and
warranties with respect to the Contribution Properties and our
acquisition properties, respectively. Any unknown or unquantifiable
liabilities that we assume from Holmwood for which we have no or
limited recourse could materially and adversely affect
us.
The Management Agreement
with our Manager was not negotiated on an arm’s-length basis
and may not be as favorable to us as if it had been negotiated with
an unaffiliated third party. Our executive officers,
including a majority of our directors, are executives of our
Manager. Our Management Agreement was negotiated between related
parties and its terms, including fees payable to our Manager, may
not be as favorable to us as if it had been negotiated with an
unaffiliated third party. In addition, we may choose not to
enforce, or to enforce less vigorously, our rights under the
Management Agreement because of our desire to maintain our ongoing
relationship with Holmwood and its affiliates.
We may have conflicts of
interest with our Manager and other affiliates, which could result
in investment decisions that are not in the best interests of our
stockholders. There are numerous conflicts of interest
between our interests and the interests of our Manager, Holmwood,
and their respective affiliates, including conflicts arising out of
allocation of personnel to our activities, purchase or sale of
properties, including from or to Holmwood or its affiliates and fee
arrangements with our Manager that might induce our Manager to make
investment decisions that are not in our best interests. In
addition to the aforementioned, while our Manager is not currently
affiliated with any other investment vehicles, there is nothing
restricting our Manager from pursuing other investment vehicles. As
a result, our Manager may face conflicts of interest in the future
regarding the allocation of investment opportunities between us and
other investment vehicles with which it is affiliated. Examples of
these potential conflicts of interest include:
●
Competition for the
time and services of personnel that work for us and our
affiliates;
●
Compensation
payable by us to our Manager and its affiliates for their various
services, which may not be on market terms and is payable, in some
cases, whether or not our stockholders receive
distributions;
●
Our Manager's
position as manager of Holmwood;
●
The possibility
that our Manager, its officers and their respective affiliates will
face conflicts of interest relating to the purchase and leasing of
properties, and that such conflicts may not be resolved in our
favor, thus potentially limiting our investment opportunities,
impairing our ability to make distributions and adversely affecting
the trading price of our stock;
●
The possibility
that if we acquire properties from Holmwood or its affiliates, the
price may be higher than we would pay if the transaction were the
result of arm’s-length negotiations with a third
party;
●
The possibility
that our Manager will face conflicts of interest caused by its
indirect ownership by Holmwood, some of whose officers are also our
officers and two of whom are directors of ours, resulting in
actions that may not be in the long-term best interests of our
stockholders;
●
Our Manager has
considerable discretion with respect to the terms and timing of our
acquisition, disposition and leasing transactions;
●
The possibility
that we may acquire or merge with our Manager, resulting in an
internalization of our management functions; and
●
The possibility
that the competing demands for the time of our Manager, its
affiliates and our officers may result in them spending
insufficient time on our business, which may result in our missing
investment opportunities or having less efficient operations, which
could reduce our profitability and result in lower distributions to
you.
Any of
these and other conflicts of interest between us and our Manager
could have a material adverse effect on the returns on our
investments, our ability to make distributions to stockholders and
the trading price of our stock.
Legal Counsel for our
company, our Manager and Holmwood is the same law
firm. Kaplan, Voekler, Cunningham
& Frank, PLC, or KVCF, acts as legal counsel to our Manager,
Holmwood and some of their affiliates and also is expected to
represent us. Additionally, Messrs. Kaplan and Kaplan, Jr., who
will respectively be our Secretary and director, and our President,
upon the initial closing of this offering, are each a member of
KVCF. In connection with the offering, Messrs. Kaplan
and Kaplan, Jr. will not serve as attorneys on behalf of KVCF or
render any legal advice but will serve solely in their capacities
with our company and our Manager. KVCF is not acting as counsel for
the stockholders or any potential investor. There is a possibility
in the future that the interests of the various parties may become
adverse and, under the Code of Professional Responsibility of the
legal profession, KVCF may be precluded from representing any one
or all of such parties. If any situation arises in which our
interests appear to be in conflict with those of our advisor, our
Dealer-Manager or their affiliates, additional counsel may be
retained by one or more of the parties to assure that their
interests are adequately protected. Moreover, should such a
conflict not be readily apparent, KVCF may inadvertently act in
derogation of the interest of parties which could adversely affect
us, and our ability to meet our investment objectives and,
therefore, our stockholders.
Risks Associated with Debt Financing
Some of our properties are
secured with cross-collateralized debt. (i) The Port Saint
Lucie Property, Jonesboro Property and Lorain Property secure a
loan made by Starwood Mortgage Capital, LLC, or the Starwood Loan;
(ii) the Johnson City Property and Port Canaveral Property secure a
loan made by Park Sterling Bank, or the Park Sterling Loan; and
(iii) the Fort Smith Property, Lawton Property, Moore Property and
Lakewood Property, secure a loan made by CorAmerica Loan Company,
LLC, or the CorAmerica Loan. If we default on one of the loans
listed above, the lender will have the ability to foreclose upon
each of the properties securing such loan. As a result, a default
on one of the above loans may have a much stronger, negative effect
on our operations than if the loans were secured by a single
asset.
We have used and may
continue to use mortgage and other debt financing to acquire
properties or interests in properties and otherwise incur other
indebtedness, which increases our expenses and could subject us to
the risk of losing properties in foreclosure if our cash flow is
insufficient to make loan payments. We are permitted to
acquire real properties and other real estate-related investments,
including entity acquisitions, by assuming either existing
financing secured by the asset or by borrowing new funds. In
addition, we may incur or increase our mortgage debt by obtaining
loans secured by some or all of our assets to obtain funds to
acquire additional investments or to pay distributions to our
stockholders. We also may borrow funds if necessary to satisfy the
requirement that we distribute at least 90% of our annual
“REIT taxable income,” or otherwise as is necessary or
advisable to assure that we maintain our qualification as a REIT
for federal income tax purposes.
There
is no limit on the amount we may invest in any single property or
other asset or on the amount we can borrow to purchase any
individual property or other investment. If we mortgage a property
and have insufficient cash flow to service the debt, we risk an
event of default which may result in our lenders foreclosing on the
properties securing the mortgage.
If we
cannot repay or refinance loans incurred to purchase our
properties, or interests therein, then we may lose our interests in
the properties secured by the loans we are unable to repay or
refinance.
High levels of debt or
increases in interest rates could increase the amount of our loan
payments, which could reduce the cash available for distribution to
stockholders. Our policies do not limit us from incurring
debt. For purposes of calculating our leverage, we assume full
consolidation of all of our real estate investments, whether or not
they would be consolidated under GAAP, include assets we have
classified as held for sale, and include any joint venture level
indebtedness in our total indebtedness.
High
debt levels will cause us to incur higher interest charges,
resulting in higher debt service payments, and may be accompanied
by restrictive covenants. Interest we pay reduces cash available
for distribution to stockholders. Additionally, with respect to our
variable rate debt, increases in interest rates increase our
interest costs, which reduces our cash flow and our ability to make
distributions to you. In addition, if we need to repay existing
debt during periods of rising interest rates, we could be required
to liquidate one or more of our investments in properties at times
which may not permit realization of the maximum return on such
investments and could result in a loss. In addition, if we are
unable to service our debt payments, our lenders may foreclose on
our interests in the real property that secures the loans we have
entered into.
High mortgage rates may
make it difficult for us to finance or refinance properties, which
could reduce the number of properties we can acquire, our cash flow
from operations and the amount of cash distributions we can
make. To qualify as a REIT, we will be required to
distribute at least 90% of our annual taxable income (excluding net
capital gains) to our stockholders in each taxable year, and thus
our ability to retain internally generated cash is limited.
Accordingly, our ability to acquire properties or to make capital
improvements to or remodel properties will depend on our ability to
obtain debt or equity financing from third parties or the sellers
of properties. If mortgage debt is unavailable at reasonable rates,
we may not be able to finance the purchase of properties. If we
place mortgage debt on properties, we run the risk of being unable
to refinance the properties when the debt becomes due or of being
unable to refinance on favorable terms. If interest rates are
higher when we refinance the properties, our income could be
reduced. We may be unable to refinance properties. If any of these
events occurs, our cash flow would be reduced. This, in turn, would
reduce cash available for distribution to you and may hinder our
ability to raise capital by issuing more stock or borrowing more
money.
Lenders may require us to
enter into restrictive covenants relating to our operations, which
could limit our ability to make distributions to you. When
providing financing, a lender may impose restrictions on us that
affect our distribution and operating policies and our ability to
incur additional debt. Loan documents we enter into may contain
covenants that limit our ability to further mortgage the property,
discontinue insurance coverage, or replace our Manager. These or
other limitations may limit our flexibility and prevent us from
achieving our operating plans.
Our ability to obtain
financing on reasonable terms would be impacted by negative capital
market conditions. Recently, domestic and international
financial markets have experienced unusual volatility and
uncertainty. Although this condition occurred initially within the
“subprime” single-family mortgage lending sector of the
credit market, liquidity has tightened in overall financial
markets, including the investment grade debt and equity capital
markets. Consequently, there is greater uncertainty regarding our
ability to access the credit market in order to attract financing
on reasonable terms. Investment returns on our assets and our
ability to make acquisitions could be adversely affected by our
inability to secure financing on reasonable terms, if at
all.
Some of our mortgage loans
may have “due on sale” provisions, which may impact the
manner in which we acquire, sell and/or finance our
properties. In purchasing properties subject to financing,
we may obtain financing with “due-on-sale” and/or
“due-on-encumbrance” clauses. Due-on-sale clauses in
mortgages allow a mortgage lender to demand full repayment of the
mortgage loan if the borrower sells the mortgaged property.
Similarly, due-on-encumbrance clauses allow a mortgage lender to
demand full repayment if the borrower uses the real estate securing
the mortgage loan as security for another loan. In such event, we
may be required to sell our properties on an all-cash basis, which
may make it more difficult to sell the property or reduce the
selling price.
Lenders may be able to
recover against our other properties under our mortgage
loans. In financing our acquisitions, we will seek to obtain
secured nonrecourse loans. However, only recourse financing may be
available, in which event, in addition to the property securing the
loan, the lender would have the ability to look to our other assets
for satisfaction of the debt if the proceeds from the sale or other
disposition of the property securing the loan are insufficient to
fully repay it. Also, in order to facilitate the sale of a
property, we may allow the buyer to purchase the property subject
to an existing loan whereby we remain responsible for the
debt.
If we are required to make
payments under any “bad boy” carve-out guaranties that
we may provide in connection with certain mortgages and related
loans, our business and financial results could be materially
adversely affected. In obtaining certain nonrecourse loans,
we may provide standard carve-out guaranties. These guaranties are
only applicable if and when the borrower directly, or indirectly
through agreement with an affiliate, joint venture partner or other
third party, voluntarily files a bankruptcy or similar liquidation
or reorganization action or takes other actions that are fraudulent
or improper (commonly referred to as “bad boy”
guaranties). Although we believe that “bad boy”
carve-out guaranties are not guaranties of payment in the event of
foreclosure or other actions of the foreclosing lender that are
beyond the borrower’s control, some lenders in the real
estate industry have recently sought to make claims for payment
under such guaranties. In the event such a claim was made against
us under a “bad boy” carve-out guaranty following
foreclosure on mortgages or related loan, and such claim were
successful, our business and financial results could be materially
adversely affected.
Interest-only indebtedness
may increase our risk of default and ultimately may reduce our
funds available for distribution to our stockholders. We may
finance our property acquisitions using interest-only mortgage
indebtedness. During the interest-only period, the amount of each
scheduled payment will be less than that of a traditional
amortizing mortgage loan. The principal balance of the mortgage
loan will not be reduced (except in the case of prepayments)
because there are no scheduled monthly payments of principal during
this period. After the interest-only period, we will be required
either to make scheduled payments of amortized principal and
interest or to make a lump-sum or “balloon” payment at
maturity. These required principal or balloon payments will
increase the amount of our scheduled payments and may increase our
risk of default under the related mortgage loan. If the mortgage
loan has an adjustable interest rate, the amount of our scheduled
payments also may increase at a time of rising interest rates.
Increased payments and substantial principal or balloon maturity
payments will reduce the funds available for distribution to our
stockholders because cash otherwise available for distribution will
be required to pay principal and interest associated with these
mortgage loans.
We may enter into
derivative or hedging contracts that could expose us to contingent
liabilities and certain risks and costs in the future. Part
of our investment strategy may involve entering into derivative or
hedging contracts that could require us to fund cash payments in
the future under certain circumstances, such as the early
termination of the derivative agreement caused by an event of
default or other early termination event, or the decision by a
counterparty to request margin securities it is contractually owed
under the terms of the derivative contract. The amount due would be
equal to the unrealized loss of the open swap positions with the
respective counterparty and could also include other fees and
charges. These economic losses would be reflected in our financial
results of operations, and our ability to fund these obligations
will depend on the liquidity of our assets and access to capital at
the time, and the need to fund these obligations could adversely
impact our financial condition and results of
operations.
Further, the cost
of using derivative or hedging instruments increases as the period
covered by the instrument increases and during periods of rising
and volatile interest rates. We may increase our derivative or
hedging activity and thus increase our related costs during periods
when interest rates are volatile or rising and hedging costs have
increased.
In
addition, hedging instruments involve risk since they often are not
traded on regulated exchanges, guaranteed by an exchange or its
clearing house, or regulated by any U.S. or foreign governmental
authorities. Consequently, in many cases, there are no requirements
with respect to record keeping, financial responsibility or
segregation of customer funds and positions. Furthermore, the
enforceability of agreements underlying derivative transactions may
depend on compliance with applicable statutory and commodity and
other regulatory requirements and, depending on the identity of the
counterparty, applicable international requirements. The business
failure of a hedging counterparty with whom we enter into a hedging
transaction will most likely result in a default. Default by a
party with whom we enter into a hedging transaction may result in
the loss of unrealized profits and force us to cover our resale
commitments, if any, at the then current market price. Although
generally we will seek to reserve the right to terminate our
hedging positions, it may not always be possible to dispose of or
close out a hedging position without the consent of the hedging
counterparty, and we may not be able to enter into an offsetting
contract in order to cover our risk. We cannot be assured that a
liquid secondary market will exist for hedging instruments
purchased or sold, and we may be required to maintain a position
until exercise or expiration, which could result in
losses.
Complying with REIT
requirements may limit our ability to hedge risk
effectively. The REIT provisions of the Code may limit our
ability to hedge the risks inherent to our operations. From time to
time, we may enter into hedging transactions with respect to one or
more of our assets or liabilities. Our hedging transactions may
include entering into interest rate swaps, caps and floors, options
to purchase these items, and futures and forward contracts. Any
income or gain derived by us from transactions that hedge certain
risks, such as the risk of changes in interest rates, will not be
treated as gross income for purposes of either the 75% or the 95%
income test, as defined below in “Material Federal Income Tax
Considerations — Gross Income Tests,” unless
specific requirements are met. Such requirements include that the
hedging transaction be properly identified within prescribed time
periods and that the transaction either (1) hedges risks associated
with indebtedness issued by us that is incurred to acquire or carry
real estate assets or (2) manages the risks of currency
fluctuations with respect to income or gain that qualifies under
the 75% or 95% income test (or assets that generate such income).
To the extent that we do not properly identify such transactions as
hedges, hedge with other types of financial instruments, or hedge
other types of indebtedness, the income from those transactions is
not likely to be treated as qualifying income for purposes of the
75% and 95% income tests. As a result of these rules, we may have
to limit the use of hedging techniques that might otherwise be
advantageous, which could result in greater risks associated with
interest rate or other changes than we would otherwise
incur.
Interest rates might
increase. Based on historical interest rates, current
interest rates are low and, as a result, it is likely that the
interest rates available for future real estate loans and
refinances will be higher than the current interest rates for such
loans, which may have a material and adverse impact on our company
and our investments. If there is an increase in interest rates, any
debt servicing on properties could be significantly higher than
currently anticipated, which would reduce the amount of cash
available for distribution to the stockholders. Also, rising
interest rates may affect the ability of our Manager to refinance a
property. Investments may be less desirable to prospective
purchasers in a rising interest rate environment and their values
may be adversely impacted by the reduction in cash flow due to
increased interest payments.
We may use floating rate,
interest-only or short-term loans to acquire
properties. Our
Manager has the right, in its sole discretion, to negotiate any
debt financing, including obtaining (i) interest-only, (ii)
floating rate and/or (iii) short-term loans to acquire properties.
If our Manager obtains floating rate loans, the interest rate would
not be fixed but would float with an established index (probably at
higher interest rates in the future). No principal would be repaid
on interest-only loans. Finally, we would be required to refinance
short term loans at the end of a relatively short period. The
credit markets have recently been in flux and are experiencing a
malaise. No assurance can be given that our Manager would be able
to refinance with fixed-rate permanent loans in the future, on
favorable terms or at all, to refinance the short-term loans. In
addition, no assurance can be given that the terms of such future
loans to refinance the short-term loans would be favorable to our
company.
We may use leverage to make
investments. Our Manager, in its sole discretion, may
leverage the properties. As a result of the use of leverage, a
decrease in revenues of a leveraged property may materially and
adversely affect that property’s cash flow and, in turn, our
ability to make distributions. No assurance can be given that
future cash flow of a particular investment will be sufficient to
make the debt service payments on any borrowed funds for that
Investment and also cover operating expenses. If the
property’s revenues are insufficient to pay debt service and
operating expenses, we would be required to use net income from
other investments, working capital or reserves, or seek additional
funds. There can be no assurance that additional funds will be
available, if needed, or, if such funds are available, that they
will be available on terms acceptable to us.
Leveraging a property
allows a lender to foreclose on that property. Lenders on a property, even
non-recourse lenders, are expected in all instances to retain the
right to foreclose on that property if there is a default in the
loan terms. If this were to occur, we would likely lose our entire
investment in that property.
Lenders may have approval
rights with respect to an encumbered property. A lender on a
property will likely have numerous other rights, which may include
the right to approve any change in the property manager for a
particular property.
Availability of financing
and market conditions will affect the success of our
company. Market fluctuations in real estate financing may
affect the availability and cost of funds needed in the future for
our investments. In addition, credit availability has been
restricted in the past and may become restricted again in the
future. Restrictions upon the availability of real estate financing
or high interest rates for real estate loans could adversely affect
our investments and our ability to execute its investment
goals.
We do not have guaranteed
cash flow. There can be no assurance that cash flow or
profits will be generated by our investments. If our investments do
not generate the anticipated amount of cash flow, we may not be
able to pay the anticipated distributions to the stockholders
without making such distributions from the net proceeds of this
offering or from reserves.
Risks Related to Our Organization and Structure
A limit on the percentage
of our securities a person may own may discourage a takeover or
business combination, which could prevent our stockholders from
realizing a premium price for their stock. Our charter
restricts direct or indirect ownership by one person or entity to
no more than 9.8% in value of the outstanding shares of our capital
stock or 9.8% in number of shares or value, whichever is more
restrictive, of the outstanding shares of our common stock unless
exempted (prospectively or retroactively) by our board of
directors. This restriction may have the effect of delaying,
deferring or preventing a change in control of us, including an
extraordinary transaction (such as a merger, tender offer or sale
of all or substantially all of our assets) that might provide a
premium price to our stockholders.
Our charter permits our
board of directors to issue stock with terms that may subordinate
the rights of our common stockholders or discourage a third party
from acquiring us in a manner that could result in a premium price
to our stockholders. Our board of directors may amend our
charter from time to time to increase or decrease the aggregate
number of shares of stock or the number of shares of stock of any
class or series that we have authority to issue and may classify or
reclassify any unissued common stock or preferred stock into other
classes or series of stock and establish the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption of any such stock. In
addition to our 400,000 shares of Series A Preferred Stock, our
board of directors could also authorize the issuance of up to
249,600,000 more shares of preferred stock with terms and
conditions that could have priority as to distributions and amounts
payable upon liquidation over the rights of the holders of our
common stock. Such preferred stock could also have the effect of
delaying, deferring or preventing a change in control of us,
including an extraordinary transaction (such as a merger, tender
offer or sale of all or substantially all of our assets) that might
provide a premium price to holders of our common
stock.
Your investment return may
be reduced if we are required to register as an investment company
under the Investment Company Act; if we are subject to registration
under the Investment Company Act, we will not be able to continue
our business. Neither we, nor our operating partnership, nor
any of our subsidiaries intend to register as an investment company
under the Investment Company Act. We expect that our operating
partnership’s and subsidiaries’ investments in real
estate will represent the substantial majority of our total asset
mix, which would not subject us to the Investment Company Act. In
order to maintain an exemption from regulation under the Investment
Company Act, we intend to engage, through our operating partnership
and our wholly and majority owned subsidiaries, primarily in the
business of buying real estate, and these investments must be made
within a year after an offering ends. If we are unable to invest a
significant portion of the proceeds of an offering in properties
within one year of the termination of such offering, we may avoid
being required to register as an investment company by temporarily
investing any unused proceeds in government securities with low
returns, which would reduce the cash available for distribution to
stockholders and possibly lower your returns.
We
expect that most of our assets will be held through wholly owned or
majority owned subsidiaries of our operating partnership. We expect
that most of these subsidiaries will be outside the definition of
investment company under Section 3(a)(1) of the Investment Company
Act as they are generally expected to hold at least 60% of their
assets in real property or in entities that they manage or
co-manage that own real property. Section 3(a)(1)(A) of the
Investment Company Act defines an investment company as any issuer
that is or holds itself out as being engaged primarily in the
business of investing, reinvesting or trading in securities.
Section 3(a)(1)(C) of the Investment Company Act defines an
investment company as any issuer that is engaged or proposes to
engage in the business of investing, reinvesting, owning, holding
or trading in securities and owns or proposes to acquire investment
securities having a value exceeding 40% of the value of the
issuer’s total assets (exclusive of U.S. government
securities and cash items) on an unconsolidated basis, which we
refer to as the 40% test. Excluded from the term “investment
securities,” among other things, are U.S. government
securities and securities issued by majority owned subsidiaries
that are not themselves investment companies and are not relying on
the exception from the definition of investment company set forth
in Section 3(c)(1) or Section 3(c)(7) of the Investment Company
Act. We believe that we, our operating partnership and most of the
subsidiaries of our operating partnership will not fall within
either definition of investment company as we invest primarily in
real property, through our wholly or majority owned subsidiaries,
the majority of which we expect to have at least 60% of their
assets in real property or in entities that they manage or
co-manage that own real property. As these subsidiaries would be
investing either solely or primarily in real property, they would
be outside of the definition of “investment company”
under Section 3(a)(1) of the Investment Company Act. We are
organized as a holding company that conducts its businesses
primarily through the operating partnership, which in turn is a
holding company conducting its business through its subsidiaries.
Both we and our operating partnership intend to conduct our
operations so that they comply with the 40% test. We will monitor
our holdings to ensure continuing and ongoing compliance with this
test. In addition, we believe that neither we nor the operating
partnership will be considered an investment company under Section
3(a)(1)(A) of the Investment Company Act because neither we nor the
operating partnership will engage primarily or hold itself out as
being engaged primarily in the business of investing, reinvesting
or trading in securities. Rather, through the operating
partnership’s wholly-owned or majority owned subsidiaries, we
and the operating partnership will be primarily engaged in the
non-investment company businesses of these
subsidiaries.
In the
event that the value of investment securities held by the
subsidiaries of our operating partnership were to exceed 40%, we
expect our subsidiaries to be able to rely on the exclusion from
the definition of “investment company” provided by
Section 3(c)(5)(C) of the Investment Company Act. Section
3(c)(5)(C), as interpreted by the staff of the SEC, requires each
of our subsidiaries relying on this exception to invest at least
55% of its portfolio in “mortgage and other liens on and
interests in real estate,” which we refer to as
“qualifying real estate assets” and maintain at least
70% to 90% of its assets in qualifying real estate assets or other
real estate-related assets. The remaining 20% of the portfolio can
consist of miscellaneous assets. What we buy and sell is therefore
limited to these criteria. How we determine to classify our assets
for purposes of the Investment Company Act will be based in large
measure upon no-action letters issued by the SEC staff in the past
and other SEC interpretive guidance. These no-action positions were
issued in accordance with factual situations that may be
substantially different from the factual situations we may face,
and a number of these no-action positions were issued more than ten
years ago. Pursuant to this guidance, and depending on the
characteristics of the specific investments, certain joint venture
investments may not constitute qualifying real estate assets and
therefore investments in these types of assets may be limited. No
assurance can be given that the SEC will concur with our
classification of our assets. Future revisions to the Investment
Company Act or further guidance from the SEC may cause us to lose
our exclusion from registration or force us to re-evaluate our
portfolio and our investment strategy. Such changes may prevent us
from operating our business successfully.
In the
event that we, or our operating partnership, were to acquire assets
that could make either entity fall within the definition of
investment company under Section 3(a)(1) of the Investment Company
Act, we believe that we would still qualify for an exclusion from
registration pursuant to Section 3(c)(6). Section 3(c)(6) excludes
from the definition of investment company any company primarily
engaged, directly or through majority owned subsidiaries, in one or
more of certain specified businesses. These specified businesses
include the real estate business described in Section 3(c)(5)(C) of
the Investment Company Act. It also excludes from the definition of
investment company any company primarily engaged, directly or
through majority owned subsidiaries, in one or more of such
specified businesses from which at least 25% of such
company’s gross income during its last fiscal year is
derived, together with any additional business or businesses other
than investing, reinvesting, owning, holding, or trading in
securities. Although the SEC staff has issued little interpretive
guidance with respect to Section 3(c)(6), we believe that we and
our operating partnership may rely on Section 3(c)(6) if 55% of the
assets of our operating partnership consist of, and at least 55% of
the income of our operating partnership is derived from, qualifying
real estate assets owned by wholly owned or majority owned
subsidiaries of our operating partnership.
To
ensure that neither we, nor our operating partnership nor
subsidiaries are required to register as an investment company,
each entity may be unable to sell assets they would otherwise want
to sell and may need to sell assets they would otherwise wish to
retain. In addition, we, our operating partnership or our
subsidiaries may be required to acquire additional income or
loss-generating assets that we might not otherwise acquire or
forego opportunities to acquire interests in companies that we
would otherwise want to acquire. Although we, our operating
partnership and our subsidiaries intend to monitor our respective
portfolios periodically and prior to each acquisition or
disposition, any of these entities may not be able to maintain an
exclusion from registration as an investment company. If we, our
operating partnership or our subsidiaries are required to register
as an investment company but fail to do so, the unregistered entity
would be prohibited from engaging in our business, and criminal and
civil actions could be brought against such entity. In addition,
the contracts of such entity would be unenforceable unless a court
required enforcement, and a court could appoint a receiver to take
control of the entity and liquidate its business. Finally, if we
were to become an investment company then we would not be permitted
to rely upon Regulation A for future offerings of our securities,
which may adversely impact our ability to raise additional
capital.
We may change our
investment and operational policies without stockholder
consent. We may change our investment and operational
policies, including our policies with respect to investments,
acquisitions, growth, operations, indebtedness, capitalization and
distributions, at any time without the consent of our stockholders,
which could result in our making investments that are different
from, and possibly riskier than, the types of investments described
in this filing. A change in our investment strategy may increase
our exposure to interest rate risk, default risk and real estate
market fluctuations, all of which could adversely affect our
ability to make distributions.
We may in the future choose
to pay dividends in our own stock, in which case you may be
required to pay income taxes in excess of the cash dividends you
receive. We may in the future distribute taxable dividends
that are payable in cash and shares of our common stock at the
election of each stockholder. Taxable stockholders receiving such
dividends will be required to include the full amount of the
dividend as ordinary income to the extent of our current and
accumulated earnings and profits for United States federal income
tax purposes. As a result, a U.S. stockholder may be required to
pay income taxes with respect to such dividends in excess of the
cash dividends received. If a U.S. stockholder sells the stock it
receives as a dividend in order to pay this tax, the sales proceeds
may be less than the amount included in income with respect to the
dividend, depending on the market price of our stock at the time of
the sale. Furthermore, with respect to non-U.S. stockholders, we
may be required to withhold U.S. tax with respect to such
dividends, including in respect of all or a portion of such
dividend that is payable in stock. In addition, if a significant
number of our stockholders determine to sell shares of our common
stock in order to pay taxes owed on dividends, it may put downward
pressure on the trading price of our common stock.
Our board of directors may
amend our bylaws without the consent of stockholders. Our
board of directors may amend our bylaws at any time without
stockholder consent, including without limitation to eliminate the
majority independent director requirement. In such an event, your
ability to control the terms of our bylaws may be limited to voting
on the appointment of directors.
Risks Related to Ownership of Our Common Stock
Our ability to pay our estimated initial annual dividend, which
represents approximately 379% of our estimated cash available for
distribution for the twelve months ending June 30, 2018, assuming
we sell the maximum offering amount, depends on our future
operating cash flow, and we expect to be required to fund a portion
of our estimated initial annual dividend through borrowings or
equity issuances, and we cannot assure you that we will be able to
obtain such funding on attractive terms or at all, in which case we
plan to use a portion of the remaining net proceeds from this
offering for such funding, which would make such amounts
unavailable for our future acquisition of properties, or to fund
such dividend in the form of shares of common stock or to eliminate
or otherwise reduce such dividend.
We
generally must distribute at least 90% of our REIT taxable income
each year (subject to certain adjustments) to our stockholders in
order to qualify as a REIT under the Code. We intend to pay cash
dividends to our stockholders on a quarterly basis. On an
annualized basis, we intend to pay a dividend equaling $0.55 per
share, or an annual dividend rate of 5.5% based on the offering
price set forth on the cover of this offering circular. Our
intended annual dividend per share represents approximately 379% of
our estimated cash available for distribution for the twelve months
ending June 30, 2018, assuming we sell the maximum offering amount,
calculated as described more fully under “Distribution
Policy.” Accordingly, we expect that we will be unable to pay
our estimated annual dividend out of our estimated cash available
for distribution for the twelve months ending June 30, 2018. Unless
our operating cash flow increases in the future, including as a
result of acquisitions using our unallocated net proceeds, we will
be required to fund $1,797,813 of our intended annual dividend,
assuming we sell the maximum offering amount, through borrowings or
equity issuances, and we cannot assure you that we will be able to
obtain such funding on attractive terms or at all, in which case we
plan to use a portion of the remaining net proceeds from this
offering for such funding, which would make such amounts
unavailable for our future acquisition of properties, or to fund
such dividend in the form of shares of common stock or to eliminate
or otherwise reduce such dividend.
If we
sell the maximum offering amount, our pro forma estimated annual
distribution for the 12 months ending June 30, 2018 will be
$2,442,352, which represents 379% of our estimated cash available
for distribution for the same period. In the event that we sell the
maximum offering amount and use offering proceeds to cover the
dividend payments in excess of the estimated cash available for
distribution, you will experience a dilution in your investment of
$0.40 per share. The dilution to investors calculated in this
paragraph does not include dilution that will occur from issuances
to management or will occur from Equity Grants. The calculation
also assumes a fair valuation of the Contribution Properties. For
more information on dilution to investors, see
"Dilution."
Although we
anticipate initially making quarterly dividends at our intended
annual dividend rate to our common stockholders, the timing, form
and amount of any dividends will be at the sole discretion of our
board of directors and will depend upon a number of factors, as to
which, no assurance can be given.
As a
result, no assurance can be given that we will pay dividends to our
common stockholders at any time or in any particular form at any
time or that the level of any dividends we do pay to our common
stockholders will be consistent with our anticipated annual
dividend rate or will increase or even be maintained over time, or
achieve a market yield. Any of the foregoing could materially and
adversely affect us and the market price of our common
stock.
Future sales of
shares of our common stock in the public market or the issuance of
other equity may adversely affect the market price of our common
stock. Sales of a substantial number of shares of common
stock or other equity-related securities in the public market could
depress the market price of our common stock, and impair our
ability to raise capital through the sale of additional equity
securities. We cannot predict the effect that future sales of
common stock or other equity-related securities would have on the
market price of our common stock.
The price of our common
stock may fluctuate significantly. If a trading market
develops, the trading price of our common stock may fluctuate
significantly in response to many factors, including:
|
●
|
actual
or anticipated variations in our operating results, funds from
operations, or FFO, cash flows, liquidity or
distributions;
|
|
●
|
changes
in our earnings estimates or those of analysts;
|
|
●
|
publication
of research reports about us or the real estate industry or sector
in which we operate;
|
|
●
|
increases
in market interest rates that lead purchasers of our shares to
demand a higher dividend yield;
|
|
●
|
changes
in market valuations of companies similar to us;
|
|
●
|
adverse
market reaction to any securities we may issue or additional debt
we incur in the future;
|
|
●
|
additions
or departures of key management personnel;
|
|
●
|
actions
by institutional stockholders;
|
|
●
|
speculation
in the press or investment community;
|
|
●
|
continuing
high levels of volatility in the credit markets;
|
|
●
|
the
realization of any of the other risk factors included herein;
and
|
|
●
|
general
market and economic conditions.
|
The availability and timing
of cash distributions is uncertain. We are generally
required to distribute to our stockholders at least 90% of our REIT
taxable income, determined without regard to the dividends paid
deduction and excluding any net capital gain, each year in order
for us to qualify as a REIT under the Code, which we intend to
satisfy through quarterly cash distributions of all or
substantially all of our REIT taxable income in such year, subject
to certain adjustments. Our board of directors will determine the
amount and timing of any distributions. In making such
determinations, our directors will consider all relevant factors,
including the amount of cash available for distribution, capital
expenditures, general operational requirements and applicable law.
We intend over time to make regular quarterly distributions to
holders of shares of our common stock. However, we bear all
expenses incurred by our operations, and the funds generated by
operations, after deducting these expenses, may not be sufficient
to cover desired levels of distributions to stockholders. In
addition, our board of directors, in its discretion, may retain any
portion of such cash in excess of our REIT taxable income for
working capital. We cannot predict the amount of distributions we
may make, maintain or increase over time.
There
are many factors that can affect the availability and timing of
cash distributions to stockholders. Because we may receive rents
and income from our properties at various times during our fiscal
year, distributions paid may not reflect our income earned in that
particular distribution period. The amount of cash available for
distribution will be affected by many factors, including without
limitation, the amount of income we will earn from investments in
target assets, the amount of its operating expenses and many other
variables. Actual cash available for distribution may vary
substantially from our expectations.
While
we intend to fund the payment of quarterly distributions to holders
of shares of our common stock entirely from distributable cash
flows, we may fund quarterly distributions to our stockholders from
a combination of available net cash flows, equity capital, proceeds
from this offering and borrowings, and the sale of assets. There is
no limit on the amount of offering proceeds we may use to fund
distributions. Distributions paid from sources other than cash flow
from operations may constitute a return of capital to our
stockholders. In the event we are unable to consistently fund
future quarterly distributions to stockholders entirely from
distributable cash flows, the value of our common stock may be
negatively impacted.
An increase in market
interest rates may have an adverse effect on the market price of
our common stock and our ability to make distributions to its
stockholders. One of the factors that investors may consider
in deciding whether to buy or sell shares of our common stock is
our distribution rate as a percentage of our share price, relative
to market interest rates. If market interest rates increase,
prospective investors may demand a higher distribution rate on
shares of common stock or seek alternative investments paying
higher distributions or interest. As a result, interest rate
fluctuations and capital market conditions can affect the market
price of shares of our common stock. For instance, if interest
rates rise without an increase in our distribution rate, the market
price of shares of our common stock could decrease because
potential investors may require a higher distribution yield on
shares of our common stock as market rates on interest-bearing
instruments such as bonds rise. In addition, to the extent we have
variable rate debt, rising interest rates would result in increased
interest expense on our variable rate debt, thereby adversely
affecting our cash flow and our ability to service our indebtedness
and make distributions to our stockholders.
Our common stock ranks
junior to our Series A Preferred Stock with regard to dividend and
liquidation preference. We have issued 144,500 shares of our
Series A Preferred Stock. Pursuant to the terms of the Series A
Preferred Stock, each share of Series A Preferred Stock is entitled
to cumulative dividends equal to 7.0% per annum on the initial
liquidation preference of $25.00 per share, or $1.75 per share, per
annum, paid quarterly in arrears. This dividend will be paid before
any distributions are made on shares of our common stock. Further,
upon liquidation of our company, holders of shares of our Series A
Preferred Stock will be entitled to receive $25.00 per share of
Series A Preferred Stock, plus an amount equal to all accrued and
unpaid dividends, before any distribution is made to holders of our
common stock.
Your interest in our
company may be diluted by additional offerings or the conversion of
the Series A Preferred Stock. We are not restricted from
offering additional common stock outside of this offering. As a
result, such an offering may be dilutive to your ownership
percentage in our company and, depending on market conditions and
the terms of the offering, may be dilutive of your financial
investment in our company.
The Series A Preferred Stock will convert to common stock upon the
earlier of a Listing Event or April 4, 2020. At such time, the
Series A Preferred Stock will convert into common stock on at least
a one-to-three ratio, depending on the amount of cumulative accrued
but unpaid dividends on each share of Series A Preferred Stock
being converted. As a result, such a conversion will be dilutive to
your ownership percentage in our company and your financial
investment in our company.
Risks Related to the Offering and Lack of Liquidity
Shares of our common stock
will have limited transferability and liquidity. Prior to
this offering, there was no active market for our common stock.
Although we intend to apply for quotation of our common stock on
the OTCQX, 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, our common stock
will not be quoted on the OTCQX until after the termination of this
offering, if at all. Therefore, purchasers in the initial closing
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 shares of our common stock will be determined by
us and was not determined based upon any appraisals of assets we
own or may own, and will not be adjusted based upon any such
appraisals. Thus, the offering price may not accurately reflect the
value of our assets at the time an investor’s investment is
made. You may not be able to sell your shares of common stock at or
above the initial offering price.
The
OTCQX, as with other public markets, has from time to time
experienced significant price and volume fluctuations. As a result,
the market price of shares of our common stock may be
similarly volatile, and holders of shares of our common stock may
from time to time experience a decrease in the value of their
shares, including decreases unrelated to our operating performance
or prospects. The price of shares of our common stock 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 shares of our common stock
will not fluctuate or decline significantly in the future or that
common stockholders will be able to sell their shares when desired
on favorable terms, or at all. Further, the sale of the shares may
have adverse federal income tax consequences.
The price of the shares is
arbitrary. The purchase price of the shares of our common
stock has been determined primarily by our capital needs and bears
no relationship to any established criteria of value such as book
value or earnings per share, or any combination thereof. Further,
the price of the shares is not based on our past earnings. There
has been no prior public market for our shares, and therefore, the
offering price is not based on any market value.
Material Federal Income Tax Risks
Failure to qualify or
remain qualified as a REIT would cause us to be taxed as a regular
corporation, which would substantially reduce funds available for
distributions to our stockholders. We will elect to be taxed
as a REIT under the federal income tax laws commencing with our
taxable year beginning January 1, 2016. We believe that we will
operate in a manner qualifying us as a REIT commencing with our
taxable year beginning January 1, 2016 and intend to continue to so
operate. However, we cannot assure you that we will remain
qualified as a REIT. Moreover, our qualification and taxation as a
REIT depend upon our ability to meet on a continuing basis, through
actual annual operating results, certain qualification tests set
forth in the federal tax laws. Tax counsel will not review our
compliance with those tests on a continuing basis. Accordingly, no
assurance can be given that our actual results of operations for
any particular taxable year will satisfy such
requirements.
If we
fail to qualify as a REIT in any taxable year, we will face serious
tax consequences that will substantially reduce the funds available
for distributions to our stockholders because:
|
●
|
we
would not be able to deduct dividends paid to stockholders in
computing our taxable income and would be subject to U.S. federal
income tax at regular corporate rates;
|
|
●
|
we
could be subject to the federal alternative minimum tax and
possibly increased state and local taxes; and
|
|
●
|
unless
we are entitled to relief under certain U.S. federal income tax
laws, we could not re-elect REIT status until the fifth calendar
year after the year in which we failed to qualify as a
REIT.
|
In
addition, if we fail to qualify as a REIT, we will no longer be
required to make distributions. As a result of all these factors,
our failure to qualify as a REIT could impair our ability to expand
our business and raise capital, and it would adversely affect the
value of our common stock. See “Material Federal Income Tax
Considerations” for a discussion of material federal income
tax consequences relating to us and our common stock.
Complying with REIT requirements may cause us
to forego otherwise attractive opportunities or liquidate otherwise
attractive investments. To maintain our qualification as a
REIT for federal income tax purposes, we must continually satisfy
tests concerning, among other things, the sources of our income,
the nature and diversification of our assets, the amounts we
distribute to our stockholders and the ownership of our capital
stock. In order to meet these tests, we may be required to forego
investments we might otherwise make. Thus, compliance with the REIT
requirements may hinder our performance.
In
particular, we must ensure that at the end of each calendar
quarter, at least 75% of the value of our assets consists of cash,
cash items, government securities and qualified real estate assets.
The remainder of our investment in securities (other than
government securities, securities of TRSs and qualified real estate
assets) generally cannot include more than 10% of the outstanding
voting securities of any one issuer or more than 10% of the total
value of the outstanding securities of any one issuer. In addition,
in general, no more than 5% of the value of our assets (other than
government securities, securities of TRSs and qualified real estate
assets) can consist of the securities of any one issuer, and no
more than 25% of the value of our total assets can be represented
by the securities of one or more TRSs. If we fail to comply with
these requirements at the end of any calendar quarter, we must
correct the failure within 30 days after the end of the calendar
quarter or qualify for certain statutory relief provisions to avoid
losing our REIT qualification and suffering adverse tax
consequences. As a result, we may be required to liquidate
otherwise attractive investments. These actions could have the
effect of reducing our income and amounts available for
distribution to our stockholders.
Even if we qualify and
remain qualified as a REIT, we may face other tax liabilities that
reduce our cash flows. Even if we remain qualified as a
REIT, we may be subject to certain federal, state and local taxes
on our income and assets, including taxes on any undistributed
income, tax on income from some activities conducted as a result of
a foreclosure, and state or local income, property and transfer
taxes. In addition, any TRS in which we own an interest will be
subject to regular corporate federal, state and local taxes. Any of
these taxes would decrease cash available for distributions to
stockholders.
Failure to make required
distributions would subject us to U.S. federal corporate income
tax. We intend to operate in a manner so as to qualify as a
REIT for U.S. federal income tax purposes. In order to qualify and
remain qualified as a REIT, we generally are required to distribute
at least 90% of our REIT taxable income, determined without regard
to the dividends paid deduction and excluding any net capital gain,
each year to our stockholders. To the extent that we satisfy this
distribution requirement, but distribute less than 100% of our REIT
taxable income, we will be subject to U.S. federal corporate income
tax on our undistributed taxable income. In addition, we will be
subject to a 4% nondeductible excise tax if the actual amount that
we pay out to our stockholders in a calendar year is less than a
minimum amount specified under the Code.
The prohibited transactions
tax may subject us to tax on our gain from sales of property and
limit our ability to dispose of our properties. A
REIT’s net income from prohibited transactions is subject to
a 100% tax. In general, prohibited transactions are sales or other
dispositions of property other than foreclosure property, held
primarily for sale to customers in the ordinary course of business.
Although we intend to acquire and hold all of our assets as
investments and not for sale to customers in the ordinary course of
business, the IRS may assert that we are subject to the prohibited
transaction tax equal to 100% of net gain upon a disposition of
real property.
Although a safe
harbor to the characterization of the sale of real property by a
REIT as a prohibited transaction is available, not all of our prior
property dispositions qualified for the safe harbor and we cannot
assure you that we can comply with the safe harbor in the future or
that we have avoided, or will avoid, owning property that may be
characterized as held primarily for sale to customers in the
ordinary course of business. Consequently, we may choose not to
engage in certain sales of our properties or may conduct such sales
through a TRS, which would be subject to federal and state income
taxation. Additionally, in the event that we engage in sales of our
properties, any gains from the sales of properties classified as
prohibited transactions would be taxed at the 100% prohibited
transaction tax rate.
The ability of our Board to
revoke our REIT qualification without stockholder approval may
cause adverse consequences to our stockholders. Our charter
provides that our Board may revoke or otherwise terminate our REIT
election, without the approval of our stockholders, if it
determines that it is no longer in our best interest to continue to
qualify as a REIT. If we cease to qualify as a REIT, we would
become subject to U.S. federal income tax on our taxable income and
would no longer be required to distribute most of our taxable
income to our stockholders, which may have adverse consequences on
our total return to our stockholders.
Our ownership of any TRSs
will be subject to limitations and our transactions with any TRSs
will cause us to be subject to a 100% penalty tax on certain income
or deductions if those transactions are not conducted on
arm’s-length terms. Overall, no more than 25% of the
value of a REIT’s assets may consist of stock or securities
of one or more TRSs. In addition, the Code limits the deductibility
of interest paid or accrued by a TRS to its parent REIT to assure
that the TRS is subject to an appropriate level of corporate
taxation. The Code also imposes a 100% excise tax on certain
transactions between a TRS and its parent REIT that are not
conducted on an arm’s-length basis. Furthermore, we will
monitor the value of our respective investments in any TRSs for the
purpose of ensuring compliance with TRS ownership limitations and
will structure our transactions with any TRSs on terms that we
believe are arm’s-length to avoid incurring the 100% excise
tax described above. There can be no assurance, however, that we
will be able to comply with the 25% REIT subsidiaries limitation or
to avoid application of the 100% excise tax.
You may be restricted from
acquiring or transferring certain amounts of our common
stock. The stock ownership restrictions of the Code for
REITs and the 9.8% stock ownership limits in our charter may
inhibit market activity in our capital stock and restrict our
business combination opportunities.
In
order to qualify as a REIT, five or fewer individuals, as defined
in the Code to include specified private foundations, employee
benefit plans and trusts, and charitable trusts, may not own,
beneficially or constructively, more than 50% in value of our
issued and outstanding stock at any time during the last half of a
taxable year. Attribution rules in the Code determine if any
individual or entity beneficially or constructively owns our
capital stock under this requirement. Additionally, at least 100
persons must beneficially own our capital stock during at least 335
days of a taxable year. To help insure that we meet these tests,
among other purposes, our charter restricts the acquisition and
ownership of shares of our capital stock.
Our
charter, with certain exceptions, authorizes our directors to take
such actions as are necessary and desirable to preserve our
qualification as a REIT. Unless exempted, prospectively or
retroactively, by our Board, our charter prohibits any person from
beneficially or constructively owning more than 9.8% in value of
the aggregate of our outstanding shares of capital stock or 9.8% in
value or number of shares, whichever is more restrictive, of the
outstanding shares of our common stock. Our Board may not grant an
exemption from these restrictions to any proposed transferee whose
ownership in excess of such thresholds does not satisfy certain
conditions designed to ensure that we will not fail to qualify as a
REIT. These restrictions on transferability and ownership will not
apply, however, if our board of directors determines that it is no
longer in our best interest to continue to qualify as a REIT or
that compliance is no longer required for REIT
qualification.
We may be subject to
adverse legislative or regulatory tax changes that could reduce the
market price of our common stock. At any time, the U.S.
federal income tax laws governing REITs or the administrative
interpretations of those laws may be amended. We cannot predict
when or if any new U.S. federal income tax law, regulation or
administrative interpretation, or any amendment to any existing
U.S. federal income tax law, regulation or administrative
interpretation, will be adopted, promulgated or become effective
and any such law, regulation, or interpretation may take effect
retroactively. We and our stockholders could be adversely affected
by any such change in the U.S. federal income tax laws, regulations
or administrative interpretations.
Dividends payable by REITs
generally do not qualify for the reduced tax rates available for
certain dividends. The maximum tax rate applicable to
“qualified dividend income” payable to U.S.
stockholders taxed at individual rates is 20%. Dividends payable by
REITs, however, generally are not eligible for the reduced rates.
The more favorable rates applicable to regular corporate qualified
dividends could cause investors who are taxed at individual rates
to perceive investments in REITs to be relatively less attractive
than investments in the stocks of non-REIT corporations that pay
dividends, which could adversely affect the value of the shares of
REITs, including our common stock.
Distributions to tax-exempt
investors may be classified as unrelated business taxable income
and tax-exempt investors would be required to pay tax on the
unrelated business taxable income and to file income tax
returns. Neither ordinary nor capital gain distributions
with respect to our common stock nor gain from the sale of stock
should generally constitute unrelated business taxable income to a
tax-exempt investor. However, there are certain exceptions to this
rule. In particular:
|
●
|
under
certain circumstances, part of the income and gain recognized by
certain qualified employee pension trusts with respect to our stock
may be treated as unrelated business taxable income if our stock is
predominately held by qualified employee pension trusts, such that
we are a “pension-held” REIT (which we do not expect to
be the case);
|
|
●
|
part of
the income and gain recognized by a tax-exempt investor with
respect to our stock would constitute unrelated business taxable
income if such investor incurs debt in order to acquire our common
stock; and
|
|
●
|
part or
all of the income or gain recognized with respect to our stock held
by social clubs, voluntary employee benefit associations,
supplemental unemployment benefit trusts and qualified group legal
services plans which are exempt from federal income taxation under
Sections 501(c)(7), (9), (17) or (20) of the Code may be treated as
unrelated business taxable income.
|
We
encourage you to consult your own tax advisor to determine the tax
consequences applicable to you if you are a tax-exempt investor.
See “Material Federal Income Tax
Considerations — Taxation of Tax-Exempt
Stockholders.”
Benefit Plan Risks Under ERISA or the Code
If you fail to meet the
fiduciary and other standards under the Employee Retirement Income
Security Act of 1974, as amended or the Code as a result of an
investment in our stock, you could be subject to criminal and civil
penalties. Special considerations apply to the purchase of
stock by employee benefit plans subject to the fiduciary rules of
title I of the Employee Retirement Income Security Act of 1974, as
amended, or ERISA, including pension or profit sharing plans and
entities that hold assets of such plans, which we refer to as ERISA
Plans, and 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. (Collectively, we refer to ERISA Plans and plans subject
to Section 4975 of the Code as “Benefit Plans” or
“Benefit Plan Investors”). If you are investing the
assets of any Benefit Plan, you should consider
whether:
|
●
|
your
investment will be consistent with your fiduciary obligations under
ERISA and the Code;
|
|
●
|
your
investment will be made in accordance with the documents and
instruments governing the Benefit Plan, including the Plan’s
investment policy;
|
|
●
|
your
investment will satisfy the prudence and diversification
requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of ERISA, if
applicable, and other applicable provisions of ERISA and the
Code;
|
|
●
|
your
investment will impair the liquidity of the Benefit
Plan;
|
|
●
|
your
investment will produce “unrelated business taxable
income” for the Benefit Plan;
|
|
●
|
you
will be able to satisfy plan liquidity requirements as there may be
only a limited market to sell or otherwise dispose of our stock;
and
|
|
●
|
your
investment will constitute a prohibited transaction under Section
406 of ERISA or Section 4975 of the Code.
|
Failure
to satisfy the fiduciary standards of conduct and other applicable
requirements of ERISA and the Code may result in the imposition of
civil and criminal penalties, and can subject the fiduciary to
claims for damages or for equitable remedies. In addition, if an
investment in our shares constitutes a prohibited transaction under
ERISA or the Code, the fiduciary or IRA owner who authorized or
directed the investment may be subject to the imposition of excise
taxes with respect to the amount invested. In the case of a
prohibited transaction involving an IRA owner, the IRA may be
disqualified and all of the assets of the IRA may be deemed
distributed and subjected to tax. Benefit Plan Investors should
consult with counsel before making an investment in shares of our
common stock.
Plans
that are not subject to ERISA or the prohibited transactions of the
Code, such as government plans or church plans, may be subject to
similar requirements under state law. The fiduciaries of such plans
should satisfy themselves that the investment satisfies applicable
law.
CAUTIONARY NOTE 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,” “continue,” “could,”
“project,” “predict,” or the negative of
such terms and other comparable terminology 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. We caution that forward-looking statements
are not guarantees. Actual events or our investments and results of
operations could differ materially from those expressed or implied
in any forward-looking statements. 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 available for distribution, cash flows,
liquidity and prospects include, but are not limited to, the
factors discussed under the heading “Risk Factors” and
otherwise referenced in this offering circular, as well as the
following:
|
●
|
national,
international, regional and local economic conditions;
|
|
●
|
the
availability of capital;
|
|
●
|
legislative
or regulatory changes (including changes to the laws governing the
taxation of REITs);
|
|
●
|
our
ability to maintain our qualification as a REIT; and
|
|
●
|
related
industry developments, including trends affecting our business,
financial condition and results of operations.
|
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
forward-looking statements included in this offering circular,
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. Except as otherwise required by the federal securities
laws, we undertake no obligation to publicly update or revise any
forward-looking statements after the date of this offering
circular, whether as a result of new information, future events,
changed circumstances or any other reason. In light of the
significant uncertainties inherent in the forward-looking
statements included in this offering circular, including, without
limitation, the risks described under “Risk Factors,”
the inclusion of such forward-looking statements should not be
regarded as a representation by us or any other person that the
objectives and plans set forth in this offering circular will be
achieved.
DILUTION
On March 14, 2016, we issued 50,000 shares of common stock to each
of Messrs. Kaplan, Kaplan, Jr., Stanton and Kurlander in exchange
for $500.00 from each such person. The common stock was issued
at a price per share of $0.01, representing a difference of $9.99
(99.9%) from the price to the public in this offering.
We have issued 144,500 shares of our Series A Preferred Stock for a
purchase price of $25.00 per share, or $3,612,500 in the aggregate.
Our independent director nominees purchased an aggregate of 12,000
shares of Series A Preferred Stock. Our Series A Preferred Stock
has an annual preferred dividend equal to 7.00% multiplied by the
per share liquidation preference of $25.00. Additionally, our
Series A Preferred Stock will convert automatically into shares of
our common stock upon a Listing Event and may be converted into
shares of our common stock, at the option of the holder, from and
after March 31, 2020 if no Listing Event has occurred prior to such
date. Mr. Kurlander acquired 26,000 shares of our Series A
Preferred Stock.
Upon either an automatic or optional conversion, each share of
Series A Preferred Stock will convert automatically into a number
of shares of common stock equal to the sum of (i) the quotient of
$25.00 plus the aggregate accrued plus unpaid preferred dividend
per share, divided by $10.00, plus (ii) one-half of a common share.
Assuming there are no accrued but unpaid dividends as of the
conversion date, each share of Series A Preferred Stock will
convert into three shares common stock, resulting in an effective
cash cost per share of common stock to the purchasers of our Series
A Preferred Stock of approximately $8.33, representing a difference
of $1.67 from the price to the public in this
offering.
We
acquired our Contribution Properties through the contribution to us
by Holmwood of (i) all of the membership interests in the four
single-member limited liability companies that own the Silt
Property, the Fort Smith Property, the Johnson City Property and
the Port Canaveral Property, or the LLC Interests, and (ii) all
of its right, title and interest in
and to any and all profits, losses and distributed cash flows, if
any, from each wholly-owned subsidiary owning the Port Saint Lucie
Property, the Jonesboro Property and the Lorain Property, or the
Affected Properties, as well as all of the other benefits and
burdens of ownership solely for federal income tax purposes, or the
Profits Interests. In exchange for the LLC Interests and
Profits Interests, our operating partnership: (i) issued 1,078,416
OP Units to Holmwood equal to the agreed value of Holmwood’s
equity in the Contribution Properties as of the closing of the
contribution, divided by $10.00; and (ii) assumed all of the
indebtedness secured by the Contribution Properties and
Holmwood’s corporate credit line. The Limited
Partnership Agreement provides Holmwood with the right to require
the operating partnership to redeem the OP Units on a certain
future date. On such date, the operating partnership can redeem the
OP Units in cash or with shares of our common stock.
Pursuant to the
Management Agreement, our Manager shall receive a grant of our
company’s equity, which may be in the form of restricted
shares of common stock, restricted stock units underlied by common
stock, LTIP Units, or such other equity security as may be
determined by the mutual consent of our board of directors and our
Manager, at each closing in this offering, such that following such
grant, our Manager shall own equity securities equivalent to 3% of
the then issued and outstanding common stock of our company, on a
fully diluted basis, solely as a result of such grants. If we sell
the maximum amount in this offering, we will grant our Manager
equity securities equivalent to 146,224 shares of our common stock,
on a fully diluted basis, pursuant to this
requirement.
Pursuant to the
Management Agreement, our Manager will receive an acquisition fee
of 1.0% of the acquisition cost for each investment, inclusive of
closing costs, made on behalf of the Company. The acquisition fee
will be paid in our common stock, or such other equity securities
of our company or our operating partnership as may be determined by
the mutual consent of our board (including a majority of the
independent directors) and our Manager, or the Acquisition Fee
Securities. The number of Acquisition Fee Securities payable as
each applicable acquisition fee to the Manager will be equal to the
dollar amount of such acquisition fee, divided by a value
determined as follows: (i) if our common stock is traded on a NYSE,
NYSE MKT, NASDAQ Stock Market or any other nationally securities
exchange, as such term is defined under the Exchange Act, the value
shall be deemed to be the average of the closing prices of our
common stock on such exchange on the five (5) business days prior
to the date on which the acquisition fee was earned; (2) if our
common stock is not traded on an exchange listed in (i) but is
actively traded over-the-counter, the value shall be deemed to be
the average of the closing bids or sales prices, as applicable, on
the over-the-counter market during the five (5) business days prior
to the date on which the acquisition fee was earned; (iii) if our
common stock is neither traded on an exchange listed in (i) nor
actively traded over-the-counter, the value shall be the fair
market value thereof, as reasonably determined in good faith by our
board (including a majority of the independent directors). Until
the earlier of (i) such time as our company's common stock is
listed on the NYSE, NYSE MKT, NASDAQ Stock Exchange, or any other
national securities exchange, or (ii) March 31, 2020, all
acquisition fees payable to our Manager shall be accrued but not
paid. Assuming that we raise the maximum offering amount, resulting
in $26,375,000 in net proceeds, that we pay off the Standridge Note
and the Promissory Notes with proceeds from this offering on
January 5, 2018 and June 11, 2018, respectively, and that we buy
properties using our target leverage of 80%, and given that we paid
off the Holmwood Loan and Citizens Loan at the initial closing of
the offering, we anticipate that acquisition fees of approximately
$1,164,892 in vested equity of our company will be paid to our
Manager as a result of this offering. To date, we owe our Manager
acquisition fees of $274,345 from our acquisition of the Norfolk
Property, the Montgomery Property, and the San Antonio Property.
DISTRIBUTION POLICY
To
qualify as a REIT so that U.S. federal income tax generally does
not apply to our earnings to the extent distributed to
stockholders, we must, in addition to meeting other requirements,
annually distribute to our stockholders an amount at least equal to
(1) 90% of our REIT taxable income (determined before the
deduction for dividends paid and excluding any net capital gain),
plus (2) 90% of the excess of our net income from foreclosure
property (as defined in the Code) over the tax imposed on such
income by the Code, less (3) the sum of certain items of
non-cash income (as determined under Section 857 of the Code).
We are subject to income tax on income that is not distributed to
our stockholders and to a nondeductible excise tax to the extent
that certain percentages of our income are not distributed to our
stockholders by specified dates.
To the
extent that, in respect of any calendar year, cash available for
distribution to our stockholders is less than our REIT taxable
income, in order to qualify as a REIT under the Code we could be
required to fund the required distributions by selling assets,
incurring debt or issuing equity securities or to make a portion of
the required distributions in the form of a taxable distribution of
our equity securities. We currently do not intend to make taxable
distributions of our equity securities. In addition, prior to the
time we have fully invested the net proceeds of this offering, we
may choose to fund our distributions out of such net proceeds.
Funding distributions from such net proceeds may constitute a
return of capital to our common stockholders, which would have the
effect of reducing each stockholder’s basis in its holdings
of shares of our common stock. We will generally not be required to
make distributions with respect to activities conducted through any
domestic TRS that we form following completion of this offering.
See “Material Federal Income Tax Considerations.” The
REIT distribution requirements will, however, generally apply to
all taxable income allocated to us from our operating partnership.
Income as computed for purposes of the foregoing tax rules will not
necessarily correspond to our income as determined for financial
reporting purposes.
We
intend to pay dividends to our stockholders in cash to the extent
that cash is available for such purpose. We may, however, in the
sole discretion of our board of directors, make a distribution of
assets or a taxable distribution of our shares (as part of a
distribution in which stockholders may elect to receive shares or
cash, subject to a limit measured as a percentage of the total
distribution).
We
anticipate that distributions generally will be taxable as ordinary
income to our non-exempt stockholders, although a portion of such
distributions may be designated by us as long-term capital gain or
qualified dividend income or may constitute a return of capital. To
the extent that we decide to make distributions in excess of our
earnings and profits, such excess distributions generally will be
considered a return of capital. The percentage of our stockholder
distributions that exceeds our current and accumulated earnings and
profits may vary substantially from year to year.
Following the
initial closing of this offering, we intend to pay cash dividends
to our stockholders on a quarterly basis. We paid a pro rata
dividend with respect to the period commencing on the initial
closing of this offering and ending June 30, 2017 based on $0.1375
per share for a full quarter. On an annualized basis, this would be
$0.55 per share, or an annual dividend rate of approximately 5.5%
based on the price set forth in this offering circular. Our
estimated annual dividend per share represents approximately 379%
of our estimated cash available for distribution if we raise the
maximum offering amount. As a result, we will need to increase our
operating cash flow in the future, or find another source of cash,
which may include remaining net proceeds from this offering, to pay
our estimated initial annual dividend. There can be no assurances
that we will find another source of cash or financing for the
payment of dividends. If this occurs, we estimate that $1,797,813
of the offering proceeds will be used to fund initial annual
dividends, if the maximum offering amount is raised. However, the
table below, including the calculation of our estimated cash
available for distribution and associated payout ratio, does not
account for any increase in rental or related revenue on the one
hand or operating costs on the other from properties acquired using
our remaining net proceeds from this offering following our
repayment of approximately up to $5,346,397 of debt. As of the date
of this offering circular, we have made quarterly dividend payments
equating to $0.1375 per share for a full quarter, or $0.55 per
share on an annualized basis.
We have
estimated our annual cash available for distribution to our
stockholders for the twelve months ending June 30, 2018 based on
adjustments to our pro forma net income for the twelve months ended
June 30, 2017. This estimate was based upon the historical
operating results of our company and does not take into account any
investments of associated cash flows, other than capital
expenditures for routine maintenance on our portfolio, as they
cannot be estimated at this time. The estimate also does not take
account of other currently unanticipated expenditures we may have
to make. In estimating our cash available for distribution to our
stockholders, we have made certain assumptions as reflected in the
table and notes below, and it does not take into account the
investment of unallocated net proceeds from this offering and any
revenues or costs arising therefrom.
We may
undertake other investing or financing activities that may have a
material effect on our estimate of cash available for distribution
to our stockholders. Because we have made the assumptions set forth
above in estimating cash available for distribution, we do not
intend this estimate to be a projection or forecast of our actual
results of operations or cash flows, and we have estimated cash
available for distribution for the sole purpose of determining the
expected amount of our initial annual dividend rate. Our estimate
of cash available for distribution should not be considered as an
alternative to cash flow from operating activities (computed in
accordance with GAAP) or as an indicator of our liquidity or our
ability to pay dividends. In addition, the calculations set forth
below may not be the basis upon which our board of directors may
determine future dividends. No assurance can be given that our
estimates will prove accurate, and any actual dividends therefore
may be significantly different from the estimated
dividends.
The
timing, form and amount of any dividends to our stockholders will
be at the sole discretion of our board of directors and will depend
upon a number of factors, including, but not limited
to:
●
our
actual and projected, results of operations, liquidity, cash flows
and financial condition;
●
our
business and prospects;
●
our
operating expenses;
●
our
capital expenditures and tenant improvements;
●
our
debt service requirements;
●
restrictive
covenants in our financing or other contractual
arrangements;
●
prohibitions or
restrictions under Maryland law;
●
the
timing of the investment of our capital;
●
the
annual distribution requirements under the REIT provisions of the
Code; and
●
such
other factors as our board of directors deems
relevant.
Although, we have
paid dividends to our common stockholders thus far, no assurance
can be given that we will pay dividends, to our common stockholders
at any time or in any particular form in the future or that the
level of any dividends we do pay to our common stockholders will be
consistent with our anticipated annual dividend rate or will
increase or even be maintained over time, or achieve a market
yield.
Any of
the foregoing could materially and adversely affect us and the
market price of our common stock.
The
following table describes our Adjusted Pro Forma Statement of Cash
Flows for the twelve months ended June 30, 2017, and the
adjustments we have made in order to estimate our cash available
for distribution to the holders of our common stock and OP units
for the twelve months ending June 30, 2018. The table reflects our
consolidated information, including the OP units, which receive
distributions from our operating partnership on a one-to-one ratio
to dividends paid on our common stock.
Adjusted Pro Forma Statement of Cash Flows:
Pro
forma condensed combined net income/(loss)
|
|
for
the 12 months ended December 31, 2016 (1)
|
$(1,253,212)
|
Less: Pro
forma net income/(loss) for the 6 months ended June 30,
2016
|
(791,528)
|
Add:
Pro forma net income/(loss) for the 6 months ended June
30, 2017
|
(971,303)
|
|
(1,432,987)
|
|
|
Pro forma
depreciation
|
2,447,069
|
Pro forma
amortization
|
586,307
|
Pro forma
amortization of above/below market leases
|
(190,116)
|
Pro forma
amortization of debt issuance costs
|
304,875
|
Pro forma
amortization of stock based
compensation
|
443,291
|
Pro
forma total estimated cash provided by operating activities for the
12
|
|
months
ending June 30, 2017
|
2,158,439
|
|
|
Investing
cash flows:
|
|
Property capital
expenditures (2)
|
(74,084)
|
Total
estimated cash used in investing activities for the 12
|
|
months
ending June 30, 2018
|
(74,084)
|
|
|
Financing
cash flows:
|
|
Scheduled debt
principal payments (3)
|
(1,186,941)
|
Payment of
preferred stock dividends (4)
|
(252,875)
|
Total
estimated cash used in financing activities for the 12
months
|
|
ending
June 30, 2018
|
$(1,439,816)
|
|
|
Estimated
cash from operations available for distributions for the 12
months
ending
June 30, 2018 (5)
|
$644,539
|
|
|
Estimated
annual distribution for the 12 months ending June 30, 2018
(6)
|
$2,442,352
|
|
|
Estimated
offering proceeds used to fund distributions to holders of our
common
|
|
stock/OP Units for the 12 months ending June 30, 2018
(7)
|
$1,797,813
|
|
|
Estimated
distribution per OP unit for the 12 months ending June 30,
2018
|
$0.55
|
Estimated
distribution per share for the 12 months ending June 30,
2018
|
$0.55
|
Payout ratio based
on estimated cash available for distribution to our holders of
common
|
|
stock/OP units
(8)
|
379%
|
Our
calculation of pro forma condensed combined net income and pro
forma cash flows for the 12 months ended June 30, 2017, and
estimated cash flows, estimated cash available for distribution and
estimated annual distribution for the 12 months ending June 30,
2018 included in the table above has been prepared by management.
Our independent auditors have not examined, compiled or otherwise
applied procedures to such calculations and, accordingly, do not
express an opinion or any other form of assurance
thereon.
(1)
Pro forma net income for the twelve months ended
December 31, 2016 as reflected in the Unaudited Pro Forma Condensed
Combined Statement of Operations included in this offering
circular.
(2)
Annual
provision for recurring capital expenditures is estimated at $0.25
per rentable square foot for 296,335 square feet, the gross
rentable square feet of the 14 properties whose pro forma operating
results are included in the above table.
(3)
Represents
estimated debt principal amortization on pro forma mortgage loans
secured by the properties totaling $58.6 million.
(4)
Represents
a 7% dividend payable on $3,612,500 preferred stock.
(5)
Represents
the estimated cash available for distribution related to the pro
forma operating results for the 14 properties described above. The
Unaudited Pro Forma Condensed Combined Balance Sheet reflects cash
of $14,042,390 available to acquire properties. The estimated cash
available for distribution does not include pro forma cash flows
from unidentified properties.
(6)
Represents
annual dividends on 4,440,640 common shares and units which include
3,000,000 common shares resulting from this offering, 216,000
common shares owned by the founders (200,000) and outside board
members (16,000), 1,078,416 operating partnership units and 146,224
LTIP units.
(7)
This
assumes no pro forma cash flow from unidentified properties is
available to pay dividends or issuance of equity in lieu of cash
dividends.
(8)
Based
on the estimated cash available for distributions ($644,539)
divided by the estimated annual dividends
($2,442,352).
PLAN OF DISTRIBUTION
The
offers and sales of our shares are being made on a best efforts
basis by broker-dealers who are members of FINRA. SANDLAPPER
Securities, LLC is our Dealer-Manager. Our Dealer-Manager will
receive selling commissions of six percent (6.0%) of the offering
proceeds which it may re-allow and pay to participating
broker-dealers who sell shares, a managing broker-dealer fee of one
and one-quarter percent (1.25%), which it may re-allow and pay, in
part, to participating broker-dealers who sell shares, and a
non-accountable due diligence, marketing and expense reimbursement
fee of one percent (1.0%) of the offering proceeds, which it may
also re-allow and pay to the participating broker-dealers. If we
raise the maximum offering amount, our Dealer-Manager will also be
entitled to the reimbursement of accountable expense reimbursement
of up to $30,000 for filing and legal fees incurred by it. Our
Dealer-Manager will also be entitled to the reimbursement of
accountable expenses in the amount of up to one-half percent (0.5%)
of the offering proceeds in relation to facilitation or clearing
fees payable to Folio. Our Dealer-Manager will not be required to
account for the spending of amounts comprising the non-accountable
due diligence, marketing and expense reimbursement fee. Our
Dealer-Manager may also sell shares as part of the selling group,
thereby becoming entitled to retain a greater portion of the six
percent (6.0%) selling commissions. Any portion of the six percent
(6.0%) selling commissions retained by the Dealer-Manager would be
included within the amount of selling commissions payable by us and
not in addition thereto. Cambria Capital, LLC will act as our
principal selling group member and, therefore, will be a
participating broker-dealer. In this role, Cambria Capital,
LLC may assist the Dealer-Manager in connection with its due
diligence review of our company, in coordinating due diligence
review for other potential participating broker-dealers and
with other services related to selling group
formation. Cambria Capital, LLC also may assist us and the
Dealer-Manager in obtaining clearing and facilitation services from
Folio or other clearing firms that may be negaged in this
offering. Cambria Capital, LLC will be compensated by our
Dealer-Manager and its participation in this offering will not
result in any additional underwriting compensation becoming payable
by us. Cambria Capital, LLC will not enter into
participating dealer agreements with other participating
broker-dealers.
We may
pay reduced or no selling commissions and/or expense reimbursements
or fees in connection with the sale of shares in this offering
to:
|
●
|
|
our
employees, officers and directors or those of our manager, our
property manager or the affiliates of any of the foregoing entities
(and the immediate family members of any of the foregoing Persons),
any Plan established exclusively for the benefit of such persons or
entities, and, if approved by our board of directors, joint venture
partners, consultants and other service providers;
|
|
●
|
|
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. In addition, participating brokers contractually
obligated to their clients for the payment of fees on terms
inconsistent with the terms of acceptance of all or a portion of
the selling commissions and/or expense reimbursements or fees may
elect not to accept all or a portion of such compensation. In that
event, such shares will be sold to the investor at a per share
purchase price, net of all or a portion of selling commissions
and/or expense reimbursements or fees. 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
reducing or eliminating selling commissions and/or expense
reimbursements or fees payable in connection with sales through
registered investment advisors or bank trust
departments.
Our
company and our Dealer-Manager have entered into a Managing
Broker-Dealer Agreement, which is incorporated by reference as an
exhibit to the offering statement of which this offering circular
is a part, for the sale of our shares. Broker-dealers desiring to
become members of the selling group will be required to execute a
participating dealer agreement with our Dealer-Manager either
before or after the date of this offering circular.
Best
Efforts Offering
The
Dealer-Manager has agreed to use its best efforts to procure
potential purchasers for the offered shares. This offering is being
undertaken on a best efforts only basis. The Dealer-Manager is not
required to take or pay for any specific number or dollar amount of
our shares.
Minimum Offering Amount and Minimum Purchase
We are
offering a maximum of 3,000,000 shares of our common stock at an
offering price of 10.00 per share, for a maximum offering amount of
$30,000,000. The minimum purchase requirement is 150 shares, or
$1,500; however, we can waive the minimum purchase requirement in
our sole discretion. On May 18, 2017, we closed on the
minimum offering amount of 300,000 shares, or $3,000,000, and
issued 317,512 shares of common stock in this offering. To date, we
have issued 588,617 shares of common stock in this offering and
received gross proceeds from the offering totaling
$5,886,170.
We will
hold closings on at least a monthly basis. The final
closing will occur whenever we have reached the maximum offering
amount or November 7, 2018, whichever occurs first. With the
exclusion of the final closing resulting from achievement of the
maximum offering amount, the timing of any closings will not be
dependent on the amount sold. Closings will occur at least monthly
or more often, at our sole discretion. As a result, an investor may
have their investment in escrow or in such investor’s account
with its clearing firm for up to one month before receipt of their
offered shares. Until each closing, the subscription proceeds for
that closing will either remain in an investors brokerage account
with its clearing firm or will be kept in the escrow account with
the escrow agent. Upon each closing, the proceeds will be
disbursed to us net of applicable expenses and the shares sold will
be issued to the investors. At the request of an investor, we may,
but will not be required to, return funds deposited in the escrow
account or an investor’s funds that are deposited in such
investor’s account with its clearing firm unless the offering
is terminated for any reason prior to closing on such
investment.
Investment
Procedures
Clearing Firm Procedures
Our
common shares are eligible to be held by the Depository Trust
Company, or its nominee, on behalf of the owners of the common
shares, or DTC-eligible. The Dealer-Manager and/or your
broker-dealer may permit you to purchase shares through the
Depository Trust Company, or DTC Settlement. If you purchase our
common shares using DTC Settlement, you will be required to
complete the subscription agreement as instructed by your
broker-dealer; however, you will not send a check, wire or ACH
transfer. Rather, a broker-dealer using DTC Settlement will have an
account with DTC in which your funds will be placed to facilitate
the applicable closing. Your broker-dealer will inform you of the
next closing date for the purchase of shares and you must
coordinate with your broker-dealer to pay the full purchase price
for the shares prior to the closing date for your purchase.
Subscription funds for shares purchased through DTC Settlement will
not be held in escrow. Any common shares issued through DTC
Settlement will be held in the name of DTC, or its nominee, Cede
& Co., on the books of the transfer agent, Direct Transfer LLC.
The transfer agent will record and maintain records of shares of
common stock issued by us.
Folio
Procedures
Prospective
investors investing through Folio or a broker-dealer that clears
through Folio will acquire our shares of common stock through
book-entry order through our Dealer-Manager or a participating
dealer by opening an account with Folio or a broker-dealer that
clears through Folio, or utilizing an existing Folio account or
existing account at a broker-dealer that clears through Folio,
which will be an account owned by the investor and held by Folio
for the exclusive benefit of such investor; provided, however that
each investor will be required to complete and submit a
subscription agreement.
Subscriptions for
the shares of common stock acquired through the platform operated
by Folio, which is a FINRA member and SEC-registered broker-dealer
and clearing firm, are processed online. Folio will maintain the
individual shareholder records in the shareholder's account opened
by investors at Folio for the purpose of investing in this
offering, and the transfer agent, on our behalf, will maintain
records of the aggregate of all shares of common stock held by
Folio for the benefit of Folio's customers who are investors in the
offering, and elsewhere. Shares issued through DTC Settlement will
be held in the name of DTC, or its nominee, Cede & Co., on the
books of the transfer agent.
The
process for investing through the platform operated by Folio will
work in the following manner. Folio has entered into a custody
agreement with us pursuant to which we will issue uncertificated
securities to be held at Folio, and the shares of common stock held
at Folio will show as an omnibus position on our records and the
transfer agent's records in the name of “Folio Investments, Inc. for the
exclusive benefit of customers.” We opened a brokerage
account with Folio and Folio holds the shares of common stock to be
sold in the offering in book-entry form and included in the
position of DTC or its nominee on the records of our transfer
agent. When the shares of common stock are sold as described
below, Folio maintains a record of each investor's ownership
interest in those securities. Under an SEC no-action letter
provided to Folio in January 2015, Folio is allowed to treat the
issuer as a good control location pursuant to Exchange Act Rule
15c3-3(c)(7) under these circumstances. The customer's funds will
not be transferred into a separate account awaiting the closing but
will remain the customer's accounts at Folio pending instructions
to release funds to us if and when we elect to close on such
investment.
In
order to subscribe to purchase the shares of common stock through
the platform operated by Folio, a prospective investor must
electronically complete and execute a subscription agreement and
provide payment using the procedures indicated
below. When submitting the subscription request through
Folio, a prospective investor is required to agree to various terms
and conditions by checking boxes and to review and electronically
sign any necessary documents.
The
funds that will be used by an investor purchasing through Folio to
purchase the securities are deposited by the investor prior to the
applicable closing date into a brokerage account at Folio, which
will be owned by the investor. The funds for the investor's
account at Folio can be provided by check, wire, Automated Clearing
House ("ACH") push, ACH pull, direct deposit, Automated Customer
Account Transfer Service ("ACATS") or non-ACATS transfer.
Under an SEC no-action letter provided to Folio in July 2015, the
funds will remain in the customer’s account after they are
deposited and until such investment closes, the prospective
investor’s offer is cancelled, or this offering is withdrawn
or expired. The funds used by an investor to purchase shares
through the platform operated by Folio will be promptly swept into
or maintained in FDIC-insured bank accounts.
