An offering statement pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the offering statement filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Final Offering Circular was filed may be obtained.

 

Preliminary Offering Circular

November 6, 2018

Subject to Completion

 

HC GOVERNMENT REALTY TRUST, INC.

1819 Main Street, Suite 212

Sarasota, Florida 34236

(941) 955-7900

 

Maximum Offering: $32,000,000 in Shares of Common Stock

 

Explanatory Note

 

This offering circular is part of the post-qualification amendment we filed in order to increase the offering, make revisions related the implementation of our distribution reinvestment plan, or the DRIP, extend the offering until November 7, 2019, and revise certain other information. 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 16 GSA Properties, comprised of 13 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 elected 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.

 

In our primary offering, which we refer to as the offering, we are offering 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, which we refer to as our maximum offering amount. The minimum purchase requirement is 150 shares, or $1,500; however, we can waive the minimum purchase requirement in our sole discretion. We are also offering up to 200,000 shares of our common stock at $10.00 per share, or $2,000,000, pursuant to our distribution reinvestment plan, or the DRIP. We reserve the right to reallocate the shares we are offering between our primary offering and the DRIP. As of the date of this offering circular, we have issued 891,041 shares of common stock in this offering in exchange for gross proceeds totaling $8,910,410. We have not yet issued any shares of common stock in the DRIP. For more information on the DRIP, see “Summary of Distribution Reinvestment Plan.”

 

We intend to hold closings in the offering 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 Purchase." 

 

We have engaged Boustead 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 offering began on November 7, 2016 and is expected to continue until the earlier of (i) the date on which the maximum offering amount has been sold, or (ii) November 7, 2019. We may, however, terminate this offering at any time and for any reason. At this time, there is no public trading market for shares of our common stock.

 

	Price to Public	Commissions and Expense Reimbursements (1)(2)	Proceeds to Company (1)(2)	Proceeds to Other Persons
The Offering
Per Share	$10.00	$0.875	$9.125	$0
Maximum Offering Amount	$30,000,000	$2,625,000	$27,375,000	$0
Distribution Reinvestment Plan
Per Share	$10.00	$0	$10.00	$0
Total Distribution Reinvestment Plan	$2,000,000	$0	$2,000,000	$0

 

	(1)	This table depicts underwriting discounts, commissions and expense reimbursements of 8.75% of the gross offering proceeds in the offering, which we refer to as 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. We will not pay any underwriting discounts, commissions or expenses reimbursements in connection with the DRIP. 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 $1,459,479 as organizational and offering costs. We anticipate no 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.

 

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 295% of our estimated cash available for distribution for the twelve months ending June 30, 2019, 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 costlier.
	●	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 [18].

 

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.

 

 Preliminary Offering Circular Dated November 6, 2018.

 

TABLE OF CONTENTS

 

SUMMARY	1
RISK FACTORS	18
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	44
DILUTION	45
DISTRIBUTION POLICY	46
PLAN OF DISTRIBUTION	49
USE OF PROCEEDS	53
DESCRIPTION OF OUR BUSINESS	54
DESCRIPTION OF OUR PROPERTIES	60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	74
DIRECTORS, EXECUTIVE OFFICERS, AND SIGNIFICANT EMPLOYEES	79
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS	83
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS	86
OUR MANAGER AND RELATED AGREEMENTS	87
COMPENSATION TO OUR MANAGER AND AFFILIATES	89
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES	92
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS	95
SECURITIES BEING OFFERED	100
SUMMARY OF DISTRIBUTION REINVESTMENT PLAN	107
IMPORTANT PROVISIONS OF MARYLAND CORPORATE LAW AND OUR CHARTER AND BYLAWS	110
ADDITIONAL REQUIREMENTS AND RESTRICTIONS	114
THE OPERATING PARTNERSHIP AGREEMENT	115
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS	122
ERISA CONSIDERATIONS	141
REPORTS	143
LEGAL MATTERS	144
INDEPENDENT AUDITORS	145
ADDITIONAL INFORMATION	146
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

 

We were formed in 2016 as a Maryland corporation, and we have elected to be taxed as a REIT for federal income tax purposes beginning with our taxable year ended December 31, 2017. We were formed primarily to source, acquire, own and manage built-to-suit or improved-to-suit, single-tenant properties leased by the United States of America and administered by the U.S General Services Administration or directly by the occupying agency, both of which are referred to as GSA Properties. We invest primarily in GSA Properties across secondary and smaller markets with sizes ranging from 5,000-50,000 rentable square feet, and in their listed lease term after construction or improvement to post-9/11 standards. We further emphasize GSA Properties that fulfill mission critical or citizen service functions. Leases associated with the GSA Properties in which our company invests are full faith and credit obligations of the United States of America.