In our
sole discretion, we will notify Folio when we wish to conduct a
closing. Folio executes the closing by transferring each
investor's funds from their Folio accounts to our Folio account and
transferring the correct number of book-entry shares to each
investor’s account from our Folio account. The shares
are then reflected in the investor's online account and shown on
the investor's Folio account statements. Folio will also send
trade confirmations individually to the investors.
Direct Registration Procedures for Subscribing
Investors not
purchasing through Folio’s platform must complete and execute
a subscription agreement for a specific number of shares and pay
for the shares at the time of the subscription. Subscription
agreements may be submitted in paper form, or electronically, if
electronic subscription agreements and signature are made available
to you by your broker-dealer or registered investment advisor.
Generally, when submitting a subscription agreement electronically,
a prospective investor will be required to agree to various terms
and conditions by checking boxes and to review and electronically
sign any necessary documents. You may pay the purchase price
for your shares by: (i) check; (ii) wire transfer in accordance
with the instructions contained in your subscription agreement; or
(iii) electronic funds transfer via ACH in accordance with the
instructions contained in your subscription
agreement. All checks should be made payable to
“Branch Banking and Trust Company, as Escrow Agent for HC
Government Realty Trust, Inc.” Completed
subscription agreements will be sent by your broker-dealer or
registered investment advisor, as applicable, to our Dealer-Manager
at the address set forth in the subscription agreement.
Subscription payments should be delivered directly to Branch
Banking and Trust Company, as escrow agent. If you send your
subscription payment to your broker or registered investment
advisor, then your broker or registered investment advisor will
immediately forward your subscription payment to Branch Banking and
Trust Company, as escrow agent. Subscriptions will be effective
only upon our acceptance, and we reserve the right to reject any
subscription in whole or in part. For any subscription agreements
received we shall have a period of 30 days after receipt of the
subscription agreement to accept or reject the subscription
agreement. If rejected, we will return all funds to the rejected
subscribers within ten business days. If accepted, the funds will
remain in the escrow account until we close on such subscription.
We intend to hold closings at least monthly in the offering until
the maximum offering amount is raised or the offering is
terminated. You will receive a confirmation of your purchase
promptly following the closing in which you participate. Shares
issued through DTC Settlement will be held in the name of DTC, or
its nominee, Cede & Co., on the books of the transfer
agent.
Delivery
of Offering Circular
Concurrently with
the delivery of any written offer to purchase our shares, your
soliciting dealer will provide you with a copy of the final
offering circular by (i) electronic delivery of the final
offering circular or the uniform resource locator to where the
final offering circular may be accessed on the SEC’s
Electronic Data Gathering, Analysis and Retrieval System
(“EDGAR”), or (ii) mailing the final offering
circular to you at your address in your soliciting dealer’s
records.
Investment Limitations
Generally,
if you are not an "accredited investor" as defined in Rule 501 (a)
of Regulation D (17 CFR §230.501 (a)) no sale may be made to
you in this offering if the aggregate purchase price you pay is
more than 10% of the greater of your annual income or net worth.
Different rules apply to accredited investors and investors who are
not 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.
As a
Tier 2, Regulation A offering, investors must comply with the 10%
limitation to investment in the offering. The only investor in this
offering exempt from this limitation is an accredited investor, or
an Accredited Investor, as defined under Rule 501 of Regulation D.
If you meet one of the following tests you should qualify as an
Accredited Investor:
(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 Units (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, or the Code, a corporation, a
Massachusetts or similar business trust or a partnership, not
formed for the specific purpose of acquiring the shares, 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, or 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, or 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
Units 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 shares;
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.
NOTE: For the purposes of
calculating your net worth, or Net Worth, for purposes of
determining compliance with the 10% limitation or the accredited
investor standard, it 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 fiduciary directly or indirectly provides funds for the
purchase of the shares.
In order to purchase offered shares and prior to the acceptance of
any funds from an investor, an investor will be required to
represent, to our company’s satisfaction, that he is either
an accredited investor or is in compliance with the 10% of net
worth or annual income limitation on investment in this
offering.
USE OF PROCEEDS
We
estimate that the net proceeds from this offering, after deducting
selling commissions and fees and offering costs and expenses
payable by us, will be approximately $2,237,500 if we raise the
minimum offering amount and $26,375,000 if we raise the maximum
offering amount, following the payment of selling commissions,
Dealer-Manager fees and other offering costs. Set forth below is a
table showing the estimated sources and uses of the proceeds from
this offering, for both the minimum and maximum offering amounts.
The table below represents our estimated use of proceeds. The
actual use of proceeds may be different from that which is
disclosed below, and we reserve the
ability to alter the use of proceeds, in our sole discretion, if
market conditions dictate as such.
|
|
|
|
|
|
Gross
Proceeds
|
$30,000,000
|
100.00%
|
|
|
|
Estimated Offering
Expenses1
|
$1,000,000
|
3.33%
|
|
|
|
Selling
Commissions, Fees & Expense Reimbursements2
|
$2,625,000
|
8.75%
|
|
|
|
Net Proceeds Available for
Investment3
|
$26,375,000
|
87.92%
|
|
|
|
Total
Use of Proceeds
|
$30,000,000
|
100.00%
|
1 Estimated offering expenses include legal, accounting,
printing, advertising, travel, marketing, blue sky compliance and
other expenses of this offering, and transfer agent and escrow
fees. They also include approximately $225,000 of financial
advisory fees paid by our Manager to BB&T Capital Markets at
the initial closing of this offering and reimbursable by us
relative to BB&T Capital Markets’ investment banking
advisory services, which includes their advising and assisting with
the structuring this offering. Reimbursements to our Manager made
prior to our initial closing will not be paid from proceeds of this
offering. As of November 7, 2017, we have incurred organizational
and offering expenses of approximately $990,000.
2 Our Dealer-Manager will receive selling commissions of
6.00% of the gross offering proceeds, which it may re-allow and pay
to participating broker-dealers, a managing broker-dealer fee of
1.25%, which it may re-allow and pay, in part, to participating
broker-dealers, and a non-accountable expense allowance of 1.0% of
the gross offering proceeds, which it may re-allow and pay to
participating broker-dealers. We will reimburse accountable
expenses up to 0.50% of the gross proceeds from this offering to
our Dealer-Manager for fees paid to Folio for its clearing and
facilitation services. If we raise the maximum offering amount, we
will also reimburse our Dealer-Manager for accountable expenses of
up to $30,000 for filing and legal fees incurred by it. The above
table does not deduct filing and legal fees because we are not able
to accurately estimate those fees at this time.
3 If the maximum
offering amount is raised, we intend to use approximately 87.92% of
the gross offering proceeds to acquire properties, manage our
business, provide working capital for operations, including costs
related to new contracts and deposits for the acquisition of
properties, and potentially pay down existing debt secured by our
investments. These amounts
may be used to pay salaries and other compensation to our
independent directors. We anticipate paying off the
Standridge Note with proceeds from this offering. On January 5,
2018, we expect Standridge Note to have a principal balance of
$445,101. Please see "Description of Our Properties - Our Portfolio
and Pipeline" for a description of the Standridge Note. We
anticipate paying off the interim loans incurred in connection with
the acquisition of the Norfolk Property with proceeds from this
offering. As of November 7, 2017, that debt consisted of three
loans with an aggregate principal balance of $3,400,000. Please see
"Description of our Properties - Our Portfolio and Pipeline" for a
description of the interim loans.We anticipate paying off the
Promissory Notes with proceeds from this offering. We expect the
Promissory Notes to have a principal balance of $1,500,000 on June
11, 2018. Please see "Description of Our Properties - Our Portfolio
and Pipeline" for a description of the Promissory
Notes.
DESCRIPTION OF OUR BUSINESS
HC
Government Realty Trust, Inc. was formed in 2016 as a Maryland
corporation, and we intend to elect and qualify to be taxed as a
REIT for federal income tax purposes beginning with our taxable
year ending December 31, 2017. We focus on acquiring primarily in
GSA Properties that fulfill mission critical or direct citizen
service functions primarily located across secondary and smaller
markets, within size ranges of 5,000-50,000 rentable square feet,
and in their first term after construction or retrofit to post-9/11
standards. Leases associated with the GSA Properties in which our
company invests are full faith and credit obligations of the United
States of America and are administered by the U.S. General Services
Administration or directly through the occupying federal agencies,
or, collectively, the GSA. Our principal objective is the creation
of value for stockholders by utilizing our relationships and
knowledge of GSA Properties, specifically, the acquisition,
management and disposition of GSA Properties. As of the date of
this offering circular, we wholly own ten properties and have
all of the rights to the profits,
losses, any distributed cash flow and all of the other benefits and
burdens of ownership for federal income taxes of three additional
GSA Properties, all of them leased in their entirety to U.S.
Government agency tenants. Our portfolio consists of (i) three
properties acquired by our company, through subsidiaries, on June
10, 2016 using proceeds from the issuance of shares of our 7.00%
Series A Cumulative Convertible Preferred Stock, or the Series A
Preferred Stock, secured financing in the amount of $7,225,000 from
CorAmerica Loan Company, LLC, or CorAmerica, $2,019,789 in
unsecured seller financing, and $1,000,000 of unsecured loans from
Holmwood, or the Holmwood Loan, (ii) one property acquired by our
company, through a subsidiary, on March 31, 2017 using secured
financing in the amount of $10,875,000 and unsecured financing from
two principals of our predecessor, Holmwood in the aggregate amount
of $3,400,000, (iii) seven properties contributed to us as of the
initial closing by Holmwood, including three properties from which
we received all of the rights to the
profits, losses, any distributed cash flow and all of the other
benefits and burdens of ownership for federal income tax purposes
rather than a fee simple interest, each pursuant to the
Contribution Agreement, (iv) one
property acquired by our company, through a subsidiary, on July 25,
2017, for a purchase price of $4,709,458, and financed by senior
debt financing and equity and (v) one
property acquired by our company, through a subsidiary, in November
2017, for a purchase price of $8,225,000, and financed by senior
mortgage debt and equity.
The GSA-leased real estate asset class
possesses a number of positive attributes that we believe will
offer our stockholders significant benefits, including a highly
creditworthy and very stable tenant base, long-term lease
structures and low risk of tenant turnover. GSA leases are backed
by the full faith and credit of the U.S. Government, and the GSA
has never experienced a financial default in its history. Payment
for rents under GSA leases are funded through the Federal
Buildings Fund and are not subject to direct federal
appropriations, which can fluctuate with federal budget and
political priorities. In addition to presenting reduced risk of
default, GSA leases typically have long initial terms of ten to 20
years with renewal leases having terms of five to ten years, which
limit operational risk. Upon renewal of a GSA lease, base rent is
typically reset based on a number of factors, including inflation
and the replacement cost of the building at the time of renewal,
which we generally expect will increase over the life of the
lease.
GSA-leased
properties generally provide attractive investment opportunities
and require specialized knowledge and expertise. Each U.S.
Government agency has its own customs, procedures, culture, needs
and mission, which translate into different requirements for its
leased space. Furthermore, the sector is highly fragmented, with a
significant amount of non-institutional owners who lack our
infrastructure and experience in GSA-leased properties, and there
is no national broker or clearinghouse for GSA-leased properties.
We believe this fragmentation results, in part, from the U.S.
Government’s and GSA’s contracting policies, including
policies of preference for small, female and minority owned
businesses. As of August 2015, the largest owner of GSA-leased
properties owned approximately 3.5% of the GSA-leased market by RSF
and the ten largest owners of GSA-leased properties collectively
owned approximately 17% of the GSA-leased market by
RSF.9 Long-term relationships and
specialized institutional knowledge regarding the agencies, their
space needs and the hierarchy and importance of a property to its
tenant agency are crucial to understanding which agencies and
properties present the greatest likelihood of long-term tenancy,
and to identifying and acquiring attractive investment properties.
Our portfolio is
diversified among U.S. Government tenant agencies, including a
number of the U.S. Government’s largest and most essential
agencies, such as the Drug Enforcement Administration, the Federal
Bureau of Investigation, the Social Security Administration and the
Department of Transportation.
We
intend to operate as an UPREIT, and own our properties through our
subsidiary, HC Government Realty Holdings, L.P., a Delaware limited
partnership. While we focus on investments in GSA Properties, we
may also develop programs in the future to invest in state and
local government, single-tenant and majority occupied properties
and properties majority leased to the United States of America and
other similar mission critical properties. We are externally
managed and advised by Holmwood Capital Advisors, LLC, a Delaware
limited liability company, our Manager. Our Manager will make all
investment decisions for us. Our Manager is owned by Messrs. Robert
R. Kaplan and Robert R. Kaplan, Jr., individually, by Stanton
Holdings, LLC, which is controlled by Mr. Edwin M. Stanton, and by
Baker Hill Holding LLC, which is controlled by Mr. Philip
Kurlander, all in equal proportions. The officers of our Manager
are Messrs. Edwin M. Stanton, President, Robert R. Kaplan, Jr.,
Vice President, Philip Kurlander, Treasurer, and Robert R. Kaplan,
Secretary.
We
believe our Manager’s and its principals’ and executive
officers’ extensive knowledge of U.S. Government properties
and lease structures allows us to execute transactions efficiently.
Additionally, we believe that our ability to identify and implement
building improvements increases the likelihood of lease renewal and
enhances the value of our portfolio. Our Manager’s
experienced management team brings specialized insight into the
mission and hierarchy of tenant agencies so that we are able to
gain a deep understanding of the U.S. Government’s long-term
strategy for a particular agency and its resulting space needs.
This allows us to target properties for use by agencies that will
have enduring criticality and the highest likelihood of lease
renewal. Lease duration and the likelihood of renewal are further
increased as properties are tailored to meet the specific needs of
individual U.S. Government agencies, such as specialized
environmental and security upgrades.
Our
Manager and its principals and executive officers have a network of
relationships with real estate owners, investors, operators and
developers of all sizes and investment formats, across the United
States and especially in relation to GSA Properties. We believe
these relationships provide us with a competitive advantage,
greater access to off-market transactions, and flexibility in our
investment choices to source and acquire GSA
Properties.
In
addition to the dedication and experience of our Manager’s
management team, we rely on the network of professional and
advisory relationships our Manager and its principals and executive
officers has cultivated, including BB&T Capital Markets, a
division of BB&T Securities, LLC, or BB&T Capital Markets.
Our Manager has engaged BB&T Capital Markets to provide
investment banking advisory services, including REIT financial and
market analysis, offering structure analysis.
We
believe in the long-term there will be a consistent flow of
properties in our target markets for purposes of acquisition,
leasing and managing which we expect will enable us to continue our
platform into the foreseeable future. We acquire GSA Properties
located across secondary and smaller markets throughout the United
States. We do not anticipate making acquisitions outside of the
United States or its territories.
We
primarily make direct acquisitions of GSA Properties, but we may
also invest through indirect investments in real property, such as
those that may be obtained in a joint venture which may or may
not be managed or affiliated with our Manager or its affiliates,
whereby we own less than a 100% of the beneficial interest therein;
provided, that in such event, we will acquire at least 50 percent of
the outstanding voting securities in the investment, or otherwise
comply with SEC staff guidance regarding majority-owned
subsidiaries, for the investment to meet the definition of
“majority-owned subsidiary” under the Investment
Company Act. While our Manager does not intend for these
types of investments to be a primary focus, we may make such
investments in our Manager’s sole discretion.
Our Competitive Strengths and Strategic Opportunities
We
believe the experience of our Manager and its affiliates,
principals and executive officers, as well as our investment
strategies, distinguish us from other real estate companies. We
believe that we are benefitted by the alignment of the following
competitive strengths and strategic opportunities:
High Quality Portfolio Leased to Mission-Critical U.S. Government
Agencies
●
We own a portfolio
of 13 GSA Properties, comprised of 10 GSA Properties we own in fee
simple and three additional GSA Properties for which we have all of
the rights to the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership for federal income tax purposes, each of which is
leased to the United States. As of the date of this offering
circular, based upon net operating income, the weighted average age
of our portfolio was approximately 8.99 years, and the weighted
average remaining lease term was approximately 9.27 years if none
of the early termination rights are exercised and 6.08 if all of
the early termination rights are exercised.
●
All of
our portfolio properties are leased to U.S. Government agencies
that serve mission-critical or citizen service
functions.
●
These
properties generally meet our investment criteria, which target GSA
Properties across secondary or smaller markets, within size ranges
of 5,000-50,000 rentable square feet, and in their first term after
construction or retrofitted to post-9/11 standards.
Aligned Management Team
●
Upon
completion of this offering, assuming we sell the maximum amount
pursuant to this offering, our senior management team will own
approximately 31.20% of our common stock on a fully diluted basis,
which will help to align their interests with those of our
stockholders. This amount does not include equity issuable to our
Manager in payment of acquisition fees, which will equal 1% of
acquisition costs for each property we acquire.
●
A
significant portion of our Manager’s fees will be accrued and
eventually paid in stock, which will be issued upon the earlier of
listing on a national exchange or March 31, 2020, which will also
align the interests of our Manager with those of our
stockholders.
Asset Management
●
Considerable
experience in developing, financing, owning, managing, and leasing
federal government-leased properties across the U.S. (transactions
involving approximately $3 billion of GSA Properties and other
government leased assets).
●
Relationships with
real estate owners, developers, brokers and lenders should allow
our company to source off-market or limited-competitive acquisition
opportunities at attractive cap rates.
●
In-depth knowledge
of the GSA procurement process, GSA requirements, and GSA
organizational dynamics. The GSA build-to-suit lease process is
detailed and requires significant process-specific expertise as
well as extensive knowledge of GSA building requirements and
leases.
●
Strong
network of professional and advisory relationships, including
BB&T Capital Markets, financial advisor to our
Manager.
Property Management
●
Significant
experience in property management and management of third party
property managers, focusing on the day-to-day management of the
owned properties, including cleaning, repairs, landscaping,
collecting rents, handling compliance with zoning and
regulations.
Credit Quality of Tenant
●
Leases
are full faith and credit obligations of the United States and, as
such, are not subject to the risk of annual
appropriations.
●
Historically high
lease retention rates for GSA Properties in first term (average of
93% for single-tenant properties, 95% for single-tenant,
built-to-suit properties).10
●
Based
on 2014 GSA statistics, since 2001 average duration of occupancy
for federal agencies in the same leased building is approximately
25 years. From 2001 through 2010, the GSA exercised the right to
terminate prior to the end of the full lease term at a rate of
1.73%, according to Colliers International research.11
●
Leases
typically include inflation-linked rent increases associated with
certain property operating costs, which the Company believes will
mitigate expense variability.
Fragmented Market for Assets Within Company Acquisition
Strategy
●
Our
Manager has observed that the market of owners and developers of
targeted assets appears highly fragmented with the majority of
ownership distributed among small regional owners and
developers.
●
Based
on our research, newly constructed, first-generation, GSA-leased
Properties currently trade at an average cap rate of 6.75% compared
to 4.5% - 5.5% for all investment grade-rated, single tenant,
triple net lease properties12 and less than 2.5% for 10-year U.S.
Treasury bonds.13
Large Inventory of Targeted Assets
●
Over
1,300 GSA Properties in our targeted size are spread throughout
U.S.14
●
Company strategy
of mitigating lease renewal risk by owning specialized, mission
critical and customer service functioned properties, portfolio
diversification by agency and location and through careful
acquisition of staggered lease expirations.
Our Strategy
We
believe there is a significant opportunity to acquire and build a
portfolio consisting of high-quality GSA Properties at attractive
risk-adjusted returns. We seek primarily to acquire “citizen
service” properties, or properties that are “mission
critical” to an agency function. Further, we primarily target
properties located within secondary or smaller markets, within size
ranges of 5,000-50,000 rentable square feet, and in their first
term after construction or retrofitted to post-9/11
standards.
We
target GSA Properties that are LEED® certified or energy star rated. Of
our portfolio of 13 properties, five properties are
LEED® certified and
another property is in the LEED® certification process.
We
believe this subset of GSA Properties is highly fragmented and
often overlooked by larger investors, which can provide
opportunities for us to buy at more attractive pricing to other
properties within the asset class. We also believe selection based
on agency function, building use and location in these smaller
markets will help to mitigate risk of non-renewal. While we intend
to focus on this subset of GSA Properties, we are not limited in
the properties in which we may invest. We have the flexibility to
expand our investment focus as market conditions may dictate and,
as determined in the sole discretion of our Manager, subject to
broad investment guidelines, or our Investment Guidelines, and
Investment Policies, as defined below, adopted by our board of
directors, as may be amended by the board of directors from time to
time.
Our
board has adopted certain investment policies, or our Investment
Policies: as more specifically described in “Policies with
Respect to Certain Activities - Investment Policies.” Our
Investment Policies provide our Manager with substantial discretion
with respect to the selection, acquisition and management of
specific investments, subject to the limitations in the Management
Agreement. Our Manager may revise the Investment Policies, which
are described herein, without the approval of our board of
directors or stockholders; provided, however, that our Manager may
not acquire properties falling outside our Investment Guidelines
without the approval of our board of directors. Our board may also
adjust our Investment Policies and will review them at least
annually to determine whether the policies are in the best
interests of our stockholders.
Growth Strategy
Value-Enhancing Asset Management
●
Our
Manager focuses on the efficient management of our properties and
on improvements to our properties that enhance their value for a
tenant agency and improve the likelihood of lease
renewal.
●
We
also seek to reduce operating costs at all of our properties, often
by implementing energy efficiency programs that help the U.S.
Government achieve its conservation and efficiency
goals.
●
Our
Manager’s asset management team also conducts frequent audits
of each of our properties in concert with the GSA and the tenant
agency so as to keep each facility in optimal condition, allowing
the tenant agency to better perform its stated mission and helping
to position us as a GSA partner of choice.
Rental Revenue Growth
●
We
intend to renew leases at our GSA-leased properties at higher
rental rates upon expiration.
●
Upon
lease renewal, GSA rental rates are typically reset based on a
number of factors, including inflation, the replacement cost of the
building at the time of renewal and enhancements to the property
since the date of the prior lease.
●
During
the term of a GSA lease, we work in close partnership with the GSA
to implement improvements at our properties to enhance the U.S.
Government tenant agency’s ability to perform its stated
mission, thereby increasing the importance of the building to the
tenant agency and the probability of an increase in rent upon lease
renewal.
Reduce Property-Level Operating Expenses
●
We
manage our properties to increase our income, through
property-level expense reduction.
●
We
manage our properties in a cost-efficient manner so as to eliminate
any excess spending and streamline our operating
costs.
●
When
we acquire a property, we review all property-level operating
expenditures to determine whether and how the property can be
managed more efficiently.
Industry and Market Data
General Services Administration
We
focus primarily on the acquisition and management of Class A
commercial properties that are leased to U.S. Government agencies
that serve essential functions. The GSA acts as the real estate
intermediary for a wide range of U.S. Government entities,
including the Drug Enforcement Administration, Federal Bureau of
Investigation, Immigration and Customs Enforcement, Internal
Revenue Service, Administrative Office of the Courts, Department of
Justice, Department of Homeland Security, Department of the
Treasury, Department of State and Central Intelligence
Agency.
The GSA
is divided into two principal divisions, the Federal Acquisition
Service, or FAS, and the Public Buildings Service, or PBS. The FAS
provides comprehensive solutions for products and services across
the U.S. Government. The PBS acquires and manages thousands of
federal properties and provides management, leasing, acquisition
and disposal services to suit the U.S. Government’s real
estate needs. The PBS provides more than 378 million square
feet of workspace for more than 1.1 million federal workers in
approximately 9,000 properties nationwide. Within the PBS
portfolio, properties are either under the full custody and control
of the GSA (i.e., U.S. Government-owned) or leased from the private
sector and include assets such as office buildings, courthouses,
land ports of entry, warehouses, laboratories and parking
structures.
GSA Leasing Dynamics
Over
the 46-year period from 1968 to 2014, the GSA’s total
portfolio of leased space grew at an average annual rate of 3.1%.
From 1998 to 2014, the GSA’s leased inventory experienced
substantially faster growth than the GSA-owned inventory, growing
by 29.1% in the aggregate as compared to 1.3% decline in the
aggregate for GSA-owned inventory over the same period. The
GSA’s leased inventory now comprises over 50% of the
GSA’s total inventory in terms of rentable square feet. The
overall growth of the GSA’s leased inventory can be seen in
the chart below:
GSA Portfolio
Source:
GSA
A
leasing model allows the GSA the flexibility to accommodate each
federal agency’s needs by accounting for both the scope and
urgency of its respective space requirements. Although the GSA
typically utilizes a uniform lease agreement, the build-out and
building security requirements for each tenant vary according to
that agency’s specific mission and hierarchy of the property
within the agency. See “Description of Our Properties–
General Provisions in Federal Government Leases.” In many
cases, existing U.S. Government-owned properties cannot accommodate
tenant needs, and the upfront cost and complexity of constructing a
new U.S. Government-owned building can be prohibitive. The average
age of the U.S. Government-owned properties is 48 years. As a
result, the GSA’s reliance on privately owned office space
has escalated. We believe this is due in part to the fact that the
full cost of each construction project must be recognized in a
single fiscal year budget, whereas a newly leased building only
requires recognition of annual payments in the applicable
agency’s annual budget. Thus, given recent federal budget
constraints, we believe it is likely that the U.S. Government will
continue to grow its leased portfolio of assets, strengthening its
reliance on leasing over ownership.
Attributes of the GSA-Leased Asset Class
The
GSA-leased asset class possesses several positive
attributes:
●
U.S. Government Tenant Credit: Leases
are backed by the full faith and credit of the U.S. Government, and
the GSA has never experienced a financial default. Even during the
U.S. Government “shutdown” of 2013, the GSA continued
to pay its rent to private landlords through the Federal Buildings
Fund that is not subject to direct appropriations. As such, we
believe that there is limited risk of tenant default.
●
Limited Renewal Risk: The historical
renewal rate for GSA-leased properties has been approximately 77%
and, properties within our target market between 5,000 –
50,000 square feet that are 100% leased to the U.S. Government have
historical renewal rates in the range of 93% to 95%. Our strategy
seeks to increase the likelihood of renewal by acquiring or
constructing projects based on the following:
o
Having specialized
knowledge and insight into the mission and hierarchy of a tenant
agency or property prior to purchasing the asset.
o
Focusing on the
market segment that we believe is most likely to renew: buildings
of Class A construction that are less than 20 years old or
have been retrofitted to post 9/11 standards, are 100% leased to a
single U.S. Government tenant, including through the GSA, are in
their first lease term post-construction or retrofit and include
build-to-suit features and are focused on environmental
sustainability.
●
Long-Term Lease Structures: A typical
initial GSA lease has a term of ten to 20 years, limiting
operational risk. A renewal lease typically has a term of five to
ten years.
●
Strong Rent Growth Upon Renewal: When a
GSA lease expires, the new base rent is typically reset based on a
number of factors, including inflation, the replacement cost of the
building at the time of renewal, which we generally expect will
increase over the life of the lease, and enhancements to the
property since the date of the prior lease. Between 2005 and 2015,
the average rental increase for GSA leases within our target market
was approximately 29% upon renewal based on a study completed by
Colliers International in March 2016.
●
Low Market Correlation: We believe that
the GSA-leased real estate asset class is less correlated to macro
cycles than traditional commercial real estate. The U.S. Government
remains the largest employer in the world, the largest office
tenant in the United States and the primary catalyst of the U.S.
economy. Finally, given our expectation for continuing budgetary
constraints, the U.S. Government’s increased reliance on
leasing over ownership is expected to continue.
●
Fragmented Market: The largest
owner of GSA-leased assets owns approximately 3.6% of the
GSA-leased market by RSF based on Colliers International Top GSA
Property Owners (2015 Edition). The ten largest owners of
GSA-leased assets collectively own approximately 17% of the
GSA-leased market by RSF. Additionally, there is no national broker
or clearinghouse for GSA-leased properties. We believe that all of
these factors work in concert to create a fragmented market that
requires owners and developers to have specialized knowledge and
expertise to navigate the landscape.
All of
these market dynamics combine to yield a strong climate for
investment opportunities and to drive stable cash flows within the
GSA-leased property market
DESCRIPTION OF OUR PROPERTIES
Our Portfolio and Pipeline
We
currently own, through wholly-owned subsidiaries of our operating
partnership, a portfolio of 13 GSA Properties, including three GSA
Properties for which we own all of the rights to the profits, losses, any distributed
cash flow and all of the other benefits and burdens of ownership
for federal income tax purposes rather than a fee simple
interest. We refer to these 13 properties as our portfolio.
The Company has entered into a
separate purchase and sale agreement to acquire an additional
property, which is expected to close in February 2018. We refer to
this property as our pipeline. The following table presents
an overview of our portfolio.
Our Portfolio and
Pipeline
|
Current
Occupant
|
|
|
|
Early Termination
and Expiration Date2
|
|
Effective Annual
Rent per Leased Square Foot
|
Effective Annual
Rent % of Portfolio
|
|
|
|
|
|
|
|
|
|
“Port Saint Lucie
Property”
650 NW Peacock Boulevard, Port Saint
Lucie, Florida 34986
|
U.S.
Drug Enforcement Administration, or DEA
|
24,858
|
8.34%
|
100%
|
5/31/2022
5/31/2027
|
$566,514
|
$22.79
|
6.68%
|
“Jonesboro
Property”
1809 LaTourette Drive, Jonesboro,
Arkansas 72404
|
U.S. Social Security Administration,
or SSA
|
16,439
|
5.52%
|
100%
|
1/11/2022
1/11/2027
|
$618,734
|
$37.64
|
7.29%
|
“Lorain
Property”
221 West 5th Street, Lorain, Ohio
44052
|
SSA
|
11,607
|
3.90%
|
100%
|
3/31/2021
3/31/2024
|
$440,763
|
$37.97
|
5.19%
|
“Port Canaveral
Property”
200 George King Boulevard, Cape
Canaveral, Florida 32920
|
U.S. Customs and Border Protection,
or CBP
|
14,704
|
4.94%
|
100%
|
7/15/2022
7/15/2027
|
$649,476
|
$44.18
|
7.65%
|
“Johnson City
Property”
2620 Knob Creek Road, Johnson City,
Tennessee 37604
|
U.S. Federal Bureau of
Investigation, or FBI
|
10,115
|
3.40%
|
100%
|
8/20/2022
8/20/2027
|
$393,454
|
$38.90
|
4.64%
|
“Fort Smith
Property”4624 Kelley Highway, Ft. Smith, Arkansas
72904
|
U.S. Citizenship and Immigration
Services, or CIS
|
13,816
|
4.64%
|
100%
|
No Early
Termination
10/30/2029
|
$423,184
|
$30.63
|
4.99%
|
“Silt Property”2300
River Frontage Road, Silt, Colorado 81652
|
U.S. Bureau of Land Management, or
BLM
|
18,813
|
6.31%
|
100%
|
9/30/2024
9/30/2029
|
$386,605
|
$20.55
|
4.56%
|
“Lakewood Property”12305
West Dakota Avenue, Lakewood, Colorado 80228
|
US Department of Transportation, or
DOT
|
19,241
|
6.46%
|
100%
|
No Early
Termination
6/20/2024
|
$461,996
|
$24.01
|
5.44%
|
“Moore
Property”
200 NE 27th Street, Moore, OK
73160
|
SSA
|
17,058
|
5.73%
|
100%
|
4/9/2022
4/9/2027
|
$526,517
|
$34.09
|
6.20%
|
“Lawton Property”1610 SW
Lee Boulevard, Lawton, OK 73501
|
SSA
|
9,298
|
3.12%
|
100%
|
8/17/2020
8/16/2025
|
$282,285
|
$30.36
|
3.33%
|
“Norfolk
Property”
5850 Lake Herbert Drive, Norfolk, VA
23502
|
SSA
|
53,917
|
18.10%
|
100%
|
No Early
Termination
6/26/2027
|
$1,297,153
|
$24.06
|
15.29%
|
“Montgomery
Property”
3391 Atlanta Highway, Montgomery, AL
36109
|
CIS
|
21,116
|
7.09%
|
75.90%
|
12/8/2026
12/8/2031
|
$446,793
|
$27.86
|
5.27%
|
“San Antonio
Property”
1015 Jackson Keller
Road,
San Antonio, TX
78213
|
U.S.
Immigration and Customs Enforcement, or
ICE
|
38,756
|
13.01%
|
100%
|
|
$1,085,323
|
$28.00
|
23.48%
|
Total - Our
Portfolio
|
|
269,738
|
90.53%
|
98.11%
|
|
$7,578,870
|
$28.81
|
$89.31%
|
Our Pipeline
|
|
|
|
|
|
|
|
|
|
“Sarasota
Property”
7525 Commerce
Court,
Sarasota, FL
34243
|
|
United States Department of
Agriculture, or USDA
|
28,210
|
9.47%
|
100%
|
1/31/2028 1/31/2038
|
$906,952
|
$32.15
|
10.69%
|
Total - Our
Pipeline
|
|
|
28,210
|
9.47%
|
100%
|
|
$906,952
|
$32.15
|
10.69%
|
Total - Our
Portfolio and Pipeline
|
|
|
297,948
|
100%
|
98.29%
|
|
$8,485,822
|
$ 29.14
|
100%
|
2 The early termination date for each lease
represents the effective date, if any, upon which our tenant may
exercise a one-time right to terminate the applicable lease. If our
tenant exercises its early termination rights with respect to any
lease, we cannot guarantee that we will be able to re-lease the
premises on comparable terms, if at all. The lease expiration date
is the date the applicable lease will terminate if the early
termination is not exercise or if no early termination right
exists. As of December 6, 2017, the weighted average remaining
lease term of our portfolio is 10.67 years if none of the early
termination rights are exercised and 6.63 years if all of the early
termination rights are exercised.
Our Portfolio
Through
our operating partnership, we acquired the Lakewood Property, Moore
Property and Lawton Property, on June 10, 2016. The
total contract purchase price for these properties was $10,226,786,
comprised of: (a) $1,925,000 in cash pursuant to a deposit made to
the seller on April 1, 2016; (b) the defeasance of the
seller’s senior secured debt on the properties at closing;
and (c) issuance of a note to the seller in an amount equal to
$2,019,789, or the Standridge Note. On December 8,
2017, the Standridge Note was amended. As a result of the
amendment, the Standridge Note will mature on the earlier of
January 5, 2018, the date on which we complete a public securities
offering (including this offering), or the date on which the
Lakewood Property, Moore Property and Lawton Property are conveyed
or refinanced by us. In conjunction with the amendment, we, through
our operating partnership, made a prepayment on the Standridge Note
in the amount of $1,502,091.82, or the Prepayment Amount. On
January 5, 2018, we expect the Standridge Note to have a principal
balance of $445,101. The Standridge Note bears interest at 7.0% and
is pre-payable at any time prior to the maturity date without
penalty. The Standridge Note is unsecured but is guaranteed by
Messrs. Kaplan, Kaplan, Jr., Kurlander and Stanton, and Baker Hill
Holding LLC. The Prepayment Amount was financed in large part by
four promissory notes payable to an affiliate
and three
additional parties in the aggregate amount of
$1,500,000, or the Promissory Notes. The Promissory Notes carry an
interest rate of 8.0%, mature on June 11, 2018 and may be prepaid
at any time without penalty. We intend to pay off the Standridge
Note and the Promissory Notes incurred in connection with financing
the Prepayment Amount with proceeds from this offering. See
“Interest of Management and Others in Certain
Transactions” for more information.
In
addition to the Standridge Note, we acquired the Lakewood Property,
Moore Property and Lawton Property using proceeds from our Series A
Preferred Stock offering, secured financing in the aggregate amount
of $7,225,000 from CorAmerica, and the $1,000,000 Holmwood
Loan.
On
March 31, 2017, our operating partnership acquired the Norfolk
Property. The purchase price for the building was $14,500,000,
excluding acquisition costs. The acquisition was financed by first
mortgage debt of $10,875,000 and the proceeds from unsecured loans
to our operating partnership from two principals of our predecessor
and a third-party aggregating $3,400,000. The Company incurred an
acquisition fee of $145,000 payable to the Manager in connection
with the acquisition of the Norfolk Property.
In connection with our purchase of the Norfolk
Property, we were issued interim loans from Baker Hill Holding LLC,
which is controlled by Philip Kurlander, and Robert R. Kaplan, both
affiliates of our company, and Fiduciary and Recovery Services,
Inc., an unaffiliated, third party. The loans from Baker Hill
Holding LLC, Robert R. Kaplan and Fiduciary and Recovery Services,
Inc. were in the amounts of $2,770,000, $300,000 and $330,000,
respectively, or $3,400,000 in the aggregate. The loans will mature
on the March 27, 2018. The
loans are pre-payable prior to the maturity date at any time
without penalty and bears annual interest at the rate 12.0%. The
loans are unsecured. We intend to pay off the loans with proceeds
from this offering. On November 7, 2017, the loans had an aggregate
principal balance of $3,400,000.
We
acquired, through the contribution to us by Holmwood, (i) all of
the membership interests in the four single-member limited
liability companies that own the Silt Property, Fort Smith
Property, Johnson City Property and Port Canaveral Property, or the
LLC Interests, and (ii) all of the rights the profits, losses, any distributed cash flow and
all of the other benefits and burdens of ownership for federal
income taxes of the three single member limited liability
companies that own the Port Saint Lucie Property, Jonesboro
Property and Lorain Property, or the Affected Properties, and
together with the other properties contributed by Holmwood, the
Contribution Properties. A condition of the closing of the
transactions contemplated by the Contribution Agreement was the
receipt of the consent to the transfer of the LLC Interests from
each of the lenders secured by the Contribution Properties. As of
May 26, 2017, the date of the contribution, we had received the
consent of the lenders secured by the properties underlying
the LLC Interests; however, we had not yet received the consent
from LNR Partners, LLC, or LNR, special servicer on the loan
secured by the Affected Properties.
Our
management determined it to be in our best interests to use an
alternate method in the interim that is intended to allow our
company to enjoy the financial benefits of the Affected Properties
intended by the Contribution Agreement, while remaining in
compliance with the Starwood Loan (as defined in “Description
of Our Properties – Description of Indebtedness”)
covenants. On May 26, 2017, our Operating Partnership and
Holmwood entered into the Second Amendment to revise certain terms
of the Contribution Agreement. Pursuant to the Second Amendment, at
the closing of the Contribution, Holmwood retained the limited
liability company interests owning the Affected Properties as its
sole and exclusive property; however, Holmwood assigned all of its
right, title and interest in and to any and all profits, losses and
distributed cash flows, if any, from each wholly-owned subsidiary
owning the Affected Properties, as well as all of the other
benefits and burdens of ownership solely for federal income tax
purposes, or the Profits Interests, to our Operating Partnership.
Upon (i) the receipt of consent to the contribution from LNR, (ii)
the sale of the Affected Properties, subject to certain consents,
or (iii) the payment of defeasance of all loans, secured by
existing mortgage liens on the Affected Properties, the LLC
Interests associated with such Affected Properties shall be deemed
to have been contributed and transferred to our operating
partnership on such date.
In
exchange for the Contribution Properties, our operating partnership
(i) issued 1,078,416 OP Units to Holmwood equal to the agreed value
of Holmwood’s equity in the Contribution Properties as of the
closing of the contribution, divided by $10.00; and (ii) assumed
all of the indebtedness secured by the Contribution Properties and
assumed Holmwood’s corporate credit line. The purchase
price for these properties was determined by our Manager and
Holmwood. By agreement, the value of the Silt Property
was agreed to be Holmwood’s purchase price, and the values of
the remaining Contribution Properties were determined by using
prevailing market capitalization rates, as determined by our
Manager, and the 2016 pro forma net operating income of each
remaining Contribution Property.
Our
Contribution Agreement required us to enter into an agreement as of
the closing of the contribution granting Holmwood registration and
qualification rights covering the resale of the shares of common
stock into which its OP Units will be convertible, subject to
conditions set forth in our operating partner’s limited
partnership agreement. In addition, as of the closing of the
contribution, we entered into a tax protection agreement with
Holmwood under which we will agreed to (i) indemnify Holmwood for any taxes
incurred as a result of a taxable sale of the Contribution
Properties for a period of ten years after the closing; and
(ii) indemnify Holmwood if a reduction in our nonrecourse
liabilities secured by the Contribution Properties results in an
incurrence of taxes, provided that we may offer Holmwood the
opportunity to guaranty a portion of our operating
partnership’s other nonrecourse indebtedness in order to
avoid the incurrence of tax on Holmwood.
On
July 25, 2017, the Company acquired the Montgomery Property for a
purchase price of $4,709,458 excluding acquisition costs. The
acquisition was financed by senior debt financing and equity. The
Company incurred an acquisition fee of $47,095 payable to the
Manager in connection with the acquisition of the Montgomery
Property.
In
November 2017, the Company acquired the San Antonio Property for a
purchase price of $8,225,000 excluding acquisition costs. The
acquisition was financed by senior debt financing and equity. The
Company incurred an acquisition fee of $82,250 payable to the
Manager in connection with the acquisition of the San Antonio
Property.
Our Pipeline
The
Company has entered into a purchase and sale agreement to acquire a
property leased to the United States of America and occupied by
United States Department of Agriculture. The contract purchase
price is $11,000,000 and is expected to close in February 2018. The
acquisition is intended to be financed by senior debt financing and
equity from the proceeds of this offering.
Port Saint Lucie Property
The
Drug Enforcement Administration, or DEA, is currently occupying
100% of this 24,858 square foot building at 650 NW Peacock
Boulevard, Port Saint Lucie, FL 34986, or the Port Saint Lucie
Property. The Port Saint Lucie Property’s proximity to
Interstate 95, with a 67-space asphalt-paved parking lot, allows
for quick entry and exit for field operations, particularly suited
to DEA activities. The building is a two-story, tilt-up concrete
structure constructed on 3.5382 acres. The building’s steel
frame is set in a concrete foundation. The exterior is painted
concrete, housed under a flat roof, which is a modified bitumen,
built-up roofing system. The Port Saint Lucie Property
is considered to be in fair to good overall condition.
The
building was constructed in 2002 and acquired by Holmwood in
January 2013. The Port Saint Lucie Property is leased to the United
States, 100% occupied by the DEA as a regional field office and is
administered for the tenant by the GSA. The Port Saint Lucie
Property lease commenced in June 2012 with an expiration date of
May 31, 2027, with the tenant having the right to terminate after
May 31, 2022 (15-year lease; 10-year firm).
The
annual rent for the Port Saint Lucie Property is
$566,514. The Port Saint Lucie Property is encumbered by
a $10,700,000 loan from Starwood Mortgage Capital, LLC, or
Starwood, which is cross-collateralized with the Jonesboro and
Lorain Properties. See “- Description of
Indebtedness – Starwood Loan.”
Jonesboro Property
The
Social Security Administration, or SSA, is currently occupying 100%
of this 16,439 square foot building at 1809 LaTourette Drive,
Jonesboro, Arkansas 72404, or the Jonesboro Property. The building
is a LEED, Silver, single-story, steel-framed structure constructed
on 3.36 acres. The Jonesboro Property’s 94-space parking lot
provides customers and stakeholders easy access to the facility.
Concrete sidewalks are located around the building’s
perimeters and at its entrances. The building is landscaped along
its perimeter. The building’s steel frame is set in a
concrete foundation. The exterior is enveloped in a brick veneer,
with CMU wainscot. The doors are double-glazed aluminum framed, and
the windows are fixed. The building has a pitched, standing seam
metal roof. The Jonesboro Property is located approximately 130
miles from Little Rock, Arkansas. The Jonesboro Property is
considered to be in excellent condition. The Property was
originally constructed in 2011 and acquired by Holmwood in May
2012.
The
lease began on January 12, 2012 and has an expiration date of
January 11, 2027, with the tenant having the right to terminate
after January 11, 2022 (15-year lease, 10 years firm). The building
is 100% occupied by the SSA and administered by the GSA. The annual
rent for the Jonesboro Property is $618,734. The
Jonesboro Property is encumbered by a $10,700,000 loan from
Starwood Mortgage Capital, LLC, or Starwood, which is
cross-collateralized with the Port Saint Lucie and Lorain
Properties. See “- Description of Indebtedness
– Starwood Loan.”
Lorain Property
The SSA
is currently occupying 100% of this 11,607 rentable square foot
building, with a 45-space parking lot, located at 221 West
5th Street, Lorain, Ohio
44052, or the Lorain Property. The building is a single-story, of
steel-framed construction on 0.688 acres. Concrete sidewalks and
landscaping encircle the building’s perimeter. The interior
consists of painted drywall in certain of the public rooms and
tenant areas, and vinyl wall coverings in the remainder of the
public rooms. The flooring is primarily carpeting with tile in the
bathrooms and vestibules. The doors are stained solid wood and
metal frames. The building’s steel frame is set in a concrete
foundation. The structure is enveloped in a brick veneer, with
stone cast accents. The doors are double-glazed aluminum framed
doors and the windows are fixed in place. This one-story,
steel-framed, LEED-Silver building sits on 0.688 acres of land. The
flat roof is fully-adhered, single ply TPO membrane flashed under
pre-finished metal coping. It was constructed in 2011 and acquired
by Holmwood in September 2011.
The SSA
lease commenced on April 1, 2011 and has an expiration date of
March 31, 2024, with the tenant having the right to terminate after
March 31, 2021 (13-year lease; 10-years firm). The Lorain Property
is convenient to public transportation and is located in the
Cleveland-Elyria-Mentor Metropolitan Statistical Area,
approximately 30 miles from the Cleveland central business
district. The Lorain Property is considered to be in excellent
condition. The annual rent for the Lorain Property is
$440,763. The Lorain Property is encumbered by a
$10,700,000 loan from Starwood Mortgage Capital, LLC, or Starwood,
which is cross-collateralized with the Jonesboro Property and Port
Saint Lucie Property. See “- Description of
Indebtedness – Starwood Loan.”
Port Canaveral Property
U.S
Customs and Border Protection, or CBP, is currently occupying 100%
of this 14,704 square foot building with a 95-space parking lot,
located at 200 George King Boulevard, Cape Canaveral, Florida
32920, or the Port Canaveral Property. The building is a
single-story, steel-framed structure on 1.59 acres, which is ground
leased from The Canaveral Port Authority until December 7, 2045;
however, Holmwood has an option to extend the ground lease for
another 10 years, until December 7, 2055. There are lawns, floral
plantings, trees and shrubs along the perimeter of the building.
The interior public areas consist of the front lobby and either
solid wood or painted metal doors. The building’s steel frame
is set in concrete footings. The building is enveloped in a
pre-finished, stay-in- place, concrete wall forming system, with
rigid polymer forms that create durable pre-finished exterior
walls. The pitched roof is constructed of metal
paneling.
The
Port Canaveral Property is encumbered by the $7,600,000 loan from
Park Sterling Bank, or Park Sterling, which is cross-collateralized
with the Johnson City Property. The CBP lease commenced on July 16,
2012 and has an expiration date of July 15, 2027, with the tenant
having the right to terminate after July 15, 2022 (15-year lease;
10 years firm). The Port Canaveral Property is considered to be in
good overall condition. The annual rent for the Port Canaveral
Property is $649,476.
An
environmental site assessment performed on the Port Canaveral
Property revealed chlorinated solvent contamination in the soil,
groundwater, and in the surrounding area, including the subject
property, in 1995, which is related to a former sump. The
responsible party was identified as the Canaveral Port Authority.
Several site assessments, groundwater monitoring events, remedial
action plans and risk assessments have been performed at the site
since the contamination was first identified. For more information
on this, see “Risk Factors.” The Port
Canaveral Property is encumbered by a $7,600,000 loan from Park
Sterling, which is cross-collateralized with the Johnson City
Property. We assumed the Park Sterling Loan at the
closing of the contribution transactions. See “-
Description of Indebtedness – Park Sterling
Loan.”
Johnson City Property
The
Federal Bureau of Investigation, or FBI, is currently occupying
100% of this 10,115 square foot building, located at 2620 Knob
Creek Road, Johnson City, Tennessee 37604, or the Johnson City
Property. The building is a single-story, steel-framed building on
2.59 acres, with a 51-space asphalt-paved parking lot. The building
flatwork and pedestrian walkways consist of poured-in-place
concrete. Landscaped areas are located along the perimeters of the
building. The public common area has a front lobby. The structure
is steel framed with CONFORM, stay-in-place concrete walls, on a
concrete footing foundation. The building is enveloped in painted
concrete masonry. The building was originally constructed in 2012,
and the Johnson City Property was acquired by Holmwood on March 26,
2015 for a total cost of $4,210,660. The Property is considered to
be in good overall condition.
The
Johnson City Property is used by the FBI as a regional field
office. The Johnson City Property lease commenced on August 21,
2012, has an expiration date of August 20, 2027, with the tenant
having the right to terminate after August 20, 2022 (15-year lease,
10 years firm). The annual rent for the Johnson City Property is
$393,454. The Johnson City Property is encumbered by a
$7,600,000 loan from Park Sterling, which is cross-collateralized
with the Port Canaveral Property. We assumed the Park
Sterling Loan at the closing of the contribution
transactions. See “- Description of Indebtedness
– Park Sterling Loan.”
Fort Smith Property
The
U.S. Citizenship and Immigration Services, or CIS, is the occupant
of this 13,848 square foot building, with 51 parking spaces,
located at 4624 Kelley Highway, Ft. Smith, Arkansas 72904, or the
Fort Smith Property. This single-story structure is steel-framed,
on 1.62 acres. Holmwood acquired the Fort Smith Property in
December 2014. Building entrance flatwork and pedestrian walkways
consist of poured concrete. Lawns, trees and shrubs are provided
along the perimeter of the building. The interior walls are painted
gypsum board. The interior doors are typically stained, solid-core
wood set in painted metal frames. The building is steel-framed and
enveloped in CMU masonry walls, set on a concrete slab-on-grade
foundation. The façade is painted cement stucco. The original
building was constructed in 1979, with an addition and renovation
in 2014. Holmwood acquired the Fort Smith Property on December 30,
2014 for a total cost of $4,364,361. The Fort Smith Property is
considered to be in good overall condition.
The
lease with CIS began on October 31, 2014 and has an expiration date
of October 30, 2029 (15-year). The annual rent for the Fort Smith
Property is $423,184. The Fort Smith Property is
encumbered by a $2,450,000 loan from CorAmerica Loan Company, LLC,
or CorAmerica, and is cross-collateralized with the Lakewood
Property, the Lawton Property and the Moore Property. We
assumed the CorAmerica Loan related to the Fort Smith Property at
the closing of the contribution transactions. See
“- Description of Indebtedness – CorAmerica
Loans.”
Silt Property
The
United States Department of Interior, Bureau of Land Management, or
BLM, Colorado River Valley Field Office is located at 2300 River
Frontage Road in Silt, Colorado. The single-story facility was
constructed in 2009 and contains 18,813 square feet, of which
13,884 square feet is office space, 3,920 square feet are
warehouse, and 1,009 square feet are common area. The structure is
composed of concrete masonry unit load bearing walls, with
structural steel interiors and wood-framing at the roofs. The roof
is a flat, single-ply thermoplastic membrane roofing, and pitched
roof with asphalt shingles. The façade is painted cement
stucco and cultured stone veneer. The facility situated on a
3.508-acre lot. The Silt Property also includes 126 parking spaces
and is the field office for BLM’s management of approximately
566,000 acres of BLM-administered public lands. Holmwood acquired
the Silt Property on December 9, 2015 for a total cost of
$3,770,183. The Silt Property is considered to be in fair to good
overall condition.
The
lease for the Silt Property, the term of which commenced October 1,
2009, and expires on September 30, 2029, can be terminated any time
after September 30, 2024 (20-year lease, 15 years firm). Tenant is
responsible for utilities, taxes and operating costs over a base
cost per sq. ft. of $2.14. The annual rent for the Silt Property is
$386,605. The Silt property is encumbered by a
$2,750,000 loan from Coastal Federal Credit Union, or Coastal Bank,
which we incurred in connection with the refinance of the Silt
Property in September 2017. See “- Description of
Indebtedness – Silt Coastal Bank Loan.”
Lakewood Property
The
United States Department of Transportation occupies 100% of this
19,241 square foot property (two buildings totaling 21,022 gross
square feet; 19,709 sq. ft. office/warehouse building and a 1,313
sq. ft. storage building) at 12305 West Dakota Avenue, Lakewood,
Colorado 80228, or the Lakewood Property. The primary structure is
a single-story, steel-framed structure with loft areas and includes
a storage building, all located on 3.836 acres. The Lakewood
Property’s 38-space concrete parking lot has the capacity for
10 truck/trailers. Building entrance flatwork and pedestrian
walkways consist of cast-in-place concrete construction. Lawns,
floral plantings, trees and shrubs adorn the perimeter of the
building and parcel. The office/warehouse building is constructed
with an entryway, warehouse, service bay, shop, bathrooms, shower
rooms and corridors. An office area is located within the
southern-most portion of the building. Walls typically are gypsum
board or exposed and painted structural elements. Interior doors
include conventional, stained solid-core wood doors set in steel
frames. The building’s steel frame and concrete masonry unit
superstructure is set in a concrete slab-on-grade foundation,
enveloped in a brick exterior, and the roof is a pitched,
standing-seam metal roofing system. The building was originally
constructed in 2004. The property is considered to be in good
condition.
The DOT
lease commenced on June 21, 2004, for a 20-year firm term that
expires June 20, 2024 (20-year lease). The annual rent for the
Lakewood Property is $461,996. The Lakewood Property is
encumbered by a $2,400,000 loan from CorAmerica and is
cross-collateralized with the Lawton Property, the Moore Property
and the Fort Smith Property. See “- Description of
Indebtedness – CorAmerica Loans.”
Lawton Property
SSA
occupies 100% of the 9,298 square foot building at 1610 SW Lee
Boulevard, Lawton, OK 73501, or the Lawton Property. Lawton is
approximately 87 miles from Oklahoma City. The building is a
steel-framed single-story structure on 1.2856 acres and includes a
48-space concrete-paved parking lot on-site. Building entrance
flatwork and pedestrian walkways consist of poured-in-place
concrete construction. The perimeter of the building is landscaped
with lawns, floral plantings, trees and shrubs. The
building’s public lobby includes waiting areas for the
public, a security desk and small desk areas mounted below service
windows. The lobby includes men’s and women’s
restrooms. The interior finishes of the lobby include ceramic tile
flooring, suspended ceilings with acoustical 2x4 lay-in tiles in
the lobby and gypsum wall board in the restrooms and vinyl wall
coverings. The building is steel–framed and enveloped in both
a brick masonry veneer and metal siding, on top of a concrete
slab-on-grade foundation. The building was originally constructed
in 2000. The Lawton Property is considered to be in good
condition.
The
lease for the Lawton Property was amended on May 1, 2014, to
provide for another 10-year term, with five years being firm, on
May 1, 2014, with the new term commencing upon completion and
acceptance of certain improvements previously requested by SSA at
the property, including reconfiguration to allow for SSA’s
Office of Disability Adjudication and Review, or ODAR, to use the
property for hearings and staff. The new lease term commenced as of
August 17, 2015, with the lease expiring on August 16, 2025
(10-year lease, 5 years firm). The annual rent for the Lawton
Property is $282,285.
The
Lawton Property is encumbered by a $1,485,000 loan from CorAmerica
and is cross-collateralized with the Lakewood Property, the Moore
Property and the Fort Smith Property. See “-
Description of Indebtedness – CorAmerica
Loans.”
Moore Property
SSA
occupies 100% of the 17,058 square foot building at 200 NE
27th Street, Moore, OK 73160
or the Moore Property. The building is steel-framed, single-story
construction on 2.19 acres. The Moore Property is approximately 10
miles from downtown Oklahoma City, and has a 94-space both asphalt
and concrete paved portions of its parking lot. The building
entrance flatwork and pedestrian walkways consist of
poured-in-place concrete. Lawns, floral plantings, trees and shrubs
adorn the perimeter of the building and parcel. The
building’s public areas include a large public lobby that
includes waiting areas, a security desk and small desk areas below
service windows. Men’s and women’s restrooms service
the lobby. The building’s steel frame is set in a concrete
slab-on-grade foundation, and wrapped in a brick masonry veneer,
concrete tilt-up panels, and painted sheet metal. The Moore
Property was originally built in 1999, with an addition in 2012.
The flat roof is constructed of modified bitumen, built-up roofing
system. The Moore Property is considered to be in good overall
condition.
The
lease began on April 10, 2012, with an expiration date of April 9,
2027, with the tenant having the right to terminate on April 9,
2022 (15-year lease, 10 years firm). The annual rent for the Moore
Property is $526,517. The Moore Property is encumbered
by a $3,300,000 loan from CorAmerica and is cross-collateralized
with the Lawton Property, the Lakewood Property and the Fort Smith
Property. See “- Description of Indebtedness
– CorAmerica Loans.”
Norfolk Property
SSA
occupies 100% of the 53,917 square foot building at 5850 Lake
Herbert Drive, Norfolk, VA 23502 or the Norfolk
Property.
The
building is a steel-framed, three-story construction on 4.53 acres.
The Norfolk Property is approximately 6.5 miles from downtown
Norfolk, and has 236 asphalt spaces which includes eight ADA
designated spaces, two are van-designated spaces. The building is
serviced by two elevators, one freight and one passenger. The
building is situated on a flat lot, and entrance flatwork and
pedestrian walkways consist of poured-in-place concrete. Landscaped
areas consist of grass-covered lawns, floral plantings, trees and
shrubs are provided in areas not occupied by the building, walkways
or pavement. An underground automatic irrigation system is on site.
The building’s public areas include waiting areas for the
public, a security desk and small desk areas mounted below service
windows. The public area also includes two, unisex restrooms.
Interior finishes include ceramic tile flooring, suspended ceilings
with acoustical tiles in the lobby and painted gysum board and
vinyl wallcovering in the restrooms. The building’s steel
frame is set in a concrete slab-on-grade foundation, with perimeter
and interior footings under load bearing structures. The building
facade is pre-cast, concrete panels with brick masonry. The Norfolk
Property was originally built in 2007. The flat roof consists of
mechanically-fastened, single-ply membrane roofing systems. The
Norfolk Property is considered to be in good overall
condition.
GSA
renewed its original 10-year lease term for another 10 years that
began on June 27, 2017, with an expiration date of June 26, 2027.
The annual rent for the Norfolk Property is $1,297,153.
Construction plans are currently underway to provide $1,315,366 of
tenant improvements. The tenant will repay the cost of the work
(estimated to be $131,536 annually). The Norfolk Property is
encumbered by a loan from Coastal Bank in the original principal
amount of $10,875,000. See “- Description of
Indebtedness – Norfolk Coastal Bank
Loan.”
Montgomery Property
CIS
occupies 16,036 square feet (or 75.9%) of the 21,116 square foot
building at 3391 Atlanta Highway, Montgomery, AL 36109, or the
Montgomery Property. The tenant has indicated it expects to
lease-up the remaining square footage in the near future. The
building is a steel-framed, single-story construction on 2.5 acres.
The Montgomery Property is approximately 3.1 miles from downtown
Montgomery, AL, and has 92 asphalt spaces and includes six ADA
accessible spaces. The building entrance flatwork and pedestrian
walkways consist of cast-in-place concrete construction. Landscaped
areas consist of grass-covered lawn and shrubs are provided in
areas not occupied by the building, walkways or pavement. An
underground automatic irrigation system is on site. The
building’s public areas include a waiting area for the
public, a security desk and provides small desk areas mounted below
service windows. The public area also includes two, unisex
restrooms. The building’s steel frame is set in a concrete,
slab-on-grade foundation with perimeter and interior footings and
wrapped in a painted brick veneer. The Montgomery Property was
originally built in 1999. The flat roof is constructed of a metal
deck supported by the steel columns and consists of a
mechanically-fastened, single-ply, thermoplastic membrane. The
Montgomery Property is considered to be in good overall
condition.
The
lease began on December 9, 2016, with an expiration date of
December 8, 2031 with an option to terminate on December 8, 2026
(15-year lease, 10 years firm). The annual rent for the Montgomery
Property is $446,793. The Montgomery Property is
encumbered by a loan from Coastal Bank in the original principal
amount of $3,530,000. See “- Description of
Indebtedness – Montgomery Coastal Bank
Loan.”
San Antonio Property
ICE
occupies 100% of the 38,756 square foot building at 1015 Jackson
Keller Road, San Antonio, TX 78213 or the San Antonio Property. The
building is a steel-framed, two-story construction on 1.98 acres.
The building has a two-stop passenger elevator that was installed
in 2010.
The San
Antonio Property is approximately 7.6 miles from downtown San
Antonio, TX, and has 166 asphalt spaces on site and includes six
designated ADA accessible spaces, of which two are van-designated.
In addition, there are 40 leased spaces at adjacent sites. The
building entrance flatwork and pedestrian walkways consist of
cast-in-place, concrete construction and surface aggregate
construction. Landscaped
areas consists of typical xeriscaping-type landscaping; trees and
shrubs in beds with gravel surfaces are provided in areas not
occupied by building, walkways or pavement. An underground
automatic irrigation system is on site. The building is a secure,
single-tenant facility. Though the building is secured and not
public, the processing area and interview rooms are publicly
accessible. The building’s steel frame is set in a concrete,
slab-on-grade foundation with interior and perimeter steel tube and
wide-flange, steel columns supporting wide-flange, steel beams and
joists. The exterior is painted stucco and concrete. The San
Anotonio Property was originally built in 1972 and substantially
renovated in 2016-2017. The flat roof consists of a single-ply,
thermoplastic membrane. The roofing systems were installed as part
of the 2016-2017 renovation. The San Antonio Property is considered
to be in good overall condition.
The
lease began on May 1, 2017, with an expiration date of April 30,
2027 with the tenant having the right to terminate on April 30,
2022 (10-year lease, 5 years firm). The annual rent for the San
Antonio Property is $1,085,323. The San Antonio Property is
encumbered by a loan in the original principal amount of $6,991,250
from NBC Oklahoma, an Oklahoma banking association, or NBC,
representing 85% of the purchase price. The loan is an
interest-only, 18-month loan guaranteed by the principals of our
Manager. We closed on the San Antonio Property on November 1, 2017.
See "Description of Indebtedness-NBC Loan".
Our Pipeline
Sarasota Property
The
United States Department of Agriculture, or the USDA, will occupy
100% of the currently under construction building consisting of
28,210 rentable square feet and located at 7525 Commerce Court,
Sarasota, FL 34243, or the Sarasota Property.
The
property will be a single-tenant, industrial LEED Silver
certifiable property. The building is expected to be completed by
February 1, 2018 and USDA to take occupancy upon completion. The
building is being constructed as a steel-framed, single-story
property situated on 3.54 acres. The Sarasota Property is
approximately 6.8 miles from downtown Sarasota, FL. The property
includes 54 parking spaces, which include both asphalt and concrete
paved portions of the parking lot. Three parking spaces are
designated ADA accessible. The building’s entrance flatwork
and pedestrian walkways will consist of cast-in-place, concrete
construction. The landscaped areas will consist of grass-covered
lawn and shrubs in areas that are not occupied by the building,
walkways or pavement. The building includes two, unisex
bathrooms, lunch room, as well as a men’s and women’s
locker room. The building’s steel frame is set in a concrete,
slab-on-grade foundation with interior and perimeter steel tube and
wide-flange, steel columns supporting wide-flange, steel beams and
joists. The pre-engineered metal building will consist of a roof
deck, rigid frames, metal wall panels on framing, canopy framing
and gutters and downspouts and installed according to design loads.
The flat roof will consist of a sure-flex, single-ply
system.
The
lease’s beginning date will begin once the building is
constructed and USDA has taken occupancy, which is projected to be
on February 1, 2018. The lease will expire twenty years from date
of occupancy, estimated to be January 31, 2038, with the tenant
having the right to terminate on January 31, 2028, after ten years
(20-year lease, 10 year firm). The annual rent for the Sarasota
Property is estimated to be $906,952 in the first year of
occupancy.
Description of Indebtedness
Starwood Loan
The
Port Saint Lucie, Jonesboro, and Lorain Properties, or the Starwood
Properties, all secure and cross collateralize the Starwood Loan,
made by Starwood Mortgage Capital, LLC in connection with
Holmwood’s refinancing of debt incurred in connection with
the acquisition of such properties, and which is now serviced by
Wells Fargo. The Starwood Loan was originally made in the amount of
$10,700,000 and is a generally nonrecourse loan, subject to
standard recourse carve-outs and environmental
indemnities. The Starwood Loan bears a fixed interest
rate of 5.265%, requires monthly blended payments of principal and
interest, and all outstanding principal and interest is due at
maturity on August 6, 2023. The Starwood Loan contains customary
events of default and restrictions upon the transfer of direct or
indirect interests in the Port Saint Lucie, Jonesboro and Lorain
Properties.
Defeasance of the
Starwood Loan is generally permitted subject to compliance with
certain conditions set forth in the Starwood Loan
Documents. Any prepayment will require the borrowers to
deposit with Wells Fargo an amount equal to that which is
sufficient to purchase U.S. Treasury Obligations and other
government securities (as defined in Treasury Regulations Section
1.860G-2(a)(8)(ii)) that provide for all future payments of monthly
interest and outstanding principal, all costs and expenses incurred
by Wells Fargo or its agents in connection with such release,
including payment of all escrow, closing, recording, legal,
appraisal, rating agency and other fees, costs and expenses paid or
incurred by Wells Fargo resulting from the borrowers exercise of
their rights to have the property released according to the
defeasance provisions of the Starwood Loan Documents.
Notwithstanding the foregoing defeasance requirement, it is
anticipated that the borrowers of the Starwood Loan will be
permitted to prepay the Starwood Loan within three months of its
maturity date on sixty days written notice to Wells
Fargo.
Messrs.
Kaplan, Kaplan Jr., Stanton and Kurlander have executed a guaranty
of the recourse carve-outs and an environmental indemnity in favor
of Starwood and its successors.
Park Sterling Loan
The
Park Sterling loan was funded on or about March 25, 2015, by Park
Sterling Bank, or Park Sterling, as lender, and GOV FBI Johnson
City, LLC and GOV CBP Cape Canaveral, LLC, collectively, are the
borrowers. The loan from Park Sterling, or the Park Sterling Loan,
was in the original principal amount of $7,600,000 and is a
recourse loan. The debt service is the greater of either the
current interest rate under the note or 5.0%. The promissory note
is guaranteed by Holmwood Capital, LLC, Baker Hill Holding, LLC,
and Messrs. Kaplan, Kaplan Jr. and Stanton. The Park
Sterling Loan is secured by a first priority lien on the properties
held by the borrowers. The maturity date for payment of all
principal and interest is March 27, 2017. The loan term may be
extended an additional twelve months if certain conditions are met,
including: all major tenants are in occupancy and paying rent
without default on their lease, there has been no event of default
by borrowers, the borrowers pay Park Sterling an extension fee of
$19,000, the borrowers provide Park Sterling 120 days’
notice, and there has been no material adverse change in the
financial condition of the borrowers.
The
borrowers under the Park Sterling Loan are obligated to maintain a
loan-to-value ratio of no more than 80% and the minimum debt
service coverage ratio for the underlying properties is 1.20x. The
borrowers have the right to have one of the encumbered properties
released from the security instruments if certain conditions are
met, including: repayment of outstanding principal, there are no
events of default under the financing documents, and the residual
debt and collateral after the release would not generate a debt
service coverage ratio less than 1.20x or a loan to value ratio
greater than 75%. Park Sterling is permitted to sell participations
in all or a portion of its rights under the financing
documents.
In the
event of default, Park Sterling has the right to foreclose on the
properties encumbered by the Park Sterling Loan.
CorAmerica Loans
CorAmerica provided
senior, secured financing, aggregating $9,675,000 for the purchase
of the Moore Property ($3,300,000), the Lawton Property
($1,485,000), and the Lakewood Property ($2,400,000) and the
refinancing of the Fort Smith Property ($2,450,000), which is
currently owned by Holmwood and will be contributed to our
operating partnership, when the first closing of the issuance of
the shares of our stock occurs. The contribution of the
Fort Smith Property to us by Holmwood will result in our assumption
of the outstanding principal amount of the portion of the
CorAmerica loans borrowed by the SPE-owner of the Fort Smith
Property.
The
CorAmerica loans are cross-collateralized, cross-defaulted and are
secured by first mortgages on each of such
facilities. The loans bear interest at 3.93% per annum,
will mature on or about June 1, 2019 and will be payable as to both
principal and interest monthly, pursuant to a 25-year amortization
schedule with the remaining balance of principal and accrued but
unpaid interest becoming due and payable at
maturity. The loans are prepayable in whole or in part
from time to time without premium or penalty. The loans
are guaranteed jointly and severally by Messrs. Stanton, Kaplan
Jr., Kaplan and Kurlander.
Silt Coastal Bank Loan
The
Coastal Bank loan agreement was executed in September 2017 between
Coastal Bank, as lender and GOV Silt, LLC as borrower. The original
principal amount of the Coastal Bank Loan was $2,750,000 secured by
a first priority lien on the property held by the
borrower. The Coastal Bank Loan is a recourse
obligation. The maturity date is September 30, 2022.
The
Coastal Bank Loan bears interest at 4.00% and requires principal
and interest payment during the term based on a 25-year
amortization schedule. The loan is prepayable without
penalty.
Norfolk Coastal Bank Loan
Coastal
Bank provided senior, secured financing in the original principal
amount of $10,875,000 for the acquisition of the Norfolk Property.
The loan is collateralized by the Norfolk Property. The
loan bears interest at 4.00% per annum, will mature on or about
July 11, 2022 and is payable as to both principal and interest
monthly, pursuant to a 25-year amortization schedule with the
remaining balance of principal and accrued but unpaid interest
becoming due and payable at maturity. The loan is
prepayable in whole or in part from time to time without premium or
penalty. The loan is guaranteed jointly and severally by
our operating partnership, Holmwood, Baker Hill Holding LLC,
Stanton Holdings, LLC, and Messrs. Stanton, Kaplan Jr., Kaplan and
Kurlander.
Montgomery Coastal Bank Loan
Coastal
Bank provided senior, secured financing in the original principal
amount of $3,530,000 for the acquisition of the Montgomery
Property. The loan is collateralized by the Montgomery
Property. The loan bears interest at 4.00% per annum,
will mature on or about July 25, 2022 and is payable as to both
principal and interest monthly, pursuant to a 25-year amortization
schedule with the remaining balance of principal and accrued but
unpaid interest becoming due and payable at
maturity. The loan is prepayable in whole or in part
from time to time without premium or penalty. The loan
is guaranteed by our operating partnership.
NBC Loan
NBC
provided senior, secured financing in the original principal amount
of $6,991,250 for the acquisition of the San Antonio Property. The
NBC Loan bears interest at the higher of the rate established by
the Wall Street Journal as the “Prime Rate” or
4.25%. The NBC Loan carries monthly, interest only payments
until maturity. The NBC Loan will mature on June 5, 2019. At
maturity, all principal and unpaid interest will be due. The
NBC Loan is pre-payable in whole or in part without premium or
penalty. The loan is collateralized by the San Antonio Property.
The NBC Loan is guaranteed by Messrs. Kaplan, Kaplan, Jr.,
Kurlander and Stanton and Baker Hill Holding LLC, our operating
partnership and Stanton Holdings, LLC.
General Provisions in Federal Government Leases
The
following is a general description of the type of lease we
typically enter into with the federal government negotiated through
the GSA, or GSA Leases. The terms and conditions of any actual GSA
Lease, or any lease entered into directly with an agency or
department of the federal government, may vary from those described
below. If we determine that the terms of a GSA Lease at a property,
taken as a whole, are favorable to us, we may enter into leases
with terms that are substantially different than the terms
described below.
Rent
In
general, GSA Leases are full service modified gross leases, which
require us to pay for maintenance, repairs, base property taxes,
utilities and insurance. Although the federal government is
typically obligated to pay us adjusted rent for changes in certain
operating costs (e.g., the costs of cleaning services,
supplies, materials, maintenance, trash removal, landscaping,
water, sewer charges, heating, electricity, repairs and certain
administrative expenses but not including insurance), the amount of
any adjustment is based on a cost of living index rather than the
actual amount of our costs. As a result, to the extent the amount
payable to us based upon the cost of living does not reflect actual
changes in our operating costs, our operating results could be
adversely affected. Furthermore, the federal government is
typically obligated to reimburse us for increases in real property
taxes above a base amount if we provide the proper documentation in
a timely manner. Notwithstanding federal government reimbursement
obligations, we remain primarily responsible for the payment of all
such costs and taxes. Unlike most commercial leases which require
monthly payments in advance, GSA Leases generally require that rent
be paid monthly in arrears.
For any
assignment of a GSA Lease to be effective, the consent of the
federal government must be obtained. The consent process is
time-consuming and will not be finalized until after we have
acquired the subject property. However, during this interim period
the seller will continue to be paid rent by the federal government.
The GSA has not adopted a standard process by which it determines
whether to grant its consent to an assignment of a GSA Lease. GSA
requires that the sale of the property be consummated prior to the
submission of a formal request for its consent. We expect that GSA
will require the following items be submitted with a request for
its consent to the assignment of a GSA Lease for any acquired
properties to us: (1) a recorded copy of the deed as evidence
of the transfer of title, (2) a letter from us to GSA
acknowledging that we are prepared to assume the GSA Lease,
(3) a letter from the seller to GSA waiving all its rights
under the GSA Lease, (4) our organizational documents and the
organizational documents of the special-purpose entity that will
own the subject property, (5) evidence of our good standing,
(6) a letter from us to GSA identifying the legal name and
address of the payee, (7) a tax identification number for the
new payee and (8) a central contractor registration number. After
we submit these items, and such other items as GSA may request, we
expect that the review process will take from one to three months.
If GSA approves our assumption of the GSA Lease, we will enter into
a supplemental lease agreement or a novation agreement with GSA and
the seller that will formally acknowledge our assumption of the GSA
Lease. Once such documentation is finalized, GSA will commence
paying rent directly to us.
While
management believes it unlikely not to receive such consent, there
is no guarantee that GSA will consent to our assumption of a GSA
Lease for an acquired property. During the interim period after we
acquire a property and prior to the execution of a supplemental
lease agreement or novation agreement (and in the event that the
GSA does not grant its consent and the assignment of such lease),
the seller will remain responsible to GSA to operate and manage the
subject property in accordance with the terms of the GSA Lease and
will continue to receive rent from GSA which it is contractually
obligated to remit to us. Notwithstanding, a seller’s
obligation in this regard, we will be performing those management
services.
Term of Lease
Our GSA
Leases typically have an initial term of 10 to 20 years. Our GSA
Leases generally do not contain provisions for the extension of the
lease term.
Early Termination
Most of
our GSA Leases include a provision which allows the federal
government to terminate at will by providing written notice to us
after an initial guaranteed term. This notice period generally
varies from 60 to 180 days. Some GSA Leases provide that, following
the initial guaranteed term, rent will be paid at a reduced
rate.
Assignment and Sublease
Our GSA
Leases generally require our written consent for assignment (which
may not be unreasonably withheld) by the federal government,
however, it may typically substitute a different federal agency or
department as an occupant under our GSA Leases without seeking our
consent. An assignment would relieve the federal government of any
future obligations under the GSA Lease but assignment would not
relieve the federal government from any unpaid rent or other
liability to us existing before the assignment. Our GSA Leases
generally allow the federal government to sublet all or part of a
property without our consent, but such sublet would not relieve the
federal government from any obligations under the GSA
Lease.
Maintenance and Alteration
We are
generally responsible for all maintenance of properties under our
GSA Leases, including maintenance of all equipment, fixtures and
appurtenances to such properties. We are generally responsible for
all utilities in order to make our properties suitable for use and
capable of supplying heat, light, air conditioning, ventilation and
access without interruption. Use of heat, ventilation and air
conditioning beyond normal working hours is generally paid for by
the federal government, except for certain GSA Leases that require
that we provide certain portions of the building with heating,
ventilation and air conditioning services 24 hours a day, seven
days a week. Our failure to maintain our properties or provide
adequate utilities, service or repair can result in the federal
government deducting the costs of such maintenance, utility,
service or repair from its rent payment to us. The federal
government generally retains the right to make alterations to our
properties at its own expense. The federal government also retains
the right to add and remove fixtures to the premises without
relinquishing ownership of such fixtures.
Damage, Destruction or Condemnation
Complete
destruction of, or significant damage to, a property under a GSA
Lease generally results in the immediate termination of the lease.
Partial destruction or damage, such that the property is unable to
be occupied by a tenant, generally grants the federal government
the option to terminate the lease by giving notice to us within 15
days following the partial destruction or damage. If the lease is
so terminated, no rent accrues after the date of such destruction
or damage.
Certain Government Standards
Each
GSA Lease requires that we maintain certain standards set by the
federal government. For instance, our GSA Leases generally require
that we certify that our procurement activities do not violate any
prohibitions against improper third-party benefits resulting from
our procurement of a federal government contract. In addition, the
GSA Leases contain provisions which require that we maintain
certain labor and equal opportunity standards in relation to our
subcontractors. When selecting subcontractors, the GSA Leases
require that we make a good faith effort to select subcontractors
that are small businesses, small businesses owned by socially or
economically disadvantaged individuals or small businesses owned by
women. Failure to comply with these standards could result in
termination of a GSA Lease, reduction in rent or liquidated damages
outlined in the lease.
Events of Default
Failure
by the federal government to pay rent or make other payments
required under a GSA Lease on the date such payment is due results
in an automatic interest penalty to be paid by the federal
government. The interest penalty is calculated as a percentage of
the payment due, based on a rate established by the U.S. Department
of the Treasury pursuant to the Contracts Dispute Act of 1978. The
interest payment accrues daily and is compounded in 30-day
increments. There is typically no provision in our GSA Leases
permitting us to terminate the lease as a result of non-payment or
other actions by the federal government.
Our
failure to maintain, repair, operate or service a property under a
GSA Lease for 30 days after receipt of notice from the federal
government generally results in our default under such lease. In
addition, repeated and unexcused failure to maintain, repair,
operate or service the property by us will generally result in
default. Upon default, the federal government is entitled to
terminate the lease and seek damages, which could consist of rent,
taxes and operating costs of a substitute property, administrative
expenses in procuring a replacement property and such other damages
as the lease or applicable law allows.
Unlike
most commercial leases, GSA Leases do not include provisions that
permit the landlord to evict a federal government that is in
default under the lease, including as a result of a holdover. In
the event that we seek to evict a federal government occupant that
is in default, the federal government occupant could institute
condemnation proceedings against us and seek to take our property,
or a leasehold interest therein, through its power of eminent
domain.
Remedies
If we
have a dispute with the federal government occupant, the dispute is
required to be resolved pursuant to the Contract Disputes Act of
1978. A dispute concerning payment must be submitted to the
contracting officer authorized to bind the federal government, who
will make a determination as to the merits of the dispute and the
determination can be appealed to an administrative agency or to a
court.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
We are an externally-managed real estate company
formed to grow our business of acquiring, developing, financing,
owning and managing properties leased primarily to the United
States of America, acting either through the GSA or directly
through the federal government agencies or departments occupying
such properties, including such properties owned by special purpose
entities contributed to our operating partnership by Holmwood, our
accounting predecessor. We invest primarily in GSA Properties
across secondary and smaller markets, within size ranges of
5,000-50,000 rentable square feet, and in their first term after
construction or retrofit to post-9/11 standards. We further
emphasize GSA Properties that fulfill mission critical or direct
citizen service functions. We intend to grow our
portfolio primarily through acquisitions of single-tenanted,
federal government-leased properties in such markets; although, at
some point in the future we may elect to develop, or joint venture
with others in the development of, competitively bid,
build-to-suit, single-tenant, federal government-leased properties,
or buy facilities that are leased to credit-worthy state or
municipal tenants.
As
of December 6, 2017, the Company owned 13 operating properties,
containing 269,738 rentable square feet located in nine states, or
our portfolio, with an additional property under contract for an
additional 28,210 rentable square feet, or our pipeline. Our
portfolio and pipeline properties are 97.75% leased to the United
States of America and occupied by federal government agencies.
Based on net operating income of each property, the properties have
a weighted average remaining lease term of 9.27 years if none of
the early termination rights are exercised and 6.08 years if the
early termination right are exercised.
Our
operating partnership holds substantially all of our assets and
conducts substantially all of our business. As of June 30, 2017, we
owned approximately 48% of the aggregate common limited partnership
interests in our operating partnership, or common units, on a fully
diluted basis. We were formed in 2016 as a Maryland
corporation, and we intend to elect to be taxed as a REIT for
federal income tax purposes beginning with our taxable year ending
December 31, 2017.
Our Predecessor
Generally. The
term “our predecessor” refers to Holmwood and its
consolidated subsidiaries, each of which subsidiaries holds all of
the fee interests in three of the facilities that were a part of
our predecessor’s seven property
portfolio.
Contribution
of Our Predecessor; Consideration Therefor, Etc. Pursuant to the contribution agreement, as
amended between our predecessor and our operating partnership (the
“contribution agreement”), all of the membership
interests in four of our predecessor’s subsidiaries were
contributed to our operating partnership in exchange for common
units of our operating partnership (the “OP Units”).
Also, in connection with the same contribution transaction in
exchange for all of the profits, losses, any distributed cash flow
and all of the other benefits and burdens of ownership for federal
income taxes of three such subsidiaries our operating
partnership issued to our predecessor the number of OP
Units it would have issued had the membership interests
of such subsidiaries also been contributed to our operating
partnership at the closing in exchange for OP
Units.
The
number of OP Units issued in connection with these contributions
was calculated based upon the agreed value of our
predecessor’s equity, plus principal amortization paid
by our predecessor from January 1, 2016 to and including the date
the contribution was made (May 26, 2017), divided by $10 per
op unit. Under our operating partnership’s limited
partnership agreement, the OP Units issued incident to the
contribution under certain circumstances can be redeemed in
exchange for shares of our common stock on a 1:1
basis.
Also,
incident to the contribution transactions, our operating
partnership assumed the outstanding mortgage indebtedness
associated with each of the underlying properties, owned by our
predecessor’s subsidiaries, aggregating $22,585,285, as well
as notes payable aggregating $1,132,038, both as of the
contribution date. The notes were repaid by our operating
partnership on the contribution date.
Our
predecessor is our attorney-in-fact for the administration of the
membership interests in the three retained subsidiaries, and under
the contribution agreement, as amended, with our predecessor, upon
the occurrence of certain events, including receipt of lender
approvals for the transfer of the membership interests, then the
membership interests shall transfer to, and be vested in, our
operating partnership.
Tax
Protection. Incident to
the closing of the contribution transactions our predecessor
entered into a tax protection agreement with our operating
partnership, whereby our operating partnership has agreed in
certain circumstances to indemnify our predecessor from and against
any tax liability that may result from actions or non-actions that
our operating partnership may take with respect to the contributed
assets during the ten years following the date of closing of the
contribution transactions.
Acquired Properties.
Shortly
after its formation our operating partnership purchased three
properties in June 2016, a 19,241 rentable square foot facility in
Lakewood, Colorado, occupied by the Department of Transportation
(our “Lakewood facility”), a 17,058 rentable square
foot facility in Moore, Oklahoma, occupied by the Social Security
Administration (SSA) (our “Moore facility”), and a
9,298 rentable square foot facility in Lawton, Oklahoma, occupied
by the SSA (our “Lawton facility”). These properties
(collectively, the “initial properties”)
were financed with $3,612,500 of proceeds from our 7.00%
Series A Cumulative Convertible Preferred Stock offering, or our
Series A Preferred Stock, $2,019,789 of seller financing (the
“Standridge indebtedness”) and a $7,225,000 bank loan
secured by the properties.
On
March 31, 2017, our operating partnership acquired a 53,917
rentable square foot building in Norfolk, Virginia, that is leased
to the United States of America and occupied by the SSA. The
purchase price for the building was $14,500,000, excluding
acquisition costs. The acquisition was financed by first mortgage
debt of $10,875,000 and the proceeds from unsecured loans to our
operating partnership from two principals of our predecessor and a
third- party aggregating $3,400,000 (the “unsecured
debt”).
Operating Results
For the six-month period ended June 30, 2017
As
of June 30, 2017, our 11 operating properties were 100% leased with
a weighted average annualized lease income per leased square foot
of $29.63 and a weighted average building age of approximately 13.3
years.
Contributed
Portfolio. For the period
from May 26, 2017 to June 30, 2017, the properties underlying our
predecessor’s contribution delivered total revenues from
operations of $348,468; operating costs, excluding depreciation and
amortization, interest expense and asset management fees, of
$127,510 and net operating income of $220,958. After deducting
depreciation and amortization, interest expense and asset
management fees, our operating partnership’s net income from
such underlying properties for the six-month period was
($3,196).
Acquired
Properties. For the
six-months ended June 30, 2017, the initial properties
delivered total revenues from operations of $650,248;
operating costs, excluding depreciation and amortization, interest
expense and asset management fees, aggregating $181,343 and net
operating income of $468,905. After deducting depreciation and
amortization, interest expense and asset management fees associated
with these three facilities, our net income for the six-month
period was $41,193.
For
the period from March 31, 2017 to June 30, 2017, the Norfolk,
Virginia property delivered total revenues from operations of
$339,608; operating costs, excluding depreciation and amortization,
interest and asset management fees, aggregating $92,239 and net
operating income from the property for the six-month period was
$247,369. After deducting depreciation and amortization, interest
expense and asset management fees, our net income from the property
for the six-month period was $78,182.
Corporate
Costs. For the six-month
period ended June 30, 2017, we incurred corporate costs for legal
representation, annual audits, tax returns, directors’ and
officers’ liability insurance, vesting of long term incentive
plans and other corporate related costs of $419,795. In addition,
for the six-month period ended June 30, 2017, we incurred $40,127
for asset management fees and $211,060 for interest expense
associated with the unsecured indebtedness incurred by our
operating partnership and used to purchase our Norfolk, Virginia
SSA facility. Corporate expenses totaled $670,982 for the
period.
For the period of March 11, 2016 (inception) and June 30,
2016
On
June 10, 2016, our operating partnership purchased the initial
properties. Total costs for the initial properties were
$11,050,596, and financed with $3,612,500 of proceeds from our
Series A Preferred Stock, $2,019,789 of seller financing and a
$7,225,000 bank loan. For the period beginning March 11, 2016
(inception) and ending June 30, 2016, these properties delivered
total revenues from operations of $76,599 and incurred operating
costs, excluding depreciation, amortization, interest expense and
asset management fees, of $38,655, resulting in net operating
income for the period of $37,944. After deducting depreciation and
amortization, interest expense and asset management fees, our net
loss was ($28,087).
Calculating Net Operating Income
We
believe that our net operating income, or NOI, a non-GAAP measure,
is a useful measure of our operating performance. We define NOI as
total property revenues less total property operating expenses,
excluding depreciation and amortization, interest expense and asset
management fees. Other REITs may use different methodologies for
calculating NOI, and accordingly, our NOI may not be comparable to
the NOI of other REITs. We believe that NOI, as we calculate it,
provides an operating perspective not immediately apparent from
GAAP operating income or net income. We use NOI to evaluate our
performance on a property-by-property basis, because NOI more
meaningfully reflects the core operations of our properties as well
as their performance by excluding items not related to property
operating performance and by capturing trends in property operating
expenses. However, NOI should only be used as an alternative
measure of our financial performance.
The
following table reflects property contributions to combined NOI
together with a reconciliation of NOI to net income (loss) as
computed in accordance with GAAP for the six-month period ended
June 30, 2017.
|
HC Government Realty
Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$348,468
|
$339,608
|
$650,248
|
$-
|
$1,338,324
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
Operating
expenses
|
77,620
|
87,560
|
162,349
|
419,795
|
747,324
|
Property
management fees
|
49,890
|
4,679
|
18,994
|
|
73,563
|
|
127,510
|
92,239
|
181,343
|
419,795
|
820,887
|
|
|
|
|
|
|
Net
Operating Income
|
220,958
|
247,369
|
468,905
|
(419,795)
|
517,437
|
Less:
|
|
|
|
|
|
Asset
management fees
|
-
|
-
|
-
|
40,127
|
40,127
|
Depreciation
and amortization
|
125,994
|
97,253
|
270,630
|
-
|
493,877
|
Interest
expense
|
98,160
|
71,934
|
157,082
|
211,060
|
538,236
|
|
224,154
|
169,187
|
427,712
|
251,187
|
1,072,240
|
|
|
|
|
|
|
Net
income (loss)
|
$(3,196)
|
$78,182
|
$41,193
|
$(670,982)
|
$(554,803)
|
Liquidity and Capital Resources
As
of June 30, 2017, there was cash on hand of
$1,716,644.
Our
business model is intended to drive growth through acquisitions.
Access to the capital markets is an important factor for our
continued success. We expect to continue to issue equity in our
Company with proceeds being used to acquire other single-tenant
properties, leased to the United States of America or facilities
that are leased to credit-worthy state or municipal
tenants.
Our
liquidity needs are primarily to fund (i) operating expenses and
cash dividends; (ii) property acquisitions; (iii) deposits and fees
associated with long-term debt financing for our properties; (iv)
recurring capital expenditures; (v) debt repayments; (vi) payment
of principal of, and interest on, outstanding indebtedness; (vii)
corporate and administrative costs; and (viii) other investments,
consonant with our investment guidelines and policies.
On
November 7, 2016, the Securities and Exchange Commission (SEC)
qualified our offering of common stock pursuant to Tier II of
Regulation A under the Securities Act of 1933, as amended (our
“offering”). Our offering required that a minimum of
300,000 shares of our common stock at $10 per share be subscribed
for and the subscription price paid into escrow before we were
permitted to close any part of the offering. This minimum was
achieved and on May 18, 2017, we issued 317,120 shares and received
initial proceeds, net of issuance costs totaling $2,894,580. The
offering also contemplates that up to a total of 3,000,000 shares
can be issued in the offering at $10 per share. The Offering
continues and unless earlier terminated, which we reserve the right
to do, will terminate on the first to occur of the issuance of a
total of 3,000,000 shares for gross proceeds of $30,000,000, or
November 7, 2018. During the period from May 18, 2017 to June 30,
2017, we issued 407,922 shares of common stock (which includes the
317,120 shares issued on May 18, 2017) and received total proceeds,
net of issuance costs, of $3,711,448, pursuant to the
Offering.
As
the Offering continues, incremental shares are issued and
additional net proceeds are received, those net proceeds for among
other purposes will be used to curtail debt, fund acquisitions,
provide working capital, and otherwise improve our capital
structure, which we expect will enable us to further implement our
acquisition strategy, and increase cash flows. It also is possible
that our Board may decide to use net proceeds to fund a portion of
our targeted dividend if funds from operations are insufficient for
such purpose.
Except
as described in our offering circular for the Offering and with
respect to first mortgage debt incurred to finance or refinance
newly acquired or owned facilities, neither have we identified, nor
have we committed to any additional material internal or external
sources of liquidity
The Standridge indebtedness bears interest at a
fixed annum rate of 7.0% and debt service payments are based on a
blended 20-year amortization of principal and interest. As of June
30, 2017, the outstanding principal balance of the Standridge
indebtedness was $1,967,552. The
Standridge indebtedness will mature on the earlier of December 10,
2017, the date on which we complete a public securities offering,
or the date on which our initial properties are sold or refinanced
by us. As of December 8, 2017, the Standridge Note was
amended and partially prepaid and debt was used to fund such
prepayment. See "Interest of Management and Others in Certain
Transactions - Standridge Note" and "Interest of Management and
Others in Certain Transactions - Prepayment of Standridge Note" for
more information.
The unsecured debt incurred by our operating
partnership to finance a portion of the purchase price for our
Norfolk, Virginia property accrues interest only at a fixed
annum rate of 12.0%, with principal due at maturity
on March 31, 2018, but may
be prepaid in whole or in part at any time and from time to time
without premium or penalty.
We
expect to pay off the Standridge indebtedness and unsecured
indebtedness of our operating partnership incurred to complete the
purchase of our Norfolk, Virginia property, as well as meet our
other short-term liquidity requirements primarily through cash
provided from operations and from the net proceeds of the
Offering.
Trend Information
Through
our operating partnership, our Company is engaged primarily in the
acquisition, leasing and disposition of single-tenanted, mission
critical or customer facing properties, leased to the United States
of America and that are situated in secondary and tertiary markets
throughout the country. As full faith and credit obligations of the
United States these leases offer risk-adjusted returns, which are
attractive, inasmuch as there continues to be no appreciable yield
of comparable credit quality in the marketplace. Conversely, these
market dynamics have caused upward pressure on sales prices, offset
by management’s deep knowledge and contacts in the sector and
the paucity of buyers which will consider smaller properties in
smaller markets, frequently enabling our Company to lock-up
transactions directly with sellers, avoiding brokerage commissions
to either party. There is some indication that short-term interest
rates may rise, but while any increase in interest rates will tend
to result in some downward pressure on sales prices, if they become
sustained, conversely, if long-term interest rates rise, our cost
of capital to fund acquisitions can be expected to rise as well,
increasing our operating costs and decreasing net
income.
With
the completion of our Offering’s initial and subsequent
closings we have been successful in acquiring one additional
property and placed two others under contract in accordance with
our business plan. While there can be no assurances that additional
funds will be raised, continuing success of our offering should
enable us to accelerate acquisition plans, provide liquidity to
support growth and enhance purchasing power for goods and services
in connection with the operation of our properties.
DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT
EMPLOYEES
Our Board of Directors
We
operate under the direction of our board of directors. Our board of
directors is responsible for the management and control of our
affairs. Our board of directors has retained our Manager to manage
our day-to-day operations and our portfolio of GSA Properties and
any other investments, subject to the supervision of our board of
directors.
Our
directors must perform their duties in good faith and in a manner
each director reasonably believes to be in our best interests.
Further, our directors must act with such care as an ordinarily
prudent person in a like position would use under similar
circumstances. However, our directors and executive officers are
not required to devote all of their time to our business and must
only devote such time to our affairs as their duties may require.
We do not expect that our directors will be required to devote a
substantial portion of their time to us in discharging their
duties.
We
currently have seven directors. Our board of directors currently
consists of a majority of independent directors. Messrs. William
Robert Fields, Leo Kiely, John F. O’Reilly and Scott A.
Musil, or our independent directors, were appointed directors as of
our initial closing, on May 18, 2017. Our directors will serve
until they resign or upon death or removal by a plurality of votes
cast at a meeting of stockholders duly called and at which a quorum
is present. At any stockholder meeting, the presence in person or
by proxy of stockholders entitled to cast a majority of all the
votes entitled to be cast at such meeting on any matter constitutes
a quorum.
Although our board
of directors may increase or decrease the number of directors, a
decrease may not have the effect of shortening the term of any
incumbent director; provided further, that any increase or decrease
after the initial closing of this offering may not occur if it
would result in our board of directors not being comprised of at
least a majority of independent directors. Any director may resign
at any time or may be removed, and then only by the stockholders
upon the affirmative vote of a plurality of all the votes cast at a
meeting of stockholders duly called and at which a quorum is
present. The notice of any special meeting called to remove a
director will indicate that the purpose, or one of the purposes, of
the meeting is to determine if the director shall be
removed.
A
vacancy created by an increase in the number of directors or the
death, resignation, or removal of a director may be filled only by
a vote of a majority of the remaining directors, even if the
remaining directors do not constitute a quorum, and any director
elected to fill a vacancy will serve for the remainder of the full
term of the directorship in which the vacancy
occurred.
In
addition to meetings of the various committees of our board of
directors, if any, we expect our directors to hold at least four
regular board meetings each year.
Our Executive Officers and Directors
The
individuals listed below are our executive officers and directors.
The following table and biographical descriptions set forth certain
information with respect to the individuals who currently serve as
our directors and the executive officers:
Name
|
Position
|
|
Age
|
|
Term of Office
|
|
Hours/Year (for Part-Time Employees)
|
|
Edwin
M. Stanton
|
Director
and Chief Executive Officer
|
|
|
43
|
|
March
2016
|
|
|
N/A
|
|
Robert
R. Kaplan, Jr.1
|
President
|
|
|
46
|
|
March
2016
|
|
|
N/A
|
|
Philip
Kurlander
|
Director
and Treasurer
|
|
|
53
|
|
March
2016
|
|
|
N/A
|
|
Robert
R. Kaplan1
|
Director
and Secretary
|
|
|
70
|
|
March
2016
|
|
|
N/A
|
|
Elizabeth
Watson
|
Chief
Financial Officer
|
|
|
58
|
|
March
2016
|
|
|
N/A
|
|
Scott
Musil
|
Independent
Director
|
|
|
49
|
|
May
2017
|
|
|
N/A
|
|
William
Robert Fields
|
Independent
Director
|
|
|
67
|
|
May
2017
|
|
|
N/A
|
|
Leo
Kiely
|
Independent
Director
|
|
|
70
|
|
May
2017
|
|
|
N/A
|
|
John F.
O’Reilly
|
Independent
Director
|
|
|
72
|
|
May
2017
|
|
|
N/A
|
|
1 Robert R. Kaplan is the father of Robert R. Kaplan,
Jr.
Edwin
M. Stanton, Director, Chief Executive
Officer. Prior
to founding our company, Mr. Stanton was a founding Principal of
Holmwood Capital, LLC, our predecessor. He has remained a Principal
of Holmwood since its inception, in 2010. In such role and as
executive officer of our company, he is directly responsible for
the development and implementation of our company’s
corporate, investment and capitalization strategies. Mr. Stanton
focuses on building relationships with GSA developers and owners as
well as financial institutions to create acquisition and joint
venture opportunities. Prior to Holmwood Capital’s formation,
Mr. Stanton was a founding Principal of U.S. Federal Properties
Trust, where he was responsible for all property acquisitions. He
directly sourced and negotiated over $250,000,000 of federal
government-leased assets. Prior to forming US Federal Properties
Trust, Mr. Stanton co-founded SRS Investments, a private equity
real estate investment firm where he was involved in all aspects of
our company and was responsible for the acquisition, financing, and
management of investment properties. Mr. Stanton maintains an
ownership interest in SRS Investments. Over the course of his
career, Mr. Stanton has participated in the acquisition and/or
financing of over $800,000,000 of commercial real estate. Mr.
Stanton holds a BA degree from Rollins College and an MBA degree
from Georgetown University.
Robert R. Kaplan, Jr.,
President. Prior
to founding our company, Mr. Kaplan, Jr. was a founding Principal
of Holmwood Capital, LLC, our predecessor. He has remained a
Principal of Holmwood since its inception, in 2010. In such role
and as executive officer of our company, he is directly responsible
for structuring our company’s investment offerings and
property and corporate legal matters. For almost 20 years, Mr.
Kaplan Jr.’s legal expertise has focused on real estate
securities and finance, real estate transactions, mergers and
acquisitions, general corporate law, securities compliance, private
offerings, tax, and strategic partnerships/joint-ventures. Mr.
Kaplan, Jr. is founder and Managing Partner, Practices, of Kaplan
Voekler Cunningham & Frank, PLC, a Richmond, VA, headquartered
law firm that practices in the areas of development and real estate
investment, capital markets, litigation, and business
representation. Mr. Kaplan, Jr. has been the primary counsel
in over $2 billion in securities offerings and real estate
financings. Mr. Kaplan, Jr. holds AB and JD degrees from the
College of William & Mary.
Philip Kurlander, MD, Director and
Treasurer. Prior
to founding our company, Dr. Kurlander was a Principal of Holmwood
Capital, LLC, our predecessor. He joined Holmwood in 2012, and he
remains a Principal of Holmwood today. In such role and as
executive officer of our company, he is responsible for the
oversight of financial and accounting matters. Prior to joining
Holmwood, and in addition to being a healthcare professional, Dr.
Kurlander has been a serial entrepreneur for the past 20 years
having served critical roles in numerous start-up ventures and
early-growth companies across a spectrum of industries from real
estate to manufacturing. In addition to Dr. Kurlander’s
involvement in HC Government Realty Trust, Inc., he currently has
investments in, and sits on the boards of: Addison McKee,
ShelterLogic, and North American Propane, Inc. ShelterLogic and
North American Propane were sold in 2012, resulting in substantial
gains for their respective investors. Dr. Kurlander also is a
director and founder of a food service industry start-up. He sits
on the advisory boards of a mezzanine lender and a private equity
firm. Dr. Kurlander holds a BS degree from SUNY Albany and an
MD degree from Albany Medical College.
Robert R. Kaplan, Director and
Secretary. Prior
to founding our company, Mr. Kaplan was a founding Principal of
Holmwood Capital, LLC, our predecessor. He has remained a Principal
of Holmwood since its inception, in 2010. In such role and as
executive officer of our company, he is directly responsible for
capital formation and structuring and corporate legal matters. Mr.
Kaplan has over 40 years of experience as an attorney, investment
banker, and entrepreneur and is a member of Kaplan Voekler
Cunningham & Frank, PLC. Prior to joining Kaplan Voekler
Cunningham & Frank, PLC, he was a co-founder of Carter Kaplan,
an investment bank now part of RBC Wealth Management. He also
co-founded Columbia Naples Capital, a leveraged buy-out sponsor
that made over $25,000,000 in equity investments, and North
American Propane, Inc., an operating business in the New England
and Mid-Atlantic energy markets that was sold in 2012 to a large
industry participant. Mr. Kaplan holds AB and JD degrees from the
College of William & Mary.
Elizabeth Watson, CPA, Chief Financial
Officer. Prior
to joining our company, Mrs. Watson was the Chief Financial Officer
for Holmwood Capital, LLC, our predecessor, beginning in January
2016. She remains Chief Financial Officer for Holmwood and is a
principal of our Manager. In such role and as executive officer of
our company, she is directly responsible for the oversight and
management of our company’s accounting, financial reporting
and portfolio investment performance. Mrs. Watson brings over 35
years of financial and operations management experience from both
domestic and international arenas. She has structured more than $2
billion of debt and $1.4 billion of equity from U.S., European and
Middle Eastern markets. Prior to joining Holmwood Capital,
Mrs. Watson was a key principal/executive and Chief Financial
Officer of four successive private equity funds investing in
government leased real estate, spanning a period of more than 20
years. She has executed multiple exit strategies including an IPO,
merger and sale of assets, yielding investors high, risk-adjusted
returns. Prior to working in private equity, Mrs. Watson held
positions with Legg Mason Wood Walker, Prime Retail, The Rouse
Company and Arthur Andersen & Co. Mrs. Watson holds a B.S.,
Accounting and MBA degrees from University of Maryland, a MS, Real
Estate degree from Johns Hopkins University and a IEMBA degree and
Certificate in Financial Planning from Georgetown
University. Ms. Watson is a licensed CPA.
Scott A. Musil, Independent
Director. Mr. Musil has been Chief Financial Officer of
First Industrial Realty Trust, Inc., a NYSE-traded REIT (FR) since
March 2011. He served as acting Chief Financial Officer of First
Industrial from December 2008 to March 2011. Mr. Musil has
also served as Senior Vice President of the First Industrial since
March 2001, Treasurer of First Industrial since May 2002 and
Assistant Secretary of First Industrial since August 2014.
Mr. Musil previously served as Controller of First Industrial
from December 1995 to March 2012, Assistant Secretary of First
Industrial from May 1996 to March 2012 and July 2012 to May 2014,
Vice President of First Industrial from May 1998 to March 2001,
Chief Accounting Officer of First Industrial from March 2006 to May
2013 and Secretary from March 2012 to July 2012 and May 2014 to
August 2014. Prior to joining First Industrial, he served in
various capacities with Arthur Andersen & Company,
culminating as an audit manager specializing in the real estate and
finance industries. Mr. Musil is a non-practicing certified
public accountant. His professional affiliations include the
American Institute of Certified Public Accountants and
NAREIT.
William Robert Fields, Independent Director. Mr. Fields served
as the Chairman and Chief Executive Officer of Factory 2-U Stores
Inc., from November 2002 to 2003. Mr. Fields has over 30 years of
retail and consumer goods industry experience with Graphic
Packaging, with approximately 20 of those years at the executive
level. He has also provided planning and oversight for various
operational support divisions, including marketing and human
relations. Mr. Fields served as Chairman and Chief Executive
Officer of APEC (China) Asset Management Ltd. from 1999 to October
2002. He served as President and Chief Executive Officer of
Hudson's Bay Company from 1997 to 1999 and as Chairman and Chief
Executive Officer of Blockbuster Entertainment Group, a division of
Viacom Inc., from 1996 to 1997. Mr. Fields held numerous positions
with Wal-Mart Stores Inc., which he joined in 1971. He left
Wal-Mart in March 1996 as President and Chief Executive Officer of
Wal-Mart Stores Division, and Executive Vice President of Wal-Mart
Stores Inc. Mr. Fields held various senior executive positions
within the organization, including Assistant to Wal-Mart Founder,
Sam Walton; Senior Vice President of Distribution and
Transportation; and Executive Vice President of Wal-Mart, Inc. Mr.
Fields currently serves as Chairman of Intersource Co. Ltd. He also
currently serves as a director of Lexmark International Inc.,
Graphic Packaging Corp, The ADX Company CreditMinders.com, Aegis
Capital Advisors LLC, Hot-Can plc, Bonus Stores Inc., The
University of Texas Pan-American Foundation, The Joint Corp.,
Cortiva Group, Inc., and SupplyScience, Inc. He also serves as a
member of the advisory board of Celeritas Management Inc. and EON
Reality, Inc. Mr. Fields has bachelor's degree in Economics and
Business from the University of Arkansas.
Leo Kiely, Independent
Director. Mr.
Kiely retired as Chief Executive Officer of MillerCoors LLC, a
joint venture combining the U.S. and Puerto Rico operations of
SABMiller plc and Molson Coors Brewing Company, in July 2011, a
position he had held since July 2009. From February 2005 through
July 2009, Mr. Kiely served as President and Chief Executive
Officer of Molson Coors Brewing Company. From March 1993 to March
2005 he held a variety of executive positions at Coors Brewing
Company, including Chief Executive Officer. Before joining Coors
Brewing Company, he held executive positions with Frito-Lay, Inc.,
a subsidiary of PepsiCo Inc., and Ventura Coastal Corporation, a
division of Seven Up Inc. He serves as a director of The Denver
Center for the Performing Arts and the Helen G. Bonfils Foundation.
He previously served as a director of Medpro Safety Products, Inc.
from 2009 to March 2014. He graduated from Harvard University and
has a MBA from the Wharton School.
John F. O’Reilly, Independent Director. John F. O’Reilly is Chairman/CEO
of the full service law firm, O’Reilly Law Group. Mr.
O’Reilly’s over 40 years of experience as an attorney
includes a broad range of businesses, business transactions and
business litigation including numerous multi-million dollar
lawsuits. His accounting and business background are an asset to
litigation clients as well as in business transactions and in
resolving business issues. In addition, Mr. O’Reilly’s
experience with the public accounting firm of Ernst & Young, as
Chairman of the Nevada Gaming Commission, as Chairman/CEO of a New
York Stock Exchange company and as a member of numerous boards of
directors uniquely qualifies Mr. O’Reilly to address the
multitude of legal issues that arise in the business
world.
Our
general investment and borrowing policies are set forth in this
offering circular. Our directors may establish further written
policies on investments and borrowings and will monitor our
administrative procedures, investment operations and performance to
ensure that our executive officers and Manager follow these
policies and that these policies continue to be in the best
interests of our stockholders. Unless modified by our directors, we
will follow the policies on investments and borrowings set forth in
this offering circular.
Material Prior Business Developments of Mr. Stanton
Mr.
Stanton is our Chief Executive Officer and has primary
responsibility for our acquisition and investment strategies and
day-to-day decisions. Mr. Stanton’s biographical
information set forth above describes Mr. Stanton’s material
experience in such matters both with our predecessor and prior
thereto. Mr. Stanton has been the Chief Executive Officer of
Holmwood, our predecessor, since its inception in 2011, and our
predecessor has not had any material adverse business developments
in such period, and each of the GSA Properties acquired by our
predecessor is being contributed to us as a Contribution
Property. As a principal of US Federal Properties Trust, Mr.
Stanton aggregated an acquisition portfolio of over $200 million of
GSA Properties under contract and an additional over $50 million of
GSA Properties to be contributed by other principals. These
contracts were ultimately assigned for value, at a significant
profit, to a private equity buyer when the registered initial
public offering of USFPT did not go forward.
Prior
to his involvement with USFPT, Mr. Stanton was an active principal
with SRS Investments, LLC, or SRS, from 2005-2010. SRS
acquired, or arranged for the acquisition of, eight total
properties. None of these properties were GSA Properties and
all were acquired between 2005 and 2008.
Of the
eight properties, SRS negotiated acquisition contracts and
financing for six of them that were ultimately acquired by
assignment of the acquisition contracts to third-party,
tenants-in-common, or TICs, for value in offerings of TIC
securities sponsored by SRS. SRS retained a 1% TIC interest
in each such property, and, as such, remained in receipt of
property information, but did not have any control over management
of the TIC’s or these properties. The TICs also
typically engaged third party property managers. Four of
these properties experienced material adverse business developments
resulting in foreclosure. In three out of the four
foreclosures, Mr. Stanton believes that vacancies resulting from
the financial crisis of 2007-2008 were primary causes for the
declining fortunes of the properties. In the fourth case, a
medical office, a competitive building was built by the
property’s primary tenant several years after acquisition,
resulting in significant vacancy. Further, when faced with
vacancies related to the financial crisis and competition, the TIC
owners of these properties were unwilling, or unable, to
financially support the properties with capital necessary to cure
the vacancy problems.
Two of
the eight properties were owned through controlled entities of SRS.
These two properties were sold in 2013 for a profit.
Mr.
Stanton has had no active involvement with SRS since
2010.
Committees of the Board of Directors
Our
board of directors may establish committees it deems appropriate to
address specific areas in more depth than may be possible at a full
board meeting. We currently do not anticipate having any committees
since the board of directors has appointed our Manager to manage
our day-to-day affairs.
Limited Liability and Indemnification of Directors, Officers,
Employees and Other Agents
Our
charter limits the personal liability of our directors and officers
to us and our stockholders for monetary damages and our charter
authorizes us to obligate ourselves to indemnify and advance
expenses to our directors, our officers, and our Manager, except to
the extent prohibited by the Maryland General Corporation Law, or
MGCL, and as set forth below. In addition, our bylaws require us to
indemnify and advance expenses to our directors and our officers,
and permit us, with the approval of our board of directors, to
indemnify and advance expenses to our Manager, except to the extent
prohibited by the MGCL.
Under
the MGCL, a Maryland corporation may limit in its charter the
liability of directors and officers to the corporation and its
stockholders for money damages unless such liability results from
actual receipt of an improper benefit or profit in money, property
or services or active and deliberate dishonesty established by a
final judgment and which is material to the cause of
action.
In
addition, the MGCL requires a corporation (unless its charter
provides otherwise, which our charter does not) to indemnify a
director or officer who has been successful, on the merits or
otherwise, in the defense of any proceeding to which he or she is
made or threatened to be made a party by reason of his or her
service in that capacity and allows directors and officers to be
indemnified against judgments, penalties, fines, settlements, and
expenses actually incurred in a proceeding unless the following can
be established:
|
●
|
the act
or omission of the director or officer was material to the cause of
action adjudicated in the proceeding, and was committed in bad
faith or was the result of active and deliberate
dishonesty;
|
|
●
|
the
director or officer actually received an improper personal benefit
in money, property or services; or
|
|
●
|
with
respect to any criminal proceeding, the director or officer had
reasonable cause to believe his or her act or omission was
unlawful.
|
However, under the
MGCL, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that a personal benefit was
improperly received, unless in either case a court orders
indemnification and then only for expenses.
Finally, the MGCL
permits a Maryland corporation to advance reasonable expenses to a
director or officer upon receipt of a written affirmation by the
director or officer of his or her good faith belief that he or she
has met the standard of conduct necessary for indemnification and a
written undertaking by him or her or on his or her behalf to repay
the amount paid or reimbursed if it is ultimately determined that
the standard of conduct was not met.
To the
maximum extent permitted by Maryland law, our charter limits the
liability of our directors and officers to us and our stockholders
for monetary damages and our charter authorizes us to obligate
ourselves to indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, pay
or reimburse reasonable expenses in advance of final disposition of
a proceeding to our directors, our officers, and our Manager
(including any director or officer who is or was serving at the
request of our company as a director, officer, partner, member,
manager or trustee of another corporation, real estate investment
trust, partnership, limited liability company, joint venture,
trust, employee benefit plan or other enterprise). In addition, our
bylaws require us to indemnify and advance expenses to our
directors and our officers, and permit us, with the approval of our
board of directors, to provide such indemnification and advance of
expenses to any individual who served a predecessor of us in any of
the capacities described above and to any employee or agent of us,
including our Manager, or a predecessor of us.
However, the SEC
takes the position that indemnification against liabilities arising
under the Securities Act is against public policy and
unenforceable.
We have
purchased insurance on behalf of all of our directors and executive
officers against liability asserted against or incurred by them in
their official capacities with us, whether or not we are required
or have the power to indemnify them against the same
liability.
We have
entered into indemnification agreements with each of our directors
and each member of our senior management team that provide for
indemnification to the maximum extent permitted by Maryland law.
See “Interest of Management and Others in Certain
Transactions– Indemnification Agreements.”
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Director Compensation
We made
an initial grant of 4,000 restricted shares of our common stock to
each of our independent directors. We anticipate granting each of
our independent directors additional restricted shares of our
common stock, in amounts to be determined by our board of
directors, upon each re-election to our board of directors of an
independent director. In addition, we pay our independent directors
$1,500 in cash per in-person board meeting attended, and $250 in
cash for each teleconference meeting of the board or any committee.
All directors receive reimbursement of reasonable out-of-pocket
expenses incurred in connection with attendance at meetings of the
board of directors.
Executive Officer Compensation
We do
not pay compensation to our executive officers. Our Manager
receives fees in return for services related to the investment and
management of our assets. No portion of these fees are allocated to
the payment of our Manger’s personnel, in their roles as our
executive officers. Our executive officers who are also employees
of our Manager, Mr. Stanton and Ms. Watson, receive compensation
from our Manager. We do not reimburse our Manager for personnel
costs of its executive officers or of employees of our Manager
acting as our executive officers, including pursuant to Section
7(b)(iv) of the Management Agreement.
HC Government Realty Trust 2016 Long Term Incentive
Plan
We
adopted the HC Government Realty Trust 2016 Long Term Incentive
Plan. The purpose of our long-term incentive plan is to provide us
and our Manager with the flexibility to use equity-based awards as
part of an overall compensation package to provide a means of
performance-based compensation to attract and retain qualified
personnel. We believe that awards under our long-term incentive
plan serve to broaden the equity participation of employees,
officers, directors and consultants, and further align the
long-term interests of such individuals and our
stockholders.
Administration
Our
long-term incentive plan is administered by our board of directors,
or a committee designated by our board for such purpose, or our
plan administrator.
Our
plan administrator has the full authority to administer and
interpret our long term incentive plan, to authorize the granting
of awards, to determine the eligibility of an employee, officer,
director or consultant to receive an award, to determine the number
of shares of common stock to be covered by each award, to determine
the terms, provisions and conditions of each award (which may not
be inconsistent with the terms of our long term incentive plan), to
prescribe the form of agreements evidencing awards and to take any
other actions and make all other determinations that it deems
necessary or appropriate in connection with our long term incentive
plan or the administration or interpretation thereof. In connection
with this authority, our plan administrator may establish
performance goals that must be met in order for awards to be
granted or to vest, or for the restrictions on any such awards to
lapse.
Eligibility and Types of Awards
Individual and
entity employees, officers, directors and consultants, of us, our
Manager, our subsidiaries or our operating partnership, or
subsidiaries of our Manager are eligible to be granted stock
options, restricted stock, stock appreciation rights and other
equity-based awards (including LTIPs and RSUs) or cash-incentive
awards under our long-term incentive plan. Eligibility for awards
under our long-term incentive plan will be determined by our plan
administrator.
Available Shares
Subject
to adjustment upon certain corporate transactions or events, a
maximum number of shares of our common stock equal to the lesser of
(i) 1,000,000 or (ii) 10% of the total number of shares of our
common stock outstanding on a fully diluted basis may be issued in
connection with awards under our long-term incentive plan. Our
board of directors will adjust the number of shares of our common
stock that may be issued under our long-term incentive plan, and
the terms of outstanding awards, as required to uniformly and
equitably reflect the impact of stock dividends, stock splits,
recapitalizations and similar changes in our
capitalization.
Any
shares of our common stock surrendered by plan participants or
retained by us in connection with the payment of an option exercise
price or in connection with tax withholding will not count towards
the share authorization under our long-term incentive plan and will
be available for issuance of additional awards under our long-term
incentive plan. If an award granted under our long-term incentive
plan is forfeited, cancelled or settled in cash, the related shares
will again become available for the issuance of additional awards.
Other equity-based awards that are LTIPs will reduce the number of
shares of our common stock that may be issued under our long-term
incentive plan on a one-for-one basis, i.e., each such unit will be
treated as an award of a share of common stock. Unless previously
terminated by our board of directors, no award may be granted upon
or after the tenth anniversary of the closing of this
offering.
Awards Under the Plan
|
●
|
|
Stock Options. Stock options are rights to purchase a stated
number of shares of our common stock at the exercise price and in
accordance with the terms set forth in the agreement reflecting the
grant of such option. The terms of specific options, including
whether options will constitute “incentive stock
options” for purposes of Section 422(b) of the Internal
Revenue Code, will be determined by our plan administrator. The
exercise price of an option will be determined by our plan
administrator and reflected in the applicable award agreement, but
may not be lower than 100% (110% in the case of an incentive stock
option granted to a 10% stockholder) of the fair market value of
our common stock on the date of grant. Each option will be
exercisable during the period or periods specified in the award
agreement, which cannot exceed 10 years from the date of grant (or
five years from the date of grant in the case of an incentive stock
option granted to a 10% stockholder). Options will be exercisable
at such times and subject to such terms as determined by our plan
administrator, but in all cases will be subject to our stock
ownership limits as provided under our charter.
|
|
●
|
|
Restricted Stock. Restricted stock awards are grants of our
common stock that may be subject to transfer restrictions and
vesting conditions. The transfer restrictions and vesting
requirements, if any, will be prescribed by our plan administrator.
For example, the transfer restrictions and the vesting conditions
may require that the participant complete a specified period of
employment or service or that we achieve specified financial
performance goals. A participant generally will have the right to
vote the shares of restricted stock and the right to receive
dividends on the restricted stock. Our plan administrator may
provide in the applicable award agreement that dividends paid on
the shares of restricted stock will be subject to the same
restrictions as the shares of restricted stock.
|
|
●
|
|
Stock Appreciation Rights. Stock appreciation rights are
rights to receive a payment in cash, shares of our common stock or
a combination of cash and common stock, upon the exercise of the
stock appreciation right. The amount of the payment upon the
exercise of a stock appreciation right cannot be greater than the
excess of the fair market value of a share of our common stock on
the date of exercise over the fair market value of a share of our
common stock on the date of the grant of the stock appreciation
right. The manner in which our obligation will be paid will be
determined by our plan administrator. The terms and conditions of
each stock appreciation right will be prescribed by our plan
administrator but the term cannot exceed ten years.
|
|
●
|
|
Other Equity-Based Awards. Our long term incentive plan
authorizes the granting of other equity-based awards,i.e., awards other than stock options,
restricted stock or stock appreciation rights. Other equity-based
awards entitle the participant to receive our common stock, or
rights or units valued in whole or in part by reference to, or
otherwise based on, our common stock, or other equity interests,
including RSUs and LTIPs, subject to terms and conditions
established at the time of grant.
|
Restricted
stock units, or RSUs, are contractual promises to deliver shares of
our common stock in the future. RSUs may remain forfeitable unless
and until specified conditions are met as determined by our plan
administrator and set forth in the applicable award agreement. RSUs
will receive quarterly dividends in parity with shares of our
common stock unless otherwise specified in the award
agreement.
Long-term incentive
plan units, or LTIPs, are a special class of partnership interests
in our operating partnership. Each LTIP awarded will be deemed
equivalent to an award of one share of common stock under our
long-term incentive plan, reducing availability for other equity
awards on a one-for-one basis. We will not receive a tax deduction
for the value of any LTIPs granted to our employees. The vesting
period for any LTIPs, if any, will be determined at the time of
issuance. LTIPs, whether vested or not, will receive the same
quarterly per unit distributions as units of our operating
partnership, which distribution generally equals per share
dividends on our shares of common stock. This treatment with
respect to quarterly distributions is similar to the expected
treatment of our restricted stock awards, which may include full
dividends whether vested or not. Initially, LTIPs will not not have
full parity with OP Units with respect to liquidating
distributions. Under the terms of the LTIPs, our operating
partnership will revalue its assets upon the occurrence of certain
specified events, and any increase in valuation from the date of
grant until such event will be allocated first to the holders of
LTIPs to equalize the capital accounts of such holders with the
capital account relating to the general partner’s OP Units.
Upon equalization of the capital accounts of the holders of LTIPs
with the general partner’s OP Units, the LTIPs will achieve
full parity with OP Units for all purposes, including with respect
to liquidating distributions. If such parity is reached, vested
LTIPs may be converted into an equal number of OP Units at any
time, and thereafter enjoy all the rights of OP Units, including
redemption rights. However, there are circumstances under which
such parity would not be reached. Until and unless such parity is
reached, the value that a participant will realize for a given
number of vested LTIPs will be less than the value of an equal
number of our shares of common stock.
|
●
|
|
Cash-Incentive Awards. Cash-incentive awards are rights to
receive a payment in cash or shares of our common stock (having a
value equivalent to the cash otherwise payable) that is contingent
on the achievement of performance objectives established by our
plan administrator. The amount payable under a cash-incentive award
may be stated on an individual basis or as an allocation of an
incentive pool. Our plan administrator will prescribe the terms and
conditions of each cash-incentive award.
|
Change in Control
Upon a
change in control of our company (as defined in our long-term
incentive plan), our plan administrator may make such adjustments
to our long-term incentive plan as it, in its discretion,
determines are necessary or appropriate in light of the change in
control. These actions may include accelerated vesting relating to
the exercise or settlement of an award, the purchase or settlement
of an award for an amount of cash equal to the amount which could
have been obtained had such award been currently exercisable or
payable or the assumption of the award by the acquiring or
surviving entity.
Amendment and Termination
Our
board of directors may amend our long term incentive plan as it
deems advisable, except that it may not amend our long term
incentive plan without stockholder approval if such amendment
(i) increases the total number of shares of our common stock
reserved for issuance pursuant to awards granted under the plan
(other than an increase to reflect a change in our capitalization,
etc.), (ii) expands the class of persons eligible to receive
awards, (iii) materially increases the benefits accruing to
participants under the plan, (iv) re-prices an option or stock
appreciation right (other than an adjustment to reflect a change in
our capitalization) or (v) otherwise requires stockholder
approval under the rules of a domestic exchange on which our common
stock is traded. Our board of directors may unilaterally amend our
long-term incentive plan and awards granted thereunder as it deems
appropriate to ensure compliance with Rule 16b-3, if
applicable, to conform our long-term incentive plan or the award
agreement to any present or future law, and to cause incentive
stock options to meet the requirements of the Code and regulations
under the Code. Except as provided in the preceding sentence, a
termination or amendment of our long-term incentive plan may not,
without the consent of the participant, adversely affect a
participant’s rights under an award previously granted to him
or her.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS
The
table below sets forth, as of the date of this offering circular,
certain information regarding the beneficial ownership of our stock
for (1) each person who is expected to be the beneficial owner of
10% or more of our outstanding shares of any class of voting stock
and (2) each of our directors and named executive officers, if
together such group would be expected to be the beneficial owners
of 10% or more of our outstanding shares of any class of voting
stock. Each person named in the table has sole voting and
investment power with respect to all of the shares of common stock
shown as beneficially owned by such person.
The SEC
has defined “beneficial ownership” of a security to
mean the possession, directly or indirectly, of voting power and/or
investment power over such security. A stockholder is also deemed
to be, as of any date, the beneficial owner of all securities that
such stockholder has the right to acquire within 60 days after that
date through (1) the exercise of any option, warrant or right, (2)
the conversion of a security, (3) the power to revoke a trust,
discretionary account or similar arrangement or (4) the automatic
termination of a trust, discretionary account or similar
arrangement. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, our shares
of common stock subject to options or other rights (as set forth
above) held by that person that are exercisable as of the
completion of this offering or will become exercisable within 60
days thereafter, are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing
percentage ownership of any other person.
Title of Class
|
|
Name and Address of Beneficial Owner
|
|
Amount and Nature of Beneficial Ownership
|
|
Amount and Nature of Beneficial Ownership Acquirable
|
|
|
Percent
of Class
|
|
Common
Stock
|
|
All
Executive Officers and Directors1
|
|
216,000
Shares
|
|
N/A
|
|
|
26.80
|
%
|
Series
A Preferred Stock
|
|
All
Executive Officers and Directors1
|
|
44,000
Shares2
|
|
N/A
|
|
|
30.45
|
%2
|
Series
A Preferred Stock
|
|
Gerald
Kreinces 191 Fox Lane Northport, NY11763
|
|
18,000
Shares
|
|
N/A
|
|
|
12.46
|
%
|
Series
A Preferred Stock
|
|
Philip
Kurlander
1819 Main Street, Suite 212,
Sarasota,
Florida 34236
|
|
26,000
Shares
|
|
N/A
|
|
|
17.99
|
%
|
1 The address of each beneficial owner is 1819 Main Street,
Suite 212, Sarasota, Florida 34236.
2 Includes the 26,000 shares owned by Philip Kurlander
disclosed in the table.
OUR MANAGER AND RELATED AGREEMENTS
Our Manager
We are
externally managed and advised by Holmwood Capital Advisors, LLC,
or our Manager, pursuant to a Management Agreement. See
“— Management Agreement.” Each of our
officers are also officers of our Manager. Our Manager is owned by
Messrs. Robert R. Kaplan and Robert R. Kaplan Jr., individually,
and by Stanton Holdings, LLC, which is controlled by Mr. Edwin M.
Stanton, and by Baker Hill Holding LLC, which is controlled by
Philip Kurlander, all in equal proportions. Our Manager is
primarily responsible for managing our day-to-day business affairs
and assets and carrying out the directives of our board of
directors. Our Manager maintains a contractual as opposed to a
fiduciary relationship with us. Our Manager will conduct our
operations and manage our portfolio of real estate investments. We
have no paid employees.
The
officers of our Manager are as follow:
Name
|
Position
|
Edwin
M. Stanton
|
President
|
Robert
R. Kaplan, Jr.1
|
Vice
President
|
Philip
Kurlander
|
Treasurer
|
Robert
R. Kaplan1
|
Secretary
|
1Messrs. Robert R. Kaplan and Robert R. Kaplan, Jr. are
father and son.
The
background and experience of Messrs. Stanton, Kaplan, Jr.,
Kurlander and Kaplan are described above in “Directors,
Executive Officers, and Significant Employees — Our
Executive Officers and Directors.” For more information on
the experience of Mr. Stanton, our Chief Executive Officer, please
see "Directors, Executive Officers, and Significant Employees -
Material Prior Business Developments of Mr. Stanton."
Liquidity Track Record
Our
Manager has not previously sponsored any other offering and has no
liquidity track record other than its record managing
us.
Management Agreement
We have
entered into a Management Agreement with our Manager pursuant to
which it will provide for the day-to-day management of our
operations. The Management Agreement requires our Manager to manage
our business affairs in conformity with the Investment Guidelines
and other policies as approved and monitored by our board of
directors. Our Manager’s role as Manager is under the
supervision and direction of our board of directors. Our Manager
does not currently manage or advise any other entities and is not
actively seeking new clients in such a capacity, although it is not
prohibited from doing so under the Management
Agreement.
Management Services
Our
Manager is responsible for (1) the sourcing and acquisition and
sale of our GSA Properties and any other investments, (2) our
financing activities, and (3) providing us with advisory services.
Our Manager is responsible for our day-to-day management of our
operations and will perform (or will cause to be performed) such
services and activities relating to our assets and operations as
may be appropriate.
Term and Termination
The
Management Agreement will continue in operation, unless terminated
in accordance with the terms hereof for an initial term through
March 31, 2018, or the Initial Term, and then will automatically
renew annually. After the Initial Term, the Management Agreement
will be deemed renewed automatically each year for an additional
one-year period, or an Automatic Renewal Term, unless our company
or our Manager elects not to renew. Upon the expiration of the
Initial Term or any Automatic Renewal Term and upon
180 days’ prior written notice to our Manager, our
company may, without cause, but solely in connection with the
expiration of the Initial Term or the then current Automatic
Renewal Term, and upon the affirmative vote of at least two-thirds
of the independent directors, decline to renew the Management
Agreement, any such nonrenewal, a Termination Without Cause. In the
event of a Termination Without Cause, or upon a termination by our
Manager if we materially breach the Management Agreement we will be
required to pay our Manager a termination fee before or on the last
day of the Initial Term or such Automatic Renewal Term. Such
termination fee will be equal to three times the sum of the asset
management fees, acquisition fees and leasing fees earned, in each
case, by our Manager during the 24-month period prior to such
termination, calculated as of the end of the most recently
completed fiscal quarter; provided, however, that if the Listing
Event has not occurred and no acquisition fees have been paid, then
all accrued acquisition fees will be included in the above
calculation of the termination fee. The termination fee is payable
in vested equity of our company, cash, or a combination thereof, in
the discretion of our board.
We may
generally terminate our Manager for cause, without payment of any
termination fee, if (i) our Manager, its agents or assignees
breaches any material provision of the Management Agreement and
such breach shall continue for a period of 30 days after
written notice thereof specifying such breach and requesting that
the same be remedied in such 30-day period (or 45 days after
written notice of such breach if our Manager takes steps to cure
such breach within 30 days of the written notice),
(ii) there is a commencement of any proceeding relating to our
Manager’s bankruptcy or insolvency, including an order for
relief in an involuntary bankruptcy case or our Manager authorizing
or filing a voluntary bankruptcy petition, (iii) any
“Manager Change of Control,” as defined in the
Management Agreement, which a majority of the independent directors
determines is materially detrimental to us and our subsidiaries,
taken as a whole, (iv) the dissolution of our Manager, or
(v) our Manager commits fraud against us, misappropriates or
embezzles our funds, or acts, or fails to act, in a manner
constituting gross negligence, or acts in a manner constituting bad
faith or willful misconduct, in the performance of its duties under
the Management Agreement; provided, however, that if any of the
actions or omissions described in clause (v) above are caused
by an employee and/or officer of our Manager or one of its
affiliates and our Manager takes all necessary and appropriate
action against such person and cures the damage caused by such
actions or omissions within 30 days of our Manager actual
knowledge of its commission or omission, we will not have the right
to terminate the Management Agreement for cause and any termination
notice previously given will be deemed to have been rescinded and
nugatory.
No
later than 180 days prior to the expiration of the Initial
Term or the then current Automatic Renewal Term, our Manager may
deliver written notice to our company informing it of our
Manager’s intention to decline to renew the Management
Agreement, whereupon the Management Agreement shall not be renewed
and extended and the Management Agreement shall terminate effective
on the anniversary date of the Management Agreement next following
the delivery of such notice. We will not be required to pay to our
Manager the termination fee if our Manager terminates the
Management Agreement.
The
Management Agreement shall terminate automatically without payment
of the termination fee in the event of its assignment, in whole or
in part, by our Manager, unless such assignment is consented to in
writing by us with the consent of a majority of the independent
directors and the operating partnership.
The
Management Agreement shall not be assigned by us without the prior
written consent of our Manager, except in the case of assignment to
another REIT or other organization which is a successor (by merger,
consolidation, purchase of assets, or other transaction) to us, in
which case such successor organization shall be bound under the
Management Agreement and by the terms of such assignment in the
same manner as we were bound under the Management
Agreement.
The
Management Agreement may be amended or modified by agreement
between us and our Manager in writing.
Management Fees payable to our Manager
See
"Compensation to Our Manager and Affiliates."
Liability and Indemnification
Pursuant to the
Management Agreement and unless provided otherwise therein, our
Manager assumes no responsibility under the Management Agreement
other than to render the services called for therein in good faith
and shall not be responsible for any action of the board of
directors in following or declining to follow any advice or
recommendations of our Manager, including as set forth in the
Investment Guidelines. Our Manager, its officers, members,
managers, directors, personnel, any person controlling or
controlled by our Manager, and any person providing sub-advisory
services to our Manager, each, a Manager Indemnified Party, will
not be liable to us, any subsidiary of ours or any of our or our
subsidiaries’ stockholders, partners, members or other
holders of equity interests for any acts or omissions by any
Manager Indemnified Party performed in accordance with and pursuant
to this Agreement, except by reason of any act or omission on the
part of such Manager Indemnified Party constituting bad faith,
willful misconduct, gross negligence or reckless disregard of their
duties under the Management Agreement as determined by a final,
non-appealable order of a court of competent
jurisdiction.
We have
agreed to reimburse, indemnify and hold harmless, to the full
extent lawful, each Manager Indemnified Party, of and from any and
all expenses, losses, damages, liabilities, demands, charges and
claims of any nature whatsoever (including reasonable
attorneys’ fees), collectively Losses, in respect of or
arising from any acts or omissions of such Manager Indemnified
Party performed in good faith under the Management Agreement and
not constituting bad faith, willful misconduct, gross negligence or
reckless disregard of duties of such Manager Indemnified Party
under the Management Agreement as determined by a final,
non-appealable order of a court of competent jurisdiction. In
addition, we have agreed to advance funds to a Manager Indemnified
Party for legal fees and other costs and expenses incurred as a
result of any claim, suit, action or proceeding for which
indemnification is being sought pursuant to the terms of the
Management Agreement, provided, that such Manager Indemnified
Party undertakes to repay the advanced funds to us, together with
the applicable legal rate of interest thereon, if it shall
ultimately be determined that such Manager Indemnified Party is not
entitled to be indemnified by us as provided in the Management
Agreement in connection with such claim, suit, action or
proceeding.
Our
Manager has agreed to reimburse, indemnify and hold harmless, to
the full extent lawful, our company, its directors and officers,
personnel, agents and Affiliates, each, a Company Indemnified
Party, of and from any and all Losses in respect of or arising from
(i) any acts or omissions of our Manager constituting bad
faith, willful misconduct, gross negligence or reckless disregard
of the duties of our Manager under the Management Agreement, or
(ii) any claims by our Manager’s personnel relating to
the terms and conditions of their employment by our
Manager.
COMPENSATION TO OUR MANAGER AND AFFILIATES
The
compensation table below outlines all compensation payable to our
Manager and its affiliates during the stages in the life of our
company.
Type
|
Description
|
Estimated Amount of Maximum Offering1
|
|
|
|
|
Offering Stage
|
|
|
|
|
Organizational
and Offering Costs
|
Our
Manager or its affiliates may advance organizational and offering
costs incurred on our behalf, and we will reimburse such advances,
but only to the extent that such reimbursements do not exceed
actual expenses incurred by our Manager or its affiliates. To date,
our Manager or its affiliates have advanced approximately $990,000
as organizational and offering costs, of which. We anticipate
approximately $10,000 of further organizational and offering
expenses to be incurred. To the extent that organizational and
offering expenses, when combined with underwriting discounts,
commissions and expense reimbursements in connection with this
offering, exceed 15.0% of the gross proceeds from the offering, or
the O&O Cap, the Manager has agreed to repay an amount of
organizational and offering expenses which would bring such fees
and commissions paid in connection with this offering below the
O&O Cap.
|
$1,000,0002
|
|
|
|
|
Operational Stage
|
|
|
|
|
Asset
Management Fee
|
We will
pay our Manager an annual asset management fee equal to 1.5% of our
stockholders’ equity payable quarterly in arrears in cash.
For purposes of calculating the asset management fee, our
stockholders’ equity means: (a) the sum of (1) the net
proceeds from (or equity value assigned to) all issuances of our
company’s equity and equity equivalent securities (including
common stock, common stock equivalents, preferred stock and OP
Units issued by our operating partnership) since inception
(allocated on a pro rata daily basis for such issuances during the
fiscal quarter of any such issuance), plus (2) our company’s
retained earnings at the end of the most recently completed
calendar quarter (without taking into account any non-cash equity
compensation expense incurred in current or prior periods), less
(b) any amount that our company has paid to repurchase our common
stock issued in this or any subsequent offering.
Stockholders’ equity also excludes (1) any unrealized gains
and losses and other non-cash items (including depreciation and
amortization) that have impacted stockholders’ equity as
reported in our company’s financial statements prepared in
accordance with GAAP, and (2) one-time events pursuant to changes
in GAAP, and certain non-cash items not otherwise described above,
in each case after discussions between our Manager and our
independent director(s) and approval by a majority of our
independent directors.
|
$611,5753
|
Property
Management Fee
|
Our
Manager’s wholly-owned subsidiary, Holmwood Capital
Management, LLC, a Delaware Fee limited liability company, or the
Property Manager, managers our portfolio earning market-standard
property management fees based on a percentage of rent pursuant to
a property management agreement executed between the Property
Manager and our subsidiary owning the applicable
property.
|
Actual
amounts depend upon the terms of each property management agreement
and the rental rates of our properties acquired in the future and,
therefore, cannot be determined at this time.
|
|
|
|
Acquisition
Fee
|
We will
pay an acquisition fee, payable in vested equity in our company,
equal to 1% of the gross purchase price, as adjusted pursuant to
any closing adjustments, of each investment made on our behalf by
our Manager following the initial closing of this offering;
provided, however that all acquisition fees for investments prior
to the earlier of (a) the initial listing of our common stock on
the New York Stock Exchange, NYSE MKT, NASDAQ Stock Exchange, or
any other national securities exchange, or a Listing Event, or (b)
March 31, 2020, shall be accrued and paid simultaneously with the
Listing Event, or March 31, 2020, as applicable. To date, we owe
our Manager acquisition fees of $192,095 from our acquisition of
the Norfolk Property and the Montgomery Property.
|
$1,164,8924
|
|
|
|
Leasing
Fee
|
Our
Manager will be entitled to a leasing fee equal to 2.0% of all
gross rent due during the term of any new lease or lease renewal,
excluding reimbursements by the tenant for operating expenses and
taxes and similar pass-through obligations paid by the tenant for
any new lease or lease renewal entered into or exercised during the
term of the Management Agreement. The Leasing Fee is due to our
Manager within thirty (30) days of the commencement of rent payment
under the applicable new lease or lease renewal. The Leasing Fee is
payable in addition to any third-party leasing commissions or fees
incurred by us.
|
Actual
amounts depend upon the leases we enter into and, therefore, cannot
be determined at the present time.
|
Equity
Grants
|
Our
Manager receives a grant of our company’s equity securities,
or a Grant, which may be in the form of restricted shares of common
stock, restricted stock units underlain by common stock, long-term
incentive units in our operating partnership, or LTIP Units, or
such other equity security as may be determined by the mutual
consent of the board of directors (including a majority of the
independent directors) and our Manager, at each closing of an
issuance of our company’s common stock or any shares of
common stock issuable pursuant to outstanding rights, options or
warrants to subscribe for, purchase or otherwise acquire shares of
common stock that are “in-the-money” on such date in a
public offering, such that following such Grant our Manager shall
own equity securities equivalent to 3.0% of the then issued and
outstanding common stock of our company, on a fully diluted basis,
solely as a result of such Grants. For the avoidance of doubt, only
equity securities owned pursuant to a Grant shall be included in
our Manager’s 3.0% ownership described in the preceding
sentence, and no other equity securities owned by our Manager or
any member of our Manager shall be included in such calculation.
Any Grant shall be subject to vesting over a five-year period with
vesting occurring on a quarterly basis, provided, that, the only
vesting requirement shall be that the Management Agreement (or any
amendment, restatement or replacement hereof with our Manager
continuing to provide the same general services as provided
hereunder to our company) remains in effect, and, further provided,
that, if the Management Agreement is terminated for any reason
other than a termination for cause as described in the Management
Agreement, then the vesting of any Grant shall accelerate such that
the Grant shall be fully vested as of such termination date. To
date, our Manager has received Grants equating to 71,645 LTIPs
valued at $716,840.
|
$1,462,2405
|
Accountable
Expense Reimbursement
|
Our
Manager will be entitled to receive an accountable expense
reimbursement for documented expenses of our Manager and its
affiliates incurred on behalf of either our company or our
operating partnership that are reasonably necessary for the
performance by our Manager of its duties and functions hereunder;
provided, that such expenses are in amounts no greater than those
that which would be payable to third party professionals or
consultants engaged to perform such services pursuant to agreements
negotiated on an arm’s-length basis, and excepting only those
expenses that are specifically the responsibility of our Manager.
The accountable expense reimbursement will be reimbursed monthly to
our Manager. The accountable expense reimbursement in any given
year will not exceed the greater of 2.0% of the average book value
of our assets and 25.0% of our net income.
|
Actual
amounts depend accountable expenses incurred by the Manager and its
affiliates in any given month, and, therefore cannot be determined
at the present time.
|
|
|
|
|
Termination and Liquidation Stage
|
|
|
|
|
Termination
Fee6
|
Subject
to certain limitations, we will pay our Manager a termination fee
equal to three times the sum of the asset management fees,
acquisition fees and leasing fees earned, in each case, by our
Manager during the 24-month period prior to such termination,
calculated as of the end of the most recently completed fiscal
quarter prior to the date of termination; provided that if the
Listing Event has not occurred and no accrued acquisition fees have
been paid, then all accrued acquisition fees will be included in
the above calculation of the termination fee. The termination fee
will be payable upon termination of the Management Agreement (i) by
us without cause or (ii) by our Manager if we materially breach the
Management Agreement. The termination fee is payable in cash,
vested equity of our company, or a combination thereof, in the
discretion of our board.
|
Actual
amounts depend upon the management fees, acquisition fees and
leasing fees payable in the 24 months prior to termination and,
therefore, cannot be determined at the present time.
|
|
|
|
Property
Management Termination Fee6
|
We
anticipate that each property management agreement will provide for
a termination fee to be paid to the Property Manager if the
Property Manager is terminated without cause or in the event of a
sale of the subject property. Each property management agreement
will or is expected to expire in 2050, and no termination fee will
be due to the Property Manager if a property management agreement
is not renewed prior to its expiration. The termination fee under
the property management agreement will equal the aggregate property
management fee paid to the Property Manager for the three full
calendar months immediately prior to termination multiplied by
four.
|
Actual
amounts depend upon the property management fees payable
immediately prior to termination and, therefore, cannot be
determined at the present time.
|
1 The maximum dollar amounts are based on the sale of the
maximum of $30,000,000 in shares to the public in our
offering.
2 Estimated organizational and operating costs represent
approximately 3.33% of the maximum offering amount, assuming we
sell the maximum offering amount.
3 The expected asset management fee assumes that we sell the
maximum offering amount and receive $26,375,000 in net proceeds
from this offering. We have previously received $3,612,500 in net
proceeds from our Series A Preferred Stock offering. In addition,
we issued 1,078,416 OP Units at the initial closing of this
offering as compensation for the Contribution Properties, valued at
$10,784,160, based on the price per share in this offering. The
expected asset management fee also assumes we raise no additional
equity and have no additional adjustments.
4 The expected acquisition fee assumes that we raise the
maximum offering amount, resulting in $26,375,000 in net proceeds,
that we pay off the Standridge Note and the Promissory Notes on
January 5, 2018 and June 11, 2018, respectively, and that we buy
properties using our target leverage of 80%. It also takes into
account the paying off of the Holmwood Loan and Citizens Loan with
proceeds from this offering. The acquisition fee will be payable in
vested equity of our company.
5 We anticipate making Grants of equity securities
equivalent to 146,224 shares of our common stock, on a fully
diluted basis, pursuant to this requirement, if we sell the maximum
offering amount. The expected value of these grants, disclosed
above, is based on a valuation of $10.00 per share.
6 The termination of the Management Agreement or a property
management agreement may be, but will not necessarily be, a part of
the termination and liquidation of our company. For example, if a
Listing Event occurs, we will be required to pay the Termination
Fee, but our company would not be in its termination and
liquidation stage.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of Investment Guidelines and certain
of our investment, financing and other policies, which we refer to
as our Investment Policies. These Investment Guidelines and
Investment Policies have been determined by our board of directors
and may be amended or revised from time to time by our board of
directors without a vote of our stockholders, except as set forth
below. Further, our Investment Policies may be amended from time to
time by our Manager without a vote of either the board of directors
or our stockholders; provided, however, that any
addition, rescission, amendment or modification of the Investment
Policies that will, or reasonably could be expected to, cause us
(or our operating partnership) to: (i) fail to qualify as a REIT
the Code and the applicable Treasury Regulations promulgated
thereunder, both as amended or (ii) be regulated as an investment
company under the Investment Company Act of 1940, as amended, or
the Investment Company Act, will require the approval of a majority
of our independent directors. Our Manager and board have the
authority to amend our Investment Policies; however only our board
(with the approval of a majority of independent directors) has the
authority to amend our Investment Guidelines, which supersede the
Investment Policies. As a result, our board has ultimate authority
over how broad our Investment Policies can be.
Investment Guidelines
Pursuant to the
Investment Guidelines as stated in the Management Agreement, no
investment shall be made that would (i) cause our company to fail
to qualify as a REIT under the Code or (ii) cause our company or
our operating partnership to be regulated as an investment company
under the Investment Company Act. The Investment Guidelines may be
amended, restated, modified, supplemented or waived by the Board
(which must include a majority of the independent directors)
without the approval of our stockholders.
Investment Policies
Subject
to the Investment Guidelines, which have been developed by our
Manager for the benefit of us and have been approved by our board,
and, subject to the proviso above, our Investment Policies may be
rescinded, amended, or replaced as our Manager or board determines
in its reasonable discretion:
●
We, through our
operating partnership will seek to acquire properties that
primarily meet the following parameters:
o
Be
single tenanted properties, which were built to meet specific needs
and requirements of the agency or departmental occupant that were
contained in the bid requested by the federal government for the
facility and that are leased to the United States of
America;
o
Be
“Citizen Service” or “Mission Critical” in
nature and function, which is to say that provide essential
services to the citizenry or make essential contributions to the
fulfillment of the stated mission of the occupying agencies or
departments;
o
Contain 5,000 to
50,000 square feet;
o
Be
located in secondary or smaller metropolitan statistical areas or
in rural areas;
o
Be
first generation new construction (after 09/11/01) or first
generation, retrofit (meeting post-9/11 security
requirements);
o
Preferably be
LEED® certified;
o
Have
installed security features meeting the occupants’ needs;
and
o
Be
expandable to meet the future needs of the occupant.
For
purposes of this Investment Policies section, we refer to
properties meeting the description above as our Target
Properties.
●
Properties we
acquire primarily should have at least eight (8) years remaining in
the lease term, but twenty percent (20.0%) (or more in certain
individual markets with attributes and demographics that our
Manager believes militate in favor of renewal or a new lease) of
the portfolio at any given time containing properties with three
years or less remaining on the particular properties firm (not
subject to early termination by the federal government) or
remaining term.
●
Properties we
acquire for our operating partnership will be owned through
wholly-owned (by the operating partnership), special purpose
entities that will isolate liability for the operating partnership
that may arise from any one property.
●
We will select
properties to acquire that in our Manager’s experience are
likely to be sellable individually if conditions warrant or are
compatible with a reasonably diversified (in terms of geography,
agencies and missions) portfolio that is capable of being managed
to maximize economies of scale, both overall and
regionally.
●
If our Manager
deems it in our company’s best interest, we may:
o
participate with
third parties in property ownership, through joint ventures,
private equity, real estate funds or other types of co-ownership;
and
o
acquire real
estate or interests in real estate in exchange for the issuance of
common stock, common units, preferred stock or options to purchase
stock.
However,
our Manager will not cause us (or our operating partnership) to
enter into a joint venture or other partnership arrangement to make
an investment that would not otherwise meet the requirements of
these Investment Policies.
●
While our company
intends to focus primarily on acquiring Target Properties, in order
to achieve higher risk-adjusted returns, we reserve the right to
invest a percentage of its capital reasonably deemed appropriate by
our Manager in properties leased to States and municipalities, the
long-term indebtedness of which is rated A or better by one or more
nationally recognized rating agencies (i.e., S&P, Moody’s
or Fitch) that will be subject to annual
appropriations.
●
While investments
and acquisitions must be consistent with our company’s
qualification as a REIT, our Manager may:
o
diversify in terms
of property locations, size and market or submarket;
and
o
invest
or acquire and expand and improve the properties owned or acquired,
or sell individually or collectively one or more of such
properties, in whole or in part, when circumstances
warrant.
●
If our Manager
reasonably deems it to be in our best interest, we may invest in
securities of other REITs, other entities engaged in real estate
activities or securities of other issuers where such investment
would be consistent with our investment objectives and our
qualification as a REIT. These investments may be either in debt or
equity securities of such entities, including for the purpose of
exercising control over such entities, subject to applicable REIT
requirements. This Policy does not permit direct investment us or
our operating partnership in entities that are not engaged in real
estate activities, but it does not restrict our Manager’s
right to cause our company to invest in one or more
TRSs.
●
Our Manager may
cause us to dispose of some, but not all, properties if, based upon
our Manager’s periodic review of the operating
partnership’s portfolio, it determines that such action would
be in our best interests. Any proposed dispositions also will be
analyzed in light of the “prohibited transaction” rules
applicable to REITs.
●
Other than as
described above, we may invest in any additional securities such as
bonds, preferred stocks or common stocks.
Financing
We
intend to maintain the aggregate indebtedness of our investment
portfolio at approximately 80% of the all-in cost of all portfolio
investments (direct and indirect). However, there is no maximum
limit on the amount of indebtedness secured by the portfolio
investments as a whole, or any portfolio investment individually.
Currently, the aggregate indebtedness of our investment portfolio
is approximately 74.75% of the all-in cost of all portfolio
investments (direct and indirect).
We have
the ability to exercise discretion as to the types of financing
structures we utilize. For example, we may obtain new mortgage
loans to finance property acquisitions, acquire properties subject
to debt or otherwise incur secured or unsecured indebtedness at the
property level at any time. The use of leverage enables us to
acquire more properties than if leverage is not used. However,
leverage also increases the risks associated with an investment in
our common stock. See “Risk Factors.” Our Manager may
also elect to enter into one or more credit facilities with
financial institutions. Any such credit facility may be unsecured
or secured, including by a pledge of or security interest granted
in our assets.
Disposition Terms
Investments may be
disposed of by sale on an all-cash or upon other terms as
determined by our Manager in its sole discretion. We may accept
purchase money obligations and other forms of consideration
(including other real properties) in exchange for one or more
investments. In connection with acquisitions or dispositions of
investments, we may enter into certain guarantee or indemnification
obligations relating to environmental claims, breaches of
representations and warranties, claims against certain financial
defaults and other matters, and may be required to maintain
reserves against such obligations. In addition, we may dispose of
less than 100% of its ownership interest in any investment in the
sole discretion of our Manager.
We will
consider all viable exit strategies for our investments, including
single asset and/or portfolio sales to institutions, investment
companies, real estate investment trusts, individuals and 1031
exchange buyers.
Interested Director and Officer Transactions
Pursuant to the
MGCL, a contract or other transaction between us and a director or
between us and any other corporation or other entity in which any
of our directors is a director or has a material financial interest
is not void or voidable solely on the grounds of such common
directorship or interest. The common directorship or interest, the
presence of such director at the meeting at which the contract or
transaction is authorized, approved or ratified or the counting of
the director’s vote in favor thereof will not render the
transaction void or voidable if:
|
●
|
the
fact of the common directorship or interest is disclosed or known
to our board of directors or a committee of our board of directors,
and our board of directors or such committee authorizes, approves
or ratifies the transaction or contract by the affirmative vote of
a majority of disinterested directors, even if the disinterested
directors constitute less than a quorum;
|
|
|
|
|
●
|
the
fact of the common directorship or interest is disclosed or known
to our stockholders entitled to vote thereon, and the transaction
is authorized, approved or ratified by a majority of the votes cast
by the stockholders entitled to vote, other than the votes of
shares owned of record or beneficially by the interested director
or corporation or other entity; or
|
|
|
|
|
●
|
the
transaction or contract is fair and reasonable to us at the time it
is authorized, ratified or approved.
|
Conflict of Interest Policies
Our
management is be subject to various conflicts of interest arising
out of our relationship with our Manager and its affiliates. See
“Risk Factors — Risks Related to Conflicts of
Interest.” We are entirely dependent upon our Manager for our
day-to-day management and do not have any independent employees.
Our executive officers and three of our directors, serve as
officers of our Manager. Messrs. Kaplan, Kaplan Jr, Kurlander and
Stanton, each beneficially own 25% of our Manager. As a result,
conflicts of interest may arise between our Manager and its
affiliates, on the one hand, and us on the other.
We have
not established any formal procedures to resolve the conflicts of
interest. Our stockholders will therefore be dependent on the good
faith of the respective parties to resolve conflicts equitably, and
reliant upon the fiduciary duties of our directors and executive
officers. We do not have a policy that expressly restricts any of
our directors, officers, stockholders or affiliates, including our
Manager and its officers and employees, from having a pecuniary
interest in an investment in or from conducting, for their own
account, business activities of the type we conduct.
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS
Management Agreement
We have
entered into the Management Agreement. We describe this agreement
and the associated fees in “Our Manager and Related
Agreements — Management Agreement.” Messrs.
Stanton, Kaplan, Jr., Kurlander and Kaplan, each an officer, and
three of which are also directors, of our company, each
beneficially own 25% of the outstanding equity of our Manager.
Under the Management Agreement, our Manager receives compensation
in the form of an asset management fee, an acquisition fee, a
leasing fee, equity grants, accountable expense reimbursements and
a termination fee. For more information on the fees payable to our
Manager and its affiliates, please see “Compensation to Our
Manager and Affiliates.”
We pay
our Manager an annual asset management fee equal to 1.5% of our
stockholders’ equity payable quarterly in arrears in cash.
Assuming that we
raise the maximum offering amount, we anticipate we will receive
$26,375,000 in net proceeds from this offering. We have previously
received $3,612,500 in net proceeds from our Series A Preferred
Stock offering and issued 1,078,416 OP Units at the initial closing
of this offering as compensation for the Contribution Properties,
valued at $10,784,160 based on the price per share in this
offering. As a result, we estimate that our Manager would receive
an annual asset management fee of $611,575 if we were to raise no
additional equity and no additional adjustments were
made.
We will
pay an acquisition fee, payable in vested equity in our company,
equal to 1% of the gross purchase price, as adjusted pursuant to
any closing adjustments, of each investment made on our behalf by
our Manager following the initial closing of this offering.