 

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, our portfolio of assets consists of 16 GSA Properties, which we refer to as our portfolio, and we have one additional property under contract to acquire, which we refer to as our pipeline.

 

Our Portfolio

 

Our portfolio consists of (i) three GSA Properties acquired by our company on June 10, 2016 for a purchase price of $11,050,596, financed with proceeds from the issuance of our 7.00% Series A Cumulative Convertible Redeemable Preferred Stock, or Series A Preferred Stock, secured mortgage financing in the original principal amount of $7,225,00, unsecured seller financing in the original principal amount of $2,019,789 and $1,000,000 in original principal amount of our unsecured loan from Holmwood; (ii) our GSA Property acquired by our company on March 31, 2017, for a purchase price of $14,717,937, financed with proceeds from senior mortgage debt in the original principal amount of $10,875,000 and $3,842,937 in original aggregate principal amount of unsecured debt from two of our directors; (iii) seven properties contributed to us as of the initial closing by Holmwood, including three properties for 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) our GSA Property acquired by our company on July 25, 2017, for a purchase price of $4,797,072, financed with secured mortgage financing in the original principal amount of $3,530,00, and proceeds from this offering of $1,179,458; (v) our GSA Property acquired by our company on November 21, 2017, for a purchase price of $8,273,349, financed by secured mortgage debt in original principal amount of $6,991,250 and proceeds from our offering of $1,282,099; (vi) our GSA Property acquired by our company on July 27, 2018, for a purchase price of $7,150,000, financed by secured mortgage debt in original principal amount of $5,360,000 and financed with mezzanine debt of $1,790,000; (vii) our GSA Property acquired by our company on August 30, 2018, for a purchase price of $3,445,000, financed by secured mortgage debt in original principal amount of $2,580,000 and financed in part with mezzanine debt of $800,000; and (viii) our GSA Property acquired by our company on October 15, 2018, for a purchase price of $11,000,000, financed by secured mortgage debt in original principal amount of $8,250,000 and financed in part with mezzanine debt of $2,470,000. See “Description of Our Properties” for more information on our portfolio of GSA Properties.

 

Our Pipeline

 

Our pipeline consists of a GSA Property located in Monroe, Louisiana under contract for a purchase price of $5,150,000 and expected to close in December 2018.

 

The GSA-leased, real estate asset class has a number of 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 United States, and the GSA has never experienced a financial default. Payment of 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 typically is reset based on a number of factors at the time of renewal, including inflation and the replacement cost of the building, that generally we expect will increase over the life of the lease.

 

GSA-leased properties generally provide attractive investment opportunities but require specialized knowledge and expertise. Each U.S. Government agency has its own customs, procedures, culture, needs and mission, which results in different requirements for its leased space. Furthermore, the GSA-leased sector is highly fragmented with a significant amount of non-institutional owners, who lack our infrastructure and experience with GSA-leased properties. Moreover, while there are a number of national real estate brokers that hold themselves out as having GSA-leased property expertise, there are no national or regional clearing houses for GSA-leased properties. We believe this fragmentation can be ascribed particularly to the U.S. Government’s – including GSA’s – procurement policies, including policies of preference for small, female and minority owned businesses. As of August 2016, the largest owner of GSA-leased properties owned approximately 3.5% of the GSA-leased properties based on leased square footage, and the ten largest owners of GSA-leased properties collectively owned approximately 18.7% of the GSA-leased properties by leased square footage.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 agency occupancy, and, therefore, to identifying and acquiring attractive GSA-leased properties. Our portfolio is diversified among occupancy agencies, including a number of the 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 operate as an “UPREIT”, which means we own our GSA-leased properties through single-purpose entities that are wholly owned by our Operating Partnership. While we focus on investments in GSA Properties, in the future we also may invest in state and local government, mission critical single tenant properties or properties previously (but not exclusively) leased to the United States, the GSA or one or more occupying agencies. We are externally managed and advised by Holmwood Capital Advisors, LLC, a Delaware limited liability company, or our Manager. Our Manager will make all investment decisions for us. Our Manager is owned equally by Robert R. Kaplan and Robert R. Kaplan, Jr., individually, Stanton Holdings, LLC, which is controlled by Edwin M. Stanton, and by Baker Hill Holding LLC, which is controlled by Philip and Vickie Kurlander. 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. Dr. Kurlander is the controlling manager of our Manager.  Our Manager will be overseen by our board of directors. For more information on our executive officers and directors please see “Directors, Executive Officers and Significant Employees.”