Assuming that we raise the maximum offering amount, resulting in
$26,375,000 in net proceeds, that we pay off the Standridge Note
and the Promissory Notes with proceeds from this offering on
January 5, 2018 and June 11, 2018, respectively, and that we buy
properties using our target leverage of 80%, and given that we paid
off the Holmwood Loan and Citizens Loan at the initial closing of
the offering, we anticipate that acquisition fees of approximately
$1,164,892 in vested equity of our company will be paid to our
Manager as a result of this offering. Based upon their percentage
ownership interests in our Manager, Messrs. Kurlander, Kaplan,
Kaplan, Jr. and Stanton will each beneficially receive vested
equity valued, at the time of accrual, at $291,223 in the
aggregate.
Our Manager will be entitled to a leasing fee equal to 2.0% of all
gross rent due during the term of any new lease or lease renewal,
excluding reimbursements by the tenant for operating expenses and
taxes and similar pass-through obligations paid by the tenant for
any new lease or lease renewal entered into or exercised during the
term of the Management Agreement. We cannot estimate the leasing
fees that will be payable to our Manager at this time.
Our Manager receives a grant of our
company’s equity securities, or a Grant, at each closing of
an issuance of our company’s common stock or any shares of
common stock issuable pursuant to outstanding rights, options or
warrants to subscribe for, purchase or otherwise acquire shares of
common stock that are “ in-the-money ” on such date in
a public offering, such that following such Grant our Manager shall
own equity securities equivalent to 3.0% of the then issued and
outstanding common stock of our company, on a fully diluted basis,
solely as a result of such Grants. Any Grant shall be subject to
vesting over a five-year period with vesting occurring on a
quarterly basis, provided, that, the only vesting requirement shall
be that the Management Agreement (or any amendment, restatement or
replacement hereof with our Manager continuing to provide the same
general services as provided hereunder to our company) remains in
effect, and, further provided, that, if the Management Agreement is
terminated for any reason other than a termination for cause as
described in the Management Agreement, then the vesting of any
Grant shall accelerate such that the Grant shall be fully vested as
of such termination date. We anticipate making Grants to our
Manager of equity securities equivalent to 146,224 shares of our
common stock, on a fully diluted basis, if we sell the maximum offering
amount. Based upon their percentage ownership interests in
our Manager, Messrs. Kurlander, Kaplan, Kaplan, Jr. and Stanton
will each beneficially own approximately 36,556 restricted shares
of our common stock as a result of the Grants after vesting. To
date, we have made Grants to the Manager of 71,645
LTIPs.
Our
Manager will be entitled to receive an accountable expense
reimbursement for documented expenses of our Manager and its
affiliates incurred on behalf of either our company or our
operating partnership that are reasonably necessary for the
performance by the Manager of its duties and functions hereunder;
provided, that such expenses are in amounts no greater than those
that would be payable to third party professionals or consultants
engaged to perform such services pursuant to agreements negotiated
on an arm’s-length basis, and excepting only those expenses
that are specifically the responsibility of our Manager. The
accountable expense reimbursement will be reimbursed monthly to the
Manager. We cannot estimate the accountable expense reimbursement
that will be payable to our Manager or its affiliates at this
time.
Our Manager will be entitled to receive a termination fee equal to
three times the sum of the asset management fees, acquisition fees
and leasing fees earned, in each case, by our Manager during the
24-month period prior to such termination, calculated as of the end
of the most recently completed fiscal quarter prior to the date of
termination; provided, however, that if the Listing Event has not
occurred and no accrued acquisition fees have been paid, then all
accrued acquisition fees will be included in the above calculation
of the termination fee. The termination fee will be payable upon
termination of the Management Agreement (i) by us without cause or
(ii) by our Manager if we materially breach the Management
Agreement. The termination fee is payable in cash, vested equity of
our company, or a combination thereof, in the discretion of our
board. We cannot estimate the termination fee that would be payable
to our Manager at this time.
Property Management Agreements
We have entered into property
management agreements for each of the Owned Properties. We expect
to enter into property management agreements for each of the
contribution properties as well on substantially the same terms.
Under the property management agreements, our Manager’s
wholly-owned subsidiary, Holmwood Capital Management, LLC, a
Delaware limited liability company, or the Property Manager,
may receive compensation in the form of property management fees and property
management termination fees. For more information on the
fees payable to our Manager and its affiliates, please see
“Compensation to Our Manager and
Affiliates.”
We
anticipate that the Property Manager, will manage some or all of
our company’s portfolio earning market-standard property
management fees based on a percentage of rent pursuant to a
property management agreement executed between the Property Manager
and our subsidiary owning the applicable property. We cannot
estimate the property management fees that will be payable to the
Property Manager at this time.
We anticipate that each property management agreement will provide
for a termination fee to be paid to the Property Manager if the
Property Manager is terminated without cause or in the event of a
sale of the subject property. Each property management agreement
will or is expected to expire in 2050, and no termination fee will
be due to the Property Manager if a property management agreement
is not renewed prior to its expiration. The termination fee under
the property management agreement will equal the aggregate property
management fee paid to the Property Manager for the three full
calendar months immediately prior to termination multiplied by
four. We cannot estimate the property management termination fees
that would be payable to our Property Manager at this
time.
Contribution Transactions
In
connection with our acquisitions of the Contribution Properties,
Messrs. Stanton, Kaplan, Jr., Kurlander and Kaplan, will receive
material benefits. Messrs. Stanton, Kaplan, Jr., Kurlander and
Kaplan are each a member of Holmwood Capital, LLC, which owns 100%
of the membership interests of (i) GOV PSL, LLC, a Delaware limited
liability company, the sole owner of the Port Saint Lucie Property;
(ii) GOV Jonesboro, LLC, a Delaware limited liability company, the
sole owner of the Jonesboro Property; (iii) GOV Lorain, LLC, a
Delaware limited liability company, the sole owner of the Lorain
Property; (iv) GOV CBP Port Canaveral, LLC, a Delaware limited
liability company, the sole owner of the Port Canaveral Property;
(v) GOV FBI Johnson City, LLC, a Delaware limited liability
company, the sole owner of the Johnson City Property; (vi) GOV Ft.
Smith, LLC, a Delaware limited liability company, the sole owner of
the Fort Smith Property; and (vii) GOV Silt, LLC, a Delaware
limited liability company, the sole owner of the Silt Property,
with each of the above properties, together being the Contribution
Properties. We indirectly purchased (i) each of the Silt Property,
the Fort Smith Property, the Johnson City Property and the Port
Canaveral Property by acquiring all of the membership interests of
the entities owning such properties, and (ii) all of the right, title and interest in and to any
and all profits, losses and distributed cash flows, if any, from
each wholly-owned subsidiary owning each of the Port Saint Lucie
Property, the Jonesboro Property and the Lorain Property, or the
Affected Properties, as well as all of the other benefits and
burdens of ownership solely for federal income tax purposes, or the
Profits Interests. At the initial closing, the agreed value
of Holmwood’s equity in the Contribution Properties was
$10,784,160, resulting in 1,078,416 OP Units being issued to
Holmwood and the assumption of an aggregate of $23,717,326 in
indebtedness. Holmwood acquired (i) the Fort Smith
Property on December 30, 2014 for a total cost of $4,364,361, (ii)
the Johnson City Property on March 26, 2015 for a total cost of
$4,210,660, (iii) the Port Canaveral Property on April 9, 2015 for
a total cost of $6,117,332 and (iv) the Silt Property on December
9, 2015 for a total cost of $3,770,183.
The
total purchase price for our Contribution Properties was determined
by our Manager and Holmwood. By agreement, the value of the Silt
Property was agreed to be Holmwood’s purchase price, and the
values of the remaining Contribution Properties were determined by
using prevailing market capitalization rates, as determined by our
Manager, and the 2016 pro forma net operating income of each
remaining Contribution Property. Our Contribution Agreement
required us to enter into an agreement as of the closing of the
contribution granting Holmwood registration and qualification
rights covering the resale of the shares of common stock into which
its OP Units will be convertible, subject to conditions set forth
in our operating partner’s limited partnership agreement. For
more information about the interest of management in the
registration rights agreement, see “- Registration Rights
Agreements” below. In addition, as of the closing of the
contribution, we entered into a tax protection agreement with
Holmwood under which we agreed to (i) indemnify Holmwood for any
taxes incurred as a result of a taxable sale of the Contribution
Properties for a period of ten years after the closing; and (ii)
indemnify Holmwood if a reduction in our nonrecourse liabilities
secured by the Contribution Properties results in an incurrence of
taxes, provided that we may offer Holmwood the opportunity to
guaranty a portion of our operating partnership’s other
nonrecourse indebtedness in order to avoid the incurrence of tax on
Holmwood. For more information about the interest of management in
the tax protection agreement, see “- Tax Protection
Agreement” below.
Based
on the issuance of 1,078,416 OP Units to Holmwood at the closing of
the contribution, and based upon their current percentage interests
in Holmwood, immediately following the closing of the contribution
Messrs. Kurlander, Kaplan, Kaplan Jr. and Stanton will beneficially
own OP Units in the following amounts: Mr. Kurlander -
approximately 857,725 OP Units; Mr. Kaplan – approximately
103,547 OP Units; Mr. Kaplan Jr. – approximately 36,553 OP
Units; and Mr. Stanton – approximately 19,238 OP
Units.
Tax Protection Agreement
We
entered into the tax protection agreement with Holmwood as of the
closing of the contribution. Pursuant to the terms of the tax
protection agreement, we are required to indemnify Holmwood for
adverse tax consequences resulting to Holmwood if we sell any one
or more of the Contribution Properties within ten years after the
closing of the contribution. Additionally, under the tax
protection agreement we will indemnify Holmwood if a reduction in
our nonrecourse liabilities secured by the Contribution Properties
results in an incurrence of taxes, provided that we may offer
Holmwood the opportunity to guaranty a portion of our operating
partnership’s other nonrecourse indebtedness in order to
avoid the incurrence of tax on Holmwood. Through their direct or
beneficial membership in Holmwood, Messrs. Kaplan and Kaplan, Jr.,
individually, and Mr. Stanton, through his ownership and control of
Stanton Holdings, LLC, and Dr. Kurlander, through his ownership and
control of Baker Hill Holding, LLC, benefit from the Tax Protection
Agreement. The Tax Protection Agreement is assignable upon a
distribution, and Messrs. Kaplan and Kaplan, Jr., individually, and
Mr. Stanton, through his ownership and control of Stanton Holdings,
LLC, and Dr. Kurlander, through his ownership and control of Baker
Hill Holding, LLC, may each become a party or beneficial party, as
applicable, to the Tax Protection Agreement.
Standridge Note
In
connection with the purchase of the Lakewood Property, the Moore
Property and the Lawton Property, we were issued the Standridge
Note in an amount equal to $2,019,789. On December 8,
2017, the Standridge Note was amended. As a result of the
amendment, the Standridge Note will mature on the earlier of
January 5, 2018, the date on which we complete a public securities
offering (including this offering), or the date on which the
Lakewood Property, Moore Property and Lawton Property are conveyed
or refinanced by us. In conjunction with the amendment, we, through
our operating partnership, made a prepayment on the Standridge Note
in the amount of $1,502,091.82, or the Prepayment Amount. The
Standridge Note bears interest at a rate of 7.0% and requires
monthly payments of principal and interest of $15,659.40 with a
balloon payment due at maturity. The Standridge Note is pre-payable
at any time prior to the maturity date without penalty. The
Standridge Note is unsecured but is jointly and severally
guaranteed by Messrs. Kaplan, Kaplan, Jr., Kurlander and Stanton,
and Baker Hill Holding LLC. On January 5, 2018, we expect the
Standridge Note to have a principal balance of $445,101, and we
intend to pay off the Standridge Note with proceeds from this
offering.
Prepayment of Standridge Note
The
Prepayment Amount related to the partial prepayment of the
Standridge Note was financed in large part by four promissory notes
in the aggregate amount of $1,500,000, or the Promissory Notes. One
of the Promissory Notes is payable to Baker Hill Holding LLC, an
affiliate of Dr. Kurlander. That Promissory Note is in the
principal amount of $500,000, and it carries an interest rate of
8.0%, matures on June 11, 2018 and may be prepaid at any time
without penalty. We intend to pay off the Promissory Notes with
proceeds from this offering.
Norfolk Interim Loans
In
connection with our purchase of the Norfolk Property, we were
issued interim loans from Baker Hill Holding LLC, which is
controlled by Philip Kurlander, and Robert R. Kaplan, both
affiliates of our company, and Fiduciary and Recovery Services,
Inc., an unaffiliated, third party. The loans from Baker Hill
Holding LLC, Robert R. Kaplan and Fiduciary and Recovery Services,
Inc. were in the amounts of $2,770,000, $300,000 and $330,000,
respectively, or $3,400,000 in the aggregate. The loans will mature
on the March 27, 2018. The
loans are pre-payable prior to the maturity date at any time
without penalty and bears annual interest at the rate 12.0%. The
loans are unsecured. We intend to pay off the loans with proceeds
from this offering. On November 7, 2017, the loans had an aggregate
principal balance of $3,400,000.
Owned Properties Acquisition Fee
In
connection with our acquisition of the Lakewood Property, the Moore
Property and the Lawton Property, we paid Mr. Edwin M. Stanton an
acquisition fee of $153,402, or 1.5% of the contract purchase price
of $10,226,786. We paid Mr. Stanton the acquisition fee
pursuant to an arrangement Mr. Stanton had with Holmwood and which
we assumed when Holmwood assigned us the acquisition contract for
our Owned Properties.
Registration Rights Agreements
We
entered into an agreement providing registration and qualification
rights to Holmwood in connection with the closing of the
contribution. Pursuant to this agreement, with respect to the
shares of our common stock that may be issued in a redemption of
the OP Units issued to Holmwood in the contribution, we agreed,
among other things to either: (a) if a Listing Event has occurred
and six months have passed from the closing of the contribution,
register such shares of common stock for resale upon the demand of
Holmwood (or a majority of the then holders of the OP Units issued
to Holmwood) on an appropriate “shelf” registration
statement under the Securities Act; or (b) if four years following
the closing of the contribution there has been no Listing Event,
upon demand of Holmwood, qualify such shares of common stock for
resale pursuant to Regulation A promulgated under the Securities
Act. We will also grant
Holmwood the right to include such shares of our common stock in
any registration statements we may file in connection with any
future public equity offerings, including a registration statement
filed in conjunction with a Listing Event, subject to the terms of
the lockup arrangements described herein and subject to the right
of the underwriters of those offerings to reduce the total number
of such shares of our common stock to be sold by selling
stockholders in those offerings. Through their direct or beneficial
membership in Holmwood, Messrs. Kaplan and Kaplan, Jr.,
individually, and Mr. Stanton, through his ownership and control of
Stanton Holdings, LLC, and Dr. Kurlander, through his ownership and
control of Baker Hill Holding, LLC, benefit from the Registration
Rights Agreement. The Registration Rights Agreement is assignable
upon a distribution, and Messrs. Kaplan and Kaplan, Jr.,
individually, and Mr. Stanton, through his ownership and control of
Stanton Holdings, LLC, and Dr. Kurlander, through his ownership and
control of Baker Hill Holding, LLC, may each become a party or
beneficial party, as applicable, to the Registration Rights
Agreement.
We
entered into a registration
and qualification rights agreement with our Manager in relation to
the shares of common stock, or other securities underlied by our
common stock, to be issued to our Manager pursuant to our
Management Agreement, whether as an equity grant or in payment of
the acquisition fee. We agreed, with respect to such shares of
common stock received by our Manager, to either (a) if a
Listing Event has occurred, register such shares of common stock
for resale on an appropriate “shelf” registration
statement under the Securities Act, upon demand of the Manager; or
(b) if four years following the initial closing of this offering
there has been no Listing Event, upon demand of our Manager,
qualify such shares of common stock for resale pursuant to
Regulation A promulgated under the Securities Act. We also granted our Manager the right
to include such shares of our common stock in any registration
statements we may file in connection with any future public equity
offerings, including a registration statement filed in conjunction
with a Listing Event, subject to the terms of the lockup
arrangements described herein and subject to the right of the
underwriters of those offerings to reduce the total number of such
shares of our common stock to be sold by selling stockholders in
those offerings.
Indemnification Agreements
We
entered into indemnification agreements with each of our directors
and our senior management team that obligate us to indemnify them
to the maximum extent permitted by Maryland law. The
indemnification agreements provide that if a director or member of
our senior management team is a party or is threatened to be made a
party to any proceeding, by reason of such director’s or
senior management team member’s status as a director, officer
or employee of our company, or our manager, we must indemnify such
director or senior management team member, and advance expenses
actually and reasonably incurred by him or her, or on his or her
behalf, unless it has been established that:
|
●
|
|
the act
or omission of the director or senior management team member was
material to the matter giving rise to the proceeding and was
committed in bad faith or was the result of active and deliberate
dishonesty;
|
|
●
|
|
the
director or senior management team member actually received an
improper personal benefit in money, property or services;
or
|
|
●
|
|
with
respect to any criminal action or proceeding, the director or
senior management team member had reasonable cause to believe his
or her conduct was unlawful.
|
Except
as described below, our directors and senior management team
members will not be entitled to indemnification pursuant to the
indemnification agreement:
|
●
|
|
if the
proceeding was one brought by us or in our right and the director
or senior management team member is adjudged to be liable to
us;
|
|
●
|
|
if the
director or senior management team member is adjudged to be liable
on the basis that personal benefit was improperly received;
or
|
|
●
|
|
in any
proceeding brought by the director or senior management team member
other than to enforce his or her rights under the indemnification
agreement, and then only to the extent provided by the agreement
and, except as may be expressly provided in our charter, our
bylaws, a resolution of our board of directors or of our
stockholders entitled to vote generally in the election of
directors or an agreement to which we are a party approved by our
board of directors.
|
Notwithstanding the
limitations on indemnification described above, on application by a
director of our company or member of our senior management team to
a court of appropriate jurisdiction, the court may order
indemnification of such director or senior management team member
if:
|
●
|
|
the
court determines the director or senior management team member is
entitled to indemnification as described in the following
paragraph, in which case the director or senior management team
member shall be entitled to recover from us the expenses of
securing such indemnification; or
|
|
●
|
|
the
court determines that such director or senior management team
member is fairly and reasonably entitled to indemnification in view
of all the relevant circumstances, whether or not the director or
senior management team member (i) has met the standards of
conduct set forth above or (ii) has been adjudged liable for
receipt of an “improper personal benefit”; provided,
however, that our indemnification obligations to such director or
senior management team member will be limited to the expenses
actually and reasonably incurred by him or her, or on his or her
behalf, in connection with any proceeding by or in the right of our
company or in which the officer or director shall have been
adjudged liable for receipt of an improper personal
benefit.
|
Notwithstanding,
and without limiting, any other provisions of the indemnification
agreements, if a director or senior management team member is a
party or is threatened to be made a party to any proceeding by
reason of such director’s or senior management team
member’s status as a director, officer or employee of our
company, and such director or senior management team member is
successful, on the merits or otherwise, as to one or more but less
than all claims, issues or matters in such proceeding, we must
indemnify such director or senior management team member for all
expenses actually and reasonably incurred by him or her, or on his
or her behalf, in connection with each successfully resolved claim,
issue or matter, including any claim, issue or matter in such a
proceeding that is terminated by dismissal, with or without
prejudice.
In
addition, the indemnification agreements will require us to advance
reasonable expenses incurred by the indemnitee within ten days of
the receipt by us of a statement from the indemnitee requesting the
advance, provided the statement evidences the expenses and is
accompanied by:
|
●
|
|
a
written affirmation of the indemnitee’s good faith belief
that he or she has met the standard of conduct necessary for
indemnification; and
|
|
●
|
|
a
written undertaking to reimburse us if a court of competent
jurisdiction determines that the director or senior management team
member is not entitled to indemnification.
|
SECURITIES BEING OFFERED
General
Our Company and stockholders are
governed by our charter and bylaws. See “– Description
of Charter and Bylaws” below for a detailed summary of terms
of our charter and bylaws. Our charter and bylaws are filed as
an exhibit to the Offering Statement of which this Offering
Circular is a part. Our charter provides that we may
issue up to 750,000,000 shares of common stock and 250,000,000
shares of preferred stock, both having par value $0.01 per share.
Pursuant to a private offering, our company classified 400,000
shares of preferred stock as 7.00% Series A Cumulative Convertible
Preferred Stock, or the Series A Preferred Stock. Immediately prior
to this offering, we had 200,000 shares of common stock issued and
outstanding and 144,500 shares of Series A Preferred Stock issued
and outstanding. Following the qualification of this offering, we
have granted and issued 16,000 shares of common stock to
independent directors and issued 588,617 shares of common stock in
this offering. We currently have 804,617 shares of common stock
issued and outstanding.
We are
offering a maximum of 3,000,000 shares of our common stock at an
offering price of 10.00 per share, for a maximum offering amount of
$30,000,000. The minimum purchase requirement is 150 shares, or
$1,500; however, we can waive the minimum purchase requirement in
our sole discretion. We will hold closings on at least a monthly
basis or more often, at our sole discretion. As a result, an
investor may have their investment in escrow or in such
investor’s Folio account for up to one month before receipt
of their offered shares. Until each closing, the proceeds for that
closing will be kept in an escrow account or deposited with Folio
for investors purchasing through its platform. See "Plan of
Distribution." Upon closing, the proceeds for that closing
will be disbursed to us and the shares sold in that closing will be
issued to the investors. At the request of an investor, we may, but
will not be required to, return funds deposited in the escrow
account or an investor’s funds that are deposited in such
investor’s Folio account.
The
sale of the offered shares began on November 7, 2016, and is
expected to continue until the earlier of (i) the date on which the
maximum shares offered hereby have been sold, or (ii) November 7,
2018. We may, however, terminate the offering at any time and for
any reason. At this time, there is no public trading market for
shares of our common stock.
Upon
completion of this offering, if we sell the maximum amount, there
will be 3,362,224 shares of common stock issued and outstanding.
Regardless of the number of shares sold in this offering, there
will be 144,500 shares of Series A Preferred Stock issued and
outstanding.
Common Stock
By
investing in this offering, you will become a holder of our common
stock. Below is a summary of the rights of such holders. For a
complete description of our common stock, please review our charter
and bylaws filed as exhibits to the offering statement, of which
this offering circular is a part.
Dividends
No dividends to purchasers of our shares
of common stock are assured, nor are any returns on, or of, a
purchaser’s investment guaranteed. Dividends are
subject to our ability to generate positive cash flow from
operations. All dividends are further subject to the
discretion of our board of directors. It is possible that we
may have cash available for dividends, but our board of directors
could determine that the reservation, and not distribution, of such
to be in our best interest. Holders of our Series A Preferred Stock
are entitled to preferred returns before dividends are issued to
holders of our common stock. To date, we have provided holders of
our common stock with an annualized dividend of 5.5%, or $0.55 per
share.
Liquidation Preference
No liquidation preference is provided for
holders of our common stock. Upon the dissolution and
liquidation of our Company, our Series A Preferred Stock will
receive a preference in the distribution of liquidation proceeds
equal to any accrued and unpaid preferred returns. Following
payment of any accrued but unpaid preferred returns to our Series A
Preferred Stock, liquidating distributions will be shared pari
passu between our common stock and our Series A Preferred Stock,
subject to the right of our board of directors to designate the
rights and privileges of our authorized but unissued preferred
stock in the future.
Registrar, Transfer Agent and Paying Agent
Shares
of our common stock will be held in “uncertificated”
form, which will eliminate the physical handling and safekeeping
responsibilities inherent in owning transferable stock certificates
and eliminate the need to return a duly executed stock certificate
to effect a transfer. Direct Transfer LLC will act as our registrar
and as the transfer agent for our shares.
Stockholder Voting
Subject
to the restrictions on ownership and transfer of stock contained in
our charter and except as may otherwise be specified in our
charter, each share of common stock will have one vote per share on
all matters voted on by stockholders, including election of
directors. Holders of common stock will vote with holders of the
Series A Preferred Stock on all matters to which holders of our
common stock are entitled to vote.
Generally, the
affirmative vote of a majority of all votes cast is necessary to
take stockholder action, except that a plurality of all the votes
cast at a meeting at which a quorum is present is sufficient to
elect a director and except as set forth in the next
paragraph.
Under
Maryland law, a Maryland corporation generally cannot dissolve,
amend its charter, merge, sell all or substantially all of its
assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business, unless
approved by the affirmative vote of stockholders holding at least
two-thirds of the shares entitled to vote on the matter. However, a
Maryland corporation may provide in its charter for approval of
these matters by a lesser percentage, but not less than a majority
of all of the votes entitled to be cast on the matter. Our charter
provides for a majority vote in these situations. Our charter
further provides that any or all of our directors may be removed
from office for cause, and then only by the affirmative vote of at
least a majority of the votes entitled to be cast generally in the
election of directors. For these purposes, “cause”
means, with respect to any particular director, conviction of a
felony or final judgment of a court of competent jurisdiction
holding that such director caused demonstrable material harm to us
through bad faith or active and deliberate dishonesty.
Each
stockholder entitled to vote on a matter may do so at a meeting in
person or by proxy directing the manner in which he or she desires
that his or her vote be cast or without a meeting by a consent in
writing or by electronic transmission. Any proxy must be received
by us prior to the date on which the vote is taken. Pursuant to
Maryland law and our bylaws, if no meeting is held, 100% of the
stockholders must consent in writing or by electronic transmission
to take effective action on behalf of our company, unless the
action is advised, and submitted to the stockholders for approval,
by our board of directors, in which case such action may be
approved by the consent in writing or by electronic transmission of
stockholders entitled to cast not less than the minimum number of
votes that would be necessary to authorize or take the action at a
meeting of stockholders.
Preferred Stock
Our
charter authorizes our board of directors, without further
stockholder action, to provide for the issuance of up to
250,000,000 shares of preferred stock, in one or more classes or
series, with such terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of
redemption, as our board of directors approves. As of the date of
this offering circular, our board of directors has classified
400,000 shares as Series A Preferred Stock and we have issued
144,500 shares of Series A Preferred Stock. Our board of directors
does not have any present plans to issue any additional preferred
shares.
Series A Preferred Stock
As of
the date this offering circular, 144,500 shares of our Series A
Preferred Stock are issued and outstanding. The following
paragraphs provide information relative to the rights and
preferences of our Series A Preferred Stock
Dividends
Holders
of shares of the Series A Preferred Stock will be entitled to
receive cumulative cash dividends on the Series A Preferred Stock
when, as and if authorized by our board of directors and declared
by us from and including the date of original issue or the end of
the most recent dividend period for which dividends on the Series A
Preferred Stock have been paid, payable quarterly in arrears on
each January 5th, April
5th, July 5th and October 5th of each year, commencing on July
5, 2016. From the date of original issue, we will pay dividends at
the rate of 7.00% per annum of the $25.00 liquidation preference
per share (equivalent to the fixed annual amount of $1.75 per
share). Dividends will accrue and be paid on the basis of a 360-day
year consisting of twelve 30-day months. Dividends on the Series A
Preferred Stock will accrue and be cumulative from the end of the
most recent dividend period for which dividends have been paid, or
if no dividends have been paid, from the date of original issue.
Dividends on the Series A Preferred Stock will accrue whether or
not (i) we have earnings, (ii) there are funds legally available
for the payment of such dividends and (iii) such dividends are
authorized by our board of directors or declared by us. Accrued
dividends on the Series A Preferred Stock will not bear
interest.
There
are no restrictions on the repurchase or redemption of the Series A
Preferred Stock while there is an arrearage in the payment of
dividends. There is no sinking fund associated with the Series A
Preferred Stock.
Liquidation Preference
If we
liquidate, dissolve or wind-up, holders of shares of the Series A
Preferred Stock will have the right to receive $25.00 per share of
the Series A Preferred Stock, plus an amount equal to all accrued
and unpaid dividends (whether or not authorized or declared) to and
including the date of payment, before any distribution or payment
is made to holders of our common stock and any other class or
series of capital stock ranking junior to the Series A Preferred
Stock as to rights upon our liquidation, dissolution or winding
up.
The
rights of holders of shares of the Series A Preferred Stock to
receive their liquidation preference will be subject to the
proportionate rights of any other class or series of our capital
stock ranking on parity with the Series A Preferred Stock as to
rights upon our liquidation, dissolution or winding up, junior to
the rights of any class or series of our capital stock expressly
designated as having liquidation preferences ranking senior to the
Series A Preferred Stock, and in all instances subject to payment
of, or provision for, our debts and other liabilities.
Automatic Conversion
The
Series A Preferred Stock shall automatically convert into common
stock upon the occurrence of our initial listing of our common
stock on the New York Stock Exchange, NYSE MKT, NASDAQ Stock
Exchange, or any other national securities exchange, or a Listing
Event. As of the date of the Listing Event, a holder of shares of
Series A Preferred Stock shall receive a number of shares of common
stock in accordance with the following formula.
where:
|
Y =
(($25.00*X1) +
X2)/$10.00 +
0.2*($25.00*X1)/$10.00)
|
|
Y = the
number of shares of common stock received
|
|
X1
= the number of shares of the Preferred Stock held by the
applicable holder.
|
|
X2
= the cumulative accrued but unpaid preferred dividends on the
applicable holder’s Preferred Stock as of the conversion
date.
|
Optional Conversion
If a
Listing Event has not occurred on or prior to the date that is four
years following the date of the Articles Supplementary filed with
the Delaware Secretary of State creating the Series A Preferred
Stock then holders of the Series A Preferred Stock, at their
option, may, at any time and from time to time after such date,
convert all, but not less than all, of their outstanding shares of
Series A Preferred Stock into common stock. Upon exercise of this
optional conversion right, a holder of Series A Preferred Stock
shall receive a number of shares of common stock in accordance with
the formula describe in “– Automatic Conversion”
above.
Voting Rights
Except
in respect of the special voting rights described below and in our
charter, the Series A Preferred Stock will have identical voting
rights as our common stock, with each share of Series A Preferred
Stock entitling its holder to one vote on all matters on which our
common stockholders are entitled to vote. The Series A Preferred
Stock and common stock will vote together as one class, except in
respect of the special voting rights described below and in our
charter.
So long
as any shares of Series A Preferred Stock remain outstanding, in
addition to any other vote or consent of stockholders required by
our charter, we will not, without the affirmative vote or consent
of the holders of at least two-thirds of the outstanding shares of
Series A Preferred Stock voting together as a single class with any
other series of preferred stock upon which like voting rights have
been conferred, authorize, create or issue, or increase the number
of authorized or issued shares of, any class or series of capital
stock ranking senior to the Series A Preferred Stock with respect
to payment of dividends or the distribution of assets upon our
liquidation, dissolution or winding up, or reclassify any of our
authorized capital stock into such capital stock, or create,
authorize or issue any obligation or security convertible into or
evidencing the right to purchase such capital stock.
Issuance of Additional Securities and Debt Instruments
Our
board of directors is authorized to issue additional securities,
including common stock, preferred stock, convertible preferred
stock and convertible debt, for cash, property or other
consideration on such terms as they may deem advisable and to
classify or reclassify any unissued shares of capital stock of our
company into other classes or series of stock without approval of
the holders of the outstanding securities. We may issue debt
obligations with conversion privileges on such terms and conditions
as the directors may determine, whereby the holders of such debt
obligations may acquire our common stock or preferred stock. We may
also issue warrants, options and rights to buy shares on such terms
as the directors deem advisable, despite the possible dilution in
the value of the outstanding shares which may result from the
exercise of such warrants, options or rights to buy shares, as part
of a ratable issue to stockholders, as part of a private or public
offering or as part of other financial arrangements. Our board of
directors, with the approval of a majority of the directors and
without any action by stockholders, may also amend our charter from
time to time to increase or decrease the aggregate number of shares
of our stock or the number of shares of stock of any class or
series that we have authority to issue.
Restrictions on Ownership and Transfer
In
order to qualify as a REIT under the federal tax laws, we must meet
several requirements concerning the ownership of our outstanding
capital stock. Specifically, no more than 50% in value of our
outstanding capital stock may be owned, directly or indirectly, by
five or fewer individuals, as defined in the federal income tax
laws to include specified private foundations, employee benefit
plans and trusts, and charitable trusts, during the last half of a
taxable year, other than our first REIT taxable year. Moreover, 100
or more persons must own our outstanding shares of capital stock
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year, other than our first
REIT taxable year.
Because
our board of directors believes it is essential for our company to
qualify and continue to qualify as a REIT and for other corporate
purposes, our charter, subject to the exceptions described below,
provides that no person may own, or be deemed to own by virtue of
the attribution provisions of the federal income tax laws, more
than 9.8% of:
|
●
|
the
total value of the outstanding shares of our capital stock;
or
|
|
●
|
the
total value or number (whichever is more restrictive) of
outstanding shares of our common stock.
|
This
limitation regarding the ownership of our shares is the “9.8%
Ownership Limitation.” Further, our charter provides for
certain circumstances where our board of directors may exempt
(prospectively or retroactively) a person from the 9.8% Ownership
Limitation and establish or increase an excepted holder limit for
such person. This exception is the “Excepted Holder Ownership
Limitation.” Subject to certain conditions, our board of
directors may also increase the 9.8% Ownership Limitation for one
or more persons and decrease the 9.8% Ownership Limitation for all
other persons.
To
assist us in preserving our status as a REIT, among other purposes,
our charter also contains limitations on the ownership and transfer
of shares of common stock that would:
|
●
|
result
in our capital stock being beneficially owned by fewer than 100
persons, determined without reference to any rules of
attribution;
|
|
●
|
result
in our company being “closely held” under the federal
income tax laws; and
|
|
●
|
cause
our company to own, actually or constructively, 9.8% or more of the
ownership interests in a tenant of our real property, under the
federal income tax laws or otherwise fail to qualify as a
REIT.
|
Any
attempted transfer of our stock which, if effective, would result
in our stock being beneficially owned by fewer than 100 persons
will be null and void, with the intended transferee acquiring no
rights in such shares of stock. If any transfer of our stock occurs
which, if effective, would result in any person owning shares in
violation of the other limitations described above (including the
9.8% Ownership Limitation), then that number of shares the
ownership of which otherwise would cause such person to violate
such limitations will automatically result in such shares being
designated as shares-in-trust and transferred automatically to a
trust effective on the day before the purported transfer of such
shares. The record holder of the shares that are designated as
shares-in-trust, or the prohibited owner, will be required to
submit such number of shares of capital stock to our company for
registration in the name of the trust. We will designate the
trustee, but it will not be affiliated with our company. The
beneficiary of the trust will be one or more charitable
organizations that are named by our company. If the transfer to the
trust would not be effective for any reason to prevent a violation
of the limitations on ownership and transfer, then the transfer of
that number of shares that otherwise would cause the violation will
be null and void, with the intended transferee acquiring no rights
in such shares.
Shares-in-trust
will remain shares of issued and outstanding capital stock and will
be entitled to the same rights and privileges as all other stock of
the same class or series. The trust will receive all dividends and
other distributions on the shares-in-trust and will hold such
dividends or other distributions in trust for the benefit of the
beneficiary. Any dividend or other distribution paid prior to our
discovery that shares of stock have been transferred to the trust
will be paid by the recipient to the trustee upon demand. Any
dividend or other distribution authorized but unpaid will be paid
when due to the trustee. The trust will vote all shares-in-trust
and, subject to Maryland law, the trustee will have the authority
to rescind as void any vote cast by the proposed transferee prior
to our discovery that the shares have been transferred to the trust
and to recast the vote in accordance with the desires of the
trustee acting for the benefit of the beneficiary. However, if we
have already taken irreversible corporate action, then the trustee
will not have the authority to rescind and recast the
vote.
Within
20 days of receiving notice from us that shares of our stock have
been transferred to the trust, the trustee will sell the shares to
a person designated by the trustee, whose ownership of the shares
will not violate the above ownership limitations. Upon the sale,
the interest of the beneficiary in the shares sold will terminate
and the trustee will distribute the net proceeds of the sale to the
prohibited owner and to the beneficiary as follows. The prohibited
owner generally will receive from the trust the lesser
of:
|
●
|
the
price per share such prohibited owner paid for the shares of
capital stock that were designated as shares-in-trust or, in the
case of a gift or devise, the market price per share on the date of
such transfer; or
|
|
●
|
the
price per share received by the trust from the sale of such
shares-in-trust.
|
The
trustee may reduce the amount payable to the prohibited owner by
the amount of dividends and other distributions that have been paid
to the prohibited owner and are owed by the prohibited owner to the
trustee. The trust will distribute to the beneficiary any amounts
received by the trust in excess of the amounts to be paid to the
prohibited owner. If, prior to our discovery that shares of our
stock have been transferred to the trust, the shares are sold by
the proposed transferee, then the shares shall be deemed to have
been sold on behalf of the trust and, to the extent that the
prohibited owner received an amount for the shares that exceeds the
amount such prohibited owner was entitled to receive, the excess
shall be paid to the trustee upon demand.
In
addition, the shares-in-trust will be deemed to have been offered
for sale to our company, or our designee, at a price per share
equal to the lesser of:
|
●
|
the
price per share in the transaction that created such
shares-in-trust or, in the case of a gift or devise, the market
price per share on the date of such gift or devise; or
|
|
●
|
the
market price per share on the date that our company, or our
designee, accepts such offer.
|
We may
reduce the amount payable to the prohibited owner by the amount of
dividends and other distributions that have been paid to the
prohibited owner and are owed by the prohibited owner to the
trustee. We may pay the amount of such reduction to the trustee for
the benefit of the beneficiary. We will have the right to accept
such offer for a period of 90 days after the later of the date of
the purported transfer which resulted in such shares-in-trust or
the date we determine in good faith that a transfer resulting in
such shares-in-trust occurred.
“Market
price” on any date means the closing price for our stock on
such date. The “closing price” refers to the last
quoted price as reported by the primary securities exchange or
market on which our stock is then listed or quoted for trading. If
our stock is not so listed or quoted at the time of determination
of the market price, our board of directors will determine the
market price in good faith.
If you
acquire or attempt to acquire shares of our capital stock in
violation of the foregoing restrictions, or if you owned common or
preferred stock that was transferred to a trust, then we will
require you to give us immediate written notice of such event or,
in the case of a proposed or attempted transaction, at least 15
days written notice, and to provide us with such other information
as we may request in order to determine the effect, if any, of such
transfer on our status as a REIT.
If you
own, directly or indirectly, more than 5%, or such lower
percentages as required under the federal income tax laws, of our
outstanding shares of stock, then you must, within 30 days after
January 1 of each year, provide to us a written statement or
affidavit stating your name and address, the number of shares of
capital stock owned directly or indirectly, and a description of
how such shares are held. In addition, each direct or indirect
stockholder shall provide to us such additional information as we
may request in order to determine the effect, if any, of such
ownership on our qualification as a REIT and to ensure compliance
with the ownership limit.
The
ownership limit generally will not apply to the acquisition of
shares of capital stock by an underwriter that participates in a
public offering of such shares. In addition, our board of
directors, upon receipt of a ruling from the IRS or an opinion of
counsel and upon such other conditions as our board of directors
may direct, including the receipt of certain representations and
undertakings required by our charter, may exempt (prospectively or
retroactively) a person from the ownership limit and establish or
increase an excepted holder limit for such person. However, the
ownership limit will continue to apply until our board of directors
determines that it is no longer in the best interests of our
company to attempt to qualify, or to continue to qualify, as a REIT
or that compliance is no longer required for REIT
qualification.
All
certificates, if any, representing our common or preferred stock,
will bear a legend referring to the restrictions described
above.
The
ownership limit in our charter may have the effect of delaying,
deferring or preventing a takeover or other transaction or change
in control of our company that might involve a premium price for
your shares or otherwise be in your interest as a
stockholder.
Distributions
We
intend to qualify as a REIT for federal income tax purposes. The
Code generally requires that a REIT annually distribute at least
90% of its REIT taxable income, determined without regard to the
deduction for dividends paid and excluding any net capital gain,
and imposes tax on any taxable income retained by a REIT, including
capital gains.
To
satisfy the requirements for qualification as a REIT and generally
not be subject to federal income and excise tax, we intend to make
regular quarterly distributions of all or substantially all of our
REIT taxable income, determined without regard to dividends paid,
to our stockholders out of assets legally available for such
purposes. Our board of directors has not yet determined the rate
for our future dividends, and all future distributions will be
determined at the sole discretion of our board of directors on a
quarterly basis. When determining the amount of future
distributions, we expect that our board of directors will consider,
among other factors, (i) the amount of cash generated from our
operating activities, (ii) our expectations of future cash flows,
(iii) our determination of near-term cash needs for acquisitions of
new properties, general property capital improvements and debt
repayments, (iv) our ability to continue to access additional
sources of capital, (v) the requirements of Maryland law, (vi) the
amount required to be distributed to maintain our status as a REIT
and to reduce any income and excise taxes that we otherwise would
be required to pay and (vii) any limitations on our distributions
contained in our credit or other agreements.
We
cannot assure you that we will generate sufficient cash flows to
make distributions to our stockholders or that we will be able to
sustain those distributions. If our operations do not generate
sufficient cash flow to allow us to satisfy the REIT distribution
requirements, we may be required to fund distributions from working
capital, borrow funds, sell assets, make a taxable distribution of
our equity or debt securities, or reduce such distributions. In
addition, while we have no intention to do so, prior to the time we
have fully invested the net proceeds of this offering, we may fund
our distributions out of the net proceeds of this offering, which
could adversely impact our results of operations. Our distribution
policy enables us to review the alternative funding sources
available to us from time to time. Our actual results of operations
will be affected by a number of factors, including the revenues we
receive from our properties, our operating expenses, interest
expense, the ability of our tenants to meet their obligations and
unanticipated expenditures. For more information regarding risk
factors that could materially adversely affect our actual results
of operations, please see “Risk Factors.”
For
income tax purposes, dividends to stockholders will be
characterized as ordinary income, capital gains, or as a return of
a stockholder’s invested capital. We will furnish annually to
each of our stockholders a statement setting forth distributions
paid during the preceding year and their characterization as
ordinary income, return of capital qualified dividend income or
capital gain.
Shares Eligible for Future Sale
After
giving effect to the completion of this offering, assuming we sell
the maximum, we will have 3,216,000 shares of common stock
outstanding. The 3,000,000 shares of common stock sold in this
offering will be freely transferable without restriction or further
registration under the Securities Act, subject to the limitations
on ownership set forth in our charter.
Prior
to this offering, there has been no public market for our common
stock. We intend to apply for quotation of our common stock on the
OTCQX beginning after the final closing of this offering. However,
no assurance can be given as to (1) our approval for quotation on
the OTCQX, (2) the likelihood that an active market for our shares
of common stock will develop, (3) the liquidity of any such market,
(4) the ability of the stockholders to sell the shares or (5) the
prices that stockholders may obtain for any of the shares. No
prediction can be made as to the effect, if any, that future sales
of shares, or the availability of shares for future sale, will have
on the market price prevailing from time to time. Sales of
substantial amounts of our common stock, or the perception that
such sales could occur, may adversely affect prevailing market
prices of our common stock. See “Risk
Factors — Risks Related to the Offering and Lack of
Liquidity.”
For a
description of certain restrictions on transfers of shares of our
common stock, see “Restrictions on Ownership and
Transfer.
IMPORTANT PROVISIONS OF MARYLAND CORPORATE LAW AND
OUR CHARTER AND BYLAWS
The
following is a summary of some important provisions of Maryland
law, our charter and our bylaws in effect as of the date of this
offering circular, copies of which are filed as an exhibit to the
offering statement to which this offering circular relates and may
also be obtained from us.
Our Charter and Bylaws
Stockholder rights
and related matters are governed by the Maryland General
Corporation Law, or MGCL, and our charter and bylaws. Provisions of
our charter and bylaws, which are summarized below, may make it
more difficult to change the composition of our board of directors
and may discourage or make more difficult any attempt by a person
or group to obtain control of our company.
Stockholders’ Meetings
An
annual meeting of our stockholders will be held each year on the
date and at the time and place set by our board of directors for
the purpose of electing directors and for the transaction of such
other business as may properly come before the meeting. A special
meeting of our stockholders may be called in the manner provided in
the bylaws, including by the president, the chief executive
officer, the chairman of the board, or our board of directors, and,
subject to certain procedural requirements set forth in our bylaws,
must be called by the secretary to act on any matter that may
properly be considered at a meeting of stockholders upon written
request of stockholders entitled to cast at least a majority of all
the votes entitled to be cast on such matter at such meeting.
Subject to the restrictions on ownership and transfer of stock
contained in our charter and except as may otherwise be specified
in our charter, at any meeting of the stockholders, each
outstanding share of common stock entitles the owner of record
thereof on the applicable record date to one vote on all matters
submitted to a vote of stockholders. In general, the presence in
person or by proxy of a majority of our outstanding shares of
common stock entitled to vote constitutes a quorum, and the
majority vote of our stockholders will be binding on all of our
stockholders.
Our Board of Directors
A
vacancy in our board of directors caused by the death, resignation
or incapacity of a director or by an increase in the number of
directors may be filled only by the vote of a majority of the
remaining directors, even if the remaining directors do not
constitute a quorum, and any director elected to fill a vacancy
will serve for the remainder of the full term of the directorship
in which the vacancy occurred. Any director may resign at any time
and may be removed only for cause, and then only by our
stockholders entitled to cast at least a majority of the votes
entitled to be cast generally in the election of
directors.
Each
director will serve a term beginning on the date of his or her
election and ending on the next annual meeting of the stockholders
and when his or her successor is duly elected and qualifies.
Because holders of common stock have no right to cumulative voting
for the election of directors, at each annual meeting of
stockholders, the holders of the shares of common stock with a
majority of the voting power of the common stock will be able to
elect all of the directors.
Beginning on the
date of the initial closing of this offering, our bylaws will
require that a majority of our board of directors be comprised of
independent directors. Our bylaws define an independent director as
a duly appointed or elected person whom the remaining members of
our board of directors have determined meets the standards for
independence set forth in the most current NYSE Listed Company
Manual. Our board of directors may amend our bylaws at any time
without stockholder consent, including without limitation to
eliminate the majority independent director
requirement.
Limitation of Liability and Indemnification
Maryland law
permits us to include in our charter a provision limiting the
liability of our directors and officers to us and our stockholders
for money damages, except for liability resulting from (1) actual
receipt of an improper benefit or profit in money, property or
services or (2) active and deliberate dishonesty established by a
final judgment and which is material to the cause of
action.
Maryland law
requires a corporation (unless its charter provides otherwise,
which our charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of
any proceeding to which he or she is made or threatened to be made
a party by reason of his or her service in that capacity and
permits a corporation to indemnify its present and former directors
and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made or
threatened to be made a party by reason of their service in those
or other capacities unless it is established that:
|
●
|
the act
or omission of the director or officer was material to the matter
giving rise to the proceeding and (1) was committed in bad faith or
(2) was the result of active and deliberate
dishonesty;
|
|
●
|
the
director or officer actually received an improper personal benefit
in money, property or services; or
|
|
●
|
in the
case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was
unlawful.
|
However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by
or in the right of the corporation or for a judgment of liability
on the basis that personal benefit was improperly received, unless
in either case a court orders indemnification and then only for
expenses.
Finally, Maryland
law permits a Maryland corporation to advance reasonable expenses
to a director or officer upon receipt of a written affirmation by
the director or officer of his or her good faith belief that he or
she has met the standard of conduct necessary for indemnification
and a written undertaking by him or her or on his or her behalf to
repay the amount paid or reimbursed if it is ultimately determined
that the standard of conduct was not met.
To the
maximum extent permitted by Maryland law, our charter limits the
liability of our directors and officers to us and our stockholders
for monetary damages and our charter authorizes us to obligate
ourselves to indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, pay
or reimburse reasonable expenses in advance of final disposition of
a proceeding to our directors, our officers, and our Manager
(including any director or officer who is or was serving at the
request of our company as a director, officer, partner, member,
manager or trustee of another corporation, real estate investment
trust, partnership, limited liability company, joint venture,
trust, employee benefit plan or other enterprise). In addition, our
bylaws require us to indemnify and advance expenses to our
directors and our officers, and permit us, with the approval of our
board of directors, to provide such indemnification and advance of
expenses to any individual who served a predecessor of us in any of
the capacities described above and to any employee or agent of us,
including our Manager, or a predecessor of us.
However, the SEC
takes the position that indemnification against liabilities arising
under the Securities Act is against public policy and
unenforceable.
We may
also purchase and maintain insurance to indemnify such parties
against the liability assumed by them whether or not we are
required or have the power to indemnify them against this same
liability.
Takeover Provisions of the MGCL
The
following paragraphs summarize some provisions of Maryland law and
our charter and bylaws which may delay, defer or prevent a
transaction or a change of control of our company that might
involve a premium price for our stockholders.
Business Combinations
Under
the MGCL, certain “business combinations” (including a
merger, consolidation, share exchange or, in certain circumstances,
an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and an interested
stockholder (defined as any person who beneficially owns 10% or
more of the voting power of the corporation’s then
outstanding voting stock or an affiliate or associate of the
corporation who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of
the voting power of the then-outstanding stock of the corporation)
or an affiliate of such an interested stockholder are prohibited
for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. A person is not an
interested stockholder under the statute if the board of directors
approved in advance the transaction by which the person otherwise
would have become an interested stockholder. However, in approving
a transaction the board of directors may provide that its approval
is subject to compliance, at or after the time of approval, with
any terms and conditions determined by the board. After the
five-year prohibition, any such business combination must be
recommended by the board of directors of such corporation and
approved by the affirmative vote of at least (1) 80% of the votes
entitled to be cast by holders of outstanding shares of voting
stock of the corporation and (2) two-thirds of the votes entitled
to be cast by holders of voting stock of the corporation other than
voting stock held by the interested stockholder with whom (or with
whose affiliate) the business combination is to be effected or held
by an affiliate or associate of the interested stockholder, unless,
among other conditions, the corporation’s common stockholders
receive a minimum price (as defined in the MGCL) for their shares
and the consideration is received in cash or in the same form as
previously paid by the interested stockholder for its shares. These
provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by a board of directors
prior to the time that the interested stockholder becomes an
interested stockholder.
Pursuant to the
statute, our board of directors has opted out of these provisions
of the MGCL provided that the business combination is first
approved by our board of directors, in which case, the five-year
prohibition and the super-majority vote requirements will not apply
to business combinations between us and any person. As a result,
any person may be able to enter into business combinations with us
that may not be in the best interest of our stockholders without
compliance by our company with the super-majority vote requirements
and the other provisions of the statute.
Control Share Acquisitions
The
MGCL provides that “control shares” of a Maryland
corporation acquired in a “control share acquisition”
have no voting rights except to the extent approved at a special
meeting by the affirmative vote of two-thirds of the votes entitled
to be cast on the matter, excluding shares of stock in a
corporation in respect of which any of the following persons is
entitled to exercise or direct the exercise of the voting power of
shares of stock of the corporation in the election of
directors:
|
●
|
a
person who makes or proposes to make a control share
acquisition;
|
|
●
|
an
officer of the corporation; or
|
|
●
|
an
employee of the corporation who is also a director of the
corporation.
|
“Control
shares” are voting shares of stock which, if aggregated with
all other such shares of stock previously acquired by the acquirer
or in respect of which the acquirer is able to exercise or direct
the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquirer to exercise voting
power in electing directors within one of the following ranges of
voting power:
|
●
|
one-tenth
or more but less than one-third;
|
|
●
|
one-third
or more but less than a majority; or
|
|
●
|
a
majority or more of all voting power.
|
Control
shares do not include shares the acquiring person is then entitled
to vote as a result of having previously obtained stockholder
approval. A “control share acquisition” means the
acquisition of issued and outstanding control shares, subject to
certain exceptions.
A
person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel our board of directors to
call a special meeting of stockholders to be held within 50 days of
demand to consider the voting rights of the shares. If no request
for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If
voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required
by the statute, then, subject to certain conditions and
limitations, the corporation may redeem any or all of the control
shares (except those for which voting rights have previously been
approved) for fair value determined without regard to the absence
of voting rights for the control shares, as of the date of the last
control share acquisition by the acquirer or of any meeting of
stockholders at which the voting rights of such shares are
considered and not approved. If voting rights for control shares
are approved at a stockholders’ meeting and the acquirer
becomes entitled to vote a majority of the shares entitled to vote,
all other stockholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of such appraisal
rights may not be less than the highest price per share paid by the
acquirer in the control share acquisition.
The
control share acquisition statute does not apply to (1) shares
acquired in a merger, consolidation or share exchange if the
corporation is a party to the transaction or (2) acquisitions
approved or exempted by the charter or bylaws of the
corporation.
Our
bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of our
stock. We cannot assure you that such provision will not be amended
or eliminated at any time in the future.
Subtitle 8
Subtitle 8 of Title
3 of the MGCL permits a Maryland corporation with a class of equity
securities registered under the Exchange Act and at least three
independent directors to elect to be subject, by provision in its
charter or bylaws or a resolution of its board of directors and
notwithstanding any contrary provision in the charter or bylaws, to
any or all of the following five provisions:
|
●
|
a
two-thirds vote requirement for removing a director;
|
|
●
|
a
requirement that the number of directors be fixed only by vote of
the directors;
|
|
●
|
a
requirement that a vacancy on the board be filled only by the
remaining directors and for the remainder of the full term of the
directorship in which the vacancy occurred; and
|
|
●
|
a
majority requirement for the calling of a special meeting of
stockholders.
|
We have
elected to provide that vacancies on our board of directors may be
filled only by the remaining directors and for the remainder of the
full term of the directorship in which the vacancy occurred.
Through provisions in our charter and bylaws unrelated to Subtitle
8, we already vest in our board of directors the exclusive power to
fix the number of directorships and require, unless called by the
president, the chief executive officer, the chairman of the board
or our board of directors, the request of stockholders entitled to
cast at least a majority of the votes entitled to be cast on any
matter that may properly be considered at a meeting of stockholders
to call a special meeting to act on such matter.
Dissolution or Termination of Our Company
We are
an infinite-life corporation that may be dissolved under the MGCL
at any time by the affirmative vote of a majority of our entire
board and of stockholders entitled to cast at least a majority of
all the votes entitled to be cast on the matter. Our operating
partnership has a perpetual existence.
Advance Notice of Director Nominations and New
Business
Our
bylaws provide that with respect to an annual meeting of
stockholders, nominations of individuals for election to the board
of directors and the proposal of business to be considered by
stockholders may be made only (1) pursuant to our notice of the
meeting, (2) by or at the direction of the board of directors or
(3) by a stockholder who is a stockholder of record both at the
time of giving the advance notice required by our bylaws and at the
time of the meeting, who is entitled to vote at the meeting in the
election of each individual so nominated or on such other business
and who has complied with the advance notice procedures of the
bylaws. With respect to special meetings of stockholders, only the
business specified in our notice of the meeting may be brought
before the meeting. Nominations of individuals for election to the
board of directors at a special meeting may be made only (1) by or
at the direction of the board of directors or (2) provided that the
special meeting has been called in accordance with our bylaws for
the purpose of electing directors, by a stockholder who is a
stockholder of record both at the time of giving the advance notice
required by our bylaws and at the time of the meeting, who is
entitled to vote at the meeting in the election of each individual
so nominated and who has complied with the advance notice
provisions of the bylaws.
ADDITIONAL REQUIREMENTS AND RESTRICTIONS
Broker-Dealer Requirements
Each of
the participating broker-dealers, authorized registered
representatives or any other person selling shares of our common
stock on our behalf is required to:
|
|
make
every reasonable effort to determine that the purchase of shares is
a suitable and appropriate investment for each investor based on
information provided by such investor to the broker-dealer,
including such investor’s age, investment objectives, income,
net worth, financial situation and other investments held by such
investor; and
|
|
|
|
|
|
maintain,
for at least six (6) years, records of the information used to
determine that an investment in our shares is suitable and
appropriate for each investor.
|
In
making this determination, your participating broker-dealer,
authorized registered representative or other person selling shares
on our behalf will, based on a review of the information provided
by you, consider whether you:
|
●
|
meet
the minimum suitability standards established by us and the
investment limitations established under Regulation A;
|
|
|
|
|
●
|
can
reasonably benefit from an investment in our shares 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; and
|
|
|
|
|
●
|
have an
apparent understanding of:
|
|
●
|
the
fundamental risks of an investment in the shares;
|
|
|
|
|
●
|
the
risk that you may lose your entire investment;
|
|
|
|
|
●
|
the
lack of liquidity of the shares;
|
|
|
|
|
●
|
the
restrictions on transferability of the share;
|
|
|
|
|
●
|
the
background and qualifications of our
management; and
|
|
|
|
|
●
|
our
business.
|
Restrictions Imposed by the USA PATRIOT Act and Related
Acts
In
accordance with the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001, or the USA PATRIOT Act, the securities offered hereby may
not be offered, sold, transferred or delivered, directly or
indirectly, to any “unacceptable investor,” which means
anyone who is:
|
●
|
a
“designated national,” “specially designated
national,” “specially designated terrorist,”
“specially designated global terrorist,” “foreign
terrorist organization,” or “blocked person”
within the definitions set forth in the Foreign Assets Control
Regulations of the United States, or U.S., Treasury
Department;
|
|
|
|
|
●
|
acting
on behalf of, or an entity owned or controlled by, any government
against whom the U.S. maintains economic sanctions or embargoes
under the Regulations of the U.S. Treasury
Department;
|
|
|
|
|
●
|
within
the scope of Executive Order 13224 — Blocking Property
and Prohibiting Transactions with Persons Who Commit, Threaten to
Commit, or Support Terrorism, effective September 24,
2001;
|
|
●
|
a
person or entity subject to additional restrictions imposed by any
of the following statutes or regulations and executive orders
issued thereunder: the Trading with the Enemy Act, the National
Emergencies Act, the Antiterrorism and Effective Death Penalty Act
of 1996, the International Emergency Economic Powers Act, the
United Nations Participation Act, the International Security and
Development Cooperation Act, the Nuclear Proliferation Prevention
Act of 1994, the Foreign Narcotics Kingpin Designation Act, the
Iran and Libya Sanctions Act of 1996, the Cuban Democracy Act, the
Cuban Liberty and Democratic Solidarity Act and the Foreign
Operations, Export Financing and Related Programs Appropriations
Act or any other law of similar import as to any
non-U.S. country, as each such act or law has been or may be
amended, adjusted, modified or reviewed from time to
time; or
|
|
|
|
|
●
|
designated
or blocked, associated or involved in terrorism, or subject to
restrictions under laws, regulations, or executive orders as may
apply in the future similar to those set forth above.
|
THE OPERATING PARTNERSHIP AGREEMENT
General
HC
Government Realty Holdings, L.P., which we refer to as our
operating partnership, was formed as a Delaware limited partnership
on March 14, 2016. All of our assets are held by, and
all of our operations are conducted through, our operating
partnership. We have entered into Agreement of Limited Partnership
of HC Government Realty Holdings, L.P., or the Limited Partnership
Agreement. Pursuant to the Limited Partnership Agreement, we are
the sole general partner of the operating partnership.
As the
general partner of our operating partnership, we have full,
exclusive and complete responsibility and discretion in the
management and control of the operating partnership, including the
ability to cause the operating partnership to enter into certain
major transactions, including acquisitions, dispositions,
re-financings, select tenants for our properties, enter into leases
for our properties, make distributions to partners, and cause
changes in the operating partnership’s business
activities.
Upon
completion of this offering, limited partners other than us will
own approximately 26.7% of our operating partnership. The limited
partners of our operating partnership have no authority in their
capacity as limited partners to transact business for, or
participate in the management activities or decisions of, our
operating partnership except as required by applicable law.
Consequently, we, by virtue of our position as the sole general
partner, control the assets and business of our operating
partnership.
In the
Limited Partnership Agreement, the limited partners of our
operating partnership expressly acknowledge that we, as general
partner of our operating partnership, are acting for the benefit of
our operating partnership, the limited partners and our
stockholders, collectively. Neither us nor our board of directors
is under any obligation to give priority to the separate interests
of the limited partners in deciding whether to cause our operating
partnership to take or decline to take any actions. In particular,
we will be under no obligation to consider the tax consequence to
limited partners when making decisions for the benefit of our
operating partnership, but we are expressly permitted to take into
account our tax consequences. If there is a conflict between the
interests of our stockholders, on one hand, and the interests of
the limited partners, on the other, we will endeavor in good faith
to resolve the conflict in a manner not adverse to either our
stockholders or the limited partners; provided, however, that for
so long as we own a controlling interest in our operating
partnership, we have agreed to resolve any conflict that cannot be
resolved in a manner not adverse to either our stockholders or the
limited partners in favor of our stockholders. We are not liable
under the Limited Partnership Agreement to our operating
partnership or to any partner for monetary damages for losses
sustained, liabilities incurred, or benefits not derived by limited
partners in connection with such decisions so long as we have acted
in good faith.
Classes of Partnership Units
Subject
to our discretion as general partner to create additional classes
of limited partnership interests, our operating partnership
currently has three classes of limited partnership interests. These
classes are the OP Units, the LTIP units, and the Series A
Preferred Units. See “- LTIP Units” and “-
Series A Preferred Units” below. In calculating the
percentage interests of our operating partnership’s partners,
holders of LTIP units are treated as holders of OP Units and LTIP
units are treated as OP Units.
Our
operating partnership will issue OP Units to limited partners,
including Holmwood, and our operating partnership will issue LTIP
units to persons who provide services to the it or us, including
our officers, directors and employees.
As
general partner, we may cause our operating partnership to issue
additional OP Units or LTIP units for any consideration, or we may
cause the creation of a new class of limited partnership interests,
at our sole and absolute discretion. LTIP Units may, in our sole
discretion, as general partner, be issued subject to vesting,
forfeiture and additional restrictions on transfer pursuant to the
terms of a vesting agreement. The terms of any vesting agreement
may be modified by us from time to time in our sole discretion,
subject to any restrictions on amendment imposed by the relevant
vesting agreement or any equity incentive plan. Vested LTIP Units
are eligible to be converted into OP Units in accordance with the
Limited Partnership Agreement, and unvested LTIP units may not be
converted into OP Units. Taking these differences into account,
when we refer to “partnership units,” we are referring
to OP Units and vested and unvested LTIP units
collectively.
Amendments to the Limited Partnership Agreement
Amendments to the
Limited Partnership Agreement may be proposed by us, as general
partner, or by limited partners holding 66 2/3% or more of all
of the outstanding partnership units held by limited partners other
than us.
Generally, the
Limited Partnership Agreement may not be amended, modified, or
terminated without our approval and the written consent of limited
partners holding more than 50% of all of the outstanding
partnership units held by limited partners other than us. As
general partner, we have the power to unilaterally make certain
amendments to the Limited Partnership Agreement without obtaining
the consent of the limited partners, as may be necessary
to:
|
●
|
add to
our obligations as general partner or surrender any right or power
granted to us as general partner for the benefit of the limited
partners;
|
|
●
|
reflect
the issuance of additional partnership units or the admission,
substitution, termination or withdrawal of partners in accordance
with the terms of the Limited Partnership Agreement;
|
|
●
|
set
forth or amend the designations, rights, powers, duties, and
preferences of the holders of any additional partnership units
issued by our operating partnership;
|
|
●
|
reflect
a change of an inconsequential nature that does not adversely
affect the limited partners in any material respect, or cure any
ambiguity, correct or supplement any provisions of the Limited
Partnership Agreement not inconsistent with law or with other
provisions of the Limited Partnership Agreement, or make other
changes concerning matters under the Limited Partnership Agreement
that will not otherwise be inconsistent with the Limited
Partnership Agreement or law;
|
|
●
|
reflect
changes that are reasonably necessary for us, as general partner,
to qualify and maintain our qualification as a REIT;
|
|
●
|
include
provisions in the Limited Partnership Agreement that may be
referenced in any rulings, regulations, notices, announcements, or
other guidance regarding the federal income tax treatment of
compensatory partnership interests issued and made effective after
the Limited Partnership Agreement or in connection with any
elections that the we determine to be necessary or advisable in
respect of any such guidance. Any such amendment may include,
without limitation, (a) a provision authorizing or directing us to
make any election under the such guidance, (b) a covenant by our
operating partnership and all of the partners to agree to comply
with the such guidance, (c) an amendment to the capital account
maintenance provisions and the allocation provisions contained in
the Limited Partnership Agreement so that such provisions comply
with (I) the provisions of the Code and the Federal Income Tax
Regulations validly issued under the Code, as amended as hereafter
amended from time to time, as they apply to the issuance of
compensatory partnership interests and (II) the requirements of
such guidance and any election made by us with respect thereto,
including, a provision requiring “forfeiture
allocations” as appropriate. Any such amendments to this
Limited Partnership Agreement shall be binding upon all partners;
and
|
|
●
|
satisfy
any requirements, conditions or guidelines of federal or state
law.
|
Amendments that
would, among other things, convert a limited partner’s
interest into a general partner’s interest, modify the
limited liability of a limited partner in a manner adverse to the
limited partner, adversely alter a partner’s right to receive
any distributions or allocations of profits or losses or adversely
alter or modify the redemption rights, or cause the termination of
our operating partnership other than in accordance with Section
2.04 of the Limited Partnership Agreement, or amend Section
11.01(c) of the Limited Partnership Agreement must be approved by
each limited partner that would be adversely affected by such
amendment.
In
addition, we, as general partner, may not do any of the following
except as expressly authorized in the Limited Partnership Agreement
under certain circumstances:
|
●
|
without
the written consent of limited partners holding more than
66 2/3% of all of the outstanding partnership units held by
limited partners other than us, take any action in contravention of
an express prohibition or limitation contained in the Limited
Partnership Agreement;
|
|
●
|
acquire
an interest in real or personal property other than through our
operating partnership; or
|
|
●
|
except
as described in “— Restrictions on Mergers, Sales,
Transfers and Other Significant Transactions” below, withdraw
from our operating partnership or transfer any portion of our
general partnership interest.
|
Restrictions on Mergers, Sales, Transfers and Other Significant
Transactions
We may
not voluntarily withdraw from the operating partnership or transfer
or assign our general partnership interest in the operating
partnership or engage in any merger, consolidation or other
combination, or sale of all, or substantially all, of our assets in
a transaction which results in a change of control of our company
(as general partner) unless:
|
●
|
we
receive the consent of limited partners holding more than 50% of
the partnership units held by the limited partners (other than
those held by us or our subsidiaries);
|
|
●
|
as a
result of such a transaction, all limited partners (other than us
or our subsidiaries) holding partnership units, will receive for
each partnership unit an amount of cash, securities or other
property equal in value to the amount of cash, securities or other
property they would have received if their partnership units had
been converted into shares of our common stock immediately prior to
such transaction, provided that if, in connection with the
transaction, a purchase, tender or exchange offer shall have been
made to, and accepted by, the holders of more than 50% of the
outstanding shares of our common stock, each holder of Units (other
than us or our subsidiaries) shall be given the option to exchange
such Units for the greatest amount of cash, securities or other
property that a limited partner would have received had it (A)
exercised its redemption right (described below) and (B) sold,
tendered or exchanged pursuant to the offer shares of our common
stock received upon exercise of the redemption right immediately
prior to the expiration of the offer; or
|
|
●
|
we are
the surviving entity in the transaction and either (A) our
stockholders do not receive cash, securities or other property in
the transaction or (B) all limited partners (other than us or our
subsidiaries) receive for each partnership unit an amount of cash,
securities or other property having a value that is no less than
the greatest amount of cash, securities or other property received
in the transaction by our stockholders.
|
We also
may merge or consolidate with another entity, if immediately after
such merger or consolidation (i) substantially all of the assets of
the successor or surviving entity, other than Units held by us, are
contributed, directly or indirectly, to our operating partnership
as a capital contribution in exchange for Units with a fair market
value equal to the value of the assets so contributed as determined
by the survivor in good faith and (ii) the survivor in such merger
or consolidation expressly agrees to assume all of our obligations
under our Limited Partnership Agreement and such Limited
Partnership Agreement shall be amended after any such merger or
consolidation so as to arrive at a new method of calculating the
amounts payable upon exercise of conversion or redemption rights
that approximates the existing method for such calculation as
closely as reasonably possible.
We also
may (i) transfer all or any portion of our general partnership
interest to (A) a wholly-owned subsidiary or (B) a parent company,
and following such transfer may withdraw as the general partner and
(ii) engage in a transaction required by law or by the rules of any
national securities exchange on which shares of our common stock
are listed.
Limited
partners may not transfer their partnership units without our
consent, as the operating partnership’s general
partner.
Capital Contributions
We will
contribute directly to our operating partnership substantially all
of the net proceeds of this offering in exchange for additional OP
Units; however, we will be deemed to have made capital
contributions in the amount of the gross offering proceeds received
from investors. The operating partnership will be deemed to have
simultaneously paid the underwriting discounts and commissions and
other costs associated with the offering.
As a
result of this structure, once we elect REIT status, we will be
considered an UPREIT, or an umbrella partnership real estate
investment trust. An UPREIT is a structure that REITs often use to
acquire real property from sellers on a tax-deferred basis because
the sellers can generally accept partnership units and defer
taxable gain otherwise required to be recognized by them upon the
disposition of their properties. Such sellers may also desire to
achieve diversity in their investment and other benefits afforded
to stockholders in a REIT. Prior to the completion of this
offering, we owned, directly and indirectly, 100% of the
partnership interests in our operating partnership, and our
operating partnership was a disregarded entity for federal income
tax purposes and we were treated as owning all of our operating
partnership’s assets and income for purposes of satisfying
the asset and income tests for qualification as a REIT. Upon
completion of this offering, our operating partnership will be
treated as having two or more partners for federal income tax
purposes, will be treated as a partnership, and the REIT’s
proportionate share of the assets and income of the operating
partnership will be deemed to be assets and income of the REIT for
purposes of satisfying the asset and income tests for qualification
as a REIT.
We are
obligated to contribute the net proceeds of any future offering of
shares as additional capital to our operating partnership. If we
contribute additional capital to our operating partnership, we will
receive additional Units and our percentage interest will be
increased on a proportionate basis based upon the amount of such
additional capital contributions and the value of the operating
partnership at the time of such contributions. Conversely, the
percentage interests of the limited partners will be decreased on a
proportionate basis in the event of additional capital
contributions by us. The Limited Partnership Agreement provides
that if the operating partnership requires additional funds at any
time in excess of funds available to the operating partnership from
cash flow, borrowings by our operating partnership or capital
contributions, we may borrow such funds from a financial
institution or other lenders and lend such funds to the operating
partnership on the same terms and conditions as are applicable to
our borrowing of such funds. In addition, if we contribute
additional capital to the operating partnership, we will revalue
the property of the operating partnership to its fair market value
(as determined by us) and the capital accounts of the partners will
be adjusted to reflect the manner in which the unrealized gain or
loss inherent in such property (that has not been reflected in the
capital accounts previously) would be allocated among the partners
under the terms of the Limited Partnership Agreement, if there were
a taxable disposition of such property for its fair market value
(as determined by us) on the date of the revaluation.
Issuance of Additional Limited Partnership Interests
As the
sole general partner of our operating partnership, we are
authorized, without the consent of the limited partners, to cause
our operating partnership to issue additional units to us, to other
limited partners or to other persons for such consideration and on
such terms and conditions as we deem appropriate. If additional
units are issued to us, then, unless the additional units are
issued in connection with a contribution of property to our
operating partnership, we must (1) issue additional shares of our
common stock and must contribute to our operating partnership the
entire proceeds received by us from such issuance or (2) issue
additional units to all partners in proportion to their respective
interests in our operating partnership. In addition, we may cause
our operating partnership to issue to us additional partnership
interests in different series or classes, which may be senior to
the units, in conjunction with an offering of our securities having
substantially similar rights, in which the proceeds thereof are
contributed to our operating partnership. Consideration for
additional partnership interests may be cash or other property or
assets. No person, including any partner or assignee, has
preemptive, preferential or similar rights with respect to
additional capital contributions to our operating partnership or
the issuance or sale of any partnership interests
therein.
Our
operating partnership may issue limited partnership interests that
are OP Units, limited partnership interests that are preferred as
to distributions and upon liquidation to our OP Units, LTIP Units
Series A Preferred Units and other types of units with such rights
and obligations as may be established by us, as the sole general
partner of our operating partnership, from time to
time.
Redemption Rights
Pursuant to the
Limited Partnership Agreement, any holders of OP Units, other than
us or our subsidiaries, will receive redemption rights, which will
enable them to cause the operating partnership to redeem their OP
Units in exchange for cash or, at our option, shares of our common
stock. The cash redemption amount per share of common stock will be
based on the market price of our common stock at the time of
redemption, multiplied by the conversion ratio set forth in our
Limited Partnership Agreement. Alternatively, we may elect to
purchase the OP Units by issuing shares of our common stock for OP
Units, based on the conversion ratio set forth in our Limited
Partnership Agreement.
The
conversion ratio is initially one to one, but is adjusted based on
certain events including: (i) a distribution in shares of our
common stock to holders of our outstanding common stock, (ii) a
subdivision of our outstanding common stock, or (iii) a reverse
split of our outstanding shares of common stock into a smaller
number of shares. Notwithstanding the foregoing, a limited partner
will not be entitled to exercise its redemption rights if the
delivery of shares of our common stock to the redeeming limited
partner would:
|
●
|
result
in any person owning, directly or indirectly, shares of our common
stock in excess of the stock ownership limit in our
charter;
|
|
●
|
result
in our common stock being beneficially owned by fewer than 100
persons (determined without reference to any rules of
attribution);
|
|
●
|
result
in our being “closely held” within the meaning of
Section 856(h) of the Code;
|
|
●
|
cause
us to own, actually or constructively, 10% or more of the ownership
interests in a tenant (other than a TRS) of ours, the operating
partnership’s or a subsidiary partnership’s real
property, within the meaning of Section 856(d)(2)(B) of the
Code;
|
|
●
|
cause
us to fail to qualify as a REIT under the Code; or
|
|
●
|
cause
the acquisition of our common stock by such redeeming limited
partner to be “integrated” with any other distribution
of common stock for purposes of complying with the registration
provisions of the Securities Act.
|
We may,
in our sole and absolute discretion, waive certain of these
restrictions.
Subject
to the foregoing, limited partners of our operating partnership
holding OP Units may exercise their redemption rights at any time
after one year following the date of issuance of their OP Units.
However, a limited partner may not deliver more than two notices of
redemption during each calendar year (subject to the terms of any
agreement between us, as general partner, and a limited partner)
and may not exercise its redemption right for less than 1,000 OP
Units, unless such limited partner holds less than 1,000 OP Units,
in which case, it must exercise its redemption right for all of its
OP Units. We do not expect to issue any shares of our common stock
offered hereby to limited partners of the operating partnership in
exchange for their OP Units, if they elect to redeem their OP
Units. Rather, in the event a limited partner of our operating
partnership exercises its redemption rights, and we elect to redeem
the OP Units by the issuance of shares of our common stock, we
expect to issue unregistered shares, or shares that shall have been
registered after completion of this offering in connection with any
such redemption transaction.
No Removal of the General Partner
We may
not be removed as general partner by the limited partners with or
without cause.
LTIP Units
LTIP
Units shall rank pari passu
with OP Units as to the payment of regular and special periodic or
other distributions and distribution of assets upon liquidation,
dissolution or winding up. As to the payment of distributions and
as to distribution of assets upon liquidation, dissolution or
winding up, any class or series of partnership units which by its
terms specifies that it shall rank junior to, on a parity with, or
senior to the OP Units shall also rank junior to, or pari passu with, or senior to, as the
case may be, the LTIP Units. Subject to the terms of any vesting
agreement, a holder of LTIP Units shall be entitled to transfer his
or her LTIP Units to the same extent, and subject to the same
restrictions as holders of OP Units.
LTIP
Units may, in our sole discretion, as general partner, be issued
subject to vesting, forfeiture and additional restrictions on
transfer pursuant to the terms of a vesting agreement. The terms of
any vesting agreement may be modified by us from time to time in
our sole discretion, subject to any restrictions on amendment
imposed by the relevant vesting agreement or any equity incentive
plan.
Holders
of LTIP Units shall (a) have the same voting rights as the any
limited partner, with the LTIP Units voting as a single class with
the OP Units and having one vote per LTIP Unit; and (b) have
the additional voting rights that are expressly set forth in the
Limited Partnership Agreement, so long as any LTIP Units remain
outstanding. The foregoing voting provisions will not apply if, at
or before the time when the act with respect to which such vote
would otherwise be required will be effected, all outstanding LTIP
Units shall have been converted into Common Units.
A
holder of LTIP Units shall have the right, or the Conversion Right,
at his or her option, at any time to convert all or a portion of
his or her vested LTIP Units into OP Units; provided, however, that a holder may
not exercise the Conversion Right for less than one thousand
(1,000) vested LTIP Units or, if such holder holds less than one
thousand vested LTIP Units, all of the vested LTIP Units held by
such holder. Holders of vested LTIP Units shall not have the right
to convert unvested LTIP Units into OP Units until they become
vested LTIP Units; provided,
however, that when a holder of LTIP Units is notified of the
expected occurrence of an event that will cause his or her unvested
LTIP Units to become vested LTIP Units, such holder may give the
operating partnership a notice in the form provided on Exhibit D to
the Limited Partnership Agreement conditioned upon and effective as
of the time of vesting and such notice, unless subsequently revoked
by such holder, shall be accepted by the operating partnership
subject to such condition. We shall have the right at any time to
cause a conversion of vested LTIP Units into OP Units.
Series A Preferred Units
The
Series A Preferred Units will, with respect to distribution rights
and rights upon liquidation, dissolution or winding up of the
operating partnership, rank (a) senior to OP Units, LTIP
Units, and any other class or series of unit designated as common
and any class or series of preferred units expressly designated as
ranking junior to the Series A Preferred Units as to distribution
rights and rights upon liquidation, dissolution or winding up of
the operating partnership, or the Junior Units; (b) on a parity
with any class or series of preferred units issued by the operating
partnership expressly designated as ranking on a parity with the
Series A Preferred Units as to distribution rights and rights upon
liquidation, dissolution or winding up of the Partnership, or the
Parity Preferred Units; and (c) junior to any class or series
of preferred units issued by the operating partnership expressly
designated as ranking senior to the Series A Preferred Units with
respect to distribution rights and rights upon liquidation,
dissolution or winding up of the operating partnership. The Series
A Preferred Units will also rank junior in right or payment to the
operating partnership’s existing and future
indebtedness.
Subject
to the preferential rights of holders of any class or series of
preferred units of the operating partnership expressly designated
as ranking senior to the Series A Preferred Units, the holders of
Series A Preferred Units shall be entitled to receive, when, as and
if authorized by us and declared by the operating partnership, out
of funds of the operating partnership legally available for payment
of distributions, preferential cumulative cash distributions at the
rate of 7.00% per annum of the liquidation preference of $25.00 per
unit (equivalent to a fixed annual amount of $1.75 per unit), or
the Series A Preferred Return, from the date of original issue of
the Series A Preferred Units. Distributions on the Series A
Preferred Units shall accrue and be cumulative from (and including)
the date of original issue of any Series A Preferred Units or the
end of the most recent Distribution Period for which distributions
have been paid, and shall be payable quarterly, in equal amounts,
in arrears, on or about the 5th day of each January, April, July and
October of each year (or, if not a business day, the next
succeeding business day (each a “Series A
Preferred Distribution Payment Date”) for the period ending
on such Series A Preferred Distribution Payment Date, commencing on
July 5, 2016. A “Distribution Period” is the respective
period commencing on and including January 1, April 1, July 1 and
October 1 of each year and ending on and including the day
preceding the first day of the next succeeding Distribution Period
(other than the initial Distribution Period and the Distribution
Period during which any Series A Preferred Units shall be redeemed
or otherwise acquired by the operating partnership). The term
“Business Day” shall mean each day, other than a
Saturday or Sunday, which is not a day on which banks in the State
of New York are required to close. The amount of any distribution
payable on the Series A Preferred Units for any Distribution Period
will be computed on the basis of twelve 30-day months and a 360-day
year. Distributions will be payable to holders of record of the
Series A Preferred Units as they appear on the records of the
operating partnership at the close of business on the
25th day of the month
preceding the applicable Series A Preferred Distribution Payment
Date, i.e., December 25,
March 25, June 25 and September 25
Distributions on
the Series A Preferred Units will accrue whether or not the
Partnership has earnings, whether or not there are funds legally
available for the payment of such distributions and whether or not
such distributions are authorized or declared. Unless full
cumulative distributions on the Series A Preferred Units have been
or contemporaneously are declared and paid in cash or declared and
a sum sufficient for the payment thereof is set apart for payment
for all past Distribution Periods that have ended, no distributions
(other than a distribution in Junior Units or in options, warrants
or rights to subscribe for or purchase any such Junior Units) shall
be declared and paid or declared and set apart for payment nor
shall any other distribution be declared and made upon the Junior
Units or the Parity Preferred Units, nor shall any Junior Units or
Parity Preferred Units be redeemed, purchased or otherwise acquired
for any consideration (or any monies be paid to or made available
for a sinking fund for the redemption of any such units) by the
operating partnership (except (i) by conversion into or exchange
for Junior Units, (ii) the purchase of Series A Preferred Units,
Junior Units or Parity Preferred Units in connection with a
redemption of stock pursuant to the charter to the extent necessary
to preserve our qualification as a REIT or (iii) the purchase of
Parity Preferred Units pursuant to a purchase or exchange offer
made on the same terms to holders of all outstanding Series A
Preferred Units). Holders of the Series A Preferred Units shall not
be entitled to any distribution, whether payable in cash, property
or units, in excess of full cumulative distributions on the Series
A Preferred Units as provided above. Any distribution made on the
Series A Preferred Units shall first be credited against the
earliest accrued but unpaid distribution due with respect to such
units which remains payable.
Upon
any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the operating partnership, the holders of Series
A Preferred Units are entitled to be paid out of the assets of the
operating partnership legally available for distribution to its
partners, after payment of or provision for the operating
partnership’s debts and other liabilities, a liquidation
preference of $25.00 per unit, plus an amount equal to any accrued
and unpaid distributions (whether or not authorized or declared)
thereon to and including the date of payment, but without interest,
before any distribution of assets is made to holders of Junior
Units. If the assets of the operating partnership legally available
for distribution to partners are insufficient to pay in full the
liquidation preference on the Series A Preferred Units and the
liquidation preference on any Parity Preferred Units, all assets
distributed to the holders of the Series A Preferred Units and any
Parity Preferred Units shall be distributed pro rata so that the
amount of assets distributed per Series A Preferred Units and such
Parity Preferred Units shall in all cases bear to each other the
same ratio that the liquidation preference per Series A Preferred
Unit and such Parity Preferred Units bear to each
other.
In
connection with any conversion of any shares of our Series A
Preferred Stock, the operating partnership shall convert, on the
date of such conversion, a number of outstanding Series A Preferred
Units into a number of OP Units equivalent to the product of the
number of shares of common stock issued upon conversion of the
Series A Preferred Stock multiplied by the Conversion Factor, as
defined in the Limited Partnership Agreement.
Holders
of the Series A Preferred Units will not have any voting
rights.
Operations
Our
Limited Partnership Agreement requires that our operating
partnership be operated in a manner that will enable us to (1)
satisfy the requirements for qualification as a REIT for tax
purposes, (2) avoid any U.S. federal income or excise tax
liability, and (3) ensure that our operating partnership will not
be classified as a “publicly traded partnership” for
purposes of Section 7704 of the Code, which classification could
result in our operating partnership being taxed as a corporation,
rather than as a partnership.
Rights, Obligations and Powers of the General Partner
As our
operating partnership’s general partner, generally we have
complete and exclusive discretion to manage and control our
operating partnership’s business and to make all decisions
affecting its assets. This authority generally includes, among
other things, the authority to:
|
●
|
acquire,
purchase, own, operate, lease and dispose of any real property and
any other property;
|
|
●
|
construct
buildings and make other improvements on owned or leased
properties;
|
|
●
|
authorize,
issue, sell, redeem or otherwise purchase any OP Units or any other
securities of the partnership;
|
|
●
|
make or
revoke any tax election;
|
|
●
|
maintain
insurance coverage in amounts and types as we determine is
necessary;
|
|
●
|
retain
employees or other service providers;
|
|
●
|
form or
acquire interests in joint ventures; and
|
|
●
|
merge,
consolidate or combine our operating partnership with another
entity.
|
In
addition to the administrative and operating costs and expenses
incurred by the operating partnership, the operating partnership
generally will pay all of our administrative costs and expenses,
including:
|
●
|
all
expenses relating to our continuity of existence and our
subsidiaries’ operations;
|
|
●
|
all
expenses relating to offerings and registration of
securities;
|
|
●
|
all
expenses associated with the preparation and filing of any of our
periodic or other reports and communications under U.S. federal,
state or local laws or regulations;
|
|
●
|
all
expenses associated with our compliance with laws, rules and
regulations promulgated by any regulatory body; and
|
|
●
|
all of
our other operating or administrative costs incurred in the
ordinary course of business on behalf of the operating
partnership.
|
These
expenses, however, do not include any of our administrative and
operating costs and expenses incurred that are attributable to
properties or interests in subsidiaries that are owned by us
directly rather than by the operating partnership or its
subsidiaries.
Fiduciary Responsibilities of the General Partner
Our
directors and officers have duties under applicable Maryland law to
manage us in a manner consistent with the best interests of our
stockholders. At the same time, we, as the general partner of our
operating partnership, will have fiduciary duties to manage our
operating partnership in a manner beneficial to our operating
partnership and its partners. Our duties, as general partner to our
operating partnership and its limited partners, therefore, may come
into conflict with the duties of our directors and officers to our
stockholders. In the event that a conflict of interest exists
between the interests of our stockholders, on the one hand, and our
operating partnership’s limited partners, on the other, we
will endeavor in good faith to resolve the conflict in a manner not
adverse to either our stockholders or such limited partners.
However, any such conflict that we determine cannot be resolved in
a manner not adverse to either our stockholders or such limited
partners shall be resolved in favor of our stockholders. The
limited partners of our operating partnership acknowledge expressly
that in the event of such a determination by us, as the general
partner of our operating partnership, we shall not be liable to
such limited partners for losses sustained or benefits not realized
in connection with, or as a result of, such a
determination.
Distributions; Allocations of Profits and Losses
Our
Limited Partnership Agreement provides that our operating
partnership will distribute cash from operations at times and in
amounts determined by us, as the sole general partner of our
operating partnership, in our sole discretion, to the partners, in
accordance with their respective percentage interests in our
operating partnership. We will cause our operating partnership to
distribute annually to us amounts sufficient to allow us to satisfy
the annual distribution requirements necessary for us to qualify as
a REIT, currently 90% of our REIT taxable income. We generally
intend to cause our operating partnership to distribute annually to
us an amount equal to at least 100% of our net taxable income,
which we will then distribute to our stockholders, but we will be
subject to corporate taxation to the extent distributions in such
amounts are not made. Upon liquidation of our operating
partnership, after payment of, or adequate provision for, debts and
obligations of our operating partnership, including any partner
loans, any remaining assets of our operating partnership will be
distributed to all partners with positive capital accounts in
accordance with their respective positive capital account balances.
If any partner has a deficit balance in its capital account (after
giving effect to all contributions, distributions and allocations
for all taxable years, including the year during which such
liquidation occurs), such partner shall have no obligation to make
any contribution to the capital of our operating partnership with
respect to such deficit, and such deficit shall not be considered a
debt owed to our operating partnership or to any other person for
any purpose whatsoever.
Income,
expenses, gains and losses of our operating partnership will
generally be allocated among the partners in a manner consistent
with the distribution of cash described in the paragraph above. All
such allocations are subject to compliance with the provisions of
Sections 704(b) and 704(c) of the Code and the Treasury Regulations
thereunder. To the extent Treasury Regulations promulgated pursuant
to Section 704(c) of the Code permit, we, as the general partner,
shall have the authority to elect the method to be used by the
operating partnership for allocating items with respect to
contributed property acquired in connection with this offering for
which fair market value differs from the adjusted tax basis at the
time of contribution, and such election shall be binding on all
partners.
Term and Termination
Our
operating partnership will continue indefinitely, or until sooner
dissolved upon:
|
●
|
our
bankruptcy, dissolution, removal or withdrawal (unless the limited
partners elect to continue the partnership);
|
|
●
|
the
passage of 90 days after the sale or other disposition of all, or
substantially all, of the assets of the partnership;
|
|
●
|
the
redemption of all limited partnership interests (other than those
held by us or our subsidiaries) unless we decide to continue the
partnership by the admission of one or more limited partners;
or
|
|
●
|
an
election by us in our capacity as the general partner.
|
Tax Matters
Our
Limited Partnership Agreement provides that we, as the sole general
partner of the operating partnership, will be the tax matters
partner of the operating partnership and, as such, will have
authority to handle tax audits and to make tax elections under the
Code on behalf of the operating partnership.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
This
section summarizes the material federal income tax considerations
that you, as a stockholder, may consider relevant in connection
with the purchase, ownership and disposition of our common stock.
Kaplan Voekler Cunningham & Frank, PLC, or our tax counsel, has
reviewed this summary, and is of the opinion that the discussion
contained herein is accurate in all material respects. Because this
section is a summary, it does not address all aspects of taxation
that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of
stockholders that are subject to special treatment under the U.S.
federal income tax laws, such as:
|
●
|
tax-exempt
organizations (except to the limited extent discussed in
“— Taxation of Tax-Exempt Stockholders”
below);
|
|
●
|
financial
institutions or broker-dealers;
|
|
●
|
non-U.S.
individuals and foreign corporations (except to the limited extent
discussed in “— Taxation of Non-U.S.
Stockholders” below);
|
|
●
|
persons
who mark-to-market our common stock;
|
|
●
|
subchapter
S corporations;
|
|
●
|
U.S.
stockholders (as defined below) whose functional currency is not
the U.S. dollar;
|
|
●
|
regulated
investment companies and REITs;
|
|
●
|
holders
who receive our common stock through the exercise of employee stock
options or otherwise as compensation;
|
|
●
|
persons
holding our common stock as part of a “straddle,”
“hedge,” “conversion transaction,”
“synthetic security” or other integrated
investment;
|
|
●
|
persons
subject to the alternative minimum tax provisions of the Code;
and
|
|
●
|
persons
holding our common stock through a partnership or similar
pass-through entity.
|
This
summary assumes that stockholders hold shares as capital assets for
U.S. federal income tax purposes, which generally means property
held for investment.
The
statements in this section are not intended to be, and should not
be construed as, tax advice. The statements in this section based
on the Code, current, temporary and proposed Treasury regulations,
the legislative history of the Code, current administrative
interpretations and practices of the IRS, and court decisions. The
reference to IRS interpretations and practices includes the IRS
practices and policies endorsed in private letter rulings, which
are not binding on the IRS except with respect to the taxpayer that
receives the ruling. In each case, these sources are relied upon as
they exist on the date of this discussion. Future legislation,
Treasury regulations, administrative interpretations and court
decisions could change the current law or adversely affect existing
interpretations of current law on which the information in this
section is based. Any such change could apply retroactively. We
have not received any rulings from the IRS concerning our
qualification as a REIT. Accordingly, even if there is no change in
the applicable law, no assurance can be provided that the
statements made in the following discussion, which do not bind the
IRS or the courts, will not be challenged by the IRS or will be
sustained by a court if so challenged.
WE
URGE YOU TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF THE PURCHASE, OWNERSHIP AND SALE OF OUR
COMMON STOCK AND OF OUR ELECTION TO BE TAXED AS A REIT.
SPECIFICALLY, YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR
REGARDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND
REGARDING POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Taxation of our Company
We plan
to elect to be taxed as a REIT under the federal income tax laws
for the taxable year ending December 31, 2017. We believe that,
commencing with such taxable year, we are organized and operate in
a manner so as to qualify as a REIT under the federal income tax
laws. We cannot assure you, however, that we will qualify or remain
qualified as a REIT. This section discusses the laws governing the
federal income tax treatment of a REIT and its stockholders, which
laws are highly technical and complex.
Kaplan
Voekler Cunningham & Frank, PLC has acted as tax counsel to us
in connection with this offering. Tax counsel is of the opinion
that based on our method of operation, we are in a position to
qualify for taxation as a REIT for the taxable year that will end
December 31, 2017. Tax counsel’s opinion is based solely
on our representations with respect to factual matters concerning
our business operations and our properties. Tax counsel has not
independently verified these facts. In addition, our qualification
as a REIT depends, among other things, upon our meeting the
requirements of Sections 856 through 860 of the Code
throughout each year. Accordingly, because our satisfaction of such
requirements will depend upon future events, including the final
determination of financial and operational results, no assurance
can be given that we will satisfy the REIT requirements during the
taxable year that will end December 31, 2017, or in any future
year.
Our
REIT qualification depends on our ability to meet on a continuing
basis several qualification tests set forth in the federal tax
laws. Those qualification tests involve the percentage of income
that we earn from specified sources, the percentage of our assets
that fall within specified categories, the diversity of our share
ownership, and the percentage of our earnings that we distribute.
We describe the REIT qualification tests, and the consequences of
our failure to meet those tests, in more detail below. Tax counsel
will not review our compliance with those tests on a continuing
basis. Accordingly, neither we nor tax counsel can assure you that
we will satisfy those tests.
If we
qualify as a REIT, we generally will not be subject to federal
income tax on the taxable income that we distribute to our
stockholders. The benefit of that tax treatment is that it avoids
the “double taxation,” which means taxation at both the
corporate and stockholder levels, that generally results from
owning stock in a corporation.
However, we will be
subject to U.S. federal tax in the following
circumstances:
|
●
|
We will
pay U.S. federal income tax on any taxable income, including net
capital gain, that we do not distribute to stockholders during, or
within a specified time period after, the calendar year in which
the income is earned.
|
|
●
|
We may
be subject to the “alternative minimum tax” on any
items of tax preference including any deductions of net operating
losses.
|
|
●
|
We will
pay income tax at the highest corporate rate on:
|
|
●
|
net
income from the sale or other disposition of property acquired
through foreclosure (“foreclosure property”) that we
hold primarily for sale to customers in the ordinary course of
business, and
|
|
●
|
other
non-qualifying income from foreclosure property.
|
|
●
|
We will
pay a 100% tax on net income from sales or other dispositions of
property, other than foreclosure property, that we hold primarily
for sale to customers in the ordinary course of
business.
|
|
●
|
If we
fail to satisfy one or both of the 75% gross income test or the 95%
gross income test, as described below under
“— Gross Income Tests,” and nonetheless
continue to qualify as a REIT because we meet other requirements,
we will pay a 100% tax on the gross income attributable to the
greater of the amount by which we fail the 75% gross income test or
the 95% gross income test, in either case, multiplied by a fraction
intended to reflect our profitability.
|
|
●
|
If we
fail to distribute during a calendar year at least the sum of (1)
85% of our REIT ordinary income for the year, (2) 95% of our REIT
capital gain net income for the year, and (3) any undistributed
taxable income required to be distributed from earlier periods, we
will pay a 4% nondeductible excise tax on the excess of the
required distribution over the amount we actually
distributed.
|
|
●
|
We may
elect to retain and pay income tax on our net long-term capital
gain. In that case, a stockholder would be taxed on its
proportionate share of our undistributed long-term capital gain (to
the extent that we made a timely designation of such gain to the
stockholders) and would receive a credit or refund for its
proportionate share of the tax we paid.
|
|
●
|
We will
be subject to a 100% excise tax on some payments we receive (or on
certain expenses deducted by any TRS we form in the future on
income imputed to our TRSs for services rendered to or on behalf of
us), if arrangements among us, our tenants, and our TRSs do not
reflect arm’s-length terms.
|
|
|
|
|
●
|
If we
fail to satisfy any of the asset tests, other than a de minimis failure of the 5% asset
test, the 10% vote test or 10% value test, as described below under
“— Asset Tests,” as long as the failure was
due to reasonable cause and not to willful neglect, we file a
description of each asset that caused such failure with the IRS,
and we dispose of the assets causing the failure or otherwise
comply with the asset tests within six months after the last day of
the quarter in which we identify such failure, we will pay a tax
equal to the greater of $50,000 or the highest federal income tax
rate then applicable to U.S. corporations (currently 35%) on the
net income from the nonqualifying assets during the period in which
we failed to satisfy the asset tests.
|
|
|
|
●
|
If we
fail to satisfy one or more requirements for REIT qualification,
other than the gross income tests and the asset tests, and such
failure is due to reasonable cause and not to willful neglect, we
will be required to pay a penalty of $50,000 for each such
failure.
|
|
|
|
●
|
If we
acquire any asset from a C corporation, or a corporation that
generally is subject to full corporate-level tax, in a merger or
other transaction in which we acquire a basis in the asset that is
determined by reference either to the C corporation’s basis
in the asset or to another asset, we will pay tax at the highest
regular corporate rate applicable if we recognize gain on the sale
or disposition of the asset during the 10-year period after we
acquire the asset provided no election is made for the transaction
to be taxable on a current basis. The amount of gain on which we
will pay tax is the lesser of:
|
|
|
|
●
|
the
amount of gain that we recognize at the time of the sale or
disposition, and
|
|
|
|
●
|
the
amount of gain that we would have recognized if we had sold the
asset at the time we acquired it.
|
|
|
|
●
|
We may
be required to pay monetary penalties to the IRS in certain
circumstances, including if we fail to meet record-keeping
requirements intended to monitor our compliance with rules relating
to the composition of a REIT’s stockholders, as described
below in “— Recordkeeping
Requirements.”
|
|
●
|
The
earnings of our lower-tier entities that are subchapter C
corporations, including any TRSs we form in the future, will be
subject to U.S. federal corporate income tax.
|
In
addition, notwithstanding our qualification as a REIT, we may also
have to pay certain state and local income taxes because not all
states and localities treat REITs in the same manner that they are
treated for U.S. federal income tax purposes. Moreover, as further
described below, any TRSs we form in the future will be subject to
federal, state and local corporate income tax on their taxable
income.
Requirements for Qualification
A REIT
is a corporation, trust, or association that meets each of the
following requirements:
|
1.
|
It is
managed by one or more trustees or directors.
|
|
|
|
2.
|
Its
beneficial ownership is evidenced by transferable shares, or by
transferable certificates of beneficial interest.
|
|
|
|
3.
|
It
would be taxable as a domestic corporation, but for the REIT
provisions of the U.S. federal income tax laws.
|
|
|
|
4.
|
It is
neither a financial institution nor an insurance company subject to
special provisions of the U.S. federal income tax
laws.
|
|
|
|
5.
|
At
least 100 persons are beneficial owners of its shares or ownership
certificates.
|
|
|
|
6.
|
Not
more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals, which the Code defines to include certain entities,
during the last half of any taxable year.
|
|
|
|
7.
|
It
elects to be a REIT, or has made such election for a previous
taxable year, and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met
to elect and maintain REIT qualification.
|
|
|
|
8.
|
It
meets certain other qualification tests, described below, regarding
the nature of its income and assets and the amount of its
distributions to stockholders.
|
|
|
|
9.
|
It uses
a calendar year for U.S. federal income tax purposes and complies
with the recordkeeping requirements of the U.S. federal income tax
laws.
|
We must
meet requirements 1 through 4, 8 and 9 during our entire taxable
year and must meet requirement 5 during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months. If we comply with all the
requirements for ascertaining the ownership of our outstanding
shares in a taxable year and have no reason to know that we
violated requirement 6, we will be deemed to have satisfied
requirement 6 for that taxable year. We do not have to comply with
5 and 6 for the first taxable year for which we elect REIT tax
status. For purposes of determining stock ownership under
requirement 6, an “individual” generally includes a
supplemental unemployment compensation benefits plan, a private
foundation, or a portion of a trust permanently set aside or used
exclusively for charitable purposes. An “individual,”
however, generally does not include a trust that is a qualified
employee pension or profit sharing trust under the U.S. federal
income tax laws, and beneficiaries of such a trust will be treated
as holding our shares in proportion to their actuarial interests in
the trust for purposes of requirement 6.
Our
charter provides restrictions regarding the transfer and ownership
of shares of our capital stock. See “Description of Capital
Stock — Restrictions on Ownership and
Transfer.” We believe that we will have issued sufficient
stock with sufficient diversity of ownership to allow us to satisfy
requirements 5 and 6 above. The restrictions in our charter are
intended (among other things) to assist us in continuing to satisfy
requirements 5 and 6 above. These restrictions, however, may not
ensure that we will, in all cases, be able to satisfy such share
ownership requirements. If we fail to satisfy these share ownership
requirements, our qualification as a REIT may
terminate.
Qualified REIT Subsidiaries. A
corporation that is a “qualified REIT subsidiary” is
not treated as a corporation separate from its parent REIT. All
assets, liabilities, and items of income, deduction, and credit of
a “qualified REIT subsidiary” are treated as assets,
liabilities, and items of income, deduction, and credit of the
REIT. A “qualified REIT subsidiary” is a corporation,
other than a TRS, all of the stock of which is owned by the REIT.
Thus, in applying the requirements described herein, any
“qualified REIT subsidiary” that we own will be
ignored, and all assets, liabilities, and items of income,
deduction, and credit of such subsidiary will be treated as our
assets, liabilities, and items of income, deduction, and
credit.
Other Disregarded Entities and
Partnerships. An unincorporated domestic entity, such as a
partnership or limited liability company that has a single owner,
generally is not treated as an entity separate from its owner for
U.S. federal income tax purposes. An unincorporated domestic entity
with two or more owners is generally treated as a partnership for
U.S. federal income tax purposes. In the case of a REIT that is a
partner in a partnership that has other partners, the REIT is
treated as owning its proportionate share of the assets of the
partnership and as earning its allocable share of the gross income
of the partnership for purposes of the applicable REIT
qualification tests. Our proportionate share for purposes of the
10% value test (see “— Asset Tests”) will be
based on our proportionate interest in the equity interests and
certain debt securities issued by the partnership. For all of the
other asset and income tests, our proportionate share will be based
on our proportionate interest in the capital interests in the
partnership. Our proportionate share of the assets, liabilities,
and items of income of any partnership, joint venture, or limited
liability company that is treated as a partnership for U.S. federal
income tax purposes in which we acquire an equity interest,
directly or indirectly, will be treated as our assets and gross
income for purposes of applying the various REIT qualification
requirements.
We may
acquire limited partner or non-managing member interests in
partnerships and limited liability companies that are joint
ventures. If a partnership or limited liability company in which we
own an interest takes or expects to take actions that could
jeopardize our qualification as a REIT or require us to pay tax, we
may be forced to dispose of our interest in such entity. In
addition, it is possible that a partnership or limited liability
company could take an action which could cause us to fail a gross
income or asset test, and that we would not become aware of such
action in time to dispose of our interest in the partnership or
limited liability company or take other corrective action on a
timely basis. In that case, we could fail to qualify as a REIT
unless we were able to qualify for a statutory REIT
“savings” provision, which may require us to pay a
significant penalty tax to maintain our REIT
qualification.
Taxable REIT Subsidiaries. A REIT may
own up to 100% of the shares of one or more TRSs. A TRS is a fully
taxable corporation that may earn income that would not be
qualifying income if earned directly by the parent REIT. The
subsidiary and the REIT must jointly elect to treat the subsidiary
as a TRS. A corporation of which a TRS directly or indirectly owns
more than 35% of the voting power or value of the securities will
automatically be treated as a TRS. We will not be treated as
holding the assets of a TRS or as receiving any income that the TRS
earns. Rather, the stock issued by a TRS to us will be an asset in
our hands, and we will treat the distributions paid to us from such
TRS, if any, as income. This treatment may affect our compliance
with the gross income and asset tests. Because we will not include
the assets and income of TRSs in determining our compliance with
the REIT requirements, we may use such entities to undertake
indirectly activities, such as earning fee income, that the REIT
rules might otherwise preclude us from doing directly or through
pass-through subsidiaries. Overall, no more than 25% of the value
of a REIT’s assets may consist of stock or securities of one
or more TRSs. We do not currently own any TRSs
A TRS
pays income tax at regular corporate rates on any income that it
earns. In addition, the TRS rules limit the deductibility of
interest paid or accrued by a taxable REIT subsidiary to its parent
REIT to assure that the TRS is subject to an appropriate level of
corporate taxation. Further, the rules impose a 100% excise tax on
transactions between a TRS and its parent REIT or the REIT’s
tenants that are not conducted on an arm’s-length
basis.
A TRS
may not directly or indirectly operate or manage any health care
facilities or lodging facilities or provide rights to any brand
name under which any health care facility or lodging facility is
operated. A TRS is not considered to operate or manage a
“qualified health care property” or “qualified
lodging facility” solely because the TRS directly or
indirectly possesses a license, permit, or similar instrument
enabling it to do so.
Rent
that we receive from a TRS will qualify as “rents from real
property” as long as (1) at least 90% of the leased space in
the property is leased to persons other than TRSs and related-party
tenants, and (2) the amount paid by the TRS to rent space at the
property is substantially comparable to rents paid by other tenants
of the property for comparable space, as described in further
detail below under “— Gross Income
Tests — Rents from Real Property.” If we
lease space to a TRS in the future, we will seek to comply with
these requirements.
Gross Income Tests
We must
satisfy two gross income tests annually to maintain our
qualification as a REIT. First, at least 75% of our gross income
for each taxable year must consist of defined types of income that
we derive, directly or indirectly, from investments relating to
real property or mortgages on real property or qualified temporary
investment income. Qualifying income for purposes of that 75% gross
income test generally includes:
|
●
|
rents
from real property;
|
|
●
|
interest
on debt secured by mortgages on real property, or on interests in
real property;
|
|
●
|
dividends
or other distributions on, and gain from the sale of, shares in
other REITs;
|
|
●
|
gain
from the sale of a real estate asset (excluding gain from the sale
of a debt instrument issued by a “publicly offered
REIT” to the extent not secured by real property or an
interest in real property) not held for sale to
customers;
|
|
●
|
income
and gain derived from foreclosure property; and
|
|
●
|
income
derived from the temporary investment of new capital that is
attributable to the issuance of our stock or a public offering of
our debt with a maturity date of at least five years and that we
receive during the one-year period beginning on the date on which
we received such new capital.
|
Second,
in general, at least 95% of our gross income for each taxable year
must consist of income that is qualifying income for purposes of
the 75% gross income test, other types of interest and dividends,
gain from the sale or disposition of shares or securities, or any
combination of these. Cancellation of indebtedness, or COD, income
and gross income from our sale of property that we hold primarily
for sale to customers in the ordinary course of business is
excluded from both the numerator and the denominator in both gross
income tests. In addition, income and gain from “hedging
transactions” that we enter into to hedge indebtedness
incurred or to be incurred to acquire or carry real estate assets
and that are clearly and timely identified as such will be excluded
from both the numerator and the denominator for purposes of the 75%
and 95% gross income tests. Finally, certain foreign currency gains
will be excluded
Rents from Real Property. Rent
that we receive, including as a result of our ownership of
preferred or common equity interests in a partnership that owns
rental properties, from our real property will qualify as
“rents from real property,” which is qualifying income
for purposes of the 75% and 95% gross income tests, only if the
following conditions are met:
|
●
|
First,
the rent must not be based, in whole or in part, on the income or
profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.
|
|
●
|
Second,
neither we nor a direct or indirect owner of 10% or more of our
stock may own, actually or constructively, 10% or more of a tenant
from whom we receive rent, other than a TRS.
|
|
●
|
Third,
if the rent attributable to personal property leased in connection
with a lease of real property is 15% or less of the total rent
received under the lease, then the rent attributable to personal
property will qualify as rents from real property. However, if the
15% threshold is exceeded, the rent attributable to personal
property will not qualify as rents from real property. With respect
to each property we will own, we believe either that the personal
property ratio will be less than 15% or that any rent attributable
to excess personal property will not jeopardize our ability to
qualify as a REIT. There can be no assurance, however, that the IRS
would not challenge our calculation of a personal property ratio,
or that a court would not uphold such assertion. If such a
challenge were successfully asserted, we could fail to satisfy the
75% or 95% gross income test and thus potentially lose our REIT
status.
|
|
|
|
|
●
|
Fourth,
we generally must not operate or manage our real property or
furnish or render services to our tenants, other than through an
“independent contractor” who is adequately compensated
and from whom we do not derive revenue. However, we need not
provide services through an “independent contractor,”
but instead may provide services directly to our tenants, if the
services are “usually or customarily rendered” in
connection with the rental of space for occupancy only and are not
considered to be provided for the tenants’ convenience. In
addition, we may provide a minimal amount of
“noncustomary” services to the tenants of a property,
other than through an independent contractor, as long as our income
from the services (valued at not less than 150% of our direct cost
of performing such services) does not exceed 1% of our income from
the related property. Furthermore, we may own up to 100% of the
stock of a TRS which may provide customary and noncustomary
services to our tenants without tainting our rental income for the
related properties.
|
If a
portion of the rent that we receive from a property does not
qualify as “rents from real property” because the rent
attributable to personal property exceeds 15% of the total rent for
a taxable year, the portion of the rent that is attributable to
personal property will not be qualifying income for purposes of
either the 75% or 95% gross income test. Thus, if such rent
attributable to personal property, plus any other income that is
nonqualifying income for purposes of the 95% gross income test,
during a taxable year exceeds 5% of our gross income during the
year, we would lose our REIT qualification. If, however, the rent
from a particular property does not qualify as “rents from
real property” because either (1) the rent is considered
based on the income or profits of the related tenant, (2) the
tenant either is a related party tenant or fails to qualify for the
exceptions to the related party tenant rule for qualifying TRSs or
(3) we furnish noncustomary services to the tenants of the
property, or manage or operate the property, other than through a
qualifying independent contractor or a TRS, none of the rent from
that property would qualify as “rents from real
property.”
Interest. Interest income
generally constitutes qualifying mortgage interest for purposes of
the 75% gross income test to the extent that the obligation upon
which such interest is paid is secured by a mortgage on real
property (and a mortgage on an interest in real property). Except
as provided in the following sentence, if we receive interest
income with respect to a mortgage loan that is secured by both real
and other property, and the highest principal amount of the loan
outstanding during a taxable year exceeds the fair market value of
the real property on the date that we acquired or originated the
mortgage loan, the interest income will be apportioned between the
real property and the other collateral, and our income from the
arrangement will qualify for purposes of the 75% gross income test
only to the extent that the interest is allocable to the real
property. In the case of real estate mortgage loans secured by both
real and personal property, if the fair market value of such
personal property does not exceed 15% of the total fair market
value of all property securing the loan, then the personal property
securing the loan will be treated as real property for purposes of
determining whether the mortgage is qualifying under the 75% asset
test and as producing interest income that qualifies for purposes
of the 75% gross income test.
The
term “interest” generally does not include any amount
received or accrued, directly or indirectly, if the determination
of such amount depends in whole or in part on the income or profits
of any person. However, interest generally includes the
following:
|
●
|
an
amount that is based on a fixed percentage or percentages of
receipts or sales; and
|
|
●
|
an
amount that is based on the income or profits of a debtor, as long
as the debtor derives substantially all of its income from the real
property securing the debt from leasing substantially all of its
interest in the property, and only to the extent that the amounts
received by the debtor would be qualifying “rents from real
property” if received directly by a REIT.
|
If a
loan contains a provision that entitles a REIT to a percentage of
the borrower’s gain upon the sale of the real property
securing the loan or a percentage of the appreciation in the
property’s value as of a specific date, income attributable
to that loan provision will be treated as gain from the sale of the
property securing the loan, which generally is qualifying income
for purposes of both gross income tests.
In
connection with development projects, if any, we may originate
mezzanine loans, which are loans secured by equity interests in an
entity that directly or indirectly owns real property, rather than
by a direct mortgage of the real property. In Revenue Procedure
2003-65, the IRS established a safe harbor under which loans
secured by a first priority security interest in ownership
interests in a partnership or limited liability company owning real
property will be treated as real estate assets for purposes of the
REIT asset tests described below, and interest derived from those
loans will be treated as qualifying income for both the 75% and 95%
gross income tests, provided several requirements are satisfied.
Although the Revenue Procedure provides a safe harbor on which
taxpayers may rely, it does not prescribe rules of substantive tax
law. Moreover, we anticipate that our mezzanine loans typically
will not meet all of the requirements for reliance on the safe
harbor. To the extent any mezzanine loans that we originate do not
qualify for the safe harbor described above, the interest income
from the loans will be qualifying income for purposes of the 95%
gross income test, but there is a risk that such interest income
will not be qualifying income for purposes of the 75% gross income
test. We intend to invest in mezzanine loans in a manner that will
enable us to continue to satisfy the REIT gross income and asset
tests.
Dividends. Our share of any
dividends received from any corporation (including any TRS, but
excluding any REIT) in which we own an equity interest will qualify
for purposes of the 95% gross income test but not for purposes of
the 75% gross income test. Our share of any dividends received from
any other REIT in which we own an equity interest, if any, will be
qualifying income for purposes of both gross income
tests.
Prohibited Transactions. A REIT
will incur a 100% tax on the net income (including foreign currency
gain) derived from any sale or other disposition of property, other
than foreclosure property, that the REIT holds primarily for sale
to customers in the ordinary course of a trade or business. We
believe that none of our properties have been or will be held
primarily for sale to customers and that all prior sales of our
properties were not, and a sale of any of our properties in the
future will not be in the ordinary course of our business. However,
there can be no assurance that the IRS would not disagree with that
belief. Whether a REIT holds a property “primarily for sale
to customers in the ordinary course of a trade or business”
depends on the facts and circumstances in effect from time to time,
including those related to a particular property. A safe harbor to
the characterization of the sale of property which is a real estate
asset by a REIT as a prohibited transaction and the 100% prohibited
transaction tax is available if the following requirements are
met:
|
●
|
the
REIT has held the property for not less than two
years;
|
|
●
|
the
aggregate expenditures made by the REIT, or any partner of the
REIT, during the two-year period preceding the date of the sale
that are includable in the adjusted basis of the property do not
exceed 30% of the selling price of the property;
|
|
●
|
either
(1) during the year in question, the REIT did not make more than
seven sales of property other than foreclosure property or sales to
which Section 1033 of the Code applies, or (2) the aggregate
adjusted bases of all such properties sold by the REIT during the
year did not exceed 10% of the aggregate bases of all of the assets
of the REIT at the beginning of the year, or (3) the aggregate fair
market value of all such properties sold by the REIT during the
year did not exceed 10% of the aggregate fair market value of all
of the assets of the REIT at the beginning of the year, or (4) the
aggregate adjusted basis of property sold during the year is 20% or
less of the aggregate adjusted basis of all of our assets as of the
beginning of the taxable year and the aggregate adjusted basis of
property sold during the 3-year period ending with the year of sale
is 10% or less of the aggregate tax basis of all of our assets as
of the beginning of each of the three taxable years ending with the
year of sale; or (5) the fair market value of property sold during
the year is 20% or less of the aggregate fair market value of all
of our assets as of the beginning of the taxable year and the fair
market value of property sold during the 3-year period ending with
the year of sale is 10% or less of the aggregate fair market value
of all of our assets as of the beginning of each of the three
taxable years ending with the year of sale;
|
|
|
|
|
●
|
in the
case of property not acquired through foreclosure or lease
termination, the REIT has held the property for at least two years
for the production of rental income; and
|
|
●
|
if the
REIT has made more than seven sales of non-foreclosure property
during the taxable year, substantially all of the marketing and
development expenditures with respect to the property were made
through an independent contractor from whom the REIT derives no
income or through any of our TRSs.
|
We will
attempt to comply with the terms of the safe-harbor provisions in
the U.S. federal income tax laws prescribing when a property sale
will not be characterized as a prohibited transaction. However, not
all of our prior sales of properties have qualified for the
safe-harbor provisions. In addition, we cannot assure you that we
can comply with the safe-harbor provisions or that we have avoided
and will avoid owning property that may be characterized as
property that we hold “primarily for sale to customers in the
ordinary course of a trade or business.” The 100% tax will
not apply to gains from the sale of property that is held through a
TRS or other taxable corporation, although such income will be
taxed to the corporation at regular corporate income tax
rates.
Fee Income. Fee income generally
will not be qualifying income for purposes of both the 75% and 95%
gross income tests. Any fees earned by a TRS will not be included
for purposes of the gross income tests.
Foreclosure Property. We will be
subject to tax at the maximum corporate rate on any income from
foreclosure property, which includes certain foreign currency gains
and related deductions, other than income that otherwise would be
qualifying income for purposes of the 75% gross income test, less
expenses directly connected with the production of that income.
However, gross income from foreclosure property will qualify under
the 75% and 95% gross income tests. Foreclosure property is any
real property, including interests in real property, and any
personal property incident to such real property:
|
●
|
that is
acquired by a REIT as the result of the REIT having bid on such
property at foreclosure, or having otherwise reduced such property
to ownership or possession by agreement or process of law, after
there was a default or default was imminent on a lease of such
property or on indebtedness that such property
secured;
|
|
●
|
for
which the related loan was acquired by the REIT at a time when the
default was not imminent or anticipated; and
|
|
●
|
for
which the REIT makes a proper election to treat the property as
foreclosure property.
|
A REIT
will not be considered to have foreclosed on a property where the
REIT takes control of the property as a mortgagee-in-possession and
cannot receive any profit or sustain any loss except as a creditor
of the mortgagor. property generally ceases to be foreclosure
property at the end of the third taxable year (or, with respect to
qualified health care property, the second taxable year) following
the taxable year in which the REIT acquired the property, or longer
if an extension is granted by the Secretary of the Treasury.
However, this grace period terminates and foreclosure property
ceases to be foreclosure property on the first day:
|
●
|
on
which a lease is entered into for the property that, by its terms,
will give rise to income that does not qualify for purposes of the
75% gross income test, or any amount is received or accrued,
directly or indirectly, pursuant to a lease entered into on or
after such day that will give rise to income that does not qualify
for purposes of the 75% gross income test;
|
|
●
|
on
which any construction takes place on the property, other than
completion of a building or any other improvement, where more than
10% of the construction was completed before default became
imminent; or
|
|
●
|
which
is more than 90 days after the day on which the REIT acquired the
property and the property is used in a trade or business which is
conducted by the REIT, other than through an independent contractor
from whom the REIT itself does not derive or receive any income or
through any TRS.
|
Hedging Transactions. From time to
time, we or our operating partnership may enter into hedging
transactions with respect to one or more of our assets or
liabilities. Our hedging activities may include entering into
interest rate swaps, caps, and floors, options to purchase such
items, and futures and forward contracts. Income and gain from
“hedging transactions” will be excluded from gross
income for purposes of both the 75% and 95% gross income tests
provided we satisfy the indemnification requirements discussed
below. A “hedging transaction” means either (1) any
transaction entered into in the normal course of our or our
operating partnership’s trade or business primarily to manage
the risk of interest rate, price changes, or currency fluctuations
with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real
estate assets and (2) any transaction entered into primarily to
manage the risk of currency fluctuations with respect to any item
of income or gain that would be qualifying income under the 75% or
95% gross income test (or any property which generates such income
or gain). If we have entered into a hedging transaction and a
portion of the hedged indebtedness or property is disposed of and
in connection with such extinguishment or disposition we enter into
a new ‘‘clearly identified’’ hedging
transaction, or a Counteracting Hedge, income from the applicable
hedge and income from the Counteracting Hedge (including gain from
the disposition of such Counteracting Hedge) will not be treated as
gross income for purposes of the 95% and 75% gross income tests. We
are required to clearly identify any such hedging transaction
before the close of the day on which it was acquired, originated,
or entered into and to satisfy other identification requirements.
We intend to structure any hedging transactions in a manner that
does not jeopardize our qualification as a REIT.
COD Income. From time-to-time, we
and our subsidiaries may recognize COD income in connection with
repurchasing debt at a discount. COD income is excluded from gross
income for purposes of both the 95% gross income test and the 75%
gross income test.
Foreign
Currency Gain. Certain foreign currency gains will be excluded
from gross income for purposes of one or both of the gross income
tests. “Real estate foreign exchange gain” will be
excluded from gross income for purposes of the 75% and 95% gross
income tests. Real estate foreign exchange gain generally includes
foreign currency gain attributable to any item of income or gain
that is qualifying income for purposes of the 75% gross income
test, foreign currency gain attributable to the acquisition or
ownership of (or becoming or being the obligor under) obligations
secured by mortgages on real property or an interest in real
property and certain foreign currency gain attributable to certain
“qualified business units” of a REIT. “Passive
foreign exchange gain” will be excluded from gross income for
purposes of the 95% gross income test. Passive foreign exchange
gain generally includes real estate foreign exchange gain as
described above, and also includes foreign currency gain
attributable to any item of income or gain that is qualifying
income for purposes of the 95% gross income test and foreign
currency gain attributable to the acquisition or ownership of (or
becoming or being the obligor under) obligations. These exclusions
for real estate foreign exchange gain and passive foreign exchange
gain do not apply to any certain foreign currency gain derived from
dealing, or engaging in substantial and regular trading, in
securities. Such gain is treated as nonqualifying income for
purposes of both the 75% and 95% gross income tests.
Failure to Satisfy Gross Income
Tests. If we fail to satisfy one or both of the gross
income tests for any taxable year, we nevertheless may qualify as a
REIT for that year if we qualify for relief under certain
provisions of the U.S. federal income tax laws. Those relief
provisions are available if:
|
●
|
our
failure to meet those tests is due to reasonable cause and not to
willful neglect; and
|
|
●
|
following
such failure for any taxable year, we file a schedule of the
sources of our income in accordance with regulations prescribed by
the Secretary of the U.S. Treasury.
|
We
cannot predict, however, whether in all circumstances we would
qualify for the relief provisions. In addition, as discussed above
in “— Taxation of Our Company,” even if the
relief provisions apply, we would incur a 100% tax on the gross
income attributable to the greater of the amount by which we fail
the 75% gross income test or the 95% gross income test multiplied,
in either case, by a fraction intended to reflect our
profitability.
Asset Tests
To
qualify as a REIT, we also must satisfy the following asset tests
at the end of each quarter of each taxable year. First, at least
75% of the value of our total assets must consist of:
|
●
|
cash or
cash items, including certain receivables and money market funds
and, in certain circumstances, foreign currencies;
|
|
●
|
interests
in real property, including leaseholds and options to acquire real
property and leaseholds;
|
|
●
|
interests
in mortgage loans secured by real property;
|
|
●
|
investments
in stock or debt instruments during the one-year period following
our receipt of new capital that we raise through equity offerings
or public offerings of debt with at least a five-year term;
and
●
(i) personal
property leased in connection with real property to the extent that
rents attributable to such personal property are treated as
‘‘rents from real property,’’ and
(ii) debt instruments issued by ‘‘publicly offered
REITs’’ (i.e., REITs which are required to file annual
and periodic reports with the SEC under the Securities Exchange Act
of 1934).
|
Second,
of our investments not included in the 75% asset class, the value
of our interest in any one issuer’s securities may not exceed
5% of the value of our total assets, or the 5% asset
test.
Third,
of our investments not included in the 75% asset class, we may not
own more than 10% of the voting power of any one issuer’s
outstanding securities or 10% of the value of any one
issuer’s outstanding securities, or the 10% vote test or 10%
value test, respectively.
Fourth,
no more than 25% (20% for taxable years beginning after December
31, 2017) of the value of our total assets may consist of the
securities of one or more TRSs.
Fifth,
no more than 25% of the value of our total assets may consist of
the securities of TRSs and other non-TRS taxable subsidiaries and
other assets that are not qualifying assets for purposes of the 75%
asset test, or the 25% securities test.
Not
more than 25% of the value of our total assets may be represented
by debt instruments issued by publicly offered REITs to the extent
not secured by real property or interests in real
property.
For
purposes of the 5% asset test, the 10% vote test and the 10% value
test, the term “securities” does not include shares in
another REIT, equity or debt securities of a qualified REIT
subsidiary or TRS, mortgage loans that constitute real estate
assets, or equity interests in a partnership. The term
“securities,” however, generally includes debt
securities issued by a partnership or another REIT, except that for
purposes of the 10% value test, the term “securities”
does not include:
|
●
|
“Straight
debt” securities, which is defined as a written unconditional
promise to pay on demand or on a specified date a sum certain in
money if (1) the debt is not convertible, directly or indirectly,
into equity, and (2) the interest rate and interest payment dates
are not contingent on profits, the borrower’s discretion, or
similar factors. “Straight debt” securities do not
include any securities issued by a partnership or a corporation in
which we or any controlled TRS (i.e., a TRS in which we own
directly or indirectly more than 50% of the voting power or value
of the stock) hold non-“straight debt” securities that
have an aggregate value of more than 1% of the issuer’s
outstanding securities. However, “straight debt”
securities include debt subject to the following
contingencies:
|
|
●
|
a
contingency relating to the time of payment of interest or
principal, as long as either (1) there is no change to the
effective yield of the debt obligation, other than a change to the
annual yield that does not exceed the greater of 0.25% or 5% of the
annual yield, or (2) neither the aggregate issue price nor the
aggregate face amount of the issuer’s debt obligations held
by us exceeds $1,000,000 and no more than 12 months of unaccrued
interest on the debt obligations can be required to be prepaid;
and
|
|
●
|
a
contingency relating to the time or amount of payment upon a
default or prepayment of a debt obligation, as long as the
contingency is consistent with customary commercial
practice.
|
|
●
|
Any
loan to an individual or an estate;
|
|
●
|
Any
“section 467 rental agreement,” other than an agreement
with a related party tenant;
|
|
●
|
Any
obligation to pay “rents from real
property”;
|
|
●
|
Certain
securities issued by governmental entities;
|
|
●
|
Any
security issued by a REIT;
|
|
●
|
Any
debt instrument issued by an entity treated as a partnership for
U.S. federal income tax purposes in which we are a partner to the
extent of our proportionate interest in the equity and debt
securities of the partnership; and
|
|
●
|
Any
debt instrument issued by an entity treated as a partnership for
U.S. federal income tax purposes not described in the preceding
bullet points if at least 75% of the partnership’s gross
income, excluding income from prohibited transactions, is
qualifying income for purposes of the 75% gross income test
described above in “— Gross Income
Tests.”
|
For
purposes of the 10% value test, our proportionate share of the
assets of a partnership is our proportionate interest in any
securities issued by the partnership, without regard to the
securities described in the last two bullet points
above.
We
believe that our holdings of assets comply with the foregoing asset
tests, and we intend to monitor compliance on an ongoing basis.
However, independent appraisals have not been obtained to support
our conclusions as to the value of our assets or the value of any
particular security or securities. Moreover, values of some assets
may not be susceptible to a precise determination, and values are
subject to change in the future. As described above, Revenue
Procedure 2003-65 provides a safe harbor pursuant to which certain
mezzanine loans secured by a first priority security interest in
ownership interests in a partnership or limited liability company
will be treated as qualifying assets for purposes of the 75% asset
test (and therefore, are not subject to the 5% asset test and the
10% vote or value test). See “— Gross Income
Tests.” We intend to make mezzanine loans only to the extent
such loans will not cause us to fail the asset tests described
above.
We will
continue to monitor the status of our assets for purposes of the
various asset tests and will manage our portfolio in order to
comply at all times with such tests. However, there is no assurance
that we will not inadvertently fail to comply with such tests. If
we fail to satisfy the asset tests at the end of a calendar
quarter, we will not lose our REIT qualification if:
|
●
|
we
satisfied the asset tests at the end of the preceding calendar
quarter; and
|
|
●
|
the
discrepancy between the value of our assets and the asset test
requirements arose from changes in the market values of our assets
and was not wholly or partly caused by the acquisition of one or
more non-qualifying assets.
|
If we
did not satisfy the condition described in the second item, above,
we still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter
in which it arose.
If we
violate the 5% asset test, the 10% vote test or the 10% value test
described above, we will not lose our REIT qualification if (1) the
failure is de
minimis (up to the lesser of 1% of our assets or
$10,000,000) and (2) we dispose of assets causing the failure or
otherwise comply with the asset tests within six months after the
last day of the quarter in which we identify such failure. In the
event of a failure of any of the asset tests (other than
de minimis failures
described in the preceding sentence), as long as the failure was
due to reasonable cause and not to willful neglect, we will not
lose our REIT qualification if we (1) dispose of assets causing the
failure or otherwise comply with the asset tests within six months
after the last day of the quarter in which we identify the failure,
(2) we file a description of each asset causing the failure with
the IRS and (3) pay a tax equal to the greater of $50,000 or 35% of
the net income from the assets causing the failure during the
period in which we failed to satisfy the asset tests.
Distribution Requirements
Each
year, we must distribute dividends, other than capital gain
dividends and deemed distributions of retained capital gain, to our
stockholders in an aggregate amount at least equal to:
|
●
|
90% of
our “REIT taxable income,” computed without regard to
the dividends paid deduction and our net capital gain or loss,
and
|
|
●
|
90% of
our after-tax net income, if any, from foreclosure property,
minus
|
|
●
|
the sum
of certain items of non-cash income.
|
We must
pay such distributions in the taxable year to which they relate, or
in the following taxable year if either (1) we declare the
distribution before we timely file our U.S. federal income tax
return for the year and pay the distribution on or before the first
regular dividend payment date after such declaration or (2) we
declare the distribution in October, November or December of the
taxable year, payable to stockholders of record on a specified day
in any such month, and we actually pay the dividend before the end
of January of the following year. The distributions under clause
(1) are taxable to the stockholders in the year in which paid, and
the distributions in clause (2) are treated as paid on December
31st of the prior taxable
year. In both instances, these distributions relate to our prior
taxable year for purposes of the 90% distribution
requirement.
We will
pay U.S. federal income tax on taxable income, including net
capital gain, that we do not distribute to stockholders.
Furthermore, if we fail to distribute during a calendar year, or by
the end of January following the calendar year in the case of
distributions with declaration and record dates falling in the last
three months of the calendar year, at least the sum
of:
|
●
|
85% of
our REIT ordinary income for such year,
|
|
●
|
95% of
our REIT capital gain net income for such year, and
|
|
●
|
any
undistributed taxable income (ordinary and capital gain) from all
prior periods.
|
We will
incur a 4% nondeductible excise tax on the excess of such required
distribution over the amounts we actually distribute. In making
this calculation, the amount that a REIT is treated as having
‘‘actually distributed’’ during the current
taxable year is both the amount distributed during the current year
and the amount by which the distributions during the prior year
exceeded its taxable income and capital gain for that prior year
(the prior year calculation uses the same methodology so, in
determining the amount of the distribution in the prior year, one
looks back to the year before and so forth).
We may
elect to retain and pay income tax on the net long-term capital
gain we receive in a taxable year. If we so elect, we will be
treated as having distributed any such retained amount for purposes
of the 4% nondeductible excise tax described above. We intend to
make timely distributions sufficient to satisfy the annual
distribution requirements and to avoid corporate income tax and the
4% nondeductible excise tax.
It is
possible that, from time to time, we may experience timing
differences between the actual receipt of income and actual payment
of deductible expenses and the inclusion of that income and
deduction of such expenses in arriving at our REIT taxable income.
For example, we may not deduct recognized capital losses from our
“REIT taxable income.” Further, it is possible that,
from time to time, we may be allocated a share of net capital gain
attributable to the sale of depreciated property that exceeds our
allocable share of cash attributable to that sale. As a result of
the foregoing, we may have less cash than is necessary to
distribute taxable income sufficient to avoid corporate income tax
and the excise tax imposed on certain undistributed income or even
to meet the 90% distribution requirement. In such a situation, we
may need to borrow funds or, if possible, pay taxable dividends of
our capital stock or debt securities.
We may
satisfy the 90% distribution test with taxable distributions of our
stock or debt securities. The IRS has issued private letter rulings
to other REITs treating certain distributions that are paid partly
in cash and partly in stock as dividends that would satisfy the
REIT annual distribution requirement and qualify for the dividends
paid deduction for U.S. federal income tax purposes. Those rulings
may be relied upon only by taxpayers to whom they were issued, but
we could request a similar ruling from the IRS. In addition, the
IRS previously issued a revenue procedure authorizing publicly
traded REITs to make elective cash/stock dividends. Accordingly, it
is unclear whether and to what extent we will be able to make
taxable dividends payable in cash and stock. We have no current
intention to make a taxable dividend payable in our
stock.
Under
certain circumstances, we may be able to correct a failure to meet
the distribution requirement for a year by paying “deficiency
dividends” to our stockholders in a later year. We may
include such deficiency dividends in our deduction for dividends
paid for the earlier year. Although we may be able to avoid income
tax on amounts distributed as deficiency dividends, we will be
required to pay interest to the IRS based upon the amount of any
deduction we take for deficiency dividends.
Recordkeeping Requirements
We must
maintain certain records in order to qualify as a REIT. In
addition, to avoid a monetary penalty, we must request on an annual
basis information from our stockholders designed to disclose the
actual ownership of our outstanding stock. We intend to comply with
these requirements.
Failure to Qualify
If we
fail to satisfy one or more requirements for REIT qualification,
other than the gross income tests and the asset tests, we could
avoid disqualification if our failure is due to reasonable cause
and not to willful neglect and we pay a penalty of $50,000 for each
such failure. In addition, there are relief provisions for a
failure of the gross income tests and asset tests, as described in
“— Gross Income Tests” and
“— Asset Tests.”
If we
fail to qualify as a REIT in any taxable year, and no relief
provision applies, we would be subject to U.S. federal income tax
and any applicable alternative minimum tax on our taxable income at
regular corporate rates. In calculating our taxable income in a
year in which we fail to qualify as a REIT, we would not be able to
deduct amounts paid out to stockholders. In fact, we would not be
required to distribute any amounts to stockholders in that year. In
such event, to the extent of our current and accumulated earnings
and profits, distributions to stockholders generally would be
taxable as ordinary income. Subject to certain limitations of the
U.S. federal income tax laws, corporate stockholders may be
eligible for the dividends received deduction and stockholders
taxed at individual rates may be eligible for the reduced U.S.
federal income tax rate of 20% on such dividends. Unless we
qualified for relief under specific statutory provisions, we also
would be disqualified from taxation as a REIT for the four taxable
years following the year during which we ceased to qualify as a
REIT. We cannot predict whether in all circumstances we would
qualify for such statutory relief.
Taxation of Taxable U.S. Stockholders
As used
herein, the term “U.S. stockholder” means a holder of
shares of our common stock that for U.S. federal income tax
purposes is:
|
●
|
a
citizen or resident of the United States;
|
|
●
|
a
corporation (including an entity treated as a corporation for U.S.
federal income tax purposes) created or organized in or under the
laws of the United States, any of its states or the District of
Columbia;
|
|
●
|
an
estate whose income is subject to U.S. federal income taxation
regardless of its source; or
|
|
●
|
any
trust if (1) a court is able to exercise primary supervision over
the administration of such trust and one or more U.S. persons have
the authority to control all substantial decisions of the trust or
(2) it has a valid election in place to be treated as a U.S.
person.
|
If a
partnership, entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds shares of our common stock,
the U.S. federal income tax treatment of a partner in the
partnership will generally depend on the status of the partner and
the activities of the partnership. If you are a partner in a
partnership holding shares of our common stock, you should consult
your tax advisor regarding the consequences of the ownership and
disposition of our common stock by the partnership.
As long
as we qualify as a REIT, a taxable U.S. stockholder must generally
take into account as ordinary income distributions made out of our
current or accumulated earnings and profits that we do not
designate as capital gain dividends or retained long-term capital
gain. A U.S. stockholder will not qualify for the dividends
received deduction generally available to corporations. In
addition, dividends paid to a U.S. stockholder generally will not
qualify for the 20% tax rate for “qualified dividend
income.” The maximum tax rate for qualified dividend income
received by U.S. stockholders taxed at individual rates is
currently 20%. The maximum tax rate on qualified dividend income is
lower than the maximum tax rate on ordinary income, which is 39.6%.
Qualified dividend income generally includes dividends paid by
domestic C corporations and certain qualified foreign corporations
to U.S. stockholders that are taxed at individual rates. Because we
are not generally subject to U.S. federal income tax on the portion
of our REIT taxable income distributed to our stockholders
(See — “Taxation of Our Company”
above), our dividends generally will not be eligible for the 20%
rate on qualified dividend income. As a result, our ordinary REIT
dividends will be taxed at the higher tax rate applicable to
ordinary income. However, the 20% tax rate for qualified dividend
income will apply to our ordinary REIT dividends (1) attributable
to dividends received by us from non REIT corporations, and (2) to
the extent attributable to income upon which we have paid corporate
income tax (e.g., to the extent that we distribute less than 100%
of our taxable income). In general, to qualify for the reduced tax
rate on qualified dividend income, a stockholder must hold our
common stock for more than 60 days during the 121-day period
beginning on the date that is 60 days before the date on which our
common stock becomes ex-dividend.
A U.S.
stockholder generally will take into account as long-term capital
gain any distributions that we designate as capital gain dividends
without regard to the period for which the U.S. stockholder has
held shares of our common stock. We generally will designate our
capital gain dividends as either 20% or 25% rate distributions. See
“— Capital Gains and Losses.” A corporate
U.S. stockholder, however, may be required to treat up to 20% of
certain capital gain dividends as ordinary income.
We may
elect to retain and pay income tax on the net long-term capital
gain that we receive in a taxable year. In that case, to the extent
that we designate such amount in a timely notice to such
stockholder, a U.S. stockholder would be taxed on its proportionate
share of our undistributed long-term capital gain. The U.S.
stockholder would receive a credit for its proportionate share of
the tax we paid. The U.S. stockholder would increase the basis in
its stock by the amount of its proportionate share of our
undistributed long-term capital gain, minus its share of the tax we
paid.
A U.S.
stockholder will not incur tax on a distribution in excess of our
current and accumulated earnings and profits if the distribution
does not exceed the adjusted basis of the U.S. stockholder’s
shares of our common stock. Instead, the distribution will reduce
the adjusted basis of such stock. A U.S. stockholder will recognize
a distribution in excess of both our current and accumulated
earnings and profits and the U.S. stockholder’s adjusted
basis in his or her shares of our common stock as long-term capital
gain, or short-term capital gain if the shares of the stock have
been held for one year or less, assuming the shares of stock are a
capital asset in the hands of the U.S. stockholder. In addition, if
we declare a distribution in October, November, or December of any
year that is payable to a U.S. stockholder of record on a specified
date in any such month, such distribution shall be treated as both
paid by us and received by the U.S. stockholder on December 31 of
such year, provided that we actually pay the distribution during
January of the following calendar year.
U.S.
stockholders may not include in their individual income tax returns
any of our net operating losses or capital losses. Instead, these
losses are generally carried over by us for potential offset
against our future income. Taxable distributions from us and gain
from the disposition of shares of our common stock will not be
treated as passive activity income and, therefore, stockholders
generally will not be able to apply any “passive activity
losses,” such as losses from certain types of limited
partnerships in which the U.S. stockholder is a limited partner,
against such income. In addition, taxable distributions from us and
gain from the disposition of shares of our common stock generally
will be treated as investment income for purposes of the investment
interest limitations. We will notify U.S. stockholders after the
close of our taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income, return
of capital and capital gain.
The
aggregate amount of dividends that we may designate as
‘‘capital gain dividends’’ or
‘‘qualified dividends’’ with respect to any
taxable year may not exceed the dividends paid by us with respect
to such year, including dividends that are paid in the following
year and if made with or before the first regular dividend payment
after such declaration) are treated as paid with respect to such
year.
Certain
U.S. stockholders who are individuals, estates or trusts and whose
income exceeds certain thresholds will be required to pay a 3.8%
Medicare tax. The Medicare tax will apply to, among other things,
dividends and other income derived from certain trades or business
and net gains from the sale or other disposition of property, such
as our capital stock, subject to certain exceptions. Our dividends
and any gain from the disposition of shares of our common stock
generally will be the type of gain that is subject to the Medicare
tax.
Taxation of U.S. Stockholders on the Disposition of Shares of our
Common Stock
A U.S.
stockholder who is not a dealer in securities must generally treat
any gain or loss realized upon a taxable disposition of shares of
our common stock as long-term capital gain or loss if the U.S.
stockholder has held shares of our common stock for more than one
year and otherwise as short-term capital gain or loss. In general,
a U.S. stockholder will realize gain or loss in an amount equal to
the difference between the sum of the fair market value of any
property and the amount of cash received in such disposition and
the U.S. stockholder’s adjusted tax basis. A
stockholder’s adjusted tax basis generally will equal the
U.S. stockholder’s acquisition cost, increased by the excess
of net capital gains deemed distributed to the U.S. stockholder
(discussed above) less tax deemed paid on such gains and reduced by
any returns of capital. However, a U.S. stockholder must treat any
loss upon a sale or exchange of common stock held by such
stockholder for six months or less as a long-term capital loss to
the extent of capital gain dividends and any other actual or deemed
distributions from us that such U.S. stockholder treats as
long-term capital gain. All or a portion of any loss that a U.S.
stockholder realizes upon a taxable disposition of shares of our
common stock may be disallowed if the U.S. stockholder purchases
other shares of our common stock within 30 days before or after the
disposition.
Capital Gains and Losses
A
taxpayer generally must hold a capital asset for more than one year
for gain or loss derived from its sale or exchange to be treated as
long-term capital gain or loss. The highest marginal individual
income tax rate currently is 39.6%. The maximum tax rate on
long-term capital gain applicable to taxpayers taxed at individual
rates is 20% for sales and exchanges of assets held for more than
one year. The maximum tax rate on long-term capital gain from the
sale or exchange of “Section 1250 property,” or
depreciable real property, is 25%, which applies to the lesser of
the total amount of the gain or the accumulated depreciation on the
Section 1250 property.
With
respect to distributions that we designate as capital gain
dividends and any retained capital gain that we are deemed to
distribute, we generally may designate whether such a distribution
is taxable to U.S. stockholders taxed at individual rates currently
at a 20% or 25% rate. Thus, the tax rate differential between
capital gain and ordinary income for those taxpayers may be
significant. In addition, the characterization of income as capital
gain or ordinary income may affect the deductibility of capital
losses. A non-corporate taxpayer may deduct capital losses not
offset by capital gains against its ordinary income only up to a
maximum annual amount of $3,000. A non-corporate taxpayer may carry
forward unused capital losses indefinitely. A corporate taxpayer
must pay tax on its net capital gain at ordinary corporate rates. A
corporate taxpayer may deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years
and forward five years.
Taxation of Tax-Exempt Stockholders
Tax-exempt
entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts, generally are exempt
from U.S. federal income taxation. However, they are subject to
taxation on their unrelated business taxable income, or UBTI.
Although many investments in real estate generate UBTI, the IRS has
issued a ruling that dividend distributions from a REIT to an
exempt employee pension trust do not constitute UBTI so long as the
exempt employee pension trust does not otherwise use the shares of
the REIT in an unrelated trade or business of the pension trust.
Based on that ruling, amounts that we distribute to tax-exempt
stockholders generally should not constitute UBTI. However, if a
tax-exempt stockholder were to finance (or be deemed to finance)
its acquisition of common stock with debt, a portion of the income
that it receives from us would constitute UBTI pursuant to the
“debt-financed property” rules. Moreover, social clubs,
voluntary employee benefit associations, supplemental unemployment
benefit trusts and qualified group legal services plans that are
exempt from taxation under special provisions of the U.S. federal
income tax laws are subject to different UBTI rules, which
generally will require them to characterize distributions that they
receive from us as UBTI. Finally, in certain circumstances, a
qualified employee pension or profit sharing trust that owns more
than 10% of our capital stock must treat a percentage of the
dividends that it receives from us as UBTI. Such percentage is
equal to the gross income we derive from an unrelated trade or
business, determined as if we were a pension trust, divided by our
total gross income for the year in which we pay the dividends. That
rule applies to a pension trust holding more than 10% of our
capital stock only if:
|
●
|
the
percentage of our dividends that the tax-exempt trust must treat as
UBTI is at least 5%;
|
|
●
|
we
qualify as a REIT by reason of the modification of the rule
requiring that no more than 50% of our capital stock be owned by
five or fewer individuals that allows the beneficiaries of the
pension trust to be treated as holding our capital stock in
proportion to their actuarial interests in the pension trust;
and
|
|
●
|
one
pension trust owns more than 25% of the value of our capital stock;
or
|
|
●
|
a group
of pension trusts individually holding more than 10% of the value
of our capital stock collectively owns more than 50% of the value
of our capital stock.
|
Taxation of Non-U.S. Stockholders
The
term “non-U.S. stockholder” means a holder of shares of
our common stock that is not a U.S. stockholder, a partnership (or
entity treated as a partnership for U.S. federal income tax
purposes) or a tax-exempt stockholder. The rules governing U.S.
federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships, and other foreign stockholders
are complex. This section is only a summary of such
rules. We urge non-U.S.
stockholders to consult their own tax advisors to determine the
impact of federal, state, and local income tax laws on the
purchase, ownership and sale of shares of our common stock,
including any reporting requirements.
Distributions
A
non-U.S. stockholder that receives a distribution that is not
attributable to gain from our sale or exchange of a “United
States real property interest,” or USRPI, as defined below,
and that we do not designate as a capital gain dividend or retained
capital gain will recognize ordinary income to the extent that we
pay such distribution out of our current or accumulated earnings
and profits. A withholding tax equal to 30% of the gross amount of
the distribution ordinarily will apply to such distribution unless
an applicable tax treaty reduces or eliminates the tax. However, if
a distribution is treated as effectively connected with the
non-U.S. stockholder’s conduct of a U.S. trade or business,
the non-U.S. stockholder generally will be subject to U.S. federal
income tax on the distribution at graduated rates, in the same
manner as U.S. stockholders are taxed with respect to such
distribution, and a non-U.S. stockholder that is a corporation also
may be subject to the 30% branch profits tax with respect to that
distribution. We plan to withhold U.S. income tax at the rate of
30% on the gross amount of any such distribution paid to a non-U.S.
stockholder unless either:
|
●
|
a lower
treaty rate applies and the non-U.S. stockholder files an IRS Form
W-8BEN evidencing eligibility for that reduced rate with
us;
|
|
●
|
the
non-U.S. stockholder files an IRS Form W-8ECI with us claiming that
the distribution is effectively connected income; or
|
|
●
|
the
distribution is treated as attributable to a sale of a USRPI under
FIRPTA (discussed below).
|
A
non-U.S. stockholder will not incur tax on a distribution in excess
of our current and accumulated earnings and profits if the excess
portion of such distribution does not exceed the adjusted basis of
its common stock. Instead, the excess portion of such distribution
will reduce the adjusted basis of such stock. A non-U.S.
stockholder will be subject to tax on a distribution that exceeds
both our current and accumulated earnings and profits and the
adjusted basis of its common stock, if the non-U.S. stockholder
otherwise would be subject to tax on gain from the sale or
disposition of its common stock, as described below. We must
withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits. Consequently, although we intend
to withhold at a rate of 30% on the entire amount of any
distribution, to the extent that we do not do so, we will withhold
at a rate of 15% on any portion of a distribution not subject to
withholding at a rate of 30%. Because we generally cannot determine
at the time we make a distribution whether the distribution will
exceed our current and accumulated earnings and profits, we
normally will withhold tax on the entire amount of any distribution
at the same rate as we would withhold on a dividend. However, a
non-U.S. stockholder may claim a refund of amounts that we withhold
if we later determine that a distribution in fact exceeded our
current and accumulated earnings and profits.
For any
year in which we qualify as a REIT, a non-U.S. stockholder may
incur tax on distributions that are attributable to gain from our
sale or exchange of a USRPI under the Foreign Investment in Real
Property Tax Act of 1980, or FIRPTA. A USRPI includes certain
interests in real property and stock in corporations at least 50%
of whose assets consist of interests in real property. Under
FIRPTA, a non-U.S. stockholder is taxed on distributions
attributable to gain from sales of USRPIs as if such gain were
effectively connected with a U.S. business of the non-U.S.
stockholder. A non-U.S. stockholder thus would be taxed on such a
distribution at the normal capital gains rates applicable to U.S.
stockholders, subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of a nonresident alien
individual. A non-U.S. corporate stockholder not entitled to treaty
relief or exemption also may be subject to the 30% branch profits
tax on such a distribution.
However, subject to
the discussion below regarding distributions to “qualified
shareholders” and “qualified foreign pension
funds,” if our common stock is regularly traded on an
established securities market in the United States, capital gain
distributions on our common stock that are attributable to our sale
of a USRPI will be treated as ordinary dividends rather than as
gain from the sale of a USRPI, as long as the non-U.S. stockholder
did not own more than 10% of our common stock at any time during
the one-year period preceding the distribution. In such a case,
non-U.S. stockholders generally will be subject to withholding tax
on such capital gain distributions in the same manner as they are
subject to withholding tax on ordinary dividends.
With
respect to any class of our stock that is not regularly traded on
an established securities market in the United States, subject
to the discussion below regarding distributions to “qualified
shareholders” and “qualified foreign pension
funds,” capital gain distributions that are attributable to
our sale of USRPIs will be subject to tax under FIRPTA, as
described above. In such case, we must withhold 35% of any
distribution that we could designate as a capital gain dividend. A
non-U.S. stockholder may receive a credit against its tax liability
for the amount we withhold. Moreover, if a non-U.S. stockholder
disposes of our common stock during the 30-day period preceding a
dividend payment, and such non-U.S. stockholder (or a person
related to such non-U.S. stockholder) acquires or enters into a
contract or option to acquire our common stock within 61 days of
the first day of the 30-day period described above, and any portion
of such dividend payment would, but for the disposition, be treated
as a USRPI capital gain to such non-U.S. stockholder, then such
non-U.S. stockholder shall be treated as having USRPI capital gain
in an amount that, but for the disposition, would have been treated
as USRPI capital gain.
A U.S.
withholding tax at a 30% rate will be imposed on dividends paid to
certain non-U.S. stockholders if certain disclosure requirements
related to U.S. accounts or ownership are not satisfied. If payment
of withholding taxes is required, non-U.S. stockholders that are
otherwise eligible for an exemption from, or reduction of, U.S.
withholding taxes with respect of such dividends will be required
to seek a refund from the IRS to obtain the benefit or such
exemption or reduction. We will not pay any additional amounts in
respect of any amounts withheld.
Qualified Shareholders. Subject to the
exception discussed below, any distribution to a
‘‘qualified shareholder’’ who holds REIT
stock directly or indirectly (through one or more partnerships)
will not be subject to U.S. tax as income effectively connected
with a U.S. trade or business and thus will not be subject to
special withholding rules under FIRPTA. While a
‘‘qualified shareholder’’ will not be
subject to FIRPTA withholding on REIT distributions, certain
investors of a ‘‘qualified shareholder’’
(i.e., non-U.S. persons who hold interests in the
‘‘qualified shareholder’’ (other than
interests solely as a creditor), and hold more than 10% of REIT
stock (whether or not by reason of the investor’s ownership
in the ‘‘qualified shareholder’’)) may be
subject to FIRPTA withholding.
A
‘‘qualified shareholder’’ is a foreign
person that (i) either is eligible for the benefits of a
comprehensive income tax treaty which includes an exchange of
information program and whose principal class of interests is
listed and regularly traded on one or more recognized stock
exchanges (as defined in such comprehensive income tax treaty), or
is a foreign partnership that is created or organized under foreign
law as a limited partnership in a jurisdiction that has an
agreement for the exchange of information with respect to taxes
with the United States and has a class of limited partnership units
representing greater than 50% of the value of all the partnership
units that is regularly traded on the NYSE or NASDAQ markets, (ii)
is a qualified collective investment vehicle (defined below), and
(iii) maintains records on the identity of each person who, at any
time during the foreign person’s taxable year, is the direct
owner of 5% or more of the class of interests or units (as
applicable) described in (i), above.
A
qualified collective investment vehicle is a foreign person that
(i) would be eligible for a reduced rate of withholding under the
comprehensive income tax treaty described above, even if such
entity holds more than 10% of the stock of such REIT, (ii) is
publicly traded, is treated as a partnership under the Code, is a
withholding foreign partnership, and would be treated as a United
States real property holding corporation if it were a domestic
corporation, or (iii) is designated as such by the Secretary of the
Treasury and is either (a) fiscally transparent within the meaning
of section 894 of the Code, or (b) required to include dividends in
its gross income, but is entitled to a deduction for distributions
to its investors.
Qualified Foreign Pension Funds. Any
distribution to a ‘‘qualified foreign pension
fund’’ or an entity all of the interests of which are
held by a ‘‘qualified foreign pension
fund’’ who holds REIT stock directly or indirectly
(through one or more partnerships) will not be subject to U.S. tax
as income effectively connected with a U.S. trade or business and
thus will not be subject to the withholding rules under
FIRPTA.
A
qualified foreign pension fund is any trust, corporation, or other
organization or arrangement (A) which is created or organized under
the law of a country other than the United States, (B) which is
established to provide retirement or pension benefits to
participants or beneficiaries that are current or former employees
(or persons designated by such employees) of one or more employers
in consideration for services rendered, (C) which does not have a
single participant or beneficiary with a right to more than 5% of
its assets or income, (D) which is subject to government regulation
and provides annual information reporting about its beneficiaries
to the relevant tax authorities in the country in which it is
established or operates, and (E) with respect to which, under the
laws of the country in which it is established or operates, (i)
contributions to such organization or arrangement that would
otherwise be subject to tax under such laws are deductible or
excluded from the gross income of such entity or taxed at a reduced
rate, or (ii) taxation of any investment income of such
organization or arrangement is deferred or such income is taxed at
a reduced rate.
Dispositions
Non-U.S.
stockholders could incur tax under FIRPTA with respect to gain
realized upon a disposition of shares of our common stock if we are
a United States real property holding corporation during a
specified testing period, subject to the discussion below regarding
distributions to “qualified shareholders” and
“qualified foreign pension funds.” If at least 50% of a
REIT’s assets are USRPIs, then the REIT will be a United
States real property holding corporation. We believe that we are,
and that we will continue to be, a United States real property
holding corporation based on our investment strategy. However, even
if we are a United States real property holding corporation, a
non-U.S. stockholder generally would not incur tax under FIRPTA on
gain from the sale of shares of our common stock if we are a
“domestically controlled qualified investment
entity.”
A
“domestically controlled qualified investment entity”
includes a REIT in which, at all times during a specified testing
period, less than 50% in value of its shares are held directly or
indirectly by non-U.S. stockholders. We cannot assure you that this
test will be met.
If our
common stock is regularly traded on an established securities
market, an additional exception to the tax under FIRPTA will be
available with respect to our common stock, even if we do not
qualify as a domestically controlled qualified investment entity at
the time the non-U.S. stockholder sells our common stock. Under
that exception, the gain from such a sale by such a non-U.S.
stockholder will not be subject to tax under FIRPTA if (1) our
common stock is treated as being regularly traded under applicable
Treasury Regulations on an established securities market and (2)
the non-U.S. stockholder owned, actually or constructively, 10% or
less of our common stock at all times during a specified testing
period. As noted above, we expect that our common stock will be
regularly traded on an established securities market following this
offering.
A sale
of our shares by:
●
a ‘‘qualified shareholder’’ or
●
a ‘‘qualified foreign pension
fund’’
who
holds our shares directly or indirectly (through one or more
partnerships) will not be subject to U.S. federal income taxation
under FIRPTA. While a ‘‘qualified
shareholder’’ will not be subject to FIRPTA withholding
upon sale of our shares, certain investors of a
‘‘qualified shareholder’’ (i.e., non-U.S.
persons who hold interests in the ‘‘qualified
shareholder’’ (other than interests solely as a
creditor), and hold more than 15% of REIT stock (whether or not by
reason of the investor’s ownership in the
‘‘qualified shareholder’’)) may be subject
to FIRPTA withholding.
If the
gain on the sale of shares of our common stock were taxed under
FIRPTA, a non-U.S. stockholder would be taxed on that gain in the
same manner as U.S. stockholders, subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of
nonresident alien individuals. In addition, distributions that are
subject to tax under FIRPTA also may be subject to a 30% branch
profits tax when made to a non-U.S. stockholder treated as a
corporation (under U.S. federal income tax principles) that is not
otherwise entitled to treaty exemption. Finally, if we are not a
domestically controlled qualified investment entity at the time our
stock is sold and the non-U.S. stockholder does not qualify for the
exemptions described in the preceding paragraph, under FIRPTA the
purchaser of shares of our common stock also may be required to
withhold 10% of the purchase price and remit this amount to the IRS
on behalf of the selling non-U.S. stockholder.
With
respect to individual non-U.S. stockholders, even if not subject to
FIRPTA, capital gains recognized from the sale of shares of our
common stock will be taxable to such non-U.S. stockholder if he or
she is a non-resident alien individual who is present in the United
States for 183 days or more during the taxable year and some other
conditions apply, in which case the non-resident alien individual
may be subject to a U.S. federal income tax on his or her U.S.
source capital gain.
A U.S.
withholding tax at a 30% rate will be imposed on proceeds from the
sale of shares of our common stock received after December 31, 2016
by certain non-U.S. stockholders if certain disclosure requirements
related to U.S. accounts or ownership are not satisfied. If payment
of withholding taxes is required, non-U.S. stockholders that are
otherwise eligible for an exemption from, or reduction of, U.S.
withholding taxes with respect of such proceeds will be required to
seek a refund from the IRS to obtain the benefit or such exemption
or reduction. We will not pay any additional amounts in respect of
any amounts withheld.
Information Reporting Requirements and Withholding
We will
report to our stockholders and to the IRS the amount of
distributions we pay during each calendar year, and the amount of
tax we withhold, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding with respect to
distributions unless the stockholder:
|
●
|
is a
corporation or qualifies for certain other exempt categories and,
when required, demonstrates this fact; or
|
|
●
|
provides
a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the
applicable requirements of the backup withholding
rules.
|
A
stockholder who does not provide us with its correct taxpayer
identification number also may be subject to penalties imposed by
the IRS. Any amount paid as backup withholding will be creditable
against the stockholder’s income tax liability. In addition,
we may be required to withhold a portion of capital gain
distributions to any stockholders who fail to certify their
non-foreign status to us.
Backup
withholding will generally not apply to payments of dividends made
by us or our paying agents, in their capacities as such, to a
non-U.S. stockholder provided that the non-U.S. stockholder
furnishes to us or our paying agent the required certification as
to its non-U.S. status, such as providing a valid IRS Form W-8BEN
or W-8ECI, or certain other requirements are met. Notwithstanding
the foregoing, backup withholding may apply if either we or our
paying agent has actual knowledge, or reason to know, that the
holder is a U.S. person that is not an exempt recipient. Payments
of the proceeds from a disposition or a redemption effected outside
the U.S. by a non-U.S. stockholder made by or through a foreign
office of a broker generally will not be subject to information
reporting or backup withholding. However, information reporting
(but not backup withholding) generally will apply to such a payment
if the broker has certain connections with the U.S. unless the
broker has documentary evidence in its records that the beneficial
owner is a non-U.S. stockholder and specified conditions are met or
an exemption is otherwise established. Payment of the proceeds from
a disposition by a non-U.S. stockholder of shares of our common
stock made by or through the U.S. office of a broker is generally
subject to information reporting and backup withholding unless the
non-U.S. stockholder certifies under penalties of perjury that it
is not a U.S. person and satisfies certain other requirements, or
otherwise establishes an exemption from information reporting and
backup withholding.
Backup
withholding is not an additional tax. Any amounts withheld under
the backup withholding rules may be refunded or credited against
the stockholder’s U.S. federal income tax liability if
certain required information is furnished to the IRS. Stockholders
should consult their own tax advisors regarding application of
backup withholding to them and the availability of, and procedure
for obtaining an exemption from, backup withholding.
For
payments after June 30, 2014, a U.S. withholding tax at a 30% rate
will be imposed on dividends received by U.S. stockholders who own
shares of our common stock through foreign accounts or foreign
intermediaries if certain disclosure requirements related to U.S.
accounts or ownership are not satisfied. In addition, if those
disclosure requirements are not satisfied, a U.S. withholding tax
at a 30% rate will be imposed on proceeds from the sale of shares
of our common stock received after December 31, 2016 by U.S.
stockholders who own shares of our common stock through foreign
accounts or foreign intermediaries. In addition, we may be required
to withhold a portion of capital gain distributions to any U.S.
stockholders who fail to certify their non-foreign status to us. We
will not pay any additional amounts in respect of amounts
withheld.
Other Tax Consequences
Tax Aspects of Our Investments in Our Operating Partnership and
Subsidiary Partnerships
The
following discussion summarizes certain U.S. federal income tax
considerations applicable to our direct or indirect investments in
our operating partnership and any subsidiary partnerships or
limited liability companies that we form or acquire (each
individually a “Partnership” and, collectively, the
“Partnerships”). The discussion does not cover state or
local tax laws or any federal tax laws other than income tax
laws.
Classification as Partnerships. We are
entitled to include in our income our distributive share of each
Partnership’s income and to deduct our distributive share of
each Partnership’s losses only if such Partnership is
classified for U.S. federal income tax purposes as a partnership
(or an entity that is disregarded for U.S. federal income tax
purposes if the entity is treated as having only one owner or
member for U.S. federal income tax purposes) rather than as a
corporation or an association taxable as a corporation. An
unincorporated entity with at least two owners or members will be
classified as a partnership, rather than as a corporation, for U.S.
federal income tax purposes if it:
|
●
|
is
treated as a partnership under the Treasury Regulations relating to
entity classification (the “check-the-box
regulations”); and
|
|
●
|
is not
a “publicly-traded partnership.”
|
Under
the check-the-box regulations, an unincorporated entity with at
least two owners or members may elect to be classified either as an
association taxable as a corporation or as a partnership. If such
an entity fails to make an election, it generally will be treated
as a partnership (or an entity that is disregarded for U.S. federal
income tax purposes if the entity is treated as having only one
owner or member for U.S. federal income tax purposes) for U.S.
federal income tax purposes. Once our operating partnership is no
longer treated as a disregarded entity, we intend for our operating
partnership intends to be classified as a partnership for U.S.
federal income tax purposes and will not cause our operating
partnership to elect to be treated as an association taxable as a
corporation under the check-the-box regulations.
A
publicly-traded partnership is a partnership whose interests are
traded on an established securities market or are readily tradable
on a secondary market or the substantial equivalent thereof. A
publicly-traded partnership will not, however, be treated as a
corporation for any taxable year if, for each taxable year
beginning after December 31, 1987 in which it was classified as a
publicly-traded partnership, 90% or more of the partnership’s
gross income for such year consists of certain passive-type income,
including real property rents, gains from the sale or other
disposition of real property, interest, and dividends, or (the
“90% passive income exception”). Treasury Regulations
provide limited safe harbors from the definition of a
publicly-traded partnership. Pursuant to one of those safe harbors
(the “private placement exclusion”), interests in a
partnership will not be treated as readily tradable on a secondary
market or the substantial equivalent thereof if (1) all interests
in the partnership were issued in a transaction or transactions
that were not required to be registered under the Securities Act of
1933, as amended, and (2) the partnership does not have more than
100 partners at any time during the partnership’s taxable
year. In determining the number of partners in a partnership, a
person owning an interest in a partnership, grantor trust, or S
corporation that owns an interest in the partnership is treated as
a partner in such partnership only if (1) substantially all of the
value of the owner’s interest in the entity is attributable
to the entity’s direct or indirect interest in the
partnership and (2) a principal purpose of the use of the entity is
to permit the partnership to satisfy the 100-partner limitation.
Each Partnership in which we own an interest currently qualifies
for the private placement exclusion.
We have
not requested and do not intend to request a ruling from the IRS
that our operating partnership will be classified as a partnership
for U.S. federal income tax purposes once it is treated as having
two or more partners for U.S. federal income tax purposes. If for
any reason our operating partnership were taxable as a corporation,
rather than as a partnership, for U.S. federal income tax purposes,
we likely would not be able to qualify as a REIT unless we
qualified for certain relief provisions. See
“— Gross Income Tests” and
“— Asset Tests.” In addition, any change in
a Partnership’s status for tax purposes might be treated as a
taxable event, in which case we might incur tax liability without
any related cash distribution. See “— Distribution
Requirements.” Further, items of income and deduction of such
Partnership would not pass through to its partners, and its
partners would be treated as stockholders for tax purposes.
Consequently, such Partnership would be required to pay income tax
at corporate rates on its net income, and distributions to its
partners would constitute dividends that would not be deductible in
computing such Partnership’s taxable income.
Income Taxation of the Partnerships and their Partners
Partners, Not the Partnerships, Subject to
Tax. A partnership is not a taxable entity for U.S. federal
income tax purposes. Rather, we are required to take into account
our allocable share of each Partnership’s income, gains,
losses, deductions, and credits for any taxable year of such
Partnership ending within or with our taxable year, without regard
to whether we have received or will receive any distribution from
such Partnership.
Partnership Allocations. Although
a partnership agreement generally will determine the allocation of
income and losses among partners, such allocations will be
disregarded for tax purposes if they do not comply with the
provisions of the U.S. federal income tax laws governing
partnership allocations. If an allocation is not recognized for
U.S. federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the
partners’ interests in the partnership, which will be
determined by taking into account all of the facts and
circumstances relating to the economic arrangement of the partners
with respect to such item. Each Partnership’s allocations of
taxable income, gain, and loss are intended to comply with the
requirements of the U.S. federal income tax laws governing
partnership allocations.
Tax Allocations with Respect to Partnership
Properties. Income, gain, loss, and deduction attributable
to appreciated or depreciated property that is contributed to a
partnership in exchange for an interest in the partnership must be
allocated in a manner such that the contributing partner is charged
with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the
contribution. The amount of the unrealized gain or unrealized loss
(“built-in gain” or “built-in loss”) is
generally equal to the difference between the fair market value of
the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution (a
“book-tax difference”). Any property purchased for cash
initially will have an adjusted tax basis equal to its fair market
value, resulting in no book-tax difference.
Allocations with
respect to book-tax differences are solely for U.S. federal income
tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The U.S.
Treasury Department has issued regulations requiring partnerships
to use a “reasonable method” for allocating items with
respect to which there is a book-tax difference and outlining
several reasonable allocation methods. Under certain available
methods, the carryover basis of contributed properties in the hands
of our operating partnership (1) could cause us to be allocated
lower amounts of depreciation deductions for tax purposes than
would be allocated to us if all contributed properties were to have
a tax basis equal to their fair market value at the time of the
contribution and (2) in the event of a sale of such properties,
could cause us to be allocated taxable gain in excess of the
economic or book gain allocated to us as a result of such sale,
with a corresponding benefit to the contributing partners. An
allocation described in (2) above might cause us to recognize
taxable income in excess of cash proceeds in the event of a sale or
other disposition of property, which might adversely affect our
ability to comply with the REIT distribution requirements and may
result in a greater portion of our distributions being taxed as
dividends. We have not yet decided what method will be used to
account for book-tax differences.
Sale of a Partnership’s Property
Generally, any gain
realized by a Partnership on the sale of property held by the
Partnership for more than one year will be long-term capital gain,
except for any portion of such gain that is treated as depreciation
or cost recovery recapture. Under Section 704(c) of the Code, any
gain or loss recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners of
the Partnership who contributed such properties to the extent of
their built-in gain or loss on those properties for U.S. federal
income tax purposes. The partners’ built-in gain or loss on
such contributed properties will equal the difference between the
partners’ proportionate share of the book value of those
properties and the partners’ tax basis allocable to those
properties at the time of the contribution as reduced for any
decrease in the “book-tax difference.” See
“— Income Taxation of the Partnerships and their
Partners — Tax Allocations with Respect to
Partnership Properties.” Any remaining gain or loss
recognized by the Partnership on the disposition of the contributed
properties, and any gain or loss recognized by the Partnership on
the disposition of the other properties, will be allocated among
the partners in accordance with their respective percentage
interests in the Partnership.
Our
share of any gain realized by a Partnership on the sale of any
property held by the Partnership as inventory or other property
held primarily for sale to customers in the ordinary course of the
Partnership’s trade or business will be treated as income
from a prohibited transaction that is subject to a 100% penalty
tax. Such prohibited transaction income also may have an adverse
effect upon our ability to satisfy the income tests for REIT
qualification. See “— Gross Income Tests.”
We do not presently intend to acquire or hold or to allow any
Partnership to acquire or hold any property that represents
inventory or other property held primarily for sale to customers in
the ordinary course of our or such Partnership’s trade or
business.
Legislative or Other Actions Affecting REITs
The
present federal income tax treatment of REITs may be modified,
possibly with retroactive effect, by legislative, judicial or
administrative action at any time. The REIT rules are constantly
under review by persons involved in the legislative process and by
the IRS and the U.S. Treasury Department which may result in
statutory changes as well as revisions to regulations and
interpretations. Additionally, several of the tax considerations
described herein are currently under review and are subject to
change. Prospective stockholders are urged to consult with their
own tax advisors regarding the effect of potential changes to the
federal tax laws on an investment in shares of our common
stock.
Several
REIT rules were recently amended under the Protecting Americans
from Tax Hikes Act of 2015, or the Act, which was enacted on
December 18, 2015. These rules were enacted with varying effective
dates, some of which are retroactive. Investors should consult with
their tax advisors regarding the effect of the Act in their
particular circumstances.
State and Local Taxes
We
and/or you may be subject to taxation by various states and
localities, including those in which we or a stockholder transacts
business, owns property or resides. The state and local tax
treatment may differ from the U.S. federal income tax treatment
described above. Consequently, you should consult your own tax
advisors regarding the effect of state and local tax laws upon an
investment in shares of our common stock.
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 purchaser, including plans and
arrangements subject to the fiduciary rules of ERISA and plans or
entities that hold assets of such plans (“ERISA
Plans”); plans and accounts that are not subject to ERISA but
are subject to the prohibited transaction rules of Section 4975 of
the Code, including IRAs, Keogh plans, and medical savings accounts
(together with ERISA Plans, “Benefit Plans” or
“Benefit Plan Investors”); and governmental plans,
church plans, and foreign plans that are exempt from ERISA and the
prohibited transaction provisions of the Code but that may be
subject to state law or other requirements, which we refer to as
Other Plans. This discussion does not address all the aspects of
ERISA, the Code or other laws that may be applicable to a Benefit
Plan or Other Plan, in light of their particular
circumstances.
In
considering whether to invest a portion of the assets of a Benefit
Plan or Other Plan, fiduciaries should consider, among other
things, whether the investment:
|
●
|
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 market
to sell or otherwise dispose of our stock.
|
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
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.
The
regulations define a publicly-offered security as a security that
is:
|
●
|
“freely-transferable;”
and
|
|
●
|
either
part of a class of securities registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, or sold in connection
with an effective registration statement under the Securities Act
of 1933, provided the securities are registered under the
Securities Exchange Act of 1934 within 120 days (or such later time
as may be allowed by the Securities and Exchange Commission) after
the end of the fiscal year of the issuer during which the offering
occurred.
|
Because
we have not registered and do not intend to register our common
stock under the Securities Exchange Act of 1934, we do not believe
our common stock would be treated as a “public-offering
security” for purposes of the Department of Labor’s
plan assets guidelines. Therefore, we must comply with another
exception to the plan assets regulations.
Another
exception in the plan asset regulations applies to a Benefit
Plan’s investment in a “real estate operating
company.” If a Benefit Plan acquires an equity security
issued by a real estate operating company, the Benefit Plan’s
assets include that equity security but do not include an undivided
interest in the underlying assets of the real estate operating
company. To constitute a “real estate operating
company” under the plan asset regulations, an entity such as
us must, on its initial valuation date and during each annual
valuation period, have at least 50% of its assets (valued at cost
and excluding short-term investments pending long-term commitment
or distribution) invested in real estate which is managed or
developed and with respect to which the entity has the right to
substantially participate directly in the management and
development activities and must, in the ordinary course of
business, engage in real estate management and development
activities. We believe that we will qualify as a “real estate
operating company” so that our assets should not constitute
the assets of a Benefit Plan that acquires or holds our common
stock.
Another
exception in the plan asset regulations applies if Benefit Plan
participation in an entity is “insignificant.” The plan
asset regulations provide that Benefit Plan participation in an
entity is insignificant if Benefit Plans do not hold 25% or more of
any class of equity security in the entity (disregarding for this
purpose, any equity securities held by persons, other than Benefit
Plans, who have discretionary authority or control with respect to
the assets of the entity or a person who provides investment advice
for a fee with respect to those assets). We may qualify for this
exception so that our assets should not constitute the assets of a
Benefit Plan that acquires or holds our common stock. However, we
do not intend to restrict investment in us by Benefit Plans. Thus,
no assurance can be given that the “insignificant
participation” exception will apply to 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
stockholders 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 stockholders. 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 stockholders 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.
REPORTS
We will
furnish the following reports, statements, and tax information to
each of our stockholders:
Reporting Requirements under Tier 2 of
Regulation A. Following this Tier 2 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 the following: an annual report with the SEC on Form 1-K; a
semi-annual report with the SEC on Form 1-SA; current reports with
the SEC on Form 1-U; and a notice under cover of Form 1-Z. The
necessity to file current reports will be triggered by certain
corporate events, similar to the ongoing reporting obligation faced
by issuers under the Exchange Act; however, the requirement to file
a Form 1-U is expected to be triggered by significantly fewer
corporate events than that of the Form 8-K. Parts I & II of
Form 1-Z will be filed by us if and when we decide to and are no
longer obligated to file and provide annual reports pursuant to the
requirements of Regulation A.
Annual Reports. As soon as practicable,
but in no event later than one hundred twenty (120) days after the
close of our fiscal year, ending December 31, our board of
directors will cause to be mailed or made available, by any
reasonable means, to each stockholder as of a date selected by the
board of directors, 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 the board of
directors. The board of directors shall be deemed to have made a
report available to each stockholder as required if it has either
(i) filed such report with the SEC via its Electronic Data
Gathering, Analysis and Retrieval, or 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 stockholders.
Tax Information. On or before March 31st
of the year immediately following our fiscal year, which is
currently January 1 through December 31, we will send to each
stockholder such tax information as shall be reasonably required
for federal and state income tax reporting purposes.
Stock Certificates. We do not anticipate
issuing stock certificates representing shares purchased in this
offering to the stockholders. However, we are permitted to issue
stock certificates and may do so at the request of our transfer
agent. The number of shares held by each stockholder, and each
stockholder’s percentage of the aggregate outstanding shares,
will be maintained by us or our transfer agent in our company
register.
LEGAL MATTERS
Certain
legal and tax matters will be passed upon for us by Kaplan Voekler
Cunningham & Frank, PLC, or KVCF. KVCF also provides legal
services to some of our affiliates, including our Manager and
Holmwood. Messrs. Kaplan and Kaplan Jr. are each a
member of KVCF. Following the conclusion of this
offering, assuming we sell the maximum offering amount, Mr. Kaplan
will beneficially own approximately 86,556 shares of our common
stock (including 36,556 restricted shares), approximately 2,000
shares of our Series A Preferred Stock and approximately 103,547 OP
Units, and Mr. Kaplan, Jr. will beneficially own approximately
86,556 shares of our common stock (including 36,556 restricted
shares) and 36,553 OP Units. In connection with the offering,
neither of Messrs. Kaplan and Kaplan Jr. will serve as an attorney
on behalf of KVCF but will serve solely in their capacities with
our company and our Manager. The statements under the caption
“Material Federal Income Tax Considerations” as they
relate to U.S. federal income tax matters have been reviewed by our
tax counsel, which will opine as to certain federal income tax
matters relating to our company. KVCF will issue an
opinion regarding certain matters of Maryland law, including the
validity of the shares of common stock offered hereby.
INDEPENDENT AUDITORS
The
consolidated financial statements of HC Government Realty Trust,
Inc. and subsidiaries as of December 31, 2016 and for the period
from March 11, 2016 to December 31, 2016, the consolidated
financial statements of Holmwood Capital, LLC and its subsidiaries
as of and for the years ended December 31, 2016 and December 31,
2015, the combined statement of revenue and certain operating
expenses of our Owned Properties for the year ended December 31,
2015, the combined statement of revenues and certain operating
expenses of the Johnson City Property and Port Canaveral Property
for the year ended December 31, 2014, the statement of revenues and
certain operating expenses of the Silt Property for the year ended
December 31, 2014, and the statement of revenues and certain
operating expenses of the Norfolk Property for the year ended
December 31, 2016 all included in this offering circular, have been
audited by Cherry Bekaert LLP, independent auditors, as stated in
their reports appearing herein.
ADDITIONAL INFORMATION
We have
filed with the SEC an offering statement on Form 1-A, as amended,
of which this offering circular is a part under the Securities Act
of 1933 with respect to the shares offered by this offering
circular. This offering circular does not contain all of the
information set forth in the offering statement, portions of which
have been omitted as permitted by the rules and regulations of the
SEC. Statements contained in this offering circular as to the
content of any contract or other document filed as an exhibit to
the offering statement are necessarily summaries of such contract
or other document, with each such statement being qualified in all
respects by such reference and the schedules and exhibits to this
offering circular. For further information regarding our Company
and the shares offered by this offering circular, reference is made
by this offering circular to the offering statement and such
schedules and exhibits.
We will
provide to each person, including any beneficial owner, to whom our
offering circular is delivered, upon request, a copy of any or all
of the information that we have incorporated by reference into our
offering circular but not delivered with our offering circular. To
receive a free copy of any of the documents incorporated by
reference in our offering circular, other than exhibits, unless
they are specifically incorporated by reference in those documents,
call or write us at:
HC
Government Realty Trust, Inc.
1819
Main Street, Suite 212
Sarasota,
Florida 34236
(941)
955-7900
The
offering statement and the schedules and exhibits forming a part of
the offering statement filed by us with the SEC can be inspected
and copies obtained from the Securities and Exchange Commission at
Room 1580, 100 F Street, N.E., Washington, D.C. 20549. Copies of
such material can be obtained from the Public Reference Section of
the Securities and Exchange Commission, Room 1580, 100 F Street,
N.E., Washington, D.C. 20549, at prescribed rates. In addition, the
SEC maintains a website that contains reports, proxies and
information statements and other information regarding our company
and other registrants that have been filed electronically with the
SEC. The address of such site is http://www.sec.gov .
PART F/S
|
|
INDEX TO FINANCIAL STATEMENTS
|
Unaudited Pro Forma Condensed Combined Financial Information of HC
Government Realty Trust, Inc.
|
|
|
Introduction to Unaudited Pro Forma Condensed Combined Financial
Statements
|
F-3
|
|
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30,
2017
|
F-4
|
|
Unaudited Pro Forma Condensed Combined Statement of Operations for
the Six-
|
|
|
Month Period Ended June 30, 2017
|
F-8
|
|
|
|
|
Introduction to Unaudited Pro Forma Condensed Combined Financial
Statements
|
F-11
|
|
Unaudited Pro Forma Condensed Combined Statement of Operations for
the Year Ended
|
|
|
December 31, 2016
|
F-12
|
HC Government Realty Trust, Inc.
|
|
|
Financial Statements as of June 30, 2017 and December 31, 2016 and
for the Six Month Period
|
|
|
Ending June 30, 2017 and for the Period from March 11, 2016 (date
of inception) to
|
|
|
June 30, 2016
|
F-17
|
|
Consolidated
Balance Sheets as of June 30, 2017 (Unaudited) and December 31,
2016
|
F-17
|
|
Consolidated
Statement of Operations for the Six-Month Period Ended June 30,
2017 (Unaudited)
|
|
|
and
for the period from March 11, 2016 (date of inception) to June 30,
2016 (Unaudited)
|
F-18
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the
Six-Month Period
|
|
|
Ended
June 30, 2017 (Unaudited)
|
F-19
|
|
Consolidated
Statements of Cash Flows for the Six-Month Period Ended June 30,
2017 (Unaudited)
|
|
|
and
for the Period from March 11, 2016 (Date of Inception) to June 30,
2016 (Unaudited)
|
F-20
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
F-21
|
|
|
|
|
Financial Statements as of December 31, 2016 and for the period
from March 11 (Date of Inception)
|
|
|
to December 31, 2016
|
F-32
|
|
Report
of Independent Registered Public Accounting Firm
|
F-32
|
|
Consolidated
Balance Sheet
|
F-33
|
|
Consolidated
Statement of Operations
|
F-34
|
|
Consolidated
Statement of Changes in Stockholders’ Equity
|
F-35
|
|
Consolidated
Statement of Cash Flows
|
F-36
|
|
Notes
to Consolidated Financial Statements
|
F-37
|
Holmwood Capital, LLC
|
|
|
Financial Statements as of May 26, 2017 and December 31, 2016 and
for the Period from January 1, 2017 to May 26, 2017 (Date of
Contribution) and for the Six-Month Period Ended June 30,
2016
|
F-46
|
|
Consolidated Balance Sheets as of May 26, 2016 (Unaudited) and
December 31, 2016
|
F-46
|
|
Consolidated
Statements of Operations for the Period from January 1, 2017
to
|
|
|
May
26, 2017 (Unaudited) and for the Six-Month Period Ended June 30,
2016 (unaudited)
|
F-47
|
|
Consolidated
Statement of Changes in Partners’ Capital for the Period from
January 1, 2017
|
|
|
to
May 26, 2017 (Unaudited).
|
F-48
|
|
Consolidated
Statements of Cash Flows for the Period from January 1, 2017
to
|
|
|
May
26, 2017 (Unaudited) and for the Six-Month Period Ended June 30,
2016 (unaudited)
|
F-49
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
F-50
|
|
|
|
|
Financial Statements as of December 31, 2016 and 2015
|
F-59
|
|
Report
of Independent Registered Public Accounting Firm
|
F-60
|
|
Consolidated
Balance Sheets
|
F-61
|
|
Consolidated
Statements of Operations
|
F-62
|
|
Consolidated
Statements of Changes in Partners’ Capital
|
F-63
|
|
Consolidated
Statements of Cash flows
|
F-64
|
|
Notes
to Consolidated Financial Statements
|
F-65
|
Johnson City Property and Port Canaveral Property
|
|
|
Financial Statement for Fiscal Year Ended December 31,
2014
|
F-73
|
|
Report
of Independent Auditor
|
F-73
|
|
Combined
Statement of Revenues and Certain Operating Expenses
|
F-74
|
|
Notes
to the Statement of Revenues and Certain Operating
Expense
|
F-75
|
Silt Property
|
|
|
Financial Statement for Six Months Ended June 30, 2015 (unaudited)
and Fiscal Year Ended
|
|
|
December 31, 2014
|
F-77
|
|
Report
of Independent Auditor
|
F-77
|
|
Statements
of Revenues and Certain Operating Expenses
|
F-78
|
|
Notes
to the Statements of Revenues and Certain Operating
Expense
|
F-79
|
Owned Properties
|
|
|
Financial Statement for Fiscal Year Ended December 31,
2015
|
F-81
|
|
Report
of Independent Auditor
|
F-81
|
|
Combined
Statement of Revenues and Certain Operating Expenses
|
F-82
|
|
Notes
to the Statement of Revenues and Certain Operating
Expense
|
F-83
|
Norfolk Property
|
|
|
Financial Statement for Fiscal Year Ended December 31,
2016
|
F-86
|
|
Report
of Independent Auditor
|
F-86
|
|
Statement
of Revenues and Certain Operating Expenses
|
F-87
|
|
Notes
to the Statement of Revenues and Certain Operating
Expense
|
F-87
|
HC
GOVERNMENT REALTY TRUST, INC
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The
following unaudited pro forma condensed combined financial
statements as of June 30, 2017 have been prepared to provide pro
forma information with regard to the Company’s capital raise
from this offering, acquisition of one property, seven properties
obtained pursuant to a contribution agreement and three properties
under contract (collectively, the
“Properties”).
The
unaudited pro forma condensed combined balance sheet as of June 30,
2017 gives effect to the Company for its capital raise to date and
estimated remaining capital to be raised as set forth in this
offering circular and its immediate use of proceeds. As of June 30,
2017, the Company owned eleven properties, three properties were
acquired in 2016, one property was acquired in March 2017 and seven
properties were acquired, pursuant to a contribution agreement, in
May 2017 (collectively, referred to as “Owned
Properties”). The Company has three properties under contract
(referred to as “Properties Under Contract”) as of June
30, 2017. Pro forma adjustments have been made to the HC Government
Realty Trust, Inc. (“HC Government REIT”) balance sheet
(unaudited) presented in the Company’s Form 1-SA semi-annual
filing as of June 30, 2017 and filed on September 28, 2017 with the
Securities and Exchange Commission (“SEC”). It
isassumed for presentation purposes that the Owned Properties and
Properties Under Contract were acquired on January 1, 2017. The pro
forma balance sheet reflects the preliminary estimated impact of
purchase accounting and other adjustments as required for the
periods presented and the impact of a full six months of operations
for the Properties.
The
unaudited pro forma condensed combined statement of operations for
the Company for the six months ended June 30, 2017 gives effect to
the Company's acquisition of its Owned Properties and Properties
Under Contract on January 1, 2017 and the results from ownership
for the six month period ended June 30, 2017. Pro forma adjustments
have been made to the HC Government REIT Historical Statement of
Operations for the six month period ended June 30, 2017 (unaudited)
presented in the Form 1-SA semi-annual filing and filed with the
SEC on September 28, 2017. The pro forma statement of operations
for the six month period ended June 30, 2017 reflects the estimated
full six months of operations for 14 properties.
The
unaudited pro forma condensed combined financial statements have
been prepared by the Company's management based upon the historical
financial statements of the Company and the pro forma results of
owning the Properties. These pro forma statements may not be
indicative of the results that actually would have occurred had the
anticipated acquisition been in effect on the dates indicated or
which may be obtained in the future.
In
management's opinion, all adjustments necessary to reflect the
effects of the Properties' acquisition as of January 1, 2017 have
been made. These unaudited pro forma condensed combined financial
statements are for informational purposes only and should be read
in conjunction with the historical consolidated financial
statements of (i) the Company, as of June 30, 2017 and December 31,
2016 and for the six month period ended June 30, 2017 and for the
period from March 11, 2016 to December 31, 2016, (ii) Holmwood
Capital, LLC, as of June 30, 2017 and December 31, 2016 and for the
period from January 1, 2017 to May 26, 2017 and for the year ended
December 31, 2016.
HC Government Realty Trust, Inc.
Unaudited Pro forma Condensed Combined Balance Sheet
As of June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
Investment in real
estate, net
|
$56,771,654
|
$(909,980)
|
$22,274,795
|
$-
|
$78,136,469
|
|
|
|
|
|
|
Cash and cash
equivalents
|
1,716,644
|
186,190
|
(5,573,831)
|
17,713,387
|
14,042,390
|
Deposits in
escrow
|
192,202
|
51,940
|
27,551
|
-
|
271,693
|
Rent and other
tenant accounts receivable, net
|
519,100
|
-
|
203,258
|
-
|
722,358
|
Related
party receivables
|
109,536
|
-
|
-
|
-
|
109,536
|
Prepaids and other
assets
|
675,033
|
5,000
|
43,760
|
-
|
723,793
|
Leasehold
intangibles, net
|
2,797,169
|
(153,101)
|
1,643,975
|
-
|
4,288,043
|
Total
Assets
|
$62,781,338
|
$(819,951)
|
$18,619,508
|
$17,713,387
|
$98,294,282
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Mortgages payable,
net
|
$40,241,084
|
$(252,596)
|
$18,346,796
|
$-
|
$58,335,284
|
Notes
payable
|
5,367,552
|
-
|
-
|
(5,367,552)
|
-
|
Other
liabilities
|
1,274,719
|
149,653
|
318,172
|
-
|
1,742,544
|
Total
Liabilities
|
46,883,355
|
(102,943)
|
18,664,968
|
(5,367,552)
|
60,077,828
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
Preferred stock
($0.001 par value, 750,000,000 shares
|
|
|
|
|
authorized and
144,500 shares issued and outstanding
|
3,612,500
|
-
|
-
|
-
|
3,612,500
|
Common
stock ($0.001 par value, 250,000,000
|
|
|
|
|
shares authorized, pro forma 3,225,148 and
200,000
|
|
|
|
|
common
shares issued, and outstanding, respectively)
|
3,824,008
|
-
|
-
|
23,793,631
|
27,617,639
|
Offering
costs
|
(1,410,764)
|
-
|
-
|
-
|
(1,410,764)
|
Accumulated
deficit
|
(949,079)
|
(197,296)
|
(34,434)
|
(552,766)
|
(1,733,575)
|
Total
Stockholders' Equity
|
5,076,665
|
(197,296)
|
(34,434)
|
23,240,865
|
28,085,800
|
Noncontrolling
interests
|
10,821,318
|
(519,712)
|
(11,026)
|
(159,926)
|
10,130,654
|
Total
Equity
|
15,897,983
|
(717,008)
|
(45,460)
|
23,080,939
|
38,216,454
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' Equity
|
$62,781,338
|
$(819,951)
|
$18,619,508
|
$17,713,387
|
$98,294,282
|
Notes
to unaudited pro forma condensed combined balance
sheet:
(1)
HC Government
REIT Historical (Column 1) balance sheet financial information was
derived from the consolidated financial statements of the Company
as of June 30, 2017 (unaudited), included in this filing with the
SEC. The Company’s balance sheet as of June 30, 2017 reflects
the Company’s acquisition of eleven properties (referred to
as the “Owned” Properties) representing 208,253
rentable square feet located in seven states. The Company’s
acquisitions are summarized as follows:
(a)
Three properties,
representing 43,984 rentable square feet, were acquired in June,
2016 for a purchase price of $10,226,786. The acquisition was
financed with a first mortgage loan with a fixed interest rate of
3.93% and a 3-year term. In addition, the seller provided a note
payable in the amount $2, 019,089 with a term of 1.5 years and due
on December 7, 2017.
(b)
Seven properties
(referred to as “Contribution Properties”),
representing 110,352 rentable square feet, were acquired in May,
2017, pursuant to a contribution agreement for a combined purchase
price of $34,501,483. The terms of the contribution agreement
provided for the issuance of 1,078,416 Operating Partnership Units
(“OP Units”) for the membership interests of four
single member limited liability companies and the rights to the profits, losses, distributed cash
flow and all of the other benefits and burdens of ownership for
three properties. The Company assumed existing debt of $23,717,323
representing 4 first mortgage loans and paid off existing corporate
notes payables totaling $1,132,041 simultaneously with the closing
of the acquisition. The average interest rate for the assumed loans
is 4.38% and the average remaining loan term is 3.8 years.
Debt service payments are based on monthly principal amortizations
that range between 20 years and 29 years.
(c)
A 53,917 rentable square foot property was
acquired in March 2017 for a purchase price of $14,500,000 plus
closing costs and was initially financed by a $10,875,000 first
mortgage debt with a floating rate interest rate of Libor + 210,
principal amortization over 25 years and a 3-year term. The loan
was refinanced in July, 2017and the new loan bears interest at a
fixed annum rate of 4%, has a 5-year loan term and debt service
payments are based on monthly principal amortization over 25-years.
In addition, principals of Holmwood Capital, LLC, the previous
owner of the Contribution Properties and an unrelated third-party,
provided the Company with 3 short term notes payables totaling $3.4
million to fund the acquisition. The notes bear interest at 12%,
have a one year term and require monthly interest only
payments.
(2)
Owned Properties
(Column 2) reflects the Pro forma adjustments to the
Company’s historical balance sheet as of June 30, 2017
(Column 1), resulting from the following assumptions:
a.
The Company
acquires eight properties purchased during the six month period
ended June 30, 2017 on January 1, 2017. The adjustments reflect the
net effect to the Company’s accumulated deficit, accumulated
depreciation and amortization, principal amortization on debt and
payment of lender required escrows had the properties been owned
for a full six months.
b.
The purchase price
for the Contribution Properties is reduced by $456,533 to reflect
the earlier purchase date. Per the contribution agreement, any
principal amortization on the agreed upon loans to be assumed or
loans that are paid off during the period from January 1, 2016 and
the date of closing shall increase the equity value and increase
the number of OP Units issued. An earlier purchase date would
result in a reduced purchase price. The pro forma adjustment
reflects the principal amortization on the Contribution Properties
related loan for the period from January 1, 2017 to May 26, 2017,
the date the Contribution Properties were acquired.
c.
Allocations to
noncontrolling interests have been made accordingly based on the
pro forma ownership of its interests as of January 1,
2017.
(3)
Properties Under
Contract (Column 3) reflects the net adjustments to the
Company’s historical balance sheet as of June 30, 2017
(Column 1) related to the acquisition of three properties the
Company had under contract as of June 30, 2017 and are assumed to
be purchased on January 1, 2017. The properties, representing
88,082 rentable square feet, have a combined purchase price of
$23,884,458. The pro forma adjustments reflect the estimated impact
of purchase accounting and the impact of a full six months of
operations for these properties. A summary of the acquisitions are
as follows:
a.
The Company closed
on a 21,116 rentable square foot building on July 25, 2017 for a
purchase price of $4,709,458 plus acquisition costs. The
acquisition was financed by a first mortgage loan in the amount
$3,530,000 and proceeds from this offering. The loan bears interest
at 4%, has a five year term and monthly debt service payments are
based on a 25-year amortization.
b.
The Company, as of
June 30, 2017, entered into separate purchase and sale agreements
to acquire two properties, representing 66,966 square feet leased
for a combined purchase price of $19,175,000 plus acquisition
costs. The acquisitions will be financed by first mortgage loan
estimated at $15,198,750 and equity raise by this offering. The
properties are expected to close in October, 2017 and February,
2018.
(4)
Pro Forma
Adjustments (Column 4) reflect the net adjustments to the
Company’s historical balance sheet as of June 30, 2017
(Column 1) related to corporate activities resulting from the
earlier acquisition of properties and proceeds from this offering.
A summary of the pro forma adjustments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued and capital raise to
|
|
|
|
|
|
acquire Properties Under
Contract(a)
|
$6,100,000
|
-
|
$6,100,000
|
-
|
-
|
Common
shares issued and capital raise to
|
|
|
|
|
|
to repay Corporate Notes
Payables(b)
|
5,900,000
|
-
|
5,900,000
|
-
|
-
|
Common shares transaction costs(c)
|
(1,050,000)
|
-
|
(1,050,000)
|
-
|
-
|
Repayment of notes payable(d)
|
(5,367,552)
|
(5,367,552)
|
-
|
-
|
-
|
Interest
savings from repayment of
|
208,972
|
-
|
-
|
208,972
|
-
|
Corporate
Notes Payables (e)
|
-
|
-
|
-
|
-
|
-
|
Increase in public company expense
(f)
|
(81,393)
|
-
|
-
|
(81,393)
|
-
|
Increase in asset management fees
(g)
|
(97,226)
|
|
|
(97,226)
|
|
Dividend payment (1Q2017)(g)
|
(602,125)
|
-
|
-
|
(442,200)
|
(159,925)
|
Vesting of LTIPs(i)
|
-
|
-
|
140,919
|
(140,919)
|
-
|
Total
|
$5,010,676
|
$(5,367,552)
|
$11,090,919
|
$(552,766)
|
$(159,925)
|
|
|
|
|
|
|
Common shares remaining to be issued
(j)
|
13,920,780
|
-
|
13,920,780
|
-
|
-
|
Common shares transaction costs(j)
|
(1,218,068)
|
-
|
(1,218,068)
|
-
|
-
|
Net
proceeds from issuance of shares
|
12,702,712
|
-
|
12,702,712
|
-
|
-
|
|
|
|
|
|
|
Combined Total
|
$17,713,387
|
$(5,367,552)
|
$23,793,631
|
$(552,766)
|
$(159,925)
|
a.
The Company will
issue 610,000 shares of common stock at $10 per share for a capital
raise of $6,100,000 and net proceeds will be used to acquire
Properties Under Contract.
b.
The Company will
issue 590,000 shares of common stock at a $10 per share for a
capital raise of $5,900,000 and net proceeds will repay corporate
notes payables.
c.
Transaction costs
related to issuing 1,200,000 shares is estimated to be 8.75% of the
$10 per common share cost or $1,050,000.
d.
Corporate notes
payables totaling $5,367,552 will be repaid on January 1, 2017 and
are described as follows:
i.
In connection with
the Company’s acquisition of three properties in 2016, the
seller provided a short term note payable in the amount of
$2,019,789. The loan bears interest at a fixed annum rate of 7.0%,
has a 1.5 year term and debt service payments are based on monthly
principal amortization over 20 years.
ii.
In connection with
the Company’s acquisition of a property in March 2017, the
Company secured three notes payables totaling $3,400,000.
Principals of Holmwood Capital, LLC, the previous owner of the
Contribution Properties, provided the related party notes payables.
The unsecured, interest-only loan bears interest at a fixed annum
rate of 12% and are due on March 31, 2018.
e.
Repayment of notes
payables results in interest savings of $208,972 for the period of
January 1, 2017 to June 30, 2017.
f.
Costs related to
operating as a public company is estimated to increase by
$81,393.
g.
Asset management
fees are estimated to be 1.5% of the stockholders’ equity
account subject to certain adjustments for depreciation and
amortization, capital gains and other adjustments as defined in the
asset management agreement. The asset management fees are allocated
to the various properties based on the Company’s equity
investment in the properties. An accrual in the amount of $112,226
is provided based on the pro forma stockholders’ equity
accounts, as adjusted based on the pro forma
assumptions.
h.
A dividend payment
in the amount $602,125 is estimated and reflects first quarter 2017
dividends on the Company’s outstanding common stock, long
term incentive units (LTIPs) and operating partnership units had
shares/units been issued on January 1, 2017. The first quarter
dividends are payable on April 10, 2017.
i.
Vesting of LTIPs
and restricted common stock in the amount of $140,919 reflects the
additional amortization of the asset manager’s LTIPs and
independent directors' restricted common stock due to the earlier
issuance of common shares. The asset manager shall hold in LTIPs 3%
of all common shares and operating partnership units outstanding on
a fully diluted basis.
j.
As of June 30,
2017, the Company issued 407,922 common shares from this offering.
The pro forma adjustments reflect proceeds from issuing 1,200,000
common shares from this offering and will primarily be used to buy
the Properties Under Contract and repay corporate notes payables.
The remaining common shares (totaling 1,392,078) assumed issued on
January 1, 2017, will result in additional net proceeds of
$12,708,712, net of transaction costs. Together with working
capital funds, the Company will have $14,042,391 available to buy
unidentified properties and available for corporate working capital
needs.
HC Government Realty Trust, Inc.
Unaudited Pro Forma Condensed Combined Statement of
Operations
For the Six Month Period ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$1,338,324
|
$1,757,161
|
$1,189,385
|
$-
|
$4,284,870
|
|
|
|
|
|
|
Property Operations
|
|
|
|
|
|
Operating
expenses
|
787,451
|
507,819
|
288,359
|
|
1,805,939
|
Depreciation
and amortization
|
493,877
|
595,365
|
437,500
|
|
1,526,742
|
Management
fees and other corporate expenses
|
73,563
|
211,821
|
66,722
|
319,537
|
449,333
|
Total
operating expenses
|
1,354,891
|
1,315,005
|
792,581
|
319,537
|
3,782,014
|
|
|
|
|
|
|
Interest
expense
|
538,236
|
702,631
|
442,264
|
(208,972)
|
1,474,159
|
|
|
|
|
|
|
Net
income(loss)
|
$(554,803)
|
$(260,475)
|
$(45,460)
|
$(110,565)
|
$(971,303)
|
Less: Net income
attributable to nonconrolling interests(5)
|
37,157
|
(63,179)
|
(11,026)
|
|
(37,048)
|
Net loss
attributable to HC Government Realty Trust, Inc.
|
(591,960)
|
(197,296)
|
(34,434)
|
(110,565)
|
(934,255)
|
Less:
Preferred stock dividends
|
126,439
|
-
|
-
|
-
|
126,439
|
Net
loss attributable to common shareholders
|
$(718,399)
|
$(197,296)
|
$(34,434)
|
$(110,565)
|
$(1,060,694)
|
|
|
|
|
|
|
Weighted average
basic and diluted
|
|
|
|
|
|
number of common shares
outstanding(6)
|
296,814
|
|
|
|
|
Net loss per basic
and dilutive common shares(6)
|
$(2.42)
|
|
|
|
|
|
|
|
|
|
|
Pro Forma weighted
average basic and diluted
|
|
|
|
|
|
number of common
shares outstanding
|
|
|
|
|
|
based on shares
issued to buy identified properties (6)
|
|
|
|
|
3,225,148
|
Pro forma net loss
per basic and dilutive common shares
|
|
|
|
|
|
based on shares
issued to buy identified properties (6)
|
|
|
|
|
$(0.33)
|
Notes
to the unaudited pro forma condensed combined statement of
operations:
(1)
HC Government REIT
Historical (Column 1) results of operations was derived from the
Company’s Statement of Operations for the six month period
ended June 30, 2017 (unaudited) and presented in the
Company’s Form 1-SA semi-annual filing filed with the SEC on
September 28, 2017. The results from operations reflect six months
operations for three properties acquired in June, 2016, three
months operations for a property acquired in March, 2017 and the
operations for the period from May 27, 2017 to June 30, 2017 for
the Contribution Properties.
(2)
The Owned
Properties (Column 2) reflect the net adjustments to HC Government
REIT Historical Statement of Operations (Column 1) assuming the
Company acquired its eight properties on January 1, 2017. The net
adjustments for the Owned Properties reflect the incremental
increases to revenues and expenses resulting from the additional
three months of operations for the Norfolk Property and the
additional results of operations for the period from January 1,
2017 to May 26, 2017, for the Contribution Properties.
(3)
Properties Under
Contract (Column 3) reflect the results from operations for three
properties under contract as of June 30, 2017 assuming the Company
acquired those properties on January 1, 2017. A pro forma condensed
summary of revenues and expenses by property assuming the
properties were owned for a full six months is as
follows:
|
|
|
|
|
Properties(a)
|
|
|
|
|
Revenues(b)
|
$189,682
|
$545,058
|
$454,644
|
$1,189,385
|
|
|
|
|
|
Property Operations(b)
|
|
|
|
|
Operating
expenses
|
54,860
|
158,501
|
74,998
|
288,359
|
Depreciation
and amortization
|
79,536
|
172,674
|
185,290
|
437,500
|
Management
fees
|
15,179
|
22,811
|
28,732
|
66,722
|
Total
operating expenses
|
149,576
|
353,986
|
289,020
|
792,581
|
|
|
|
|
|
Interest
expense
|
78,887
|
181,190
|
182,187
|
442,264
|
|
|
|
|
|
Net income(loss)
|
$(38,781)
|
$9,883
|
$(16,562)
|
$(45,460)
|
(a)
The three
properties are leased to the United States of America and
administered by GSA. A description of the properties are as
follows;
i.
Montgomery, AL, a
21,116 rentable square foot property was originally built in 1999
for a commercial tenant. In response to a GSA solicitation for
offer (“SFO) to lease space, the previous owner submitted a
bid to buy this building and renovate it according to the plans and
specifications outlined in the SFO. Construction took 12 months to
complete and GSA signed a 10-year lease and accepted the building
on December 9, 2016. The Company purchased the building on July 25,
2017 for a purchase price of $4,709,458 plus acquisition costs. The
property has 5,080 rentable square feet vacant which GSA has
indicated one of the government’s agencies plans to lease the
vacant space in the near future.
ii.
San Antonio, TX
property, a 38,756 rentable square foot property, was originally
developed in 1972 and leased by a commercial tenant. The tenant
vacated and the property sat vacant for several years. The owner,
in response to a GSA SFO to lease space, submitted a bid to
renovate its vacant building in accordance to the plans and
specification outlined in the SFO. The owner’s bid was
accepted. The gut-renovation job cost over $5.7 million and took 12
months to complete. GSA has accepted the space and its lease term
began on May 1, 2017. The Company has a contract to buy the
building at a purchase price of $8,225,000 plus acquisition costs.
The Company expects to close on the property in November
2017.
iii.
Sarasota, FL. a
28,210 square foot building, build-to-suit, single tenanted
property, is currently under construction. The Company has a
contract to purchase the property for $11,000,000 plus acquisition
costs and is expected to close in February, 2018, after GSA has
accepted the space. The property is entirely leased to GSA under a
20-year firm term lease.
(b)
Pro forma revenues
and expenses for the six month period ended June 30, 2017 were
determined as follows;
i.
The Montgomery, AL
property was a vacant property prior to the previous owner winning
GSA’s SFO award to deliver office space. The Company was able
to obtain the previous owners’ results of operations for
actual revenues and property operating expenses from January 1 to
July 25, 2017 (the dates of GSA acceptance of the renovated space
and the date the Company acquired the property). Property operating
expenses includes cleaning and janitorial, utilities, repairs and
maintenance, landscaping and general and administrative costs.
Expenses related to real estate taxes, insurance, property
management fees, interest expense, asset management fees and
depreciation and amortization are estimated as if the Company owned
and managed the properties for the entire six month
period.
ii.
Given the San
Antonio, TX property was vacant prior to its 12-month
gut-renovation and the Sarasota, FL property is currently under
construction, there are no prior operating histories for these
properties. The Company estimated the first six months of operating
results using a zero based budgeting approach. Revenues were
estimated based on signed leases with GSA. Property operating
expenses were determined based on operating contracts, in existence
or in negotiation, to provide janitorial, maintenance and
landscaping services. Other routine operating expenses and
utilities costs are estimated based on similar buildings in size
and tenancy for the respective property locations. Expenses related
to real estate taxes, insurance, property management fees, interest
expense, asset management fees and depreciation and amortization
are estimated as if the Company owned and managed the properties
for the entire six month period.
(4)
Pro Forma
Adjustments (Column 4) reflect the net adjustments to the
Company’s historical statement of operations for the six
month period ended June 30, 2017 related to certain corporate
activities and are summarized as follows:
a.
Adjustments
totaling $319,537 reflect the following:
i.
Additional
amortization of the asset manager’s LTIP units and
independent directors' restricted common stock in the amount of
$140,919 represents the earlier issuance of LTIPs and a longer
vesting period assuming funds from this offering were available on
January 1, 2017. The asset manager is issued LTIP units so that the
asset manager holds at all times 3% of common shares and operating
partnership units outstanding on a fully-diluted basis. The asset
managers LTIP units vest over a five-year period.
ii.
Additional public
company expense in the amount of $81,393 is estimated.
iii.
Additional asset
management fees in the amount of $97,226 is estimated.
a.
Interest savings of
$208,972 represents six months interest on the Company’s
corporate notes payables ($5,367,552) and reflected in the
historical Statement of Operations (Column 1). The note is assumed
to be repaid on January 1, 2017.
(5)
Net income
attributable to noncontrolling interests represents the allocation
of net income (losses) primarily to the previous owner of the
Contribution Properties. Based on the pro forma statement of
operations, as of June 30, 2017, the noncontrolling interests would
be entitled to 24.3% of the Company’s Operating
Partnership’s net income (loss).
(6)
As of June 30,
2017, the Company’s actual weighted average basic and diluted
number of common shares outstanding was 296,814. Assuming the
remaining available common shares from this offering are issued and
the pro forma adjustments occur, the pro forma weighted average
basic and diluted number of common shares increases to 3,225,148
and the pro forma net loss per basic and diluted common shares
decreases to ($0.33) per common share.
HC
GOVERNMENT REALTY TRUST, INC
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The
following unaudited pro forma condensed combined Statement of
Operations for the year ended December 31, 2016 has been prepared
to provide pro forma information with regard to the Company’s
capital raise from this offering, acquisition of three properties
acquired in 2016, seven properties obtained pursuant to a
contribution agreement and four properties under contract
(collectively, the “Properties”).
The
unaudited pro forma condensed combined Statement of Operations
gives effect to the Company’s acquisition of 14 properties on
January 1, 2016 and the results of those properties operations for
the year end December 31, 2016. As of December 31, 2016, the
Company acquired three properties in June 2016 and are referred to
as “Owned Properties”. Pursuant to a contribution
agreement, the Company acquired seven properties (referred to as
“Contribution Properties”) in May 2017. In addition,
the Company acquired one property in March 2017 and has three
properties under contract (referred to collectively as
“Properties Under Contract”) as of June 30, 2017. Pro
forma adjustments have been made to the HC Government Realty Trust,
Inc. (“HC Government REIT”) Statement of Operations for
the period from March 11, 2016 (date of inception) to December 31,
2016 presented in the Company’s Form 1K Annual Report as of
December 31, 2016 and filed on April 27, 2017 with the Securities
and Exchange Commission (“SEC”). It is assumed for
presentation purposes that the Owned Properties, Contribution
Properties and Properties Under Contract were acquired on January
1, 2016. The pro forma Statement of Operations reflects the
preliminary estimated impact of purchase accounting and other
adjustments as required for the period presented and the impact of
a full twelve months of operations for the Properties.
The
unaudited pro forma condensed combined Statement of Operations has
been prepared by the Company's management based upon the
Company’s historical Statement of Operations from March 11,
2016 (date of inception) to December 31, 2016 and the pro forma
results of owning the Properties. This pro forma statement may not
be indicative of the results that actually would have occurred had
the anticipated acquisition been in effect on the dates indicated
or which may be obtained in the future.
In
management's opinion, all adjustments necessary to reflect the
effects of the Properties' acquisition as of January 1, 2016 have
been made. These unaudited pro forma condensed combined financial
statements are for informational purposes only and should be read
in conjunction with the historical consolidated financial
statements of (i) the Company, as of December 31, 2016 and for the
period from March 11, 2016 to December 31, 2016, (ii) Holmwood
Capital, LLC, as of December 31, 2016 and 2015 and for the Years
Ended December 31, 2016 and 2015.
HC Government Realty Trust, Inc.
Unaudited Pro Forma Condensed Combined Statement of
Operations
For the Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
$747,477
|
$581,666
|
$3,711,203
|
$3,835,580
|
$-
|
$8,875,926
|
|
|
|
|
|
|
|
Property Operations
|
|
|
|
|
|
|
Operating
expenses
|
257,557
|
102,099
|
973,972
|
973,145
|
1,315,269
|
3,622,042
|
Depreciation
and amortization
|
302,484
|
238,773
|
1,228,415
|
1,263,704
|
|
3,033,376
|
Management
fees
|
57,309
|
39,416
|
284,832
|
239,211
|
|
620,768
|
Total
operating expenses
|
617,350
|
380,288
|
2,487,219
|
2,476,060
|
1,315,269
|
7,276,186
|
|
|
|
|
|
|
|
Interest
expense
|
256,171
|
150,079
|
1,023,406
|
1,501,224
|
(77,928)
|
2,852,952
|
|
|
|
|
|
|
|
Net
income(loss)
|
$(126,044)
|
$51,299
|
$200,578
|
$(141,704)
|
$(1,237,341)
|
$(1,253,212)
|
Less: Net income attributable to nonconrolling
interests(6)
|
-
|
11,433
|
44,701
|
(31,580)
|
-
|
24,554
|
Net
loss attributable to HC Government Realty Trust, Inc.
|
(126,044)
|
39,866
|
155,877
|
(110,124)
|
(1,237,341)
|
(1,277,766)
|
Less:
Preferred stock dividends
|
104,636
|
85,020
|
-
|
-
|
-
|
189,656
|
Net loss attributable to common shareholders
|
$(230,680)
|
$(45,154)
|
$155,877
|
$(110,124)
|
$(1,237,341)
|
$(1,467,422)
|
|
|
|
|
|
|
|
Weighted
average basic and diluted
|
|
|
|
|
|
|
number of common shares
outstanding(7)
|
160,000
|
|
|
|
|
|
Net loss per basic and dilutive common
shares(7)
|
$(1.44)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma weighted average basic and diluted
|
|
|
|
|
|
|
number
of common shares outstanding
|
|
|
|
|
|
3,244,329
|
Pro
forma net loss per basic and dilutive common shares
|
|
|
|
|
|
|
based on shares issued to buy identified
properties (7)
|
|
|
|
|
|
$(0.45)
|
Notes
to the unaudited pro forma condensed combined statement of
operations:
(1)
HC Government REIT
Historical (Column 1) was derived from the Company’s Audited
Statement of Operations for the period from March 11, 2016 (date of
inception) to December 31, 2016 and presented in the
Company’s Form 1K Annual Filing filed with the SEC on April
27, 2017. The historical Statement of Operations reflect the
results of operations for three properties on June 10, 2016 (the
date the properties were acquired) to December 31, 2016, and
corporate activities from the period of March 11, 2016 to December
31, 2016.
(2)
Owned Properties
(Column 2) reflect the net adjustments to HC Government REIT
Historical Statement of Operations for the period from March 11,
2016 to December 31, 2016 (Column 1) assuming the Company acquired
its three properties on January 1, 2016. The pro forma adjustments
reflect the incremental increases to revenues and expenses
resulting from owning the properties during the period from January
1, 2016 to June 10, 2016. To determine the adjustments required,
the Company obtained the previous seller’s results of
operation for actual revenues and property operating expenses from
January 1, 2015 to June 30, 2015. These results were provided in
the Offering Circular and filed with the SEC on November 7, 2016.
Adjustments were made for the actual results of operations for the
period June 10, 2016 to June 30, 2016, the period when the Company
owned the properties. Property operating expenses includes cleaning
and janitorial, utilities, repairs and maintenance, landscaping and
general and administrative expenses. Expenses related to real
estate taxes, insurance, property management fees, interest
expense, asset management fees and depreciation and amortization
are estimated as if the Company owned and managed the properties
during the period from January 1, 2016 to June 10, 2016. A summary
of revenues and expenses are as follows:
|
Proforma
January 1, 2016 to June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Rental revenues(1)
|
$140,572
|
$262,025
|
$229,831
|
632,428
|
73,769
|
558,659
|
Real
estate tax reimbursements
|
1,740
|
37
|
16,382
|
18,159
|
2,830
|
15,329
|
Other
income
|
850
|
6,828
|
-
|
7,678
|
-
|
7,678
|
|
143,162
|
268,890
|
246,213
|
658,265
|
76,599
|
581,666
|
|
|
|
|
|
|
|
Certain
Operating Expenses
|
|
|
|
|
|
|
Property operating(1)
|
18,977
|
29,890
|
32,889
|
81,756
|
22,665
|
59,091
|
Real
estate taxes
|
4,967
|
10,449
|
26,755
|
42,171
|
5,221
|
36,950
|
Insurance
|
1,311
|
2,179
|
1,293
|
4,783
|
1,176
|
3,607
|
Property
management fees
|
2,764
|
7,863
|
7,504
|
18,131
|
4,980
|
13,151
|
Other
|
900
|
1,200
|
351
|
2,451
|
-
|
2,451
|
|
28,919
|
51,581
|
68,792
|
149,292
|
34,042
|
115,250
|
|
|
|
|
|
|
|
Excess
of revenues over
|
|
|
|
|
|
|
operating
expenses
|
$114,243
|
$217,309
|
$177,421
|
$508,973
|
$42,557
|
$466,416
|
|
|
|
|
|
|
|
Asset management fees(2)
|
|
|
|
30,878
|
4,613
|
26,265
|
Interest expense(2)
|
|
|
|
185,497
|
35,418
|
150,079
|
Depreciation and amortization(2)
|
|
|
269,386
|
30,613
|
238,773
|
|
|
|
|
|
|
|
|
|
|
|
$23,212
|
$(28,087)
|
$51,299
|
(1)
Rental revenues and property operation expense were provided
by the previous owners for the period of January 1, 2015 to June
30, 2015
(2)
The Company made adjustments for asset management fees, interest
expense and depreciation and amortization expense as if the assets
were acquired on January 1, 2016.
(3)
Contribution
Properties (Column 3) represents seven properties to be acquired
pursuant to a contribution agreement with Holmwood Capital, LLC
(“Holmwood”), the predecessor entity to HC Government
Realty Trust, Inc. The properties represents 110,352 rentable
square feet and are 100% leased to the United States of America and
occupied by various governmental agencies. The combined purchased
price for the properties totals $34,501,483 and the transaction
closed on May 26, 2017. The pro forma adjustments to HC Government
REIT Historical Statement of Operations (Column 1) reflect twelve
months of operations assuming these properties were acquired on
January 1, 2016. The revenues and expenses for these properties
were derived from the actual revenues and operating expense results
for the operating properties and included in Holmwood Capital,
LLC’s audited financial statement as of December 31, 2016.
This statement is included herein with this filing.
(4)
Properties Under
Contract (Column 4) reflect the results from operations for four
properties under contract assuming the Company acquired the
properties on January 1, 2016. A pro forma condensed summary of
revenues and expenses by property assuming the properties were
owned for a full year is as follows:
|
|
|
|
|
|
Properties(a)
|
|
|
|
|
|
Revenues(b)
|
$1,402,018
|
$432,223
|
$1,092,051
|
$909,288
|
$3,835,580
|
|
|
|
|
|
|
Property Operations(b)
|
|
|
|
|
|
Operating
expenses
|
416,369
|
103,261
|
303,519
|
149,996
|
973,145
|
Depreciation
and amortization
|
388,704
|
159,072
|
345,349
|
370,580
|
1,263,704
|
Management
fees
|
105,697
|
30,381
|
45,670
|
57,464
|
239,211
|
Total
operating expenses
|
910,770
|
292,714
|
694,537
|
578,039
|
2,476,060
|
|
|
|
|
|
|
Interest
expense
|
619,543
|
156,937
|
362,380
|
362,365
|
1,501,224
|
|
|
|
|
|
|
Net income(loss)
|
$(128,295)
|
$(17,427)
|
$35,134
|
$(31,116)
|
$(141,704)
|
(a)
The four properties
are leased to the United States of America and the leases are
administered by GSA. A description of the properties are as
follows;
i.
Norfolk, VA is a
53,917 rentable square foot existing operating property the Company
acquired on March 31, 2017 for a purchase price of $14,500,000 plus
closing costs. The tenant renewed its lease prior to our purchase
and began its 10-year firm term on June 27, 2017. Under the terms
of the lease, GSA plans to invest $1.4 million in tenant
improvements and will repay this amount over the remaining firm
term of its lease when the improvements have been completed. The
funds to complete the planned improvements were funded by the
seller and are escrowed.
ii.
Montgomery, AL, a
21,116 rentable square foot property was originally built in 1999
for a commercial tenant. In response to a GSA solicitation for
offer (“SFO) to lease space, the previous owner submitted a
bid to buy this building and renovate it according to the plans and
specifications outlined in the SFO. Construction took 12 months to
complete and GSA signed a 10-year lease and accepted the building
on December 9, 2016. The Company purchased the building on July 25,
2017 for a purchase price of $4,709,458 plus acquisition costs. The
property has 5,080 rentable square feet vacant which GSA has
indicated the tenant plans to lease the vacant space in the near
future.
iii.
San Antonio, TX
property, a 38,756 rentable square foot property, was originally
developed in 1972 and leased by a commercial tenant. The tenant
vacated and the property sat vacant for several years. The owner,
in response to a GSA SFO to lease space, submitted a bid to
renovate its vacant building in accordance to the plans and
specification outlined in the SFO. Upon acceptance of its bid, the
seller made over $5.7 million in necessary improvements to the
property taking 12 months to complete. GSA has accepted the space
and the lease began on May 1, 2017. The Company has a contract to
buy the building at a purchase price of $8,225,000 plus acquisition
costs and expects to close on the property in November
2017.
iv.
Sarasota, FL, a
28,210 rentable square foot, build-to-suit, single tenanted
property, is currently under construction. The Company has a
contract to purchase the property for $11,000,000 upon GSA’s
acceptance of the space and is estimated to occur in February,
2018. GSA has signed a 20-year firm term lease and its government
tenants will occupy the entire space.
(b)
Pro forma revenues
and expenses for the year ended December 31, 2016 were determined
as follows;
i.
The Norfolk, VA
Statement of Revenues and Certain Operating Expenses for the year
ending December 31, 2016 was provided by the seller and has been
audited. The financial report and auditors opinion letter has been
included in this filing. Certain of the pro forma adjustments
reflect the audited results from operations. In addition, pro forma
adjustments related to real estate taxes, insurance, property
management fees, interest expense, asset management fees and
depreciation and amortization are estimated as if the Company owned
and managed the properties for the entire year.
ii.
Montgomery,
AL property, an existing operating property, the Company obtained
the previous seller’s results of operations for actual
revenues and property operating expenses from January 1 to July 25,
2017, the date the Company purchased the property. Property
operating expenses includes cleaning and janitorial, utilities,
repairs and maintenance, landscaping and general and administrative
costs. Expenses related to real estate taxes, insurance, property
management fees, interest expense, asset management fees and
depreciation and amortization are estimated as if the Company owned
and managed the properties for the entire six month
period.
iii.
Given the San
Antonio, TX property was vacant prior to its 12-month
gut-renovation and the Sarasota, FL property is currently under
construction, there are no prior operating histories for these
properties. The Company estimated the properties’ operating
results using a zero based budgeting approach. Revenues were
estimated based on the signed leases with GSA. Property operating
expenses were determined based on operating contracts, in existence
or in negotiation, to provide janitorial, maintenance and
landscaping services. Other routine operating expenses and
utilities costs are estimated based on similar buildings in size
and tenancy for the respective property locations. Expenses related
to real estate taxes, insurance, property management fees, interest
expense, asset management fees and depreciation and amortization
are estimated as if the Company owned and managed the properties
for the entire year.
(5)
Pro Forma
Adjustments (Column 5) reflect the net adjustments to the
Company’s historical statement of operations for the year
ended December 31, 2016 related to certain corporate activities and
are summarized as follows:
a.
Adjustments
totaling $1,315,269 reflect the following:
i.
Annual amortization
of independent directors' ($160,000) restricted common stock and
asset manager’s ($283,291) LTIP units totaling $443,291 are
estimated. The Company’s independent directors of its board
each receives 4,000 shares of restricted common stock (16,000
shares of restricted common stock) to be vested over one year. The
asset manager is issued LTIP units so that the asset manager holds
at all times 3% of common shares and OP Units outstanding on a
fully-diluted basis. The asset manager’s LTIP units vest over
a five-year period.
ii.
Additional public
company expense in the amount of $678,478 is estimated. Public
company expense includes increase audit and tax fees, legal costs
related to SEC filings, directors’ and officers’
insurance, transfer fees, investor relations and other related
costs.
iii.
Asset management
fees are estimated to be 1.5% of the stockholders’ equity
account with certain adjustments for depreciation and amortization
and capital gains and other events as defined in the asset
management agreement. The asset management fees are allocated to
the various properties based on the Company’s equity
investment in the properties. The Company estimates additional
asset management fees in the amount of $193,500.
b.
Interest savings of
$77,928 represents the interest on the Company’s corporate
note payable ($1,992,140) and reflected in the historical Statement
of Operations (Column 1). The note is assumed to be repaid on
January 1, 2016.
(6)
Net income
attributable to noncontrolling interests represents the allocation
of net income (losses) primarily to the previous owner of the
Contribution Properties. Based on the pro forma statement of
operations, as of December 31, 2016, the noncontrolling interest
would be entitled to 22.3% of the Company’s Operating
Partnership’s net income (loss).
(7)
As of December 31,
2016, the Company’s historical weighted average basic and
diluted number of common shares outstanding was 160,000. Assuming
the remaining available common shares from this offering are issued
and the pro forma adjustments occur, the pro forma weighted average
basic and diluted number of common shares increases to 3,244,329
and the pro forma net loss per basic and diluted common shares
decreases to ($0.45) per common share.
HC
Government Realty Trust, Inc.
Consolidated
Financial Statements – as of June 30, 2017 (unaudited) and
December 31, 2016 (audited) and for the six-month period ended June
30, 2017 (unaudited) and the period from March 11, 2016 (date of
inception) to June 30, 2016 (unaudited)
HC Government Realty Trust, Inc.
|
|
|
Consolidated Balance Sheet
|
|
|
As of June 30, 2017 (unaudited) and December 31,
2016 (audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Investment
in real estate, net:
|
$56,771,654
|
$10,435,991
|
|
|
|
Cash
and cash equivalents
|
1,716,644
|
247,137
|
Deposits
in escrow
|
192,202
|
51,656
|
Rent
and other tenant accounts receivables, net
|
519,100
|
126,590
|
Related
parties receivables
|
109,536
|
525,397
|
Prepaids
and other assets
|
675,033
|
182,376
|
Leasehold
intangibles, net
|
2,797,169
|
326,279
|
Total Assets
|
$62,781,338
|
$11,895,426
|
|
-
|
|
LIABIILTIES
|
|
|
Mortgages
payable, net of unamortized debt costs
|
$40,241,084
|
$7,068,067
|
Notes
payable
|
5,367,552
|
1,992,140
|
Other
note payable
|
37,719
|
111,821
|
Accrued
interest payable
|
151,755
|
35,379
|
Other
liabilities
|
1,085,245
|
378,684
|
Total Liabilities
|
46,883,355
|
9,586,091
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
Preferred
stock ($0.001 par value, 750,000,000 shares authorized
|
|
|
and
144,500 shares issued and outstanding)
|
3,612,500
|
3,612,500
|
Common
stock ($0.001 par value, 250,000,000
|
|
|
shares
authorized, 618,978 and 200,000 common shares issued,
|
|
|
and
outstanding, respectively)
|
3,824,008
|
2,000
|
Offering
costs
|
(1,410,764)
|
(1,074,485)
|
Accumulated
deficit
|
(949,079)
|
(230,680)
|
Total Stockholders' Equity
|
5,076,665
|
2,309,335
|
Noncontrolling
interests
|
10,821,318
|
-
|
Total Equity
|
15,897,983
|
2,309,335
|
Total Liabilities and Stockholders' Equity
|
$62,781,338
|
$11,895,426
|
The accompanying notes are an integral part of the financial
statements.
HC GOVERNMENT REALTY TRUST, INC.
|
|
|
Consolidated Satement of Operations
|
|
|
For the
six-month period ended June 30, 2017 (unaudited) and for the period
from March 11, 2016 (date of inception) to June 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
Rental
revenues
|
$1,319,748
|
$73,769
|
Real
estate tax reimbursments and other revenues
|
18,576
|
2,830
|
Total
Revenues
|
1,338,324
|
76,599
|
|
|
|
Other
Property Operations
|
|
|
Repairs
and maintenance
|
48,739
|
1,750
|
Utilities
|
72,069
|
4,305
|
Real
estate and other taxes
|
120,158
|
5,221
|
Depreciation
and amortization
|
493,877
|
30,613
|
Other
operating expense
|
69,735
|
2,777
|
Management
fees
|
73,563
|
9,593
|
Professional
expenses
|
184,647
|
5,856
|
Insurance
|
16,828
|
1,176
|
Amortization
of stock compensation
|
110,560
|
-
|
General
and administrative
|
164,715
|
7,977
|
Total
Operating Expenses
|
1,354,891
|
69,268
|
|
|
|
Interest
expense
|
538,236
|
35,418
|
Net
loss
|
(554,803)
|
(28,087)
|
Less:
Net income attributable to nonconrolling interests
|
37,157
|
-
|
Net
loss attributable to HC Government Realty Trust, Inc.
|
(591,960)
|
(28,087)
|
Less:
Preferred stock dividends
|
(126,439)
|
-
|
Net
loss attributable to common shareholders
|
$(718,398)
|
$(28,087)
|
|
|
|
Net
loss per basic and dilutive common shares
|
$(0.88)
|
$(0.46)
|
|
|
|
Weighted
average number of basic and diluted
|
|
|
common
shares outstanding
|
814,464
|
60,822
|
The accompanying notes are an integral part of the financial
statements. In the opinion of management, all adjustments necessary
in order to make the interim financial statements not misleading
have been included.
HC GOVERNMENT REALTY TRUST, INC.
|
Consolidated Statement of Changes in Stockholders'
Equity
|
For the six-month period ended June 30, 2017
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
144,500
|
$3,612,500
|
200,000
|
$2,000
|
$(1,074,485)
|
$(230,680)
|
$2,309,335
|
-
|
$-
|
$2,309,335
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuing common
|
|
|
|
|
|
|
|
|
|
|
shares,
net of issuance costs
|
-
|
-
|
407,922
|
3,711,448
|
-
|
-
|
3,711,448
|
-
|
-
|
3,711,448
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
investments
|
-
|
-
|
|
-
|
-
|
-
|
-
|
1,078,416
|
10,784,161
|
10,784,161
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
of longterm incentive
|
|
|
|
|
|
|
|
|
|
|
plans
|
-
|
-
|
11,056
|
110,560
|
-
|
-
|
110,560
|
-
|
-
|
110,560
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
-
|
-
|
|
-
|
-
|
(126,439)
|
(126,439)
|
-
|
-
|
(126,439)
|
|
|
|
|
|
|
|
|
|
|
|
Offering
costs
|
-
|
-
|
|
-
|
(336,279)
|
-
|
(336,279)
|
-
|
-
|
(336,279)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
-
|
-
|
|
-
|
-
|
(591,960)
|
(591,960)
|
-
|
37,157
|
(554,803)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2017
|
144,500
|
$3,612,500
|
618,978
|
$3,824,008
|
$(1,410,764)
|
$(949,079)
|
$5,076,665
|
1,078,416
|
$10,821,318
|
$15,897,983
|
The accompanying notes are an integral part of the financial
statements.
HC Government Realty Trust, Inc.
|
|
|
Consolidated
Statement of Cash Flows
|
|
|
For the
six-month period ended June 30, 2017 (unaudited) and for the period
from March 11, 2016 (date of inception) to June 30, 2016
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
Net
loss
|
$(554,803)
|
$(28,087)
|
Adjustments
to reconcile net loss to net cash used in
|
|
|
operating
activities:
|
|
|
Depreciation
|
388,561
|
24,944
|
Amortization
of acquired lease-up costs
|
55,751
|
2,453
|
Amortization
of in-place leases
|
49,566
|
4,210
|
Amortization
of above/below-market leases
|
(7,669)
|
(994)
|
Amortization
of debt issuance costs
|
29,720
|
7,334
|
Amortization
of stock based compensation
|
110,560
|
-
|
Change
in assets and liabilities
|
|
|
Increase
in rent and other tenant accounts receivables, net
|
(392,510)
|
(43,613)
|
Increase
in prepaid expense and other assets
|
(492,657)
|
(1,418,513)
|
Increase
in deposits in escrow
|
(140,546)
|
(163,386)
|
Increase
in accounts payable and other accrued expenses
|
703,758
|
21,395
|
Increase
in accrued interest payable
|
116,376
|
24,418
|
(Increase)decrease
in related party receivables
|
415,861
|
-
|
Net
cash provided(used) in operating activities
|
281,967
|
(1,569,839)
|
|
|
|
Cash flows from investing activities:
|
|
|
Investment
property acquisitions
|
(14,788,473)
|
(11,050,596)
|
Net
cash used in investing activities
|
(14,788,473)
|
(11,050,596)
|
|
|
|
Cash flows from financing activities:
|
|
|
Issuance
of common stock, net of underwriter's discount
|
3,711,448
|
2,000
|
Issuance
of preferred stock
|
-
|
2,800,000
|
Offering
costs
|
(336,279)
|
(217,710)
|
Mortgage
proceeds
|
10,875,000
|
7,225,000
|
Mortgage
principal payments
|
(165,496)
|
-
|
Proceeds
from seller note payable
|
-
|
2,019,789
|
Proceeds
from other note payable
|
3,400,000
|
1,000,000
|
Assumed
notes from contribution properties repaid
|
(1,132,038)
|
-
|
Notes
principal repayments
|
(98,690)
|
-
|
Debt
issuance costs
|
(151,493)
|
(105,072)
|
Dividends
paid
|
(126,439)
|
-
|
Net
cash from financing activities
|
15,976,013
|
12,724,007
|
|
|
|
Net
increase in cash and cash equivalents
|
1,469,507
|
103,572
|
Cash
and cash equivalents, beginning of period
|
247,137
|
-
|
Cash
and cash equivalents, end of period
|
$1,716,644
|
$103,572
|
The accompanying notes are an integral part of the financial
statements.
Notes
to the Consolidated Financial Statements
HC Government Realty Trust, Inc. (the
“REIT” or the “Company), a Maryland corporation,
was formed on March 11, 2016 to primarily source,
acquire, own and manage built-to-suit and improved-to-suit,
single-tenant properties leased by the United States of America
through the U.S General Services Administration (“GSA
Properties”). The Company
focuses primarily on GSA Properties across secondary and smaller
markets, within size ranges of 5,000-50,000 rentable square feet,
and in their first term after construction or retrofit to post-9/11
standards. Further, the Company selects GSA Properties that fulfill
mission critical or citizen service functions. Leases associated
with the GSA Properties are full faith and credit obligations of
the United States of America and are administered by the U.S.
General Services Administration or directly through the occupying
federal agencies, or collectively the GSA.
The Company owns its properties through the
Company’s subsidiary, HC Government Realty Holdings, L.P., a
Delaware limited partnership (“Operating Partnership”).
The Operating Partnership invests
through wholly-owned special purpose limited liability companies,
or special purpose entities (“SPE”), primarily in
properties across secondary or smaller markets.
The consolidated financial statements include the
accounts of its Operating Partnership subsidiary and related SPEs
and the accounts of the REIT. As of June 30, 2017, the financial
statements reflect the operations of 11 properties representing
208,203 rentable square feet located in seven states. There were 3
properties purchased in June, 2016 representing 43,984 rentable
square feet located in two states. The properties are 100% leased
to the United States of America and, based on aggregate net
operating income of each property, have a weighted average
remaining lease term of 9.7 years and 9.4 years if none of the
early termination rights are exercised and 6.7 years and 6.2 years
if all of the early termination rights are exercised as of June 30,
2017 and June 30, 2016, respectively. The Company and its assets
are managed externally by Holmwood Capital Advisors, LLC and its
subsidiary Holmwood Capital Management, LLC (collectively
“HCA” or “Asset Manager”). The
Company operates as an UPREIT and plans to elect to be treated as a
real estate investment trust, or REIT, for federal income tax
purposes under the Internal Revenue Code of 1986, as amended, or
the Code, beginning with the taxable year ended December 31,
2017.
2.
Significant Accounting Policies
Basis of Accounting and Consolidation
Basis - The
accompanying consolidated financial statements include the accounts
of the subsidiary and eleven SPEs as of June 30, 2017 including
transactions whereby the Company has been determined to have
majority voting interest, or has both control and is the primary
beneficiary in accordance with the Financial Accounting Standards
Board (“FASB”) guidance. All other significant
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates
and assumptions.
Cash and Cash Equivalents - Cash and cash equivalents include all
cash and liquid investments with an initial maturity of three
months or less when purchased. At times, the Company’s cash
and cash equivalents balance deposited with financial institutions
may exceed federally insurable limits. The Company mitigates this
risk by depositing funds with major financial institutions. The
Company has not experienced any losses in connection with such
deposits.
Organizational, Offering and Related Costs
- Organizational and offering costs of the Company include
expenses paid by the Company in connection with the formation of
the Company and the qualification of the Offering, and the
marketing and distribution of shares, including, without
limitation, expenses for printing, and amending offering statements
or supplementing offering circulars, mailing and distributing
costs, advertising and marketing expenses, charges of experts and
fees, expenses and taxes related to the filing, registration and
qualification of the sale of shares under federal and state laws,
including taxes and fees and accountants’ and
attorneys’ fees. As of June 30, 2017 and December 31, 2016,
organizational and offering costs totaled $1,410,764 and $1,074,485
respectively.
Deposits in Escrow – As of June 30, 2017 and December
31, 2016, deposits in escrow represent cash held by a lender which
are restricted for real estate tax and insurance
expenses.
Purchase Accounting for Acquisitions of Real
Estate Subject to a Lease - In accordance with the FASB
guidance on business combinations, the Company determines the fair
value of the real estate assets acquired on an “as if
vacant” basis. The difference between the purchase price and
the fair value of the real estate assets on an “as if
vacant” basis is first allocated to the fair value of above-
and below-market leases, and then allocated to in-place leases and
lease-up costs.
Management
estimates the “as if vacant” value considering a
variety of factors, including the physical condition and quality of
the buildings, estimated rental and absorption rates, estimated
future cash flows, and valuation assumptions consistent with
current market conditions. The “as if vacant” fair
value is allocated to land and buildings and improvements based on
relevant information obtained in connection with the acquisition of
the property, including appraisals and property tax assessments.
Above-market and below-market lease values are determined on a
lease-by-lease basis based on the present value (using an interest
rate that reflects the risk associated with the leases acquired) of
the difference between (a) the contractual amounts to be paid under
the lease and (b) management’s estimate of the fair market
lease rate for the corresponding space over the remaining
non-cancelable terms of the related leases. Above (below) market
lease values are recorded as leasehold intangibles and are
recognized as an increase or decrease in rental income over the
remaining non-cancelable term of the lease.
Additionally,
in-place leases are valued in consideration of the net rents earned
that would have been foregone during an assumed lease-up period;
and lease-up costs are valued based upon avoided brokerage fees.
The Company has not recognized any value attributable to customer
relationships. The difference between the total of the calculated
values described above, and the actual purchase price plus
acquisition costs, is allocated pro-ratably to each component of
calculated value. In-place leases and lease-up costs are amortized
over the remaining non-cancelable term of the leases. Real estate
values were determined by independent accredited
appraisers.
Building assets are
depreciated over a 40-year period, tenant improvements and the
leasehold intangibles are amortized over the remaining
non-cancelable term of the lease. In the event that a tenant
terminates its lease, the unamortized portion of the in-place lease
and lease-up costs are charged to expense immediately.
The Company’s
real estate is leased to tenants on a modified gross lease basis.
The leases provide for a minimum rent which normally is flat during
the firm term of the lease. The minimum rent payment may include
payments to pay for lessee requests for tenant improvement or to
cover the cost for extra security. The tenant is required to pay
increases in property taxes over the first year and an increase in
operating costs based on the consumer price index of the
lease’s base year operating expenses. Operating costs
includes repairs and maintenance, cleaning, utilities and other
related costs. Generally, the leases provide the tenant with
renewal options, subject to generally the same terms and conditions
of the base term of the lease. The Company accounts for its leases
using the operating method. Such method is described
below:
Operating method – Properties
with leases accounted for using the operating method are recorded
at the cost of the real estate. Revenue is recognized as rentals
are earned and expenses (including depreciation and amortization)
are charged to operations as incurred. Buildings are depreciated on
the straight-line method over their estimated useful lives.
Leasehold interests are amortized on the straight-line method over
the terms of their respective leases. When scheduled rentals vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the term of
the lease.
Construction
expenditures for tenant improvements, leasehold improvements and
leasing commissions are capitalized and amortized over the
remaining terms of each specific lease. Maintenance and repairs are
charged to expense during the financial period in which they are
incurred. Expenditures for improvements that extend the useful life
of the real estate investment are capitalized. Upon sale or
disposition of the investment in real estate, the cost and related
accumulated depreciation and amortization are removed from the
accounts with the resulting gain or loss included as a component of
net income (loss) during the period in which the disposition
occurred.
Impairment – Real Estate - The Company reviews
investments in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not
be recoverable. To determine if impairment may exist, the Company
reviews its properties and identifies those that have had either an
event of change or an event of circumstances warranting further
assessment of recoverability (such as a decrease in occupancy). If
further assessment of recoverability is needed, the Company
estimates the future net cash flows expected to result from the use
of the property and its eventual disposition, on an individual
property basis. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the
carrying amount of the property on an individual property basis,
the Company will recognize an impairment loss based upon the
estimated fair value of such property. As of June 30, 2017,
the Company has not recorded any impairment charges.
Tenant Improvements - As part of the leasing process, the
Company may provide the lessee with an allowance for the
construction of leasehold improvements. These leasehold
improvements are capitalized and recorded as tenant improvements,
and depreciated over the shorter of the useful life of the
improvements or the remaining lease term. If the allowance
represents a payment for a purpose other than funding leasehold
improvements, or in the event the Company is not considered the
owner of the improvements, the allowance is considered to be a
lease incentive and is recognized over the lease term as a
reduction of minimum rent revenue. Factors considered during this
evaluation include, among other things, who holds legal title to
the improvements as well as other controlling rights provided by
the lease agreement and provisions for substantiation of such costs
(e.g. unilateral control of the tenant space during the build-out
process). Determination of the appropriate accounting for the
payment of a tenant allowance is made on a lease-by-lease basis,
considering the facts and circumstances of the individual tenant
lease. No tenant allowances were provided year-to-date June 30,
2017 and during the period from March 11, 2016 (inception) to June
30, 2016.
Revenue Recognition - Minimum rents are recognized when due
from tenants; however, minimum rent revenues under leases which
provide for varying rents over their terms, if any, are straight
lined over the term of the leases. In the case of expense
reimbursements due from tenants, the revenue is recognized in the
period in which the related expense is incurred.
Rents and Other Tenant Accounts Receivables,
net - Rents and other tenant accounts receivables represent
amounts billed and due from tenants. When a portion of the
tenants’ receivable is estimated to be uncollectible, an
allowance for doubtful accounts is recorded. Due to the high credit
worthiness of the tenant, there were no allowances as of June 30,
2017 and December 31, 2016, respectively.
Income Taxes – The Company
accounts for income taxes using the asset and liability approach
for the recognition of deferred tax assets and liabilities for the
expected future tax consequences attributable to differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
statutory tax rates applicable to the future years in which the
deferred amounts are expected to be settled or realized. The effect
of changes in tax rates is recognized in the provision for income
tax in the period the change in rates is enacted. Significant
judgment is required in determining income tax provisions and
evaluating tax provisions under the accounting guidance for income
taxes.
Management
determines whether a tax position of the Company is more likely
than not to be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the technical
merits of the position. For tax positions meeting the more likely
than not threshold, the tax amount recognized in the consolidated
financial statements is reduced by the largest benefit that has a
greater than fifty percent likelihood of being realized upon
ultimate settlement with the relevant taxing authority. As of June
30, 2017 and June 30, 2016, the Company has not identified any
uncertain tax positions requiring an
accrual.
Noncontrolling Interests -
Noncontrolling interests represents the portion of equity
in the Company’s Operating Partnership not attributable to
the REIT. Accordingly, noncontrolling interests are included in the
equity section of the consolidated balance sheets but separate from
the Company’s equity. On the consolidated statements of
operations, the subsidiaries are reported at the consolidated
amount, including both the amount attributable to the Company and
noncontrolling interests. Consolidated statements of changes in
equity include beginning balances, activity for the period and
ending balances for shareholders’ equity, noncontrolling
interests and total equity.
The noncontrolling
interest of the Operating Partnership common unit holders is
calculated by multiplying the noncontrolling interest ownership
percentage at the balance sheet date by the Operating
Partnership’s net assets (total assets less total
liabilities). The noncontrolling interest percentage is calculated
at any point in time by dividing the number of units not owned by
the Company by the total number of units outstanding. The
noncontrolling interest ownership percentage will change as
additional units are issued or as units are exchanged for the
Company’s $0.001 par value per share common stock.
In accordance with GAAP, any changes in the value from period to
period are charged to additional paid-in capital.
Debt Costs – Mortgages Payable – Debt costs
incurred in connection with the Company’s mortgages payable
have been deferred and are being amortized over the term of the
respective loan agreements using the straight-line method, which
approximates the effective interest method and are recorded in
Mortgages payable on the Consolidated Balance Sheet. For the
six-month period ended June 30, 2017 and for the period from March
11, 2016 (date of inception) to June 30, 2016, the Company incurred
total gross debt issuance costs of $256,565 and $105,072,
respectively. The accumulated amortization related to these debt
issuance costs as of June 30, 2017 and December 31, 2016 was
$49,304 and $19,584, respectively.
Recent Accounting Pronouncements
- In May 2014, the FASB
issued ASU 2014-09, “Revenue from Contracts with
Customers,” which supersedes the revenue recognition
requirements of Accounting Standards Codification
(“ASC”) Topic 605, “Revenue Recognition”
and most industry-specific guidance on revenue recognition
throughout the ASC. The new standard is principles based and
provides a five step model to determine when and how revenue is
recognized. The core principle of the new standard is that revenue
should be recognized when a company transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. The new standard also requires disclosure of
qualitative and quantitative information surrounding the amount,
nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. The new standard will be effective
for the Company for the year ending December 31, 2019 and can be
applied either retrospectively to all periods presented or as a
cumulative-effect adjustment as of the date of adoption. Early
adoption is permitted beginning for the year ending December 31,
2017. The Company is currently evaluating the impact of adoption of
the new standard on its consolidated financial
statements.
In February 2016,
the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 is
intended to improve financial reporting about leasing transactions.
The ASU will require organizations that lease assets referred
to as “Lessees” to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by
those leases with lease terms of more than 12 months. An
organization is to provide disclosures designed to enable users of
financial statements to understand the amount, timing, and
uncertainty of cash flows arising from leases. These disclosures
include qualitative and quantitative requirements concerning
additional information about the amounts recorded in the financial
statements. The leasing standard will be effective for the
year ended December 31, 2020.
Early adoption will
be permitted upon issuance of the standard and a modified
retrospective approach must be applied. See Note 7 for the
Company’s current lease commitments. The Company is currently
evaluating the impact of ASU 2016-02 on its financial
statements.
In August 2016, the
FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments.”
ASU 2016-15 is intended to improve cash flow statement
classification guidance. The standard will be effective for fiscal
years beginning after December 15, 2018. The Company is currently
evaluating the impact of ASU 2016-15 on its financial
statements.
In January 2017,
the FASB issued ASU 2017-01, "Business Combinations (Topic 805):
Clarifying the Definition of a Business.” ASU 2017-01 is
intended to help companies evaluate whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses. The standard will be effective for fiscal years
beginning after December 15, 2018. The Company is currently
evaluating the impact of ASU 2017-01 on its financial
statements.
Other accounting
standards that have been issued or proposed by the FASB or other
standard-setting bodies are not currently applicable to the Company
or are not expected to have a significant impact on the
Company’s financial position, results of operations and cash
flows.
3.
Investment
in Real Estate
Pursuant to a
contribution agreement, as amended between our predecessor,
Holmwood Capital, LLC (“predecessor” or
“Holmwood”) and our Operating Partnership, all of the
membership interests in four of our predecessor’s
subsidiaries were contributed to our Operating Partnership in
exchange for common units (the “OP Units”). In
addition, in exchange for all of the profits, losses, any
distributed cash flow and all of the other benefits and burdens of
ownership for federal income taxes for three of our
predecessor’s subsidiaries, our Operating Partnership issued
OP Units as if the membership interests of such subsidiaries also
had been contributed to our Operating Partnership at the date of
closing.
The number of OP
Units issued in connection with this transaction was calculated
based upon the agreed value of our predecessor’s equity, plus
principal amortization paid by our predecessor from January 1, 2016
to and including the date the contribution was made (May 26, 2017),
divided by $10 per OP Unit. The equity value for the membership
interests and the rights to the profits, losses, distributed cash
flow and all of the other benefits and burdens of ownership,
determined as of the date of the contribution, was $10,974,023,
which was reduced by an outstanding balance on an advance of
$189,862 by the REIT. The OP Units can be redeemed in exchange for
shares of our common stock on a 1:1 basis.
In addition, as of
the date of closing, our Operating Partnership assumed the
outstanding mortgage indebtedness associated with each of the
underlying properties, aggregating $22,585,285, as well as notes
payable aggregating $1,132,038. The notes were repaid by our
Operating Partnership on the contribution date. The Company entered
into a tax protection agreement indemnifying Holmwood for any taxes
resulting from a sale for a period of ten years after the date of
closing.
The Company
acquired a 53,917 rentable square foot building leased to the
United States of America on March 31, 2017 for a purchase price of
$14,500,000 excluding acquisition costs. The acquisition was
financed by first mortgage debt of $10,875,000 and the proceeds
from unsecured loans to our Operating Partnership from two
principals of our predecessor and a third-party aggregating
$3,400,000 (the “unsecured debt”) (see Note 5). The
Company’s initial acquisition included three properties
purchased in June 2016. The results of the property operations are
included in the consolidated financial statements from their date
of acquisition.
A summary of the
Company’s contributed and acquired properties for the
six-month period ended June 30, 2017 and for the period from March
11, 2016 to June 30, 2016 is as follows:
|
Date
|
|
|
|
Acquired/
|
|
|
Contributed
|
|
|
2017 Contributed Properties
|
|
|
|
Lorain,
OH
|
May
2017
|
$3,764,784
|
$-
|
Jonesboro,
AR
|
May
2017
|
7,075,744
|
-
|
PSL
- Port Saint Lucie, FL
|
May
2017
|
5,107,182
|
-
|
Fort
Smith, AR
|
May
2017
|
3,512,142
|
-
|
Johnson
City, TN
|
May
2017
|
4,501,956
|
-
|
Cape
Canaveral, FL
|
May
2017
|
6,589,675
|
-
|
Silt,
CO
|
May
2017
|
3,950,000
|
-
|
|
34,501,483
|
-
|
2017 Acquisitions
|
|
|
|
Norfolk,
VA
|
March
2017
|
14,788,473
|
-
|
|
|
|
2016 Acquisitions
|
|
|
|
Lawton,
OK
|
June
2016
|
-
|
2,287,688
|
Moore,
OK
|
June
2016
|
-
|
5,015,422
|
Lakewood,
CO
|
June
2016
|
-
|
3,747,486
|
|
$49,289,956
|
$11,050,596
|
The purchase price
allocations for properties contributed and acquired for the
six-month period ended June 30, 2017 and acquired during the period
from March 11, 2016 and December 31, 2016 were based on estimated
fair values. A summary is as follows:
Land
|
$4,411,240
|
$841,155
|
Buildings
and improvements
|
40,858,415
|
8,420,511
|
Tenant
improvements
|
1,454,569
|
1,418,354
|
Acquired
in-place leases
|
1,238,310
|
366,167
|
Acquired
lease-up costs
|
1,427,077
|
268,127
|
Above(below)-market
leases
|
(99,656)
|
(263,718)
|
|
$49,289,956
|
$11,050,596
|
The properties are
100% leased to the United States of America and administered by
General Services Administration (GSA) or occupying agency. The
average lease term is 10.1 years for the total lease term and 7.1
years if GSA elects its’ early termination right. Lease
maturities range from 2021 to 2027.
The expected future
amortization of above (below)-market leases and acquired in-place
lease value and acquired lease-up costs (combined intangible lease
costs) totaled $2,797,169 as of June 30, 2017. A summary of the
components are as follows:
|
|
|
|
|
|
|
|
|
Year
ending June 30:
|
|
|
2018
|
$(75,282)
|
$474,909
|
2019
|
(74,753)
|
489,427
|
2020
|
(74,285)
|
484,043
|
2021
|
(67,367)
|
465,886
|
2022
|
(50,819)
|
324,391
|
Thereafter
|
3,766
|
897,253
|
|
$(338,740)
|
$3,135,909
|
Accretion of
above-market leases resulted in a net increase in rental revenues
of $7,669 for the six-month period ended June 30, 2017.
Amortization of below-market leases resulted in a decrease in
rental revenues of $994 for the period from March 11, 2016 (date of
inception) to June 30, 2016. Amortization of in-place leases and
lease-up costs was $105,316 for the six-month period ended June 30,
2017 and $6,663 for the period from March 11, 2016 (date of
inception) to June 30, 2016.
Summary of Investments - The following is a
summary of Investment in real estate, net as of June 30, 2017 and
December 31, 2016, respectively:
|
|
|
Land
|
$5,252,395
|
$841,155
|
Buildings
and improvements
|
49,278,926
|
8,420,511
|
Tenant
improvements
|
2,872,923
|
1,418,354
|
|
57,404,244
|
10,680,020
|
Accumulated
depreciation
|
(632,590)
|
(244,029)
|
Investments
in real estate, net
|
$56,771,654
|
$10,435,991
|
The following is a
summary of Leasehold intangibles, net:
Acquired
in-place leases
|
$1,604,477
|
$366,167
|
Acquired
lease-up costs
|
1,695,204
|
268,127
|
Acquired
above-(below) market lease
|
(363,373)
|
(263,718)
|
|
2,936,308
|
370,576
|
Accumulated
amortization
|
(139,139)
|
(44,297)
|
Leasehold
intangibles, net
|
$2,797,169
|
$326,279
|
Mortgages Payable - The Company’s mortgage notes
totaled $40,241,084 and $7,068,067, net of unamortized debt costs
of $207,261 and $85,488 as of June 30, 2017 and December 31, 2016,
respectively. The loans are collateralized by the Company’s
respective properties. Loans in the amount of $30,362,078 and
$7,225,000, bear interest as a fixed annum rate of 4.40% and 3.93%,
as of June 30, 2017 and December 31, 2016, respectively. The
variable rate loans of $10,086,268 as of June 30, 2017 averaged
3.61%. The average remaining loan term as of June 30, 2017 and
December 31, 2016 was 3.8 years and 2.4 years,
respectively.
The following is a
schedule of the principal payments of the Company’s mortgages
and notes payable as of June 30, 2017.
|
|
|
|
|
|
2018
|
$10,900,571
|
$5,405,271
|
2019
|
19,879,661
|
-
|
2020
|
216,501
|
-
|
2021
|
228,179
|
-
|
2022
|
240,487
|
-
|
Thereafter
|
8,982,946
|
-
|
|
$40,448,345
|
$5,405,271
|
On March 31, 2017,
the Operating Partnership entered into a note payable agreement
with two principals of our predecessor and a third-party
aggregating $3,400,000 in connection with the Company’s 2017
property acquisition. The unsecured, interest-only loan bears
interest at a fixed annum rate of 12% and matures on March 31,
2018. The note is pre-payable without penalty prior to the maturity
date after the note has been held for six months.
On June 10, 2016,
the Operating Partnership entered into a note payable agreement in
the amount of $2,019,789 with the seller (“Seller”
Note) of the Company’s 2016 acquisitions. The loan bears
interest at a fixed annum rate of 7.0% and debt service payments
are based on monthly principal amortization over 20 years. The note
matures on the earlier of December 10, 2017, or the date on which
the Company has completed a public securities offering (including
its Tier II, Regulation A), or the date on which the properties are
conveyed or refinanced by the Company. The note is pre-payable
prior to the maturity date at any time without penalty. For the
six-month period ended June 30, 2017 and for the period of June 10,
2016 (the date when properties were acquired) to June 30, 2016,
principal repayments totaled $24,588 and $0,
respectively.
On November 7,
2016, the REIT entered into a one-year fully amortizing note
payable in the amount of $124,000 to finance certain corporate
costs. The loan bears interest at a fixed annum rate of 4.8%. As of
June 30, 2017, the outstanding balance was $37,718.
Related party receivables – The
Company advanced funds of $410,861 to Holmwood primarily related to
its refinancing of a certain property, which balance had been
reduced to $189,862 immediately prior to the closing of the
transactions contemplated in the Contribution Agreement. The
balance was subsequently repaid entirely in connection with the
closing of the transactions contemplated in the Contribution
Agreement. In May, 2017, in connection with the contribution
transaction (see Note 3), this amount was repaid. In addition, the
Company advanced the Asset Manager funds to cover certain working
capital needs. As of June 30, 2017 and December 31, 2016, the net
funds advanced to the asset manager totaled $109,536 and $114,536,
respectively.
Related party management fees - The
Asset Manager provides acquisition, asset management, property
management and leasing services for the Company. For acquisition
services, the Company will pay the Asset Manager 1% of the gross
purchase price of properties acquired following the initial closing
of the Company’s escrow related to its offering (see Note 9).
The fees will be accrued and paid by issuance of the
Company’s stock simultaneously with the initial listing of
the Company’s stock on a national securities exchange or on
March 31, 2020, whichever occurs, first. For the six-month period
ended June 30, 2017 and for the period March 11, 2016 (date of
inception) to June 30, 2016, deferred acquisition fees totaled
$145,000 and $0, respectively.
The Company pays
the Asset Manager an asset management fee equal to 1.5% of the
stockholders’ equity adjusted as defined in the offering
circular, payable, in arrears, on a quarterly basis. In connection
with this agreement, Asset Manager’s fees were $40,127 and
$7,295 as of June 30, 2017 and June 30, 2016, respectively. In
addition, for some properties, the Company pays property management
fees, payable on a monthly basis, in arrears, at market-standard
rates. In connection with this agreement, the Company paid the
Asset Manager’s property management fees of $33,436 and
$2,297, for the six-month period ended June 30, 2017 and for the
period from March 11, 2016 (date of inception) to June 30, 2016,
respectively.
The Company agrees
to pay the Asset Manager a leasing fee equal to 2.0% of all gross
rent due during the term of the lease or lease renewal, excluding
reimbursements by the tenant for operating expenses and taxes and
similar pass-through obligations paid by the tenant for any new
lease or lease renewal entered into or exercised during the term of
the Management Agreement. No leasing fees were paid for the
six-month period ended June 30, 2017 or for the period from March
11, 2016 (date of inception) to June 30, 2016.
Occupancy of the
operating properties was 100% for the six-month period ended June
30, 2017 and for the period from March 11, 2016 (date of inception)
to June 30, 2016. Lease terms range from four to twelve years as of
June 30, 2017. The future minimum rents for existing leases as of
June 30, 2017 are as follows:
|
|
|
|
|
|
2018
|
$6,147,748
|
2019
|
6,147,748
|
2020
|
6,147,748
|
2021
|
5,653,233
|
2022
|
5,271,077
|
Thereafter
|
11,784,659
|
Total
|
$41,152,213
|
Net losses for the
six-month period ended June 30, 2017 and for the period from March
11, 2016 (date of inception) to June 30, 2016 differs from taxable
losses due to temporary differences primarily relating to different
methods utilized to account for depreciation and
amortization.
The
Company is required to provide a reserve against deferred tax
assets when it is likely that deferred tax assets will not be
realized. The Company recorded a valuation allowance of $46,368 at
December 31, 2016 due to uncertainty surrounding the utilization of
the tax assets. The tax effects of temporary differences that give
rise to significant portions of the deferred tax assets and
liabilities as of June 30, 2017 is presented below, assuming an
effective combined U.S. federal and state statutory tax rate of
37.7 percent.
|
|
Deferred
tax assets
|
|
Book
over tax depreciation fixed assets
|
$263,277
|
Total
deferred tax assets
|
263,277
|
|
|
Deferred
tax liabilities
|
|
Tax
over book amortization intangibles
|
216,909
|
Valuation
allowance
|
46,368
|
Total
deferred tax liabilities
|
263,277
|
|
|
Deferred
tax, net
|
$-
|
The Company plans
to elect to be treated as a real estate investment trust, or REIT,
for federal income tax purposes under the Internal Revenue Code of
1986, as amended, or the Code, beginning with the taxable year
ended December 31, 2017. Therefore, no additional reserve was
estimated as of June 30, 2017.
Between March 11,
2016 (date of inception) and June 30, 2016, the Company issued
144,500 shares of its 7.00% Series A Cumulative Convertible
Preferred Stock, or the Series A Preferred Stock, to various
investors in exchange for a total of $3,612,500, or $25 per share
of Series A Preferred Stock. The Series A Preferred Stock is
convertible upon the Company’s listing on a national
securities exchange or can be exchanged at the end of four years or
March 31, 2020, at the owners’ request whichever comes first.
The shares are convertible into common shares at a 3:1
ratio.
The Company paid
quarterly dividends totaling $126,438 during the six-month period
ending June 30, 2017. No dividends were paid during the period
March 11, 2016 (date of inception) to June 30, 2016 to holders of
the Series A Preferred Stock. The Company paid dividends in the
amount of $63,219 for holders of record of the Series A Preferred
Stock as of June 30, 2017 on July 14, 2017.
On March 14, 2016,
the Company issued 50,000 shares (200,000 shares, collectively) of
common stock at a price of $0.01 a share to each of Messrs. Robert
R. Kaplan, Robert R. Kaplan, Jr., Edwin M. Stanton and Philip
Kurlander, founders of the Company. Total consideration was $500
per person.
In connection with
the Company’s offering under the Securities and Exchange
Commission (“SEC”) guidelines (the
“Offering”), the Company offers a minimum of 300,000
and a maximum of 3,000,000 shares of our common stock at an
offering price of $10 per share, for a minimum offering amount of
$3,000,000 and a maximum offering amount of $30,000,000. The
Offering was qualified by the SEC on November 7, 2016. The Company
reached its minimum offering and completed its initial closing on
May 18, 2017. Simultaneously to the initial closing, Robert R.
Kaplan, Jr., resigned as a member of the board of directors and the
remaining directors increased the board seats to seven members and
appointed four independent directors to fill the expansion
seats.
During the period
from May 18, 2017 to June 30, 2017, the Company issued 407,922
shares of common stock for $3,711,448, net of issuance costs, in
connection with its offering.
On May 26, 2017, in
connection with the closing on the contribution (see Note 3), the
Company’s Operating Partnership issued 1,078,416 OP Units in
exchange for all of the membership interests in four single-member
limited liability companies and the rights to all of the profits,
losses, any distributed cash flow and all of the benefits and
burdens of ownership for three properties. The number of units
issued represents the agreed value of the equity in the
contribution properties as of the date of closing of the
contribution, divided by $10. The OP Units can be exchanged into
the common shares of the REIT on a 1:1 basis.
Compensation to an
independent board member includes an initial share grant of 4,000
restricted common shares with a one-year vesting schedule. The
Company issued 16,000 shares on May 18, 2017, the date of their
appointment to the board, to its 4 independent board members,
collectively. The shares, valued at $10 per share, pay dividends on
the number of shares issued without regard to the number of shares
vested. For the six-month period ended June 30, 2017, the Company
recognized $106,667 related to stock based
compensation.
In addition, HC
Government Realty Holdings LP issued the Company’s asset
manager, 66,056 long term incentive plan shares
(“LTIPs”) that vest over five-years. The LTIPs are
issued concurrent with each closing where the Company issues common
stock. The vesting will accelerate if the Company terminates is
management agreement with its asset manager. The asset manager is
entitled to hold 3% of the Company’s issued and outstanding
shares on a fully diluted basis. Dividends are paid on the number
of LTIPs issued. For the six-month period ended June 30, 2017, the
Company recognized $3,893 as stock based compensation.
On July 14, 2017,
the Company paid dividends of $63,219 on issued and outstanding
preferred shares and paid dividends of $40,536 on issued and
outstanding common shares to owners of record as of June 30, 2017.
Simultaneously, the Operating Partnership made common units
distributions of $70,065 to Holmwood, the holder of the operating
partnership units and paid dividends of $4,292 to HCA for its
outstanding LTIPs issued under the LTIPs program as of June 30,
2017.
10.
Commitments
and Contingencies
In the normal
course of business, the Company can be involved in legal actions
arising from the ownership of its properties. In the
Company’s opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have
a materially adverse effect on the financial position, operations
or liquidity of the Company.
On July 25, 2017,
the Company acquired a 21,116 rentable square foot building located
in montgomery, Alabama and leased to the United States of America
and occupied by United States Customs and Immigration
Administration for a purchase price of $4,709,458 excluding
acquisition costs. The acquisition was financed by senior debt
financing and equity. The Company incurred an acquisition fee of
$47,095 payable to its asset manager upon listing on a national
exchange or March 31, 2020, whichever comes first.
The Company has
entered into separate purchase and sale agreements to acquire two
properties leased to the United States of America and occupied by
United States Immigration and Customs Enforcement and United States
Department of Agriculture, respectively. The contract purchase
prices are $8,175,000 and $11,000,000, respectively, and are
expected to close in November 2017 and February 2018, respectively.
Each acquisition will be financed by senior debt financing and
equity. The Company has acquisition deposits outstanding in the
amount of $150,000 as of June 30, 2017.
The Company
refinanced an existing loan in the amount of $10,875,000 on July
11, 2017. The new loan bears interest at a fixed annual rate of 4%,
debt service payments are based on principal amortization over 25
years and the loan matures in July 2022. The loan is pre-payable
without penalty and collateralized by the property. Debt issuance
costs of $189,732 were incurred and will be amortized over five
years, the term of the new loan. Unamortized debt issuance costs of
$134,285, related to the property’s retired loan, were
expensed.
The Company
refinanced its maturing loan with a principal balance of $3,069,733
in September 2017 with a loan in the amount of $2,750,000. The new
loan bears interest as a fixed annual rate of 4%, debt service
payments are based on principal amortization over 25 years and the
loan matures in five years from the date of the loan closing. The
loan is pre-payable without penalty and collateralized by the
property.
The Company issued
148,796 additional shares of common stock under its offering
for approximately
$1,368,533, net of issuance costs through the date of filing this
report.
The Company
evaluated subsequent events through the date of filing this report.
The Company concluded no additional material events subsequent to
June 30, 2017 were required to be reflected in the Company’s
consolidated financial statements or notes as required by standards
for accounting disclosures of subsequent events.
Report
of Independent Registered Public Accounting Firm
To the Board of
Directors and Stockholders
of HC Government
Realty Trust, Inc.
Sarasota,
Florida
We have audited the
accompanying consolidated balance sheet of HC Government Realty
Trust, Inc. (a Maryland Corporation) (the “Company”),
as of December 31, 2016, and the related consolidated statements of
operations, changes in stockholders’ equity and cash flows
for the period from March 11, 2016 (date of inception) to December
31, 2016. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our
audit.
We conducted our
audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and 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 consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HC
Government Realty Trust, Inc. as of December 31, 2016 and the
results of its operations and its cash flows for the period from
March 11, 2016 (date of inception) to December 31, 2016 in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Cherry Bekaert
LLP
Richmond,
VA
April 27,
2017
HC
Government Realty Trust, Inc.
Consolidated
Balance Sheet
December
31, 2016
|
|
ASSETS
|
|
Investment in real
estate, net:
|
$10,435,991
|
|
|
Cash and cash
equivalents
|
247,137
|
Deposits in
escrow
|
51,656
|
Rent and other
tenant accounts receivables, net
|
126,590
|
Related parties
receivables
|
525,397
|
Prepaids and other
assets
|
182,376
|
Leasehold
intangibles, net
|
326,279
|
Total
Assets
|
$11,895,426
|
|
|
LIABIILTIES
|
|
Mortgages payable,
net of unamortized debt costs
|
$7,068,067
|
Note
payable
|
1,992,140
|
Other note
payable
|
111,821
|
Accrued interest
payable
|
35,379
|
Other
liabilities
|
378,684
|
Total
Liabilities
|
9,586,091
|
|
|
STOCKHOLDERS'
EQUITY
|
|
Preferred stock
($0.001 par value, 750,000,000 shares authorized
|
3,612,500
|
and 144,000 shares
issued and outstanding)
|
|
Common stock
($0.001 par value, 250,000,000 shares authorized
|
2,000
|
and 2,000 shares
issued and outstanding)
|
|
Offering
costs
|
(1,074,485)
|
Accumulated
deficit
|
(230,680)
|
Total
Stockholders' Equity
|
2,309,335
|
Total
Liabilities and Stockholders' Equity
|
$11,895,426
|
See accompanying notes to consolidated financial
statements
HC
Government Realty Trust, Inc.
Consolidated
Statement of Operations
From
March 11, 2016 (date of inception) to December 31,
2016
Revenues:
|
|
Rental
revenues
|
$720,850
|
Real estate tax
reimbursments and other revenues
|
26,627
|
Total
Revenues
|
747,477
|
|
|
Other Property
Operations:
|
|
Repairs and
maintenance
|
36,373
|
Utilities
|
35,267
|
Real estate and
other taxes
|
50,723
|
Depreciation and
amortization
|
302,484
|
Other operating
expense
|
27,298
|
Management
fees
|
57,309
|
Professional
expenses
|
3,864
|
Insurance
|
32,510
|
General and
administrative
|
71,522
|
Total Operating
Expenses
|
617,350
|
|
|
Interest
expense
|
256,171
|
Net
loss
|
(126,044)
|
Less: Preferred
dividends
|
(104,636)
|
Net loss
attributable to common shareholders
|
$(230,680)
|
|
|
Net loss per basic
common shares
|
$(144.18)
|
|
|
Weighted average
number of common shares outstanding, basic
|
1,600
|
See accompanying notes to consolidated financial
statements
HC
Government Realty Trust, Inc.
Consolidated
Statement of Changes in Stockholders’ Equity
From
March 11, 2016 (date of inception) to December 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 11,
2016
|
$-
|
$-
|
|
$-
|
$-
|
|
|
|
|
|
|
Proceeds from
issuance of stock
|
3,612,500
|
2,000
|
|
-
|
3,614,500
|
|
|
|
|
|
|
Dividends
|
-
|
-
|
|
(104,636)
|
(104,636)
|
|
|
|
|
|
|
Offering
Costs
|
-
|
-
|
(1,074,485)
|
-
|
(1,074,485)
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
|
(126,044)
|
(126,044)
|
|
|
|
|
|
|
Balance, December
31, 2016
|
$3,612,500
|
$2,000
|
$(1,074,485)
|
$(230,680)
|
$2,309,335
|
See accompanying notes to consolidated financial
statements
HC
Government Realty Trust, Inc.
Consolidated
Statement of Cash Flows
From
March 11, 2016 (date of inception) to December 31,
2016
|
|
Cash
flows from operating activities:
|
|
Net
loss
|
$(126,044)
|
Adjustments to
reconcile net loss to net cash used in
|
|
operating
activities:
|
|
Depreciation
|
244,029
|
Amortization of
acquired lease-up costs
|
23,862
|
Amortization of
in-place leases
|
34,593
|
Amortization of
above/below-market leases
|
(14,158)
|
Amortization of
debt issuance costs
|
19,584
|
Change in assets
and liabilities
|
|
Rent and other
tenant accounts receivables, net
|
(126,590)
|
Prepaid expense and
other assets
|
(182,376)
|
Deposits in
escrow
|
(51,656)
|
Accounts payable
and other accrued expenses
|
378,684
|
Accrued interest
payable
|
35,379
|
Related party
receivables
|
(525,397)
|
Net cash used in
operating activities
|
(290,090)
|
|
|
Cash
flows from investing activities:
|
|
Investment property
acquisitions
|
(11,050,596)
|
Net cash used in
investing activities
|
(11,050,596)
|
|
|
Cash
flows from financing activities:
|
|
Issuance of common
stock
|
2,000
|
Issuance of
preferred stock
|
3,612,500
|
Offering
costs
|
(1,074,485)
|
Mortgage
proceeds
|
7,225,000
|
Mortgage principal
payments
|
(71,445)
|
Proceeds from
Seller note payable
|
2,019,789
|
Proceeds from other
note payable
|
124,000
|
Notes payable
repayments
|
(39,828)
|
Debt
costs
|
(105,072)
|
Dividends
paid
|
(104,636)
|
Net cash from
financing activities
|
11,587,823
|
|
|
Net increase in
cash and cash equivalents
|
247,137
|
Cash and cash
equivalents, beginning of period
|
-
|
Cash and cash
equivalents, end of period
|
$247,137
|
|
|
Supplemental
cash flow information:
|
|
Interest paid
during the period
|
$201,208
|
See accompanying notes to consolidated financial
statements
Interest paid
during the year
|
|
Interest expense
(per income statement)
|
$256,171
|
Less: Accrued
interest (accounts 20502 and 21020)
|
(35,379)
|
Less: Debt
amortization
|
(19,584)
|
Interest
paid
|
$201,208
|
HC
Government Realty Trust, Inc.
Notes
to the Consolidated Financial Statements
From
March 11, 2016 (date of inception) to December 31,
2016
HC Government
Realty Trust, Inc. (the “REIT” or the “Company),
a Maryland corporation, was formed on March 11, 2016 to primarily source, acquire, own and
manage built-to-suit and improved-to-suit, single-tenant properties
leased by the United States of America through the U.S General
Services Administration (“GSA
Properties”). The Company focuses primarily
on GSA Properties across secondary and smaller markets, within size
ranges of 5,000-50,000 rentable square feet, and in their first
term after construction or retrofit to post-9/11 standards.
Further, the Company selects GSA Properties that fulfill mission
critical or citizen service functions. Leases associated with the
GSA Properties are full faith and credit obligations of the United
States of America and are administered by the U.S. General Services
Administration or directly through the occupying federal agencies,
or collectively the GSA.
The Company owns
its properties through the Company’s subsidiary, HC
Government Realty Holdings, L.P., a Delaware limited partnership
(“Operating Partnership”). The Operating
Partnership invests through wholly-owned special purpose limited
liability companies, or special purpose entities
(“SPE”), primarily in properties across secondary or
smaller markets.
The consolidated
financial statements include the accounts of its Operating
Partnership subsidiary and related SPEs and the accounts of the
REIT. There were three (3) wholly-owned SPEs as of
December 31, 2016 representing 43,984 rentable square feet located
in two states. The properties are 100% leased to the
United States of America and based on net operating income, have a
weighted average remaining lease term of 8.9 years as of December
31, 2016 if none of the early termination rights are exercised and
5.7 years if all of the early termination rights are
exercised. The Company and its assets are managed
externally by Holmwood Capital Advisors, LLC and its subsidiary
Holmwood Capital Management, LLC (collectively “HCA” or
“Asset Manager”). The principal owners of HCA or
their respective affiliates are also the majority owners of the
Company. The Asset Manager makes all investment
decisions for the Company and will have oversight by an independent
board of directors of the Company upon its election in 2017 (See
Note 9).
The Company intends
to operate as an UPREIT and plans to elect to be treated as a real
estate investment trust, or REIT, for federal income tax purposes
under the Internal Revenue Code of 1986, as amended, or the Code,
beginning with the taxable year ended December 31,
2017.
2.
Significant
Accounting Policies
Basis of Accounting and Consolidation
Basis - The
accompanying consolidated financial statements include the accounts
of the subsidiary and the three wholly-owned SPEs including
transactions whereby the Company has been determined to have
majority voting interest, or has both control and is the primary
beneficiary in accordance with the Financial Accounting Standards
Board (“FASB”) guidance. All other
significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates - The preparation of consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates and assumptions.
HC Government Realty Trust,
Inc.
Notes to the Consolidated Financial
Statements
From March 11, 2016 (date of inception) to
December 31, 2016
2. Significant Accounting Policies (continued):
Cash and Cash Equivalents - Cash and cash equivalents include all
cash and liquid investments with an initial maturity of three
months or less when purchased. At times, the
Company’s cash and cash equivalents balance deposited with
financial institutions may exceed federally insurable
limits. The Company mitigates this risk by depositing
funds with major financial institutions. The Company has
not experienced any losses in connection with such
deposits.
Organizational, Offering and Related Costs
- Organizational and offering costs of the Company include
expenses paid by the Company in connection with the formation of
the Company and the qualification of the Offering, and the
marketing and distribution of shares, including, without
limitation, expenses for printing, and amending offering statements
or supplementing offering circulars, mailing and distributing
costs, advertising and marketing expenses, charges of experts and
fees, expenses and taxes related to the filing, registration and
qualification of the sale of shares under federal and state laws,
including taxes and fees and accountants’ and
attorneys’ fees.
Deposits in Escrow - In 2016 deposits in escrow represented
cash held by a lender which are restricted for real estate tax and
insurance expenses. As of December 31, 2016 the balances
include reserves for taxes and insurance.
Purchase Accounting for Acquisitions of Real
Estate Subject to a Lease - In accordance with the FASB
guidance on business combinations, the Company determines the fair
value of the real estate assets acquired on an “as if
vacant” basis. The difference between the purchase price and
the fair value of the real estate assets on an “as if
vacant” basis is first allocated to the fair value of above-
and below-market leases, and then allocated to in-place leases and
lease-up costs.
Management
estimates the “as if vacant” value considering a
variety of factors, including the physical condition and quality of
the buildings, estimated rental and absorption rates, estimated
future cash flows, and valuation assumptions consistent with
current market conditions. The “as if vacant” fair
value is allocated to land and buildings and improvements based on
relevant information obtained in connection with the acquisition of
the property, including appraisals and property tax assessments.
Above-market and below-market lease values are determined on a
lease-by-lease basis based on the present value (using an interest
rate that reflects the risk associated with the leases acquired) of
the difference between (a) the contractual amounts to be paid under
the lease and (b) management’s estimate of the fair market
lease rate for the corresponding space over the remaining
non-cancelable terms of the related leases. Above (below) market
lease values are recorded as leasehold intangibles and are
recognized as an increase or decrease in rental income over the
remaining non-cancelable term of the lease.
Additionally,
in-place leases are valued in consideration of the net rents earned
that would have been foregone during an assumed lease-up period;
and lease-up costs are valued based upon avoided brokerage
fees. The Company has not recognized any value
attributable to customer relationships. The difference
between the total of the calculated values described above, and the
actual purchase price plus acquisition costs, is allocated
pro-ratably to each component of calculated
value. In-place leases and lease-up costs are amortized
over the remaining non-cancelable term of the
leases. Real estate values were determined by
independent accredited appraisers.
Building assets are
depreciated over a 40-year period, tenant improvements and the
leasehold intangibles are amortized over the remaining
non-cancelable term of the lease. In the event that a
tenant terminates its lease, the unamortized portion of the
in-place lease and lease-up costs are charged to expense
immediately.
HC Government Realty Trust,
Inc.
Notes to the Consolidated Financial
Statements
From March 11, 2016 (date of inception) to
December 31, 2016
2. Significant Accounting Policies (continued):
The Company’s
real estate is leased to tenants on a modified gross lease
basis. The leases provide for a minimum rent which
normally is flat during the firm term of the lease. The
minimum rent payment may include payments to pay for lessee
requests for tenant improvement or to cover the cost for extra
security. The tenant is required to pay increases in
property taxes over the first year and an increase in operating
costs based on the consumer price index of the lease’s base
year operating expenses. Operating costs includes
repairs and maintenance, cleaning, utilities and other related
costs. Generally, the leases provide the tenant with
renewal options, subject to generally the same terms and conditions
of the base term of the lease. The Company
accounts for its leases using the operating method. Such
method is described below:
Operating method – Properties
with leases accounted for using the operating method are recorded
at the cost of the real estate. Revenue is recognized as rentals
are earned and expenses (including depreciation and amortization)
are charged to operations as incurred. Buildings are depreciated on
the straight-line method over their estimated useful lives.
Leasehold interests are amortized on the straight-line method over
the terms of their respective leases. When scheduled rentals vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the term of
the lease.
Construction
expenditures for tenant improvements, leasehold improvements and
leasing commissions are capitalized and amortized over the
remaining terms of each specific lease. Maintenance and
repairs are charged to expense during the financial period in which
they are incurred. Expenditures for improvements that
extend the useful life of the real estate investment are
capitalized. Upon sale or disposition of the investment
in real estate, the cost and related accumulated depreciation and
amortization are removed from the accounts with the resulting gain
or loss included as a component of net income (loss) during the
period in which the disposition occurred.
Impairment – Real Estate - The Company reviews
investments in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not
be recoverable. To determine if impairment may exist,
the Company reviews its properties and identifies those that have
had either an event of change or an event of circumstances
warranting further assessment of recoverability (such as a decrease
in occupancy). If further assessment of recoverability
is needed, the Company estimates the future net cash flows expected
to result from the use of the property and its eventual
disposition, on an individual property basis. If the sum
of the expected future net cash flows (undiscounted and without
interest charges) is less than the carrying amount of the property
on an individual property basis, the Company will recognize an
impairment loss based upon the estimated fair value of such
property. As of December 31, 2016, the Company has
not recorded any impairment charges.
Tenant Improvements - As part of the leasing process, the
Company may provide the lessee with an allowance for the
construction of leasehold improvements. These leasehold
improvements are capitalized and recorded as tenant improvements,
and depreciated over the shorter of the useful life of the
improvements or the remaining lease term. If the
allowance represents a payment for a purpose other than funding
leasehold improvements, or in the event the Company is not
considered the owner of the improvements, the allowance is
considered to be a lease incentive and is recognized over the lease
term as a reduction of minimum rent revenue. Factors
considered during this evaluation include, among other things, who
holds legal title to the improvements as well as other controlling
rights provided by the lease agreement and provisions for
substantiation of such costs (e.g. unilateral control of the tenant
space during the build-out process). Determination of
the appropriate accounting for the payment of a tenant allowance is
made on a lease-by-lease basis, considering the facts and
circumstances of the individual tenant lease. No tenant
allowances were provided during the period from inception to
December 31, 2016
HC Government Realty Trust,
Inc.
Notes to the Consolidated Financial
Statements
From March 11, 2016 (date of inception) to
December 31, 2016
2.
Significant Accounting Policies (continued):
Revenue Recognition - Minimum rents are recognized when due
from tenants; however, minimum rent revenues under leases which
provide for varying rents over their terms, if any, are straight
lined over the term of the leases. In the case of expense
reimbursements due from tenants, the revenue is recognized in the
period in which the related expense is incurred.
Rents and Other Tenant Accounts Receivables,
net - Rents and other tenant accounts receivables represent
amounts billed and due from tenants. When a portion of
the tenants’ receivable is estimated to be uncollectible, an
allowance for doubtful accounts is recorded. Due to the
high credit worthiness of the tenant, there were no allowances as
of December 31, 2016.
Income Taxes – The
Company accounts for income taxes using the asset and liability
approach for the recognition of deferred tax assets and liabilities
for the expected future tax consequences attributable to
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and their respective tax
bases. Deferred tax assets and liabilities are measured
using enacted statutory tax rates applicable to the future years in
which the deferred amounts are expected to be settled or
realized. The effect of changes in tax rates is
recognized in the provision for income tax in the period the change
in rates is enacted. Significant judgment is required in
determining income tax provisions and evaluating tax provisions
under the accounting guidance for income taxes.
Management
determines whether a tax position of the Company is more likely
than not to be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the technical
merits of the position. For tax positions meeting the
more likely than not threshold, the tax amount recognized in the
consolidated financial statements is reduced by the largest benefit
that has a greater than fifty percent likelihood of being realized
upon ultimate settlement with the relevant taxing
authority. As of December 31, 2016, the Company has
not identified any uncertain tax positions requiring an
accrual.
Debt Costs – Mortgages Payable – Debt costs
incurred in connection with the Company’s mortgages payable
have been deferred and are being amortized over the term of the
respective loan agreements using the straight-line method, which
approximates the effective interest method and are recorded in
Mortgages payable on the Consolidated Balance Sheet. For
the period from inception to December 31, 2016, the Company had
total gross debt costs of $105,072. The accumulated
amortization related to these debt costs as of December 31, 2016
was $19,584.
Recent Accounting Pronouncements
- In May 2014, the FASB
issued ASU 2014-09, “Revenue from Contracts with
Customers,” which supersedes the revenue recognition
requirements of Accounting Standards Codification
(“ASC”) Topic 605, “Revenue Recognition”
and most industry-specific guidance on revenue recognition
throughout the ASC. The new standard is principles based and
provides a five-step model to determine when and how revenue is
recognized. The core principle of the new standard is that revenue
should be recognized when a company transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. The new standard also requires disclosure of
qualitative and quantitative information surrounding the amount,
nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. The new standard will be
effective for the Company for the year ending December 31, 2019 and
can be applied either retrospectively to all periods presented or
as a cumulative-effect adjustment as of the date of adoption. Early
adoption is permitted beginning for the year ending December 31,
2017. The Company is currently evaluating the impact of
adoption of the new standard on its consolidated financial
statements.
In February 2016,
the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 is
intended to improve financial reporting about leasing transactions.
The ASU will require organizations that lease assets referred
to as “Lessees” to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by
those leases with lease terms of more than 12 months. An
organization is to provide disclosures designed to enable users of
financial statements to understand the amount, timing, and
uncertainty of cash flows arising from leases. These disclosures
include qualitative and quantitative requirements concerning
additional information about the amounts recorded in the financial
statements. The leasing standard will be effective for the
year ended December 31, 2020.
HC Government Realty Trust,
Inc.
Notes to the Consolidated Financial
Statements
From March 11, 2016 (date of inception) to
December 31, 2016
2. Significant Accounting Policies (continued):
Early adoption will
be permitted upon issuance of the standard and a modified
retrospective approach must be applied. See Note 6 for the
Company’s current lease commitments. The Company is currently
evaluating the impact of ASU 2016-02 on its financial
statements.
In August 2016, the
FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments.” ASU 2016-15 is intended to improve cash
flow statement classification guidance. The standard
will be effective for fiscal years beginning after December 15,
2018. The Company is currently evaluating the impact of
ASU 2016-15 on its financial statements.
In January 2017,
the FASB issued ASU 2017-01, "Business Combinations (Topic 805):
Clarifying the Definition of a Business.” ASU
2017-01 is intended to help companies evaluate whether transactions
should be accounted for as acquisitions (or disposals) of assets or
businesses. The standard will be effective for fiscal
years beginning after December 15, 2018. The Company is
currently evaluating the impact of ASU 2017-01 on its financial
statements.
Other accounting
standards that have been issued or proposed by the FASB or other
standard-setting bodies are not currently applicable to the Company
or are not expected to have a significant impact on the
Company’s financial position, results of operations and cash
flows.
3.
Investment
in Real Estate
Acquisitions – The
Company’s initial acquisition included three properties
purchased in June 2016. The results of the property
operations are included in the consolidated financial statements
from their date of acquisition.
|
Date
|
|
|
|
|
2016
Acquisitions
|
|
|
Lawton, OK
|
June
2016
|
$2,287,687
|
Moore, OK
|
June
2016
|
5,015,422
|
Lakewood, CO
|
June
2016
|
3,747,487
|
|
$11,050,596
|
The purchase price
allocations for properties acquired in 2016 were based on estimated
fair values.
|
|
Land
|
$841,155
|
Buildings and
improvements
|
8,420,511
|
Tenant
Improvements
|
1,418,354
|
Acquired In-place
leases
|
366,167
|
Acquired lease-up
costs
|
268,127
|
Above(below)-market
leases
|
(263,718)
|
|
$11,050,596
|
The properties are
100% leased to the United States of America and administered by
General Services Administration (GSA) or occupying
agency. The average lease term is 5.7 years based on the
firm term of the leases. Lease maturities range from
2020 to 2024.
HC Government Realty Trust,
Inc.
Notes to the Consolidated Financial
Statements
From March 11, 2016 (date of inception) to
December 31, 2016
3.
Investment in real estate (continued):
The expected future
amortization of above (below)-market leases and acquired in-place
lease value and acquired lease-up costs (combined intangible lease
costs) are as follows:
|
|
|
|
|
|
|
|
|
Year ending
December 31:
|
|
|
2017
|
$(25,334)
|
$104,637
|
2018
|
(25,334)
|
104,637
|
2019
|
(25,334)
|
104,637
|
2020
|
(24,397)
|
93,869
|
2021
|
(22,821)
|
75,737
|
Thereafter
|
(126,340)
|
92,322
|
|
$(249,560)
|
$575,839
|
Accretion of
above-market leases and amortization of below-market leases
resulted in a net increase in rental revenue of $14,158 during
2016. Amortization of in-place leases and lease-up costs
was $58,455 during 2016.
Summary of Investments - The following is a
summary of Investment in real estate, net as of December 31,
2016:
|
|
Land
|
$841,155
|
Buildings and
improvements
|
8,420,511
|
Tenant
improvements
|
1,418,354
|
|
10,680,020
|
Accumulated
depreciation
|
(244,029)
|
Investments in real
estate, net
|
$10,435,991
|
The
following is a summary of Leasehold intangibles, net:
Acquired in-place
leases
|
$366,167
|
Acquired lease-up
costs
|
268,127
|
Acquired
above-(below) market lease
|
(263,718)
|
|
370,576
|
Accumulated
amortization
|
(44,297)
|
Leasehold
intangibles, net
|
$326,279
|
HC Government Realty Trust,
Inc.
Notes to the Consolidated Financial
Statements
From March 11, 2016 (date of inception) to
December 31, 2016
Mortgages Payable - The Company’s mortgage notes
totaling $7,068,067, net of unamortized debt costs of $85,488, are
payable to one financial institution and are collateralized by the
Company’s three properties. The loan bears
interest as a fixed annum rate of 3.93%, debt service payments are
based on principal amortization over 25 years and the loan matures
in June 2019. The Company considers the loan maturity
date to be the earlier of the stated loan maturity date, the
anticipated repayment date, or the balloon payment
date.
The following is a
schedule of the principal payments of the Company’s mortgage
and notes payable at December 31, 2016.
|
|
|
|
|
|
2017
|
$182,388
|
$2,103,961
|
2018
|
190,275
|
-
|
2019
|
6,780,891
|
-
|
|
$7,153,554
|
$2,103,961
|
On June 10, 2016,
the Operating Partnership entered into a note payable agreement in
the amount of $2,019,789 with the seller (“Seller”
Note) of the Company’s 2016 acquisitions. The loan
bears interest at a fixed annum rate of 7.0% and debt service
payments are based on principal amortization over 20
years. The note matures on the earlier of December 10,
2017, or the date on which the Company has completed a public
securities offering (including its Tier II, Regulation A), or the
date on which the properties are conveyed or refinanced by the
Company. The note is pre-payable prior to the maturity
date at any time without penalty. For the period of June
10, 2016 (the date when properties were acquired) to December 31,
2016, principal repayments totaled $27,649.
On November 7,
2016, the REIT entered into a one-year fully amortizing note
payable in the amount of $124,000 to finance certain corporate
costs. The loan bears interest at a fixed annum rate of
4.8%.
Related party receivables – The
Company advanced funds to Holmwood primarily related to its
refinancing of property debt in June 2016. As of
December 31, 2016, the balance outstanding was
$410,861. Subsequent to December 31, 2016, the Company
received payments of $147,128. In addition, the Company
advanced the Asset Manager funds to cover certain working capital
needs. As of December 31, 2016, the funds advanced
totaled $114,536. Subsequent to December 31, 2016, the
Company received payments of $20,000 from the Asset
Manager.
Related party management fees - The
Asset Manager provides acquisition, asset management, property
management and leasing services for the Company. For
acquisition services, the Company will pay the Asset Manager 1% of
the gross purchase price of properties acquired following the
initial closing of the Company’s escrow related to its
offering (see Note 9). The fees will be accrued and paid
by issuance of the Company’s stock simultaneously with the
initial listing of the Company’s stock on a national
securities exchange or on March 31, 2020, whichever occurs,
first. There are no acquisition fees due as of December
31, 2016.
The Company pays
the Asset Manager an asset management fee equal to 1.5% of the
stockholders’ equity payable, in arrears, on a quarterly
basis. In connection with this agreement, the Company
paid the Asset Manager fees of $35,948. In addition, for
some properties, the Company pays property management fees, payable
on a monthly basis, in arrears, at market-standard rates. In
connection with this agreement, the Company paid the Asset
Manager’s property management fees of $21,361 during the
period from inception to December 31, 2016.
The Company agrees
to pay the Asset Manager a leasing fee equal to 2.0% of all gross
rent due during the term of the lease or lease renewal, excluding
reimbursements by the tenant for operating expenses and taxes and
similar pass-through obligations paid by the tenant for any new
lease or lease renewal entered into or exercised during the term of
the Management Agreement. No leasing fees were paid during the
period from inception to December 31, 2016.
HC Government Realty Trust,
Inc.
Notes to the Consolidated Financial
Statements
From March 11, 2016 (date of inception) to
December 31, 2016
Occupancy of the
operating properties was 100% at December 31,
2016. Lease terms range from four to seven
years. The future minimum rents for existing leases are
as follows:
|
|
|
|
|
|
2017
|
1,243,849
|
2018
|
1,243,849
|
2019
|
1,243,849
|
2020
|
1,138,238
|
2021
|
962,477
|
Thereafter
|
1,223,876
|
Total
|
7,056,138
|
Net loss for the
period ended December 31, 2016 differs from taxable loss due
to temporary differences primarily relating to different methods
utilized to account for depreciation and amortization.
The Company is
required to provide a reserve against deferred tax assets when it
is likely that deferred tax assets will not be
realized. The Company recorded a valuation allowance of
$46,368 due to uncertainty surrounding the utilization of the tax
assets. The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
liabilities for the years ended December 31, 2016 is presented
below, assuming an effective combined U.S. federal and state
statutory tax rate of 37.7 percent.
|
|
Deferred tax
assets
|
|
Book over tax
depreciation fixed assets
|
$263,277
|
Total deferred tax
assets
|
263,277
|
|
|
Deferred tax
liabilities
|
|
Tax over book
amortization intangibles
|
216,909
|
Valuation
allowance
|
46,368
|
Total deferred tax
liabilities
|
263,277
|
|
|
Deferred tax,
net
|
$-
|
Between March 11,
2016 (date of inception) and December 31, 2016, the Company issued
an aggregate 144,000 shares of its 7.00% Series A Cumulative
Convertible Preferred Stock, or the Series A Preferred Stock, to
various investors in exchange for a total of $3,612,500, or $25 per
share of Series A Preferred Stock. The Series A
Preferred Stock is convertible upon the Company’s listing on
a national securities exchange or can be exchanged at the end of
four years or March 31, 2020, at the owners’ request
whichever comes first. The shares are converted into
common shares at a 3:1 ratio.
The Company paid
quarterly dividends of $104,636 during the period from March 11,
2016 (date of inception) to December 31, 2016 to holders of the
Series A Preferred Stock. The Company has not declared
dividends in the amount of $63,219 for holders of record of the
Series A Preferred Stock for the fourth quarter of
2016.
HC Government Realty Trust,
Inc.
Notes to the Consolidated Financial
Statements
From March 11, 2016 (date of inception) to
December 31, 2016
9.
Stockholders’
Equity (continued):
On March 14, 2016,
the Company issued 50,000 shares of common stock at a price of
$0.01 a share to each of Messrs. Robert R. Kaplan, Robert R.
Kaplan, Jr., Edwin M. Stanton and Philip
Kurlander. Total consideration was $500 per
person.
In connection with
the Company’s offering under the Securities and Exchange
Commission (“SEC”) guidelines (the
“Offering”), the Company intends to offer a minimum of
300,000 and a maximum of 3,000,000 shares of our common stock at an
offering price of $10 per share, for a minimum offering amount of
$3,000,000 and a maximum offering amount of
$30,000,000. The Offering was qualified by the SEC on
November 7, 2016. Until the Company has achieved the
minimum offering and has its initial closing, the proceeds for that
closing will be kept in an escrow account. The Company
anticipates closing its escrow by May 2017. The election
of a board of directors will occur once escrow is
broken.
On March 14, 2016,
the Company issued 50,000 shares of common stock at a price of
$0.01 a share to each of Messrs. Robert R. Kaplan, Robert R.
Kaplan, Jr., Edwin M. Stanton and Philip
Kurlander. Total consideration was $500 per
person.
In connection with
the Company’s offering under the Securities and Exchange
Commission (“SEC”) guidelines (the
“Offering”), the Company intends to offer a minimum of
300,000 and a maximum of 3,000,000 shares of our common stock at an
offering price of $10 per share, for a minimum offering amount of
$3,000,000 and a maximum offering amount of
$30,000,000. The Offering was qualified by the SEC on
November 7, 2016. Until the Company has achieved the
minimum offering and has its initial closing, the proceeds for that
closing will be kept in an escrow account. The Company
anticipates closing its escrow by May 2017. The election
of a board of directors will occur once escrow is
broken.
10.
Commitments
and Contingencies
In connection with
the Company’s offering, the Company has entered into a
Contribution Agreement with Holmwood whereby Holmwood’s
membership interests in its seven properties will be exchanged for
985,855 operating partnership units in the Company’s
Operating Partnership. The Company will assume the seven
properties existing indebtedness at the time of
contribution. In addition, as of the closing of the
contribution, the Company will enter into a tax protection
agreement with Holmwood to indemnify it for any taxes resulting
from a sale for a period of ten years after the
closing. The number of Operating Partnership units,
valued at $10 each, was determined by the Company’s Asset
Manager based on prevailing market rates.
In the normal
course of business, the Company can be involved in legal actions
arising from the ownership of its properties. In the
Company’s opinion, the liabilities, if any, that may
ultimately result from such legal actions are not expected to have
a materially adverse effect on the financial position, operations
or liquidity of the Company.
The Company
acquired a 53,917 rentable square foot building leased to the GSA
on March 31, 2017 for a purchase price of $14,500,000 excluding
acquisition costs. The acquisition was financed by
senior debt financing and a loan from our affiliate (See Note
5).
The Company
evaluated subsequent events through April 27, 2017, the date the
financial statements were available to be issued. The
Company concluded no additional material events subsequent to
December 31, 2016 were required to be reflected in the
Company’s consolidated financial statements or notes as
required by standards for accounting disclosures of subsequent
events.
Holmwood
Capital, LLC
Consolidated
Financial Statements – as of May 26, 2017 (unaudited) and
December 31, 2016 (audited) and for the period from January 1, 2017
to May 26, 2017 (date of contribution) (unaudited) and for the
six-month period ended June 30, 2016 (unaudited)
HOLMWOOD CAPITAL, LLC
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
May 26, 2017 (unaudited) and December 31, 2016
(audited)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Investment
in real estate, net:
|
$-
|
$29,107,886
|
|
|
|
Cash
and cash equivalents
|
170,217
|
258,840
|
Deposits
in escrow
|
-
|
239,221
|
Rent
and other tenant accounts receivables, net
|
-
|
336,464
|
Prepaids
and other assets
|
69,965
|
52,579
|
Investment
in HC Government Realty Holdings, LP
|
10,784,161
|
-
|
Leasehold
intangibles, net
|
-
|
1,019,970
|
Total Assets
|
$11,024,343
|
$31,014,960
|
|
|
|
LIABILITIES
|
|
|
Mortgages
payable, net of unamortized debt costs
|
$-
|
$22,455,942
|
Notes
payable
|
-
|
1,387,901
|
Accrued
interest payable
|
-
|
94,942
|
Related
party payable
|
-
|
410,861
|
Other
liabilities
|
102,391
|
405,801
|
Total Liabilities
|
102,391
|
24,755,447
|
|
|
|
PARTNERS' CAPITAL
|
|
|
Partners'
capital, net
|
6,804,872
|
6,804,872
|
Accumulated
deficit
|
4,117,080
|
(545,359)
|
Total Partners' Capital
|
10,921,952
|
6,259,513
|
Total Liabilities and Partners' Capital
|
$11,024,343
|
$31,014,960
|
The accompanying notes are an integral part of the financial
statements.
HOLMWOOD CAPITAL, LLC
|
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
For the period from January 1, 2017 to May 26,
2017 (date of contribution) (unaudited) and for the six-month
period ended June 30, 2016 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
Rental
revenues
|
$1,397,471
|
$1,729,629
|
Real
estate tax reimbursments and other revenues
|
45,322
|
53,763
|
Total
Revenues
|
1,442,793
|
1,783,392
|
|
|
|
Other Property Operations:
|
|
|
Repairs
and maintenance
|
51,480
|
73,664
|
Utilities
|
69,701
|
77,371
|
Real
estate and other taxes
|
121,449
|
167,599
|
Depreciation
and amortization
|
505,641
|
543,246
|
Other
operating expense
|
83,011
|
86,609
|
Management
fees
|
82,161
|
90,154
|
Ground
lease
|
29,550
|
35,450
|
Professional
expenses
|
21,814
|
18,600
|
Insurance
|
16,695
|
26,479
|
General
and administrative
|
3,860
|
12,222
|
Total
Operating Expenses
|
985,362
|
1,131,394
|
|
|
|
Interest
expense
|
489,040
|
588,332
|
Net
income (loss) before extraordinary items
|
(31,609)
|
63,666
|
Gain
on exchange of membership interests for
|
|
|
operating
partnership units
|
4,694,049
|
-
|
Net income
|
$4,662,440
|
$63,666
|
The accompanying notes are an integral part of the financial
statements. In the opinion of management, all adjustments necessary
in order to make the interim financial statements not misleading
have been included.
HOLMWOOD CAPITAL, LLC
|
|
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
|
|
|
|
|
|
|
For the period from January 1, 2017 to May 26,
2017 (date of contribution) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2016
|
$6,804,872
|
$(545,359)
|
$6,259,513
|
|
|
|
|
Net
income
|
-
|
4,662,440
|
4,662,440
|
Balance,
May 26, 2017
|
$6,804,872
|
$4,117,080
|
$10,921,953
|
The accompanying notes are an integral part of the financial
statements.
HOLMWOOD CAPITAL, LLC
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASHFLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period from January 1, 2017 to May 26,
2017 (date of contribution) (unaudited) and for the six-month
period ended June 30, 2016 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
$4,662,440
|
$63,666
|
Less:
Gain from extraordinary items
|
(4,694,049)
|
|
Net
income(loss) from operations
|
(31,609)
|
63,666
|
Adjustments
to reconcile net income(loss) to net cash provided by
|
|
|
|
|
|
Depreciation
|
388,426
|
454,577
|
Amortization
of acquired lease-up costs
|
56,765
|
67,986
|
Amortization
of in-place leases
|
60,450
|
72,420
|
Amortization
of above/below-market leases
|
(43,110)
|
(51,738)
|
Amortization
of debt costs
|
38,472
|
64,894
|
Change
in assets and liabilities
|
|
|
Rent
and other tenant accounts receivables, net
|
139,473
|
(89,216)
|
Prepaid
expense and other assets
|
(33,203)
|
121,312
|
|
104,357
|
(56,745)
|
Accounts
payable and other accrued expenses
|
(61,829)
|
235,910
|
|
(220,999)
|
-
|
|
6,444
|
(833)
|
Net
cash provided by operating activities
|
403,636
|
882,233
|
|
|
|
Cash flows from investing activities:
|
|
|
Improvements
to investment properties
|
(23,680)
|
(20,102)
|
Net
cash used in investing activities
|
(23,680)
|
(20,102)
|
|
|
|
Cash flows from financing activities:
|
|
|
Contributions
from partners
|
-
|
(5,406)
|
|
-
|
1,000,000
|
|
-
|
2,450,000
|
|
-
|
(3,700,000)
|
Mortgage
principal payments
|
(185,223)
|
(230,870)
|
Notes
payable principal repayments
|
(271,955)
|
(150,056)
|
|
(11,400)
|
(118,659)
|
Net
cash from financing activities
|
(468,578)
|
(754,991)
|
|
|
|
Net
increase(decrease) in cash and cash equivalents
|
(88,623)
|
107,140
|
Cash
and cash equivalents, beginning of year
|
258,840
|
292,100
|
Cash
and cash equivalents, end of year
|
$170,217
|
$399,240
|
|
|
|
The accompanying notes are an integral part of the financial
statements.
Notes
to the Consolidated Financial Statements
Holmwood Capital,
LLC ("Holmwood" or the "Company"), a Delaware limited liability
company, was organized for the primary purpose of acquiring,
owning, leasing and disposing of commercial real estate properties
leased by the United States of America and administered by General
Services Administration ("GSA") or occupying agency. The Company
invests through wholly-owned, special purpose limited liability
companies, or special purpose entities (“SPE”),
primarily in properties across secondary or smaller
markets.
Pursuant to a
contribution agreement, as amended between our Company and HC
Government Realty Holdings, LP, ("HC Government Realty" or the
"Operating Partnership"), a subsidiary of HC Government Realty
Trust, Inc ("HC Government Realty Trust" or "REIT"), the Company
exchanged its membership interests in four of its single-member
limited liability companies and assigned all of the profits,
losses, any distributed cash flows and all of the other benefits
and burdens of ownership for federal income taxes for three of the
Company’s subsidiaries for common units in the Operating
Partnership ("OP Units"). HC Government Realty Trust, a real estate
investment trust, was formed in 2016 to acquire and own
government-leased assets. The REIT is currently offering up to
$30,000,000 of common stock for $10.00 per share pursuant to a
Final Offering Circular dated November 7, 2016. (See Note 3
Contribution Transaction).
The consolidated
financial statements as of December 31, 2016 include the accounts
of each SPE and the accounts of Holmwood. As of May 26, 2017, the
Company no longer owned or consolidated the seven limited liability
companies. The Consolidated Statement of Operations reflects the
operating results from owning properties from January 1, 2017 to
May 26, 2017, the date the properties were exchanged for operating
partnership units. The results of operations in 2017 are compared
to the results of operations for the seven properties for the
six-month period ended June 30, 2016. The seven (7) SPEs for the
reporting periods represented 110,352 rentable square feet located
in five states. The properties were 100% leased to the United
States of America.
Beginning in 2015,
the Company and its assets have been managed externally by Holmwood
Capital Advisors, LLC and its subsidiary, Holmwood Capital
Management, LLC, (collectively “HCA” or “Asset
Manager”). The principal owners of HCA or their
respective affiliates are also the majority owners of Holmwood as
well as the founding owners of HC Government Realty
Trust.
2.
Significant Accounting Policies
Basis of Accounting and Consolidation
- The accompanying
consolidated financial statements include the accounts of the
subsidiary and the seven wholly-owned SPEs including transactions
whereby the Company has been determined to have majority voting
interest, control and is the primary beneficiary in accordance with
the Financial Accounting Standards Board (“FASB”)
guidance. All other significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates - The preparation of consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates and assumptions.
Cash and Cash Equivalents - Cash and cash equivalents include all
cash and liquid investments with an initial maturity of three
months or less when purchased. At times, the Company’s cash
and cash equivalents balance deposited with financial institutions
may exceed federally insurable limits. The Company mitigates this
risk by depositing funds with major financial institutions. The
Company has not experienced any losses in connection with such
deposits.
Deposits in Escrow – There were no deposits in escrow
as of May 26, 2017. Deposits in escrow represented cash held by a
lender which are restricted for leasing and repair expenditures, as
well as real estate tax and insurance expenses. As of December 31,
2016, deposits in escrow totaled $239,221.
Real
Estate and Related Intangible Assets
Purchase Accounting for Acquisitions of Real
Estate Subject to a Lease - In accordance with the FASB
guidance on business combinations, Holmwood determines the fair
value of the real estate assets acquired on an “as if
vacant” basis. The difference between the purchase price and
the fair value of the real estate assets on an “as if
vacant” basis is first allocated to the fair value of above-
and below-market leases, and then allocated to in-place leases and
lease-up costs.
Management
estimates the “as if vacant” value considering a
variety of factors, including the physical condition and quality of
the buildings, estimated rental and absorption rates, estimated
future cash flows, and valuation assumptions consistent with
current market conditions. The “as if vacant” fair
value is allocated to land and buildings and improvements based on
relevant information obtained in connection with the acquisition of
the property, including appraisals and property tax assessments.
Above-market and below-market lease values are determined on a
lease-by-lease basis based on the present value (using an interest
rate that reflects the risk associated with the leases acquired) of
the difference between (a) the contractual amounts to be paid under
the lease and (b) management’s estimate of the fair market
lease rate for the corresponding space over the remaining
non-cancelable terms of the related leases. Above (below) market
lease values are recorded as leasehold intangibles and are
recognized as an increase or decrease in rental income over the
remaining non-cancelable term of the lease.
Additionally,
in-place leases are valued in consideration of the net rents earned
that would have been foregone during an assumed lease-up period;
and lease-up costs are valued based upon avoided brokerage fees.
Holmwood has not recognized any value attributable to customer
relationships. The difference between the total of the calculated
values described above, and the actual purchase price plus
acquisition costs, is allocated pro-ratably to each component of
calculated value. In-place leases and lease-up costs are amortized
over the remaining non-cancelable term of the leases. Real estate
values were determined by independent accredited
appraisers.
Building assets are
depreciated over a 40-year period, tenant improvements and the
leasehold intangibles are amortized over the remaining
non-cancelable term of the lease. In the event that a tenant
terminates its lease, the unamortized portion of the in-place lease
and lease-up costs is charged to expense immediately.
Holmwood’s
real estate is leased to tenants on a modified gross lease basis.
The leases provide for a minimum rent which normally is flat during
the firm term of the lease. The minimum rent payment may include
payments to pay for lessee requests for tenant improvement or to
cover the cost for extra security. The tenant is required to pay
increases in property taxes over the first year and an increase in
operating costs based on the consumer price index of the
lease’s base year operating expenses. Operating costs
includes repairs and maintenance, cleaning, utilities and other
related costs. Generally, the leases provide the tenant with
renewal options, subject to generally the same terms and conditions
of the base term of the lease. Holmwood accounts for its leases
using the operating method. Such method is described
below:
Operating method – Properties
with leases accounted for using the operating method are recorded
at the cost of the real estate. Revenue is recognized as rentals
are earned and expenses (including depreciation and amortization)
are charged to operations as incurred. Buildings are depreciated on
the straight-line method over their estimated useful lives.
Leasehold interests are amortized on the straight-line method over
the terms of their respective leases. When scheduled rentals vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the term of
the lease.
Construction
expenditures for tenant improvements, leasehold improvements and
leasing commissions are capitalized and amortized over the terms of
each specific lease. Maintenance and repairs are charged to expense
during the financial period in which they are incurred.
Expenditures for improvements that extend the useful life of the
real estate investment are capitalized. Upon sale or disposition of
the investment in real estate, the cost and related accumulated
depreciation and amortization are removed from the accounts with
the resulting gain or loss included as a component of net income
during the period in which the disposition occurred.
Impairment – Real Estate - The Company reviews
investments in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not
be recoverable. To determine if impairment may exist, the Company
reviews its properties and identifies those that have had either an
event of change or an event of circumstances warranting further
assessment of recoverability (such as a decrease in occupancy). If
further assessment of recoverability is needed, the Company
estimates the future net cash flows expected to result from the use
of the property and its eventual disposition, on an individual
property basis. If the sum of the expected future net cash flows
(undiscounted and without interest charges) is less than the
carrying amount of the property on an individual property basis,
the Company will recognize an impairment loss based upon the
estimated fair value of such property. As of May 26, 2017 and
December 31, 2016, the Company has not recorded any impairment
charges.
Tenant Improvements - As part of the leasing process, the
Company may provide the lessee with an allowance for the
construction of leasehold improvements. These leasehold
improvements are capitalized and recorded as tenant improvements,
and depreciated over the shorter of the useful life of the
improvements or the remaining lease term. If the allowance
represents a payment for a purpose other than funding leasehold
improvements, or in the event the Company is not considered the
owner of the improvements, the allowance is considered to be a
lease incentive and is recognized over the lease term as a
reduction of minimum rent. Factors considered during this
evaluation include, among other things, who holds legal title to
the improvements as well as other controlling rights provided by
the lease agreement and provisions for substantiation of such costs
(e.g. unilateral control of the tenant space during the build-out
process). Determination of the appropriate accounting for the
payment of a tenant allowance is made on a lease-by-lease basis,
considering the facts and circumstances of the individual tenant
lease. No tenant allowances were provided during the period from
January 1, 2017 to May 26, 2017 and for the six-month period ended
June 30, 2016.
Revenue Recognition - Minimum rents are recognized when due
from tenants; however, minimum rent revenues under leases which
provide for varying rents over their terms, if any, are straight
lined over the term of the leases. In the case of expense
reimbursements due from tenants, the revenue is recognized in the
period in which the related expense is incurred.
Rents and Other Tenant Accounts Receivables,
net - Rents and other tenant accounts receivables represent
amounts billed and due from tenants. When a portion of the
tenants’ receivable is estimated to be uncollectible, an
allowance for doubtful accounts is recorded. Due to the high
credited worthiness of the tenants, there were no allowances as of
May 26, 2017 and December 31, 2016.
Income and Other Taxes - No provision for income taxes is made
because Holmwood and its operating subsidiaries are not subject to
income tax. Management has evaluated tax positions that could have
a significant effect on the financial statements and determined
that the Company has a franchise and excise state tax liability of
$3,723 to reflect its share of the annual costs for the period from
January 1, 2017 to May 26, 2017. The franchise and excise state tax
liability as of December 31, 2016 was $12,249.
Debt Costs – Mortgages Payable
– Debt costs incurred in connection with Holmwood’s
mortgages payable were deferred and amortized as interest expense
over the term of the respective loan agreement. The straight-line
method was used to determine the amount amortized which
approximates the effective interest method and recorded in
Mortgages payable in the Consolidated Balance Sheet dated December
31, 2016.
Debt Costs – Note Payable –
Debt costs incurred in connection with the issuance of notes
payable were deferred and amortized as interest expense over the
term of the respective debt obligation, using the effective
interest method and recorded as Note Payable on the Consolidated
Balance Sheet dated December 31, 2016.
Recent Accounting Pronouncements
- In May 2014, the FASB
issued ASU 2014-09, “Revenue from Contracts with
Customers,” which supersedes the revenue recognition
requirements of Accounting Standards Codification
(“ASC”) Topic 605, “Revenue Recognition”
and most industry-specific guidance on revenue recognition
throughout the ASC. The new standard is principles based and
provides a five step model to determine when and how revenue is
recognized. The core principle of the new standard is that revenue
should be recognized when a company transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. The new standard also requires disclosure of
qualitative and quantitative information surrounding the amount,
nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. The new standard will be effective
for the Company for the year ending December 31, 2019 and can be
applied either retrospectively to all periods presented or as a
cumulative-effect adjustment as of the date of adoption. Early
adoption is permitted beginning for the year ending December 31,
2017. The Company is currently evaluating the impact of adoption of
the new standard on its consolidated financial
statements.
In February 2016,
the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 is
intended to improve financial reporting about leasing transactions.
The ASU will require organizations that lease assets referred
to as “Lessees” to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by
those leases with lease terms of more than 12 months. An
organization is to provide disclosures designed to enable users of
financial statements to understand the amount, timing, and
uncertainty of cash flows arising from leases. These disclosures
include qualitative and quantitative requirements concerning
additional information about the amounts recorded in the financial
Statements.
The leasing
standard will be effective for the year ended December 31, 2020.
Early adoption will be permitted upon issuance of the standard and
a modified retrospective approach must be applied. The Company is
currently evaluating the impact of ASU 2016-02 on its financial
statements.
In August 2016, the
FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash Payments.”
ASU 2016-15 is intended to improve cash flow statement
classification guidance. The standard will be effective for fiscal
years beginning after December 15, 2018. The Company is currently
evaluating the impact of ASU 2016-15 on its financial
statements.
In January 2017,
the FASB issued ASU 2017-01, "Business Combinations (Topic 805):
Clarifying the Definition of a Business.” ASU 2017-01 is
intended to help companies evaluate whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses. The standard will be effective for fiscal years
beginning after December 15, 2018. The Company is currently
evaluating the impact of ASU 2017-01 on its financial
statements.
Other accounting
standards that have been issued or proposed by the FASB or other
standard-setting bodies are not currently applicable to the Company
or are not expected to have a significant impact on the
Company’s financial position, results of operations and cash
flows.
3.
Contribution
Transaction
Pursuant to a
contribution agreement (the "Contribution
Agreement"), as amended, between our Company and HC Government
Realty, all of the membership interests in four of our
Company’s subsidiaries were contributed to HC Government
Realty in exchange for OP Units. In addition, in exchange for all
of the profits, losses, any distributed cash flow and all of the
other benefits and burdens of ownership for federal income taxes
for three of our Company’s subsidiaries, our Company received
OP Units as if the membership interests of such subsidiaries also
had been contributed at the date of closing.
The number of OP
Units issued in connection with this transaction was calculated
based upon the agreed value of the Company’s equity, plus
principal amortization paid by the Company from January 1, 2016 to
and including the date the contribution was made (May 26, 2017),
divided by $10 per OP Unit less the repayment of advances owed to
the REIT. The equity value for the membership interests of the four
SPEs and the rights to the profits, losses, distributed cash flow
and all of the other benefits and burdens of ownership of the three
SPEs plus principal amortization payments, determined as of the
date of the contribution, was $10,974,023, which amount was reduced
by the balance owed on advances of $189,862 under this arrangement.
HC Government Realty advanced the Company funds primarily related
to the Company’s refinancing of debt for one of its
properties. The Company received 1,078,416 OP Units related to this
transaction and the units can be exchanged for shares of HC
Government Realty Trust’s common stock on a 1:1 basis,
subject to certain limitations.
In addition, as of
the date of closing, HC Government Realty assumed the outstanding
mortgage indebtedness associated with each of the underlying
properties, aggregating $22,585,285, as well as the Company’s
notes payable aggregating $1,132,038 plus accrued interest as of
the date of the contribution on the mortgages and notes payable,
respectively. The Company entered into a tax protection agreement
indemnifying the Company for any taxes resulting from a sale of any
of these interests for a period of ten years after the
closing.
On November 7,
2016, the Securities and Exchange Commission ("SEC") qualified HC
Government Realty Trust’s offering of common stock pursuant
to Tier II of Regulation A under the Securities Act of 1933. The
offering contemplates that up to a total of 3,000,000 shares will
be issued in the offering at an offering price of $10 per share.
The offering, unless earlier terminated, will terminate on the
first to occur of the issuance of a total of 3,000,000 shares for
gross proceeds of $30,000,000, or November 7, 2018.
The Company
realized a gain resulting from its exchange of its members’
interests in the four SPEs and the assignment
of all of the profits, losses, any distributable cash flows and all
of the other benefits and burdens of ownership for federal income
taxes for three SPEs for OP Units and is determined as
follows:
Assets
contributed
|
|
Buildings
and improvements, net
|
$28,748,477
|
Intangible
assets, net
|
945,865
|
Total
assets contributed, net
|
29,694,342
|
|
|
Liabilities
assumed
|
|
Mortgages
payable
|
(22,585,285)
|
Notes
payable
|
(1,132,038)
|
Total
liabilities assumed
|
(23,717,323)
|
|
|
Equity,
net
|
5,977,019
|
|
|
Value
of OP Units issued for membership interest
|
10,974,023
|
Gain
on exchange of members'
|
|
for
operating partnership units before adjustments
|
$4,997,004
|
Less:
write-off of unamortized debt issuance costs
|
(302,955)
|
Gain,
net
|
$4,694,049
|
4.
Investment
in Real Estate
Summary of Investments - The following is a
summary of investment in real estate, net as of May 26, 2017,
immediately before the closing of the
transactions contemplated in the Contribution Agreement and as of
December 31, 2016:
|
|
|
|
|
|
Land,
building and improvements
|
$29,578,189
|
$29,549,302
|
Tenant
improvements
|
2,278,862
|
2,278,862
|
|
31,857,051
|
31,828,164
|
Accumulated
depreciation
|
(3,108,574)
|
(2,720,278)
|
Investments
in real estate, net
|
$28,748,477
|
$29,107,886
|
The following is a
summary of Leasehold intangibles, net, as of May 26, 2017,
immediately before the closing of the
transactions contemplated in the Contribution Agreement and as of
December 31, 2016:
|
|
|
|
|
|
Acquired
in-place leases
|
$1,320,305
|
$1,320,305
|
Acquired
lease-up costs
|
1,285,251
|
1,285,251
|
Acquired
above-(below) market lease
|
(1,057,409)
|
(1,057,409)
|
|
1,548,147
|
1,548,147
|
Accumulated
amortization
|
(602,282)
|
(528,177)
|
Leasehold
intangibles, net
|
$945,865
|
$1,019,970
|
During the period
from January 1, 2017 to May 26, 2017 and for the six-month period
ended June 30, 2016, the Company made capital improvements to the
seven properties in the amount of $23,680 and $20,102,
respectively.
Accretion of
above-market leases and amortization of below-market leases
resulted in a net increase in rental revenue of $43,110 for the
period from January 1, 2017 to May 26, 2017 and $51,738 for the
six-month period ended June 30, 2016. Amortization of in-place
leases and lease-up costs was $117,215 and $140,406 for the same
respective periods.
Mortgages Payable – Mortgage loan balances as of May
26, 2017, immediately prior to the closing of the
transactions contemplated in the Contribution Agreement, and as of
December 31, 2016 totaled $22,585,285 and $22,769,867, and
unamortized debt issuance costs totaled $290,155 and $313,925,
respectively. The loans are payable to various financial
institutions and are collateralized by specific properties. Fixed
rate loans before unamortized debt costs totaled $12,482,906 and
$12,584,982 immediately prior to the closing of the
transactions contemplated in the Contribution Agreement and as of
December 31, 2016 and variable rate loans before unamortized debt
costs totaled $10,101,379 and $10,184,885 for the same respective
periods. Of the fixed rate loans, the $10,082,759 loan outstanding
as of May 26, 2017 before the closing of the transactions
contemplated in the Contribution Agreement bear interest at a fixed
annum rate of 5.265%, debt service payments are based on principal
amortization over 30 years and the loan matures in August 2023. The
fixed rate loan with a balance of $2,401,147 on May 26, 2017,
immediately prior to the closing of the
transactions contemplated in the Contribution Agreement, bears
interest as a fixed annum rate of 3.93%, debt service payments are
based on principal amortization over 25 years and the loan matures
in June 2019. In connection with the contribution transaction,
these outstanding loan balances were assumed by HC Government
Realty. The unamortized portion of debt issuance costs related to
the mortgage loans was written off in the amount of $290,155. At
December 31, 2016, Holmwood had total gross debt costs of $540,812
and accumulated amortization related to these debt costs of
$226,886.
Of the variable
rate loans outstanding as of May 26, 2017, immediately prior to
the closing of the
transactions contemplated in the Contribution Agreement and as of
December 31, 2016, the $7,031,646 loan’s interest rate is
equal to the one-month LIBOR rate plus 235 basis points. For the
period from January 1, 2017 to May 26, 2017, the averaged interest
was 3.92% and for the six-month period ended June 30, 2016 the
average interest rate was 2.83%. Debt service payments were made
based on principal amortization over 20 years. The loan would have
matured on March 27, 2017; however, the Company exercised its
option to extend the loan for one year. The Company paid an
extension fee in the amount of $11,400. The terms of the variable
rate interest only loan with an outstanding balance of $3,69,733 as
of May 26, 2017, immediately prior to the closing of the
transactions contemplated in the Contribution Agreement, bears
interest at the prime rate; however, in no event could the interest
rate be less than 4%. The average interest rate paid for the period
from January 1, 2017 to May 26, 2017 was 4.03% and for the
six-month period ended June 30, 2016, the average interest rate was
4.04%. The carrying amount of Holmwood’s variable rate debt
approximates its fair value as of May 26, immediately before
the closing of the
transactions contemplated in the Contribution Agreement and as of
December 31, 2016.
The overall
weighted average interest rate for the mortgage notes outstanding
during the period from January 1, 2017 to May 26, 2017 was 4.61%
and 4.19% for the six-month period ended June 30, 2016. The
mortgage notes as of May 26, 2017 were assumed by HC Government
Realty in connection with the contribution
transaction.
The following table
outlines the mortgages payable as of May 26, 2017, immediately
prior to the closing of the
transactions contemplated in the Contribution Agreement, and as of
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entered
|
|
|
Maturity
|
|
|
July
2013
|
$10,700,000
|
5.27%
|
August
2023
|
$10,082,759
|
$10,159,209
|
December
2014
|
3,700,000
|
3.93%
|
April
2016
|
-
|
-
|
June
2016
|
2,450,000
|
3.93%
|
June
2019
|
2,401,147
|
2,425,773
|
April
2015
|
7,600,000
|
3.92%
|
March
2018
|
7,031,646
|
7,115,152
|
December
2015
|
3,080,000
|
4.07%
|
June
2017
|
3,069,733
|
3,069,733
|
|
|
|
|
22,585,285
|
22,769,867
|
Debt
issuance costs
|
|
|
|
(552,212)
|
(540,812)
|
Accumulated
amortization
|
|
|
|
262,057
|
226,887
|
Debt
issuance costs, net of accumulated amortization
|
|
(290,155)
|
(313,925)
|
|
|
|
|
|
|
Mortgage
payable net of unamortized debt costs
|
|
$22,295,130
|
$22,455,942
|
Notes Payable – Notes
payable balances as of May 26, 2017, immediately prior to
the closing of the
transactions contemplated in the Contribution Agreement and as of
December 31, 2016 totaled $1,132,038 and $1,403,992, and
unamortized debt issuance costs totaled $12,800 and $16,091,
respectively. The loans are fixed rate with interest rates ranging
from 5.5% to 7.25% and mature during the period between June, 2018
and June, 2019. The weighted average interest rate on the notes
during the period from January 1, 2017 to May 26, 2017 and for the
six-month period ended June 30, 2016 was 6.20%.
On June 10, 2016,
the Company received $1 million in loan proceeds from a financial
institution in connection with the refinancing of its $3.7 million
maturing mortgage payable. The $3.7 million loan was replaced with
a new loan in the amount of $2,450,000. The loans from the Company
to an SPE were pursuant to two promissory notes, one in the
original principal amount of $338,091, and one in the original
principal amount of $661,909. The notes bear interest at 5.5% per
annum. The $338,091 note matures in June 2019, requires
interest only payments for the first 24 months and then monthly
payments will increase in order to fully amortize the loan over the
remaining 12 months of its term. The $661,909 note’s
debt service payment is based on principal amortization over 2
years. Both notes have been repaid pursuant to the terms of the
Contribution Agreement. In connection with the contribution
transaction, the unamortized portion of debt issuance costs was
written off in the amount of $12,800. At December 31, 2016,
Holmwood has gross debt costs of $19,750 and accumulated
amortization related to these debt costs of $3,659.
In July, 2013,
Holmwood entered into a $1.5 million promissory note and related
collateral pledge and security agreement to finance certain
reserves and closing costs related to closing a $10.7 million loan.
The loan balance outstanding as of December 31, 2016 is $563,299.
The loan bears interest at 7.25% and the monthly debt service
payment is $30,008 based on the principal fully amortizing over a
five-year term. The loan was secured by the Company’s
membership interests in three of its properties. There were no debt
issuance costs related to this loan. This loan was assumed by HC
Government Realty and repaid concurrent with the
closing
of the transactions contemplated in the Contribution
Agreement.
The following table
outlines the notes payable as of May 26, 2017, immediately prior to
the closing of the
transactions contemplated in the Contribution Agreement and as of
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entered
|
|
|
Maturity
|
|
|
June
2016
|
$338,091
|
5.50%
|
June
2019
|
$338,091
|
$338,091
|
June
2016
|
661,909
|
5.50%
|
June
2018
|
364,933
|
502,602
|
July
2013
|
1,500,000
|
7.25%
|
August
2018
|
429,014
|
563,299
|
|
|
|
|
1,132,038
|
1,403,992
|
Debt
issuance costs
|
|
|
|
(19,750)
|
(19,750)
|
Accumulated
amortization
|
|
|
|
6,950
|
3,659
|
Debt
issuance costs, net of accumulated amortization
|
|
(12,800)
|
(16,091)
|
|
|
|
|
|
|
Notes
payable net of unamortized debt costs
|
|
|
$1,119,238
|
$1,387,901
|
The Operating
Partnership advanced the Company funds to meet certain equity
requirements needed for a property refinancing and to fund other
working capital needs. As of December, 31, 2016, the net funds
outstanding totaled $410,861 including interest accrued on
outstanding amounts based on the monthly applicable federal funds
rate. During the period from January 1, 2017 and May 26, 2017, the
Company made payments totaling $220,999. The remaining outstanding
balance of $189,862 was repaid by the Company in the form of
reduced OP Units in connection with the contribution
transaction.
Property management
fees are charged by the Asset Manager to Holmwood through an
informal agreement between the two parties. Under the terms of the
property management agreements, Holmwood pays the Asset Manager a
monthly management fee of 3% of all gross receipts from each
property or $1,000 a month, whichever is greater. In connection
with this agreement, Holmwood paid the Asset Manager property
management fees of $40,598 during the period from January 1, 2017
to May 26, 2017 and $50,258 for the six-month period ended June 30,
2016.
Asset management
fees are charged by the Asset Manager to Holmwood through an
informal agreement between the two parties. Holmwood pays the Asset
Manager a monthly asset management fee equal to 2.4% of each
property’s gross revenues or $1,000 per month, whichever is
greater. Asset management fees totaled $41,563 during the period
from January 1, 2017 and May 26, 2017 and $45,980 for the
six-months ended June 30, 2016.
In 2016, the
Company made distributions totaling $374,889 to its
owners.
8.
Commitments and Contingencies
In connection with
a property acquisition in 2015, the property located in Port
Canaveral, FL was purchased, subject to a ground lease. The ground
lease has an extended term of 30 years to 2045 with one 10-year
renewal option. The Company made ground lease payments of $29,550
during the period from January 1, 2017 to May 26, 2017 and $35,450
for the six-month period ended June 30, 2017.
In the normal
course of business, the Company can be involved in legal actions
arising from the ownership of its properties. In the Company's
opinion, the liabilities, if any, that may ultimately result from
such legal actions are not expected to have a material adverse
effect on the financial position, operations or liquidity of the
Company.
The Company
received on July 15, 2017 dividends on its OP Units in the amount
of $70,064.
The Company
evaluated subsequent events through the date of filing this report.
The Company concluded no additional material events subsequent to
June 30, 2017 were required to be reflected in the Company’s
consolidated financial statements or notes as required by standards
for accounting disclosures of subsequent events.
Report
of Independent Registered Public Accounting Firm
To the
Management
of Holmwood
Capital, LLC
Sarasota,
Florida
We have audited the
accompanying consolidated balance sheets of Holmwood Capital, LLC
(a Delaware LLC) (the “Company”), as of December 31,
2016 and 2015, and the related consolidated statements of
operations, changes in Partners’ capital, and cash flows for
the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and 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 consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Holmwood Capital, LLC as of December 31, 2016 and 2015, and the
results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted
in the United States of America.
/s/ Cherry Bekaert
LLP
Richmond,
VA
April 27,
2017
Holmwood
Capital, LLC
Consolidated
Balance Sheets
December
31, 2016 and 2015
|
|
|
ASSETS
|
|
|
Investment in real
estate, net:
|
$29,107,886
|
$30,040,892
|
|
|
|
Cash and cash
equivalents
|
258,840
|
292,100
|
Deposits in
escrow
|
239,221
|
122,851
|
Rent and other
tenant accounts receivables, net
|
336,464
|
245,627
|
Prepaids and other
assets
|
52,579
|
166,349
|
Leasehold
intangibles, net
|
1,019,970
|
1,197,853
|
Total
Assets
|
$31,014,960
|
$32,065,672
|
|
|
|
LIABILITIES
|
|
|
Mortgages payable,
net of unamortized debt costs
|
$22,455,942
|
$24,183,225
|
Note
payable
|
1,387,901
|
869,027
|
Accrued interest
payable
|
94,942
|
81,278
|
Related party
payable
|
410,861
|
-
|
Other
liabilities
|
405,801
|
389,504
|
Total
Liabilities
|
24,755,447
|
25,523,034
|
|
|
|
PARTNERS'
CAPITAL
|
|
|
Partners' capital,
net
|
6,804,872
|
7,179,761
|
Accumulated
deficit
|
(545,359)
|
(637,123)
|
Total
Partners' Capital
|
6,259,513
|
6,542,638
|
Total
Liabilities and Partners' Capital
|
$31,014,960
|
$32,065,672
|
See accompanying
notes to consolidated financial statements
Holmwood
Capital, LLC
Consolidated
Statements of Operations
For
the years ended December 31, 2016 and 2015
|
|
|
Revenues:
|
|
|
Rental
revenues
|
$3,564,278
|
$2,925,153
|
Real estate tax
reimbursments and other revenues
|
146,890
|
80,380
|
Total
Revenues
|
3,711,168
|
3,005,533
|
|
|
|
Other
Property Operations:
|
|
|
Repairs and
maintenance
|
210,693
|
138,415
|
Utilities
|
161,048
|
149,682
|
Real estate and
other taxes
|
237,959
|
270,824
|
Depreciation and
amortization
|
1,228,062
|
981,801
|
Other operating
expense
|
169,174
|
123,695
|
Management
fees
|
192,652
|
155,789
|
Ground
lease
|
71,094
|
51,600
|
Professional
expenses
|
54,125
|
189,181
|
Insurance
|
54,149
|
51,605
|
General and
administrative
|
15,731
|
17,295
|
Total Operating
Expenses
|
2,394,687
|
2,129,887
|
|
|
|
Interest
expense
|
1,224,717
|
1,069,831
|
Net
income (loss)
|
$91,764
|
$(194,185)
|
See accompanying
notes to consolidated financial statements
Holmwood
Capital, LLC
Consolidated
Statements of Changes in Partners’ Capital
For
the years ended December 31, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1,
2015
|
$3,814,762
|
$(442,938)
|
$3,371,824
|
|
|
|
|
Contributions
|
3,264,999
|
-
|
3,264,999
|
|
|
|
|
Notes payable
converted to equity
|
100,000
|
-
|
100,000
|
|
|
|
|
Net
loss
|
-
|
(194,185)
|
(194,185)
|
Balance, December
31, 2015
|
7,179,761
|
(637,123)
|
6,542,638
|
|
|
|
|
Distributions
|
(374,889)
|
-
|
(374,889)
|
|
|
|
|
Net
income
|
-
|
91,764
|
91,764
|
Balance, December
31, 2016
|
$6,804,872
|
$(545,359)
|
$6,259,513
|
See accompanying notes to consolidated financial
statements
Holmwood
Capital, LLC
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2016 and 2015
|
|
|
Cash
flows from operating activities:
|
|
|
Net
income(loss)
|
$91,764
|
$(194,185)
|
Adjustments to
reconcile net income(loss) to net cash provided by
|
|
|
operating
activities:
|
|
|
Depreciation
|
946,751
|
752,674
|
Amortization of
acquired lease-up costs
|
136,234
|
110,606
|
Amortization of
in-place leases
|
145,079
|
118,521
|
Amortization of
above/below-market leases
|
(103,429)
|
(91,147)
|
Amortization of
debt costs
|
138,095
|
95,762
|
Change in assets
and liabilities
|
|
|
Rent and other
tenant accounts receivables, net
|
(90,837)
|
(86,971)
|
Prepaid expense and
other assets
|
113,770
|
36,636
|
Deposits in
escrow
|
(116,370)
|
(51,726)
|
Accounts payable
and other accrued expenses
|
16,297
|
117,087
|
Related party
payable
|
410,861
|
-
|
Accrued interest
payable
|
13,664
|
35,009
|
Net cash provided
by operating activities
|
1,701,879
|
842,266
|
|
|
|
Cash
flows from investing activities:
|
|
|
Investment property
acquisitions
|
-
|
(13,986,180)
|
Improvements to
investment properties
|
(13,745)
|
(6,195)
|
Returned deposit
for property under contract
|
-
|
35,500
|
Net cash used in
investing activities
|
(13,745)
|
(13,956,875)
|
|
|
|
Cash
flows from financing activities:
|
|
|
Contributions from
partners
|
-
|
3,264,999
|
Distributions to
partners
|
(374,889)
|
-
|
Notes payable
proceeds
|
1,000,000
|
100,000
|
Mortgage
proceeds
|
2,450,000
|
11,380,000
|
Mortgage principal
payments
|
(4,198,676)
|
(1,056,322)
|
Note payable
principal repayments
|
(465,036)
|
(284,294)
|
Debt issuance
costs
|
(132,793)
|
(112,020)
|
Net cash from
financing activities
|
(1,721,394)
|
13,292,363
|
|
|
|
Net
increase(decrease) in cash and cash equivalents
|
(33,260)
|
177,754
|
Cash and cash
equivalents, beginning of year
|
292,100
|
114,346
|
Cash and cash
equivalents, end of year
|
$258,840
|
$292,100
|
|
|
|
Supplemental
cash flow information:
|
|
|
Interest paid
during the year
|
$1,084,704
|
$974,070
|
|
|
|
Noncash
financing and investing activities:
|
|
|
Note payable
converted to equity
|
$-
|
$100,000
|
See accompanying notes to consolidated financial
statements
Holmwood
Capital, LLC
Notes
to the Consolidated Financial Statements
December
31, 2016 and 2015
Holmwood Capital,
LLC (Holmwood or the Company), a Delaware limited liability
company, was organized for the primary purpose of acquiring,
owning, leasing and disposing of commercial real estate properties
leased by the United States of America and administered by General
Services Administration (GSA) or occupying agency. The Company
invests through wholly-owned, special purpose limited liability
companies, or special purpose entities (“SPE”),
primarily in properties across secondary or smaller
markets.
The consolidated
financial statements include the accounts of each SPE and the
accounts of Holmwood. There were seven (7) SPEs as of
December 31, 2016 representing 110,352 rentable square feet located
in five states. The properties are 100% leased to the
United States of America and have a weighted average remaining
lease term of 6.5 years as of December 31,
2016. Beginning in 2015, the Company and its assets are
managed externally by Holmwood Capital Advisors, LLC and its
subsidiary, Holmwood Capital Management, LLC, (collectively
“HCA” or “Asset Manager”). The
principal owners of HCA or their respective affiliates are also the
majority owners of Holmwood.
2.
Significant
Accounting Policies
Basis of Accounting and Consolidation
- The accompanying
consolidated financial statements include the accounts of the
subsidiary and the seven wholly-owned SPEs including transactions
whereby the Company has been determined to have majority voting
interest, control and is the primary beneficiary in accordance with
the Financial Accounting Standards Board (“FASB”)
guidance. All other significant intercompany balances
and transactions have been eliminated in
consolidation.
Use of Estimates - The preparation of consolidated
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ
from those estimates and assumptions.
Cash and Cash Equivalents - Cash and cash equivalents include all
cash and liquid investments with an initial maturity of three
months or less when purchased. At times, the
Company’s cash and cash equivalents balance deposited with
financial institutions may exceed federally insurable
limits. The Company mitigates this risk by depositing
funds with major financial institutions. The Company has
not experienced any losses in connection with such
deposits.
Deposits in Escrow - In 2016 and 2015, deposits in escrow
represented cash held by a lender which are restricted for leasing
and repair expenditures, as well as real estate tax and insurance
expenses. As of December 31, 2016 and 2015, the balances
include reserves for taxes, insurance and repairs to ensure
Holmwood’s performance relating to improvement of the
properties.
Purchase Accounting for Acquisitions of Real
Estate Subject to a Lease - In accordance with the FASB
guidance on business combinations, Holmwood determines the fair
value of the real estate assets acquired on an “as if
vacant” basis. The difference between the purchase price and
the fair value of the real estate assets on an “as if
vacant” basis is first allocated to the fair value of above-
and below-market leases, and then allocated to in-place leases and
lease-up costs.
Holmwood Capital, LLC
Notes to the Consolidated Financial
Statements
December 31, 2016 and 2015
2. Significant Accounting Policies
(continued):
Management
estimates the “as if vacant” value considering a
variety of factors, including the physical condition and quality of
the buildings, estimated rental and absorption rates, estimated
future cash flows, and valuation assumptions consistent with
current market conditions. The “as if vacant” fair
value is allocated to land and buildings and improvements based on
relevant information obtained in connection with the acquisition of
the property, including appraisals and property tax assessments.
Above-market and below-market lease values are determined on a
lease-by-lease basis based on the present value (using an interest
rate that reflects the risk associated with the leases acquired) of
the difference between (a) the contractual amounts to be paid under
the lease and (b) management’s estimate of the fair market
lease rate for the corresponding space over the remaining
non-cancelable terms of the related leases. Above (below) market
lease values are recorded as leasehold intangibles and are
recognized as an increase or decrease in rental income over the
remaining non-cancelable term of the lease.
Additionally,
in-place leases are valued in consideration of the net rents earned
that would have been foregone during an assumed lease-up period;
and lease-up costs are valued based upon avoided brokerage
fees. Holmwood has not recognized any value attributable
to customer relationships. The difference between the
total of the calculated values described above, and the actual
purchase price plus acquisition costs, is allocated pro-ratably to
each component of calculated value. In-place leases and
lease-up costs are amortized over the remaining non-cancelable term
of the leases. Real estate values were determined by
independent accredited appraisers.
Building assets are
depreciated over a 40-year period, tenant improvements and the
leasehold intangibles are amortized over the remaining
non-cancelable term of the lease. In the event that a
tenant terminates its lease, the unamortized portion of the
in-place lease and lease-up costs is charged to expense
immediately.
Holmwood’s
real estate is leased to tenants on a modified gross lease
basis. The leases provide for a minimum rent which
normally is flat during the firm term of the lease. The
minimum rent payment may include payments to pay for lessee
requests for tenant improvement or to cover the cost for extra
security. The tenant is required to pay increases in
property taxes over the first year and an increase in operating
costs based on the consumer price index of the lease’s base
year operating expenses. Operating costs includes
repairs and maintenance, cleaning, utilities and other related
costs. Generally, the leases provide the tenant with
renewal options, subject to generally the same terms and conditions
of the base term of the lease. Holmwood accounts
for its leases using the operating method. Such method
is described below:
Operating method – Properties
with leases accounted for using the operating method are recorded
at the cost of the real estate. Revenue is recognized as rentals
are earned and expenses (including depreciation and amortization)
are charged to operations as incurred. Buildings are depreciated on
the straight-line method over their estimated useful lives.
Leasehold interests are amortized on the straight-line method over
the terms of their respective leases. When scheduled rentals vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the term of
the lease.
Construction
expenditures for tenant improvements, leasehold improvements and
leasing commissions are capitalized and amortized over the terms of
each specific lease. Maintenance and repairs are charged
to expense during the financial period in which they are
incurred. Expenditures for improvements that extend the
useful life of the real estate investment are
capitalized. Upon sale or disposition of the investment
in real estate, the cost and related accumulated depreciation and
amortization are removed from the accounts with the resulting gain
or loss included as a component of net income during the period in
which the disposition occurred.
Holmwood Capital, LLC
Notes to the Consolidated Financial
Statements
December 31, 2016 and 2015
2. Significant Accounting Policies (continued):
Impairment – Real Estate - The Company reviews
investments in real estate for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not
be recoverable. To determine if impairment may exist,
the Company reviews its properties and identifies those that have
had either an event of change or an event of circumstances
warranting further assessment of recoverability (such as a decrease
in occupancy). If further assessment of recoverability
is needed, the Company estimates the future net cash flows expected
to result from the use of the property and its eventual
disposition, on an individual property basis. If the sum
of the expected future net cash flows (undiscounted and without
interest charges) is less than the carrying amount of the property
on an individual property basis, the Company will recognize an
impairment loss based upon the estimated fair value of such
property. As of December 31, 2016 and 2015, the
Company has not recorded any impairment charges.
Tenant Improvements - As part of the leasing process, the
Company may provide the lessee with an allowance for the
construction of leasehold improvements. These leasehold
improvements are capitalized and recorded as tenant improvements,
and depreciated over the shorter of the useful life of the
improvements or the remaining lease term. If the
allowance represents a payment for a purpose other than funding
leasehold improvements, or in the event the Company is not
considered the owner of the improvements, the allowance is
considered to be a lease incentive and is recognized over the lease
term as a reduction of minimum rent. Factors considered
during this evaluation include, among other things, who holds legal
title to the improvements as well as other controlling rights
provided by the lease agreement and provisions for substantiation
of such costs (e.g. unilateral control of the tenant space during
the build-out process). Determination of the appropriate
accounting for the payment of a tenant allowance is made on a
lease-by-lease basis, considering the facts and circumstances of
the individual tenant lease. No tenant allowances were
provided during the years ended December 31, 2016 and
2015.
Revenue Recognition - Minimum rents are recognized when due
from tenants; however, minimum rent revenues under leases which
provide for varying rents over their terms, if any, are straight
lined over the term of the leases. In the case of expense
reimbursements due from tenants, the revenue is recognized in the
period in which the related expense is incurred.
Rents and Other Tenant Accounts Receivables,
net - Rents and other tenant accounts receivables represent
amounts billed and due from tenants. When a portion of
the tenants’ receivable is estimated to be uncollectible, an
allowance for doubtful accounts is recorded. Due to the
high credited worthiness of the tenants, there were no allowances
as of December 31, 2016 and 2015.
Income and Other Taxes - No provision for income taxes is made
because Holmwood and its operating subsidiaries are not subject to
income tax. Management has evaluated tax positions that
could have a significant effect on the financial statements and
determined that the Company has a franchise and excise state tax
liability of $12,249 and $12,217 as of December 31, 2016 and 2015,
respectively. During 2016, the Company made
estimated franchise and excise tax payments of $7,860 and made a
subsequent payment of $2,620 in January, 2017.
Debt Costs – Mortgages Payable
– Debt costs incurred in connection with Holmwood’s
mortgages payable have been deferred and are being amortized over
the term of the respective loan agreement using the straight-line
method, which approximates the effective interest method and are
recorded in Mortgages payable on the Consolidated Balance Sheets.
At December 31, 2016 and 2015, Holmwood had total gross debt costs
of $540,812 and $476,669 respectively. The accumulated
amortization related to these debt costs as of December 31, 2016
and 2015 was $226,886 and $141,351, respectively.
Debt Costs – Note Payable –
Any debt costs incurred in connection with the issuance of notes
payable would be deferred and amortized to interest expense over
the term of the particular debt obligation, using the effective
interest method and would be recorded as Note Payable on the
Consolidated Balance Sheets. At December 31, 2016, Holmwood
incurred $19,750 in issuance costs related to a note payable
entered into in 2016. In 2015, Holmwood had no
debt costs related to its note payable.
Holmwood Capital, LLC
Notes to the Consolidated Financial
Statements
December 31, 2016 and 2015
2. Significant Accounting Policies
(continued):
Recent Accounting Pronouncements
- In May 2014, the FASB
issued ASU 2014-09, “Revenue from Contracts with
Customers,” which supersedes the revenue recognition
requirements of Accounting Standards Codification
(“ASC”) Topic 605, “Revenue Recognition”
and most industry-specific guidance on revenue recognition
throughout the ASC. The new standard is principles based and
provides a five step model to determine when and how revenue is
recognized. The core principle of the new standard is that revenue
should be recognized when a company transfers promised goods or
services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those
goods or services. The new standard also requires disclosure of
qualitative and quantitative information surrounding the amount,
nature, timing and uncertainty of revenues and cash flows arising
from contracts with customers. The new standard will be effective
for the Company for the year ending December 31, 2019 and can be
applied either retrospectively to all periods presented or as a
cumulative-effect adjustment as of the date of adoption. Early
adoption is permitted beginning for the year ending December 31,
2017. The Company is currently evaluating the impact of
adoption of the new standard on its consolidated financial
statements.
In February 2016,
the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 is
intended to improve financial reporting about leasing transactions.
The ASU will require organizations that lease assets referred
to as “Lessees” to recognize on the balance sheet the
assets and liabilities for the rights and obligations created by
those leases with lease terms of more than 12 months. An
organization is to provide disclosures designed to enable users of
financial statements to understand the amount, timing, and
uncertainty of cash flows arising from leases. These disclosures
include qualitative and quantitative requirements concerning
additional information about the amounts recorded in the financial
Statements.
The leasing
standard will be effective for the year ended December 31,
2020. Early adoption will be permitted upon issuance of
the standard and a modified retrospective approach must be applied.
See Note 8 for the Company’s current lease commitments. The
Company is currently evaluating the impact of ASU 2016-02 on its
financial statements.
In August 2016, the
FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts and Cash
Payments.” ASU 2016-15 is intended to improve cash
flow statement classification guidance. The standard
will be effective for fiscal years beginning after December 15,
2018. The Company is currently evaluating the impact of
ASU 2016-15 on its financial statements.
In January 2017,
the FASB issued ASU 2017-01, "Business Combinations (Topic 805):
Clarifying the Definition of a Business.” ASU
2017-01 is intended to help companies evaluate whether transactions
should be accounted for as acquisitions (or disposals) of assets or
businesses. The standard will be effective for fiscal
years beginning after December 15, 2018. The Company is
currently evaluating the impact of ASU 2017-01 on its financial
statements.
Other accounting
standards that have been issued or proposed by the FASB or other
standard-setting bodies are not currently applicable to the Company
or are not expected to have a significant impact on the
Company’s financial position, results of operations and cash
flows.
Holmwood Capital, LLC
Notes to the Consolidated Financial
Statements
December 31, 2016 and 2015
3.
Investment
in Real Estate
Acquisitions - Holmwood acquired
three properties in 2015 and no properties in 2016. The
results of the property operations are included in the consolidated
financial statements from their respective dates of
acquisitions.
|
Date
|
|
|
|
|
2015
Acquisitions
|
|
|
Johnson
City, TN and
|
|
|
Port
Canaveral, FL
|
March 2015
|
$10,260,504
|
Silt,
CO
|
December 2015
|
3,725,676
|
|
$13,986,180
|
The purchase price
allocations for properties acquired in 2015 were based on estimated
fair values.
|
|
Land
|
$1,388,420
|
Buildings and
improvements
|
11,032,485
|
Tenant
Improvements
|
883,403
|
Acquired In-place
leases
|
497,411
|
Acquired lease-up
costs
|
448,764
|
Above(below)-market
leases
|
(264,303)
|
|
$13,986,180
|
The properties are
100% leased to United States of America and administered by General
Services Administration (GSA) or occupying agency. The
average lease term is 6.5 years based on the firm term of the
leases. Lease maturities range from 2021 to
2029.
The expected future
amortization of above (below)-market leases and acquired In-place
lease value and acquired lease-up costs (combined intangible lease
costs) are as follows:
|
|
|
|
|
|
|
|
|
Year ending
December 31:
|
|
|
2017
|
$(103,483)
|
$280,827
|
2018
|
(103,483)
|
280,827
|
2019
|
(103,483)
|
280,827
|
2020
|
(103,483)
|
280,827
|
2021
|
(90,894)
|
255,890
|
Thereafter
|
(234,727)
|
380,325
|
|
$(739,553)
|
$1,759,523
|
Accretion of
above-market leases and amortization of below-market leases
resulted in a net increase in rental revenue of $103,429 and
$91,147 during 2016 and 2015, respectively. Amortization
of in-place leases and lease-up costs was $281,311 and $229,127
during 2016 and 2015, respectively.
Holmwood Capital, LLC
Notes to the Consolidated Financial
Statements
December 31, 2016 and 2015
3. Investment
in Real Estate (continued):
Summary of Investments - The following is a summary of
Investment in real estate, net:
|
|
|
Land, building and
improvements
|
$29,549,302
|
$29,535,557
|
Tenant
improvements
|
2,278,862
|
2,278,862
|
|
31,828,164
|
31,814,419
|
Accumulated
depreciation
|
(2,720,278)
|
(1,773,527)
|
Investments in real
estate, net
|
$29,107,886
|
$30,040,892
|
The following is a
summary of Leasehold intangibles, net:
|
|
|
Acquired in-place leases
|
$1,320,305
|
$1,320,305
|
Acquired lease-up costs
|
1,285,251
|
1,285,251
|
Acquired above-(below) market lease
|
(1,057,409)
|
(1,057,409)
|
|
1,548,147
|
1,548,147
|
Accumulated amortization
|
(528,177)
|
(350,294)
|
Leasehold intangibles, net
|
$1,019,970
|
$1,197,853
|
4. Debt
Mortgages Payable - Mortgage notes totaling $22,769,867,
before unamortized debt costs of $313,925, are payable to various
financial institutions and are collateralized by specific
properties. Of this amount, fixed rate loans before
unamortized debt costs total $12,584,982 and variable rate loans
before unamortized debt costs total $10,184,885. Of the
fixed rate loans, the $10,159,209 loan bears interest at a fixed
annum rate of 5.265%, debt service payments are based on principal
amortization over 30 years and the loan matures in August
2023. The $2,425,773 loan bears interest as a fixed
annum rate of 3.93%, debt service payments are based on principal
amortization over 25 years and the loan matures in June
2019.
Of the variable
rate loans, the $7,115,152 loan’s interest rate is equal to
the one-month LIBOR rate plus 235 basis points. In 2016,
the averaged interest was 2.89%. Debt service payments
were made based on principal amortization over 20
years. The loan would have matured on March 27, 2017;
however, the Company exercised its option to extend the loan for
one year. The $3,069,733 variable rate loan bears
interest at Prime however, in no event should the loan be less than
4%. Monthly payments on the loan are to cover the
interest cost only. The average interest rate paid
during 2016 was 4.07%. The loan would have matured on
March 15, 2017; however, the Company exercised its option to extend
the loan for three months with a new maturity date of June 15,
2017. The Company is in discussions with the bank to
refinance this loan. (See Note 9).
The weighted
average interest rate for all the mortgage notes at December 31,
2016 and 2015 was 4.19% and 4.16%, respectively. The
Company refinanced its $3.7 million maturing loan on June 10,
2016. Holmwood considers the loan maturity date to be
the earlier of the stated loan maturity date, the anticipated
repayment date, or the balloon payment date. The
weighted average loan maturity as of December 31, 2016 and 2015 was
3.3 years and 3.8 years, respectively. The carrying
amount of Holmwood’s variable rate debt approximates its fair
value.
The following table
outlines the mortgages payable included in Holmwood’s
consolidated financial statements:
Holmwood Capital, LLC
Notes to the Consolidated Financial
Statements
December 31, 2016 and 2015
4. Debt
(continued):
|
|
|
|
|
2016
|
|
|
|
Outstanding
Principal
|
|
|
|
Initial
|
|
|
Interest
|
|
|
|
Balance
at December 31,
|
|
Entered
|
|
Balance
|
|
|
Rate
|
|
Maturity
|
|
2016
|
|
|
2015
|
|
July
2013
|
|
$
|
10,700,000
|
|
|
|
5.27%
|
|
August
2023
|
|
$
|
10,159,209
|
|
|
$
|
10,330,742
|
|
December
2014
|
|
|
3,700,000
|
|
|
|
3.93%
|
|
April
2016
|
|
|
-
|
|
|
|
3,700,000
|
|
June
2016
|
|
|
2,450,000
|
|
|
|
3.93%
|
|
June
2019
|
|
|
2,425,773
|
|
|
|
-
|
|
April
2015
|
|
|
7,600,000
|
|
|
|
2.89%
|
|
March
2018
|
|
|
7,115,152
|
|
|
|
7,407,801
|
|
December
2015
|
|
|
3,080,000
|
|
|
|
4.07%
|
|
June
2017
|
|
|
3,069,733
|
|
|
|
3,080,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,769,867
|
|
|
|
24,518,543
|
|
Debt issuance
costs
|
|
|
|
|
|
|
|
|
|
|
|
(540,812
|
)
|
|
|
(476,669
|
)
|
Accumulated
amortization
|
|
|
|
|
|
|
|
|
|
|
|
226,887
|
|
|
|
141,351
|
|
Debt issuance
costs, net of accumulated amortization
|
|
|
|
|
|
|
|
|
(313,925
|
)
|
|
|
(335,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage payable
net of unamortized debt costs
|
|
|
|
|
|
|
|
$
|
22,455,942
|
|
|
$
|
24,183,225
|
|
Notes Payable – Notes
payable totaling $1,403,992 before unamortized debt costs of
$16,091, are guaranteed by certain owners of the
Company. The loans are fixed rate with interest rates
ranging from 5.5% to 7.25% and mature during the period between
June, 2018 and June, 2019. The weighted average interest
rate on the notes outstanding as of December 31, 2016 was
6.20%.
On June 10, 2016,
the Company received $1 million in loan proceeds from a financial
institution in connection with the refinancing of its $3.7 million
maturing mortgage payable. The $3.7 million loan was
replaced with a new loan in the amount of
$2,450,000. The loans from the Company to a
property’s operating partnership were pursuant to two
promissory notes, one in the original principal amount of $338,091,
and one in the original principal amount of $661,909. The notes
bear interest at 5.5% per annum. The $338,091 note matures in
June 2019, requires interest only payments for the first 24 months
and then monthly payments will increase in order to fully amortize
the loan over the remaining 12 months of its term. The
$661,909 note’s debt service payment is based on principal
amortization over 2 years. Both notes are pre-payable in
whole or in part at any time and from time to time without premium
or penalty. The combined $1 million notes payable to the bank
is personally guaranteed by certain of the owners of the
Company.
In July, 2013,
Holmwood entered into a $1.5 million promissory note and related
collateral pledge and security agreement to finance certain
reserves and closing costs related to closing a $10.7 million
loan. The loan balance outstanding as of December 31,
2016 is $563,299. The loan bears interest at 7.25% and
the monthly debt service payment is $30,008 based on the principal
fully amortizing over a five-year term. The loan is
secured by the Company’s membership interests in three of its
properties. There were no debt issuance costs related to
this loan.
The following table
outlines the notes payable included in Holmwood’s
consolidated financial statements:
Holmwood Capital, LLC
Notes to the Consolidated Financial
Statements
December 31, 2016 and 2015
4. Debt (continued):
|
|
|
|
|
|
|
|
|
|
Entered
|
|
|
|
|
|
June
2016
|
$338,091
|
5.50%
|
June
2019
|
$338,091
|
$-
|
June
2016
|
661,909
|
5.50%
|
June
2018
|
502,602
|
-
|
July
2013
|
1,500,000
|
7.25%
|
August
2018
|
563,299
|
869,027
|
|
|
|
|
1,403,992
|
869,027
|
Debt issuance
costs
|
|
|
|
(19,750)
|
-
|
Accumulated
amortization
|
|
|
|
3,659
|
-
|
Debt issuance
costs, net of accumulated amortization
|
|
|
(16,091)
|
-
|
|
|
|
|
|
|
Notes payable net
of unamortized debt costs
|
|
|
$1,387,901
|
$869,027
|
The following is a
schedule of the principal payments of Holmwood’s mortgages
and notes payable at December 31, 2016.
|
|
|
|
|
|
2017
|
$10,436,553
|
$661,046
|
2018
|
253,556
|
571,455
|
2019
|
2,521,959
|
171,491
|
2020
|
221,045
|
-
|
2021
|
234,398
|
-
|
Thereafter
|
9,102,356
|
-
|
|
$22,769,867
|
$1,403,992
|
5.
Related
Parties
The Operating
Partnership advanced the Company funds to meet certain equity
requirements needed for a property refinancing and to fund other
working capital needs. As of December, 31, 2016, the net
funds outstanding totaled $410,861 including interest accrued on
outstanding amounts based on the monthly applicable federal funds
rate. Since December, 31, 2016, the Company has made
repayments in the amount of $147,128.
Property management
fees are charged by the Asset Manager to Holmwood through an
informal agreement between the two parties. Under the
terms of the property management agreements, Holmwood pays the
Asset Manager a monthly management fee of 3% of all gross receipts
from each property or $1,000 a month, whichever is
greater. In connection with this agreement,
Holmwood paid the Asset Manager property management fees of
$100,706 and $82,037 for the years ended December 2016 and 2015,
respectively.
Holmwood Capital, LLC
Notes to the Consolidated Financial
Statements
December 31, 2016 and 2015
5. Related Parties (continued):
Asset management
fees are charged by the Asset Manager to Holmwood through an
informal agreement between the two parties. Holmwood
pays the Asset Manager a monthly asset management fee equal to 2.4%
of each property’s gross revenues or $1,000 per month,
whichever is greater. Asset management fees totaled
$91,946 and $73,752 in 2016 and 2015, respectively.
Occupancy of the
operating properties was 100% at December 31 2016 and 2015,
respectively. Lease terms range from five to twelve
years. The future minimum rents for existing leases are as
follows:
|
|
|
|
|
|
2017
|
$3,465,838
|
2018
|
3,465,838
|
2019
|
3,465,838
|
2020
|
3,465,838
|
2021
|
3,381,837
|
Thereafter
|
5,258,727
|
Total
|
$22,503,916
|
During 2016, the
Company made quarterly distributions totaling $374,889 to its
owners. No distributions were made in 2015.
8.
Commitments
and Contingencies
In connection with
a property acquisition in 2015, the property, located in Port
Canaveral, FL, was purchased subject to a ground
lease. The ground lease has an extended term of 30 years
to 2045 with one 10-year renewal option. The Company
made ground lease payments of $71,094 during 2016.
In the normal
course of business, the Company can be involved in legal actions
arising from the ownership of its properties. In the
Company' opinion, the liabilities, if any, that may ultimately
result from such legal actions are not expected to have a material
adverse effect on the financial position, operations or liquidity
of the Company.
The Company has
entered into a Contribution Agreement with the REIT whereby
Holmwood’s membership interests in its seven properties will
be exchanged for 985,855 Operating Partnership units in HC
Government Realty Holdings, LP, an affiliate of the REIT, in
connection with the REIT’s Regulation A
offering. The REIT will assume the indebtedness of the
seven properties as well as the Company’s note
payable. In addition, as of the closing of the
contribution, Holmwood will enter into a tax protection agreement
with the REIT to indemnify the Company for any taxes resulting from
a sale for a period of ten years after the closing. The
number of Operating Partnership units, valued at $10.00 each, was
determined by the Asset Manager based on prevailing market
rates.
The Company is in
negotiation to refinance its $3,069,733 maturing loan due on June
15, 2017. The proposed terms assume loan proceeds in the
amount of $2,750,000, the loan will bear interest at a fixed annum
rate of 4.25%, debt service payments are based on principal
amortization over 25 years and the loan matures in seven years from
the date of closing.
The Company
evaluated subsequent events through April 27, 2017, the date the
consolidated financial statements were available to be
issued. The Company concluded no additional material
events subsequent to December 31, 2016 were required to be
reflected in the Company’s consolidated financial statements
or notes as required by standards for accounting disclosures of
subsequent events.
Report of Independent
Auditor
To the Board of Directors and
Stockholders
HC Government Realty Trust,
Inc.
We have audited the
accompanying combined statement of revenues and certain operating
expenses (the “Statement”) of the Johnson City Property
and the Port Canaveral Property (collectively the
“Properties”), as defined in Note 1 of the Statement,
for the year ended December 31, 2014.
Management’s Responsibility for the
Statement
Management is
responsible for the preparation and fair presentation of this
Statement, in accordance with accounting principles generally
accepted in the United States of America that is free from material
misstatement, whether due to fraud or error.
Auditor’s
Responsibility
Our responsibility
is to express an opinion on this Statement 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 Statement is free from material
misstatement.
An audit involves
performing procedures to obtain audit evidence about the amounts
and disclosures in the Statement. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks
of material misstatement of the Statement, 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 Statement 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 Statement.
We believe the
audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the
Statement referred to above presents fairly, in all material
respects, the revenues and certain operating expenses of the
Properties for the year ended December 31, 2014 in conformity with
accounting principles generally accepted in the United States of
America.
Emphasis of Matter
As further
discussed in Note 1, Holmwood Capital, LLC, acquired the Properties
in March 2015 through its subsidiaries of GOV FBI Johnson City,
L.P., and GOV CBP Cape Canaveral, L.P., respectively.
The accompanying
Statement was prepared as described in Note 2, for the purpose of
complying with the rules and regulations of the Securities and
Exchange Commission and is not intended to be a complete
presentation of the Properties revenues and expenses. Our opinion
is not modified with respect to this matter.
/s/ Cherry Bekaert
LLP,
Richmond,
Virginia
June 14,
2016
Johnson City Property and
Port Canaveral Property
Combined Statement of Revenues
and
Certain Operating Expenses
For the Year Ended December 31,
2014
|
|
|
|
Revenues
|
|
Rental
revenues
|
$1,034,930
|
Other
income
|
6,919
|
Total
revenues
|
1,041,849
|
|
|
Certain Operating
Expenses
|
|
Property
operating
|
140,038
|
Real estate
taxes
|
37,909
|
Insurance
|
12,868
|
Property management
fees
|
43,909
|
Ground
Rent
|
70,872
|
Other
|
25,550
|
Total certain
operating expenses
|
331,146
|
|
|
Excess of revenues
over certain operating expenses
|
$710,703
|
See accompanying notes to combined statement
of revenues and certain operating expenses.
Johnson City Property and Port Canaveral
Property
Notes to the Combined Statement of Revenues and
Certain Operating Expenses
for the Year Ended December 31,
2014
1. Business and Purchase and Sales
Agreement
In March, 2015,
Holmwood Capital, LLC, through its subsidiaries, Gov FBI Johnson
City, L.P. and Gov Cape Canaveral, L.P. (the “Operating
Partnerships”), acquired, pursuant to Purchase and Sales
Agreements (the “Agreements”), the Johnson City
Property and the Port Canaveral Property (the
“Properties”).
The Johnson City
Property is a 10,115 rentable square foot, single-tenant, one-story
office building located on 2.59 acres located in Johnson City, TN.
The property is 100% leased to the United States of America and
administered by the General Services Administration
(“GSA”). The property was an existing property that was
substantially renovated in 2012 for the intended use exclusively by
the Federal Bureau Investigation, the occupying tenant. The lease
had an initial firm term of 10 years and one five-year option. The
lease, as of December 31, 2014, has a remaining firm term of 7.6
years.
The Port Canaveral
Property is a 14,704 rentable square foot, build-to-suit,
single-tenant, one-story office building located on 1.59 acres
located in Cape Canaveral, FL. The property is under a 30-year
ground lease with 26 years remaining on the lease term. The
property is 100% leased to the United States of America and
administered by the GSA. The property was developed in 2012 for the
intended use by the U. S. Customs and Border Patrol office, the
occupying tenant. The lease had an initial firm term of 10 years
and one five-year option. The lease, as of December 31, 2014, has a
remaining firm term of 7.5 years.
2. Basis of Presentation
The Combined
Statement of Revenues and Certain Operating Expenses (the
“Statement”) has been prepared for the purpose of
complying with Rule 8-06 of Regulation S-X, promulgated by the
Securities and Exchange Commission, and is not intended to be a
complete presentation of the Properties revenues and expenses.
Revenues and certain operating expenses include only those amounts
expected to be comparable to the proposed future operations of the
Properties. Expenses, such as depreciation and amortization, are
excluded from the accompanying Statement. The Statement has been
prepared on the accrual basis of accounting which requires
management to make estimates and assumptions that affect the
reported amounts of the revenues and expenses during the reporting
periods. Actual results may differ from those
estimates.
3. Revenues
Revenues result
from the rental of space to tenants under noncancelable operating
leases. Tenant reimbursements, include reimbursement for operating
expenses, which are determined by the base year operating expenses
and are subject to reimbursement in subsequent years based on
changes in the urban CPI. Tenant reimbursements also include
amounts due from tenants for real estate taxes and other
reimbursements. The tenant reimburses the Properties for real
estate taxes over the base year. In the case of expense
reimbursements due from tenants, revenues are recognized in the
period in which the related expense is incurred. When a portion of
accounts receivable is estimated to be uncollectible, an allowance
for doubtful accounts is recorded. There were no allowances as of
December 31, 2014.
Johnson City Property and Port Canaveral
Property
Notes to the Combined Statement of Revenues and
Certain Operating Expenses
for the Year Ended December 31,
2014
The weighted
average remaining lease term for the tenants at the Properties is
7.55 years. Future minimum rentals to be received under the
tenants’ noncancelable operating leases for each of the next
five years and thereafter, as of December 31, 2014 were as
follows:
2015
|
$1,037,883
|
2016
|
1,037,883
|
2017
|
1,037,883
|
2018
|
1,037,883
|
2019
|
1,037,883
|
Thereafter
|
2,668,921
|
Total
|
$7,858,336
|
4. Ground Lease
The Port Canaveral
Property is under a long term ground lease to Canaveral Port
Authority (“Port Canaveral”). The ground rent is
$70,872 per year. The rental rate was fixed for the first three
years of the term, and then adjusted every three years by the
consumer price index. There are approximately 26 years remaining on
the ground lease. Port Canaveral establishes ground lease rental
rates based on a periodic review of local comparable land sales
data performed by a local appraiser. The most recent review was
completed in August, 2014. It is noted that the Port Authority
typically renews ground leases upon expiration.
5. Combining Schedules
Income statements
for each property for the year ended December 31, 2014 are
presented below.
|
For the year ended December 31,
2014
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
Rental
revenues
|
$391,473
|
$643,457
|
$1,034,930
|
Other
income
|
—
|
6,919
|
6,919
|
Total
revenues
|
391,473
|
650,376
|
1,041,849
|
Certain Operating
Expenses
|
|
|
|
Property
operating
|
62,253
|
77,785
|
140,038
|
Real estate
taxes
|
21,894
|
16,015
|
37,909
|
Insurance
|
5,990
|
6,878
|
12,868
|
Property management
fees
|
16,499
|
27,410
|
43,909
|
Ground
Rent
|
—
|
70,872
|
70,872
|
Other
|
25,550
|
—
|
25,550
|
Total certain
operating expenses
|
132,186
|
198,960
|
331,146
|
Excess of revenues
over certain
|
|
|
|
operating
expenses
|
$259,287
|
$451,416
|
$710,703
|
6. Subsequent Events
Management has
evaluated all events and transactions that occurred after December
31, 2014 through June 14, 2016, the date the financial statement
was available to be issued, and are not aware of any events that
have occurred subsequent to December 31, 2014 that would require
additional adjustments to or disclosures in the
Statement.
Report of Independent
Auditor
To the Board of Directors and
Stockholders
HC Government Realty Trust,
Inc.
We have audited the
accompanying statement of revenues and certain operating expenses
(the “Statement”) of the Silt Property
(“Property”), as defined in Note 1 of the Statement,
for the year ended December 31, 2014.
Management’s Responsibility for the
Statement
Management is
responsible for the preparation and fair presentation of this
Statement, in accordance with accounting principles generally
accepted in the United States of America that is free from material
misstatement, whether due to fraud or error.
Auditor’s
Responsibility
Our responsibility
is to express an opinion on this Statement 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 Statement is free from material
misstatement.
An audit involves
performing procedures to obtain audit evidence about the amounts
and disclosures in the Statement. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks
of material misstatement of the Statement, 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 Statement 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 Statement.
We believe the
audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the
Statement referred to above presents fairly, in all material
respects, the revenues and certain operating expenses of the
Property for the year ended December 31, 2014 in conformity with
accounting principles generally accepted in the United States of
America.
Emphasis of Matter
As further
discussed in Note 1, on December 9, 2015, Holmwood Capital, LLC,
through its subsidiary of GOV-Silt, L.P., completed the acquisition
of the Property.
The accompanying
Statement was prepared as described in Note 2, for the purpose of
complying with the rules and regulations of the Securities and
Exchange Commission and is not intended to be a complete
presentation of the Property’s revenues and expenses. Our
opinion is not modified with respect to this matter.
/s/ Cherry Bekaert
LLP
Richmond,
Virginia
June 14,
2016
Silt Property
Statements of Revenues and
Certain Operating Expenses
For the Six Months Ended June 30, 2015
(unaudited)
and the Year Ended December 31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
Rental
revenues
|
$192,516
|
$384,768
|
Real estate tax
reimbursements
|
6,000
|
8,162
|
Total
revenues
|
198,516
|
392,930
|
|
|
|
Certain Operating
Expenses
|
|
|
Property
operating
|
36,800
|
52,290
|
Real estate
taxes
|
25,836
|
45,788
|
Insurance
|
1,079
|
4,866
|
Property management
fees
|
6,026
|
8,880
|
Other
|
1,222
|
2,910
|
Total certain
operating expenses
|
70,963
|
114,734
|
|
|
|
Excess of revenues
over certain operating expenses
|
$127,553
|
$278,196
|
See accompanying notes to statement of
revenues and certain operating expenses.
Silt Property
Notes to the Statements of Revenues and Certain
Operating Expenses
For the Six Months Ended June 30, 2015
(unaudited)
and the Year Ended December 31,
2014
1. Business and Purchase and Sales
Agreement
On December 9,
2015, Holmwood Capital, LLC, through its subsidiary, Gov Silt, L.P.
(the “Operating Partnership”), acquired the Silt
Property (the “Property”), pursuant to a Purchase and
Sales Agreement (the “Agreement”), an 18,813 rentable
square foot, build-to-suit single-tenant, one-story office
building, developed in 2009, located on 3.51 acres in Silt,
Colorado. The Property is 100% leased by the United States of
America and administered by the Bureau of Land Management (BLM) on
a single tenant/user basis. The lease had an initial firm term of
15 years and one five-year option. The lease, as of December 31,
2014, has a remaining firm term of 9.8 years.
2. Basis of Presentation
The Statements of
Revenues and Certain Operating Expenses (the
“Statements”) have been prepared for the purpose of
complying with Rule 8-06 of Regulation S-X, promulgated by the
Securities and Exchange Commission, and are not intended to be a
complete presentation of the Property’s revenues and
expenses. Revenues and certain operating expenses include only
those amounts expected to be comparable to the proposed future
operations of the Property. Expenses, such as depreciation and
amortization, are excluded from the accompanying Statements. The
Statements have been prepared on the accrual basis of accounting
which requires management to make estimates and assumptions that
affect the reported amounts of the revenues and expenses during the
reporting periods. Actual results may differ from those
estimates.
3. Revenues
Revenues result
from the rental of space to the tenant under a noncancelable
operating lease. Tenant reimbursements, include reimbursement for
operating expenses, which are determined by the base year operating
expenses and are subject to reimbursement in subsequent years based
on changes in the urban CPI. Tenant reimbursements also include
amounts due from the tenant for real estate taxes and other
reimbursements. The tenant reimburses the Property for real estate
taxes over the base year. In the case of expense reimbursements due
from tenant, the revenue is recognized in the period in which the
related expense is incurred. When a portion of accounts receivable
is estimated to be uncollectible, an allowance for doubtful
accounts is recorded. There were no allowances as of December 31,
2014 and for the six months ending June 30, 2015.
The remaining lease
term for the tenant at the Property is 9.3 years as of June 30,
2015 (unaudited). Future minimum rentals to be received under the
tenant’s noncancelable operating lease for each of the next
five years and thereafter as of December 31, 2014 were as
follows:
Silt
Property
Notes to the Statements of Revenues and Certain
Operating Expenses
For the Six Months Ended June 30, 2015
(unaudited)
and the Year Ended December 31,
2014
2015
|
$385,029
|
2016
|
385,029
|
2017
|
385,029
|
2018
|
385,029
|
2019
|
385,029
|
Thereafter
|
1,637,163
|
Total
|
$3,562,308
|
4. Subsequent Events
Management has
evaluated all events and transactions that occurred after December
31, 2014 through June 14, 2016, the date the financial statement
was available to be issued, and are not aware of any events that
have occurred subsequent to December 31, 2014 that would require
additional adjustments to or disclosures in the
Statements.
Report of Independent
Auditor
To the Board of Directors and
Stockholders
HC Government Realty Trust,
Inc.
We have audited the
accompanying combined statement of revenues and certain operating
expenses (the “Statement”) of the Lakewood Property,
Lawton Property and the Moore Property (the “Owned
Properties”), as defined in Note 1 of the Statement, for the
year ended December 31, 2015.
Management’s Responsibility for the
Statement
Management is
responsible for the preparation and fair presentation of this
Statement, in accordance with accounting principles generally
accepted in the United States of America that is free from material
misstatement, whether due to fraud or error.
Auditor’s
Responsibility
Our responsibility
is to express an opinion on this Statement 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 Statement is free from material
misstatement.
An audit involves
performing procedures to obtain audit evidence about the amounts
and disclosures in the Statement. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks
of material misstatement of the Statement, 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 Statement 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 Statement.
We believe the
audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the
Statement referred to above presents fairly, in all material
respects, the revenues and certain operating expenses of the Owned
Properties for the year ended December 31, 2015 in conformity with
accounting principles generally accepted in the United States of
America.
Emphasis of Matter
As further
discussed in Note 1, HC Government Realty Trust, Inc., acquired the
Owned Properties on June 10, 2016 through its subsidiaries of
GOV-Lakewood DOT, LLC, GOV-Lawton SSA, LLC, and GOV-Lawton SSA,
LLC, respectively.
The accompanying
Statement was prepared as described in Note 2, for the purpose of
complying with the rules and regulations of the Securities and
Exchange Commission and is not intended to be a complete
presentation of the Owned Properties’ revenues and expenses.
Our opinion is not modified with respect to this
matter.
/s/ Cherry Bekaert
LLP,
Richmond,
Virginia
June 14,
2016
The Owned Properties
Combined Statement of Revenues
and
Certain Operating Expenses
For the Year Ended December 31,
2015
|
|
|
|
Revenues
|
|
Rental
revenues
|
$1,180,474
|
Real estate tax
reimbursements
|
36,317
|
Other
income
|
15,355
|
Total
revenues
|
1,232,146
|
|
|
Certain Operating
Expenses
|
|
Property
operating
|
163,512
|
Real estate
taxes
|
84,341
|
Insurance
|
9,566
|
Property management
fees
|
36,264
|
Other
|
4,902
|
Total certain
operating expenses
|
298,585
|
|
|
Excess of revenues
over certain operating expenses
|
$933,561
|
See accompanying notes to combined statement
of revenues and certain operating expenses.
The Owned Properties
Notes to the Combined Statement of
Revenues
and Certain Operating
Expenses
for the Year Ended December 31,
2015
1. Business and Purchase and Sales
Agreement
On June 10, 2016 HC
Government Realty Trust, Inc., through its subsidiaries,
Gov-Lakewood DOT, LLC, Gov-Lawton SSA, LLC and Gov-Moore PSA, LLC
(the “Operating Partnerships”), acquired, pursuant to
Purchase and Sales Agreements (the “Agreements”), the
Lakewood Property described below, the Lawton Property described
below and the Moore Property described below (collectively the
“Owned Properties”) respectively, for a combined
purchase price of $10,226,786 plus closing costs.
The Lakewood
Property is a 19,241 rentable square foot, single-tenant building
built in 2004 on 3.8 acres located in Lakewood, CO. The property
includes two buildings (19,709 gross square feet of
office/warehouse building and a 1,313 gross square feet storage
building. The property is 100% leased to the United States of
America and administered by the General Services Administration
(GSA). The property was a build to suit exclusively for use by the
Department of Transportation (DOT), the occupying tenant. The lease
had an initial firm term of 20 years. The lease, as of December 31,
2015, has a remaining firm term of 8.5 years.
The Lawton Property
is a 9,298 rentable square foot, single-tenant, steel frame single
story office building located on 1.3 acres located 87 miles from
Oklahoma City, OK. The property was built in 2000. The property is
100% leased to the United States of America, administered by GSA
and occupied by the Social Security Administration agency. The
lease was amended and GSA signed a new 10-year term, 5 years firm
that commenced on August 17, 2015. The lease, as of December 31,
2014, has a remaining firm term of 4.6 years.
The Moore Property
is a 17,058 rentable square foot, single-tenant, single story
office building located on 2.2 acres located in 10 miles from
downtown Oklahoma City, OK. The property was originally built in
1999 and an addition was added in 2012. The property is 100% leased
to the United States of America, administered by GSA and occupied
by the Social Security Administration agency. GSA signed a new
15-year term lease, 10 years firm that commenced on April 10, 2012.
The lease, as of December 31, 2015, has a remaining firm term of
6.3 years.
2. Basis of Presentation
The Combined
Statement of Revenues and Certain Operating Expenses (the
“Statement”) has been prepared for the purpose of
complying with Rule 8-06 of Regulation S-X, promulgated by the
Securities and Exchange Commission, and is not intended to be a
complete presentation of the Owned Properties revenues and
expenses. Revenues and certain operating expenses include only
those amounts expected to be comparable to the proposed future
operations of the Owned Properties. Expenses, such as depreciation
and amortization, are excluded from the accompanying Statement. The
Statement has been prepared on the accrual basis of accounting
which requires management to make estimates and assumptions that
affect the reported amounts of the revenues and expenses during the
reporting periods. Actual results may differ from those
estimates.
The Owned Properties
Notes to the Combined Statement of
Revenues
and Certain Operating
Expenses
for the Year Ended December 31,
2015
3. Revenues
Revenues results
from the rental of space to tenants under noncancelable operating
leases. Tenant reimbursements, include reimbursement for operating
expenses, which are determined by the base year operating expenses
and are subject to reimbursement in subsequent years based on
changes in the urban CPI. Tenant reimbursements also include
amounts due from tenants for real estate taxes and other
reimbursements. The tenant reimburses the Owned Properties for real
estate taxes over the base year. In the case of expense
reimbursements due from tenants, revenues are recognized in the
period in which the related expense is incurred. When a portion of
accounts receivable is estimated to be uncollectible, an allowance
for doubtful accounts is recorded. There were no allowances as of
December 31, 2015.
The weighted
average remaining lease terms for the tenants at the Owned
Properties is 6.8 years. Future minimum rentals to be received
under the tenants’ noncancelable operating leases for each of
the next five years and thereafter, as of December 31, 2015 were as
follows:
2015
|
$1,264,737
|
2016
|
1,264,737
|
2017
|
1,264,737
|
2018
|
1,264,737
|
2019
|
1,159,308
|
Thereafter
|
2,263,150
|
Total
|
$8,481,406
|
4. Combining Schedules
An income statement
for each property for the year ended December 31, 2015 is presented
below.
The Owned Properties
Notes to the Combined Statement of
Revenues
and Certain Operating
Expenses
for the Year Ended December 31,
2015
|
For the year
ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
Rental
revenues
|
$196,554
|
$524,018
|
$459,902
|
1,180,474
|
Real estate tax
reimbursements
|
3,479
|
73
|
32,765
|
36,317
|
Other
income
|
1,700
|
13,655
|
—
|
15,355
|
Total
revenues
|
201,733
|
537,746
|
492,667
|
1,232,146
|
|
|
|
|
|
Certain Operating
Expenses
|
|
|
|
|
Property
operating
|
37,953
|
59,780
|
65,779
|
163,512
|
Real estate
taxes
|
9,933
|
20,898
|
53,510
|
84,341
|
Insurance
|
2,622
|
4,358
|
2,586
|
9,566
|
Property management
fees
|
5,529
|
15,727
|
15,008
|
36,264
|
Other
|
1,800
|
2,400
|
702
|
4,902
|
Total certain
operating expenses
|
57,837
|
103,163
|
137,585
|
298,585
|
|
|
|
|
|
Excess of revenues
over certain
|
|
|
|
|
operating
expenses
|
$143,896
|
$434,583
|
$355,082
|
$933,561
|
5. Subsequent Events
Management has
evaluated all events and transactions that occurred after December
31, 2015 through June 14, 2016, the date the financial statement
was available to be issued, and are not aware of any events that
have occurred subsequent to December 31, 2015 that would require
additional adjustments to or disclosures in the
Statement.
Report of Independent Auditor
To the
Board of Directors and Stockholders
HC
Government Realty Trust, Inc.
We have
audited the accompanying statement of revenues and certain
operating expenses (the “Statement”) of the Norfolk
Property (the “Property”), as defined in Note 1 of the
Statement, for the year ended December 31, 2016.
Management’s Responsibility for the Statement
Management
is responsible for the preparation and fair presentation of this
Statement, in accordance with accounting principles generally
accepted in the United States of America that is free from material
misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our
responsibility is to express an opinion on this Statement 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 Statement is free from
material misstatement.
An
audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the Statement. The procedures
selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the Statement,
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 Statement
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
Statement.
We
believe the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our
opinion, the Statement referred to above presents fairly, in all
material respects, the revenues and certain operating expenses of
the Property for the year ended December 31, 2016 in conformity
with accounting principles generally accepted in the United States
of America.
Emphasis of Matter
As
further discussed in Note 1, HC Government Realty Trust, Inc.
acquired the Property in March 2017 through its subsidiary Gov
Norfolk, LLC.
The
accompanying Statement was prepared as described in Note 2, for the
purpose of complying with the rules and regulations of the
Securities and Exchange Commission and is not intended to be a
complete presentation of the Property’s revenues and
expenses. Our opinion is not modified with respect to this
matter.
/s/
Cherry Bekaert LLP
Richmond,
Virginia
November 7,
2017
Norfolk, VA Property
Notes to the Statement of Revenues and Certain Operating
Expenses
For the Year Ended December 31, 2016
|
|
|
|
|
|
Revenues
|
|
Rental
revenues
|
$1,381,400
|
Real
estate tax reimbursements
|
15,428
|
Other
miscellaneous revenues
|
5,190
|
Total
revenues
|
1,402,018
|
|
|
Certain
Operating Expenses
|
|
Property
operating
|
306,037
|
Real
estate taxes
|
78,113
|
Insurance
|
21,060
|
Property
management fees
|
28,040
|
Other
|
11,159
|
Total
certain operating expenses
|
444,409
|
|
|
Excess
of revenues over certain operating expenses
|
$957,609
|
1.
Business
and Purchase and Sales Agreement
On
March 31, 2017, HC Government Realty Trust, Inc., through its
operating partnership, Gov Norfolk, LLC, acquired the Norfolk
Property (the “Property”), pursuant to a Purchase and
Sales Agreement (the “Agreement”). The Property, a
53,917 rentable square foot, build-to-suit single-tenant, one-story
office building, was developed in 2007 and located on 4.53 acres in
Norfolk, VA. The Property is 100% leased by the United States of
America and administered by the Social Security Administrations
(SSA) on a single tenant/user basis. The initial lease was for ten
years and expired in June 2017. The tenant signed a new 10-year
firm term lease and began on June 27, 2017.
The
Statement of Revenues and Certain Operating Expenses (the
“Statement”) has been prepared for the purpose of
complying with Rule 8-06 of Regulation S-X, promulgated by the
Securities and Exchange Commission, and is not intended to be a
complete presentation of the Property’s revenues and
expenses. Revenues and certain operating expenses include only
those amounts expected to be comparable to the proposed future
operations of the Property. Expenses, such as depreciation and
amortization, are excluded from the accompanying Statements. The
Statement has been prepared on the accrual basis of accounting
which requires management to make estimates and assumptions that
affect the reported amounts of the revenues and expenses during the
reporting periods. Actual results may differ from those
estimates.
Revenues result
from the rental of space to the tenant under a noncancelable
operating lease. Tenant reimbursements, include reimbursement for
operating expenses, which are determined by the base year operating
expenses and are subject to reimbursement in subsequent years based
on changes in the urban Consumer Price Index (“CPI”).
Tenant reimbursements may also include amounts due from the tenant
for real estate taxes and other reimbursements. The tenant
reimburses the Property for real estate taxes over the base year.
In the case of expense reimbursements due from tenant, the revenue
is recognized in the period in which the related expense is
incurred. When a portion of accounts receivable is estimated to be
uncollectible, an allowance for doubtful accounts is recorded.
There were no allowances as of December 31, 2016.
The
remaining lease term for the tenant’s new lease as of the
date of this report is 9.6 years. The future minimum rentals for
the existing and new lease beginning June 27, 2017 to be received
under the tenant’s noncancelable operating leases for each of
the next five years and thereafter is as follows:
|
|
|
|
|
|
2017
|
$1,338,573
|
2018
|
1,297,153
|
2019
|
1,297,153
|
2020
|
1,297,153
|
2021
|
1,297,153
|
Thereafter
|
7,123,531
|
Total
|
$13,650,716
|
4.
Tenant
Improvement Work
As part
of GSA signing the new lease, the landlord promised to complete
certain tenant improvement work which the tenant would repay in
monthly installments over the remaining term of the lease once the
work was completed and accepted by the tenant. The seller provided
the funds for estimated tenant improvement work in the amount of
$1,315,366 and the amount has been escrowed. The Company is working
with the tenant on the construction plans for their tenant
improvements and it is estimated to take six months to complete. If
the tenant work had been completed by the beginning of the new
lease term, the monthly rent would have increased by $10,961 each
month or $131,536 annually to reflect the repayment of the tenant
improvements over the term of the lease. The monthly reimbursement
amount will adjust accordingly once the improvements are complete
so that the landlord will receive the $1,315,366 within the new
lease term. The tenant’s new lease beginning June 27, 2017,
will result in annual rental income of $1,297,153 for the shell
rent and reimbursement for operating expenses. This amount
represents a 12.6% increase over its existing lease annual rent of
$1,151,335 representing the shell rent and reimbursement for
operating expenses. Under the existing lease as of December 31,
2016, the tenant reimbursed the landlord for tenant improvement
work at an annual amount of $230,051. Total annual rent proceeds
under the existing lease including reimbursement for tenant work
totaled $1,381,386.
Management has
evaluated all events and transactions that occurred after December
31, 2016 through November 7, 2017, the date the financial statement
was available to be issued, and are not aware of any events that
have occurred subsequent to December 31, 2016 that would require
additional adjustments to or disclosures in the
Statement.
HC GOVERNMENT REALTY TRUST,
INC.
Minimum Offering Amount: $3,000,000 in Shares
of Common Stock
Maximum Offering Amount: $30,000,000 in Shares
of Common Stock
OFFERING CIRCULAR
December 18,
2017