 

        

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 and offering structure analysis.

 

We believe in the long-term there will be a consistent flow of GSA 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. 

 

1 “Top Federal Property Owners (2016)” by Kurt Stout January 17, 2017, Colliers International Government Solutions

 

We primarily make direct acquisitions of GSA Properties, but we may also invest in GSA Properties through indirect investments, such as joint ventures which may or may not be managed or affiliated with our Manager or its affiliates, and whereby we may 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 so that the investment meets the definition of “majority-owned subsidiary” under the 40 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 Dr. Kurlander, Mr. Stanton, Mr. Kaplan, Mr. William Robert Fields, Mr. Scott A. Musil, and Mr. Leo Kiely , the latter three of which are our independent directors. Our fourth independent director, Mr. John F. O’Reilly, resigned his position in September 2018, and our remaining board members have not yet selected a replacement independent director to fill the vacancy created by his resignation.

 

Our Competitive Strengths and Strategic Opportunities

 

We believe the experience of our Manager, its affiliates, principals and executive officers, as well as our investment strategies, distinguish us from other real estate companies. We believe that we will be benefitted by the alignment of the following competitive strengths and strategic opportunities:

 

High Quality Portfolio Leased to Mission-Critical U.S. Government Agencies

 

 

 

 

Aligned Management Team

 

 

 

 

Asset Management

 

 

 

 

 

Property Management

 

 

Credit Quality of Tenant

 

 

 

 

 

Fragmented Market for Assets Within Company Acquisition Strategy

 

 

 

Large Inventory of Targeted Assets

 

 

 

2 ”The Benefits of Longer Firm-Term Leases” presentation PBS Customer Forum June 25, 2018

3 “GSA Lease Terminations: How Often Do They Occur?” by Kurt Stout, Colliers International Government Solutions, November 20, 2017

4 RCAnalytics

5 As of the date of this offering circular amendment

6 GSA July 2018 External Inventory Report

 

Investment 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” GSA Properties, or GSA Properties that are “mission critical” to an agency’s function. Further, we primarily target GSA Properties located in secondary or smaller markets, with sizes ranging from 5,000 to 50,000 rentable square feet, and in their first term after construction or to post-9/11 standards.

 

 

We believe the subset of GSA Properties on which we focus is highly fragmented and often overlooked by larger investors, which can provide opportunities for us to buy at more attractive pricing compared 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 or our Investment Policies, adopted by our board of directors, as either may be amended by the board of directors from time to time.

 

Our Investment Policies are 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 our Investment Policies 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 also may 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

 

 

 

 

Renew Existing Leases at Positive Spreads

 

 

 

 

Reduce Property-Level Operating Expenses

 

 

 

 

Our Portfolio and Pipeline

 

We currently own, through wholly-owned subsidiaries of our operating partnership, a portfolio of 16 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 16 properties as our portfolio. The Company has entered into a separate purchase and sale agreements to acquire one additional property, which is expected to close before December 31, 2018. We refer to this property as our pipeline. The following table presents an overview of our portfolio.

 

Our Portfolio and Pipeline		Current Occupant	Rentable Sq. Ft	% of Portfolio 1	% Leased	Early Termination and Expiration Date 2	Effective Annual Rent	Effective Annual Rent per Leased Square Foot	Effective Annual Rent % of Portfolio
Our Portfolio
"Port Saint Lucie Property"		U.S Drug Enforcement Administration, or DEA
650 NE Peacock
Boulevard, Port Saint						5/31/2022
Lucie, Florida 34986			24,858	7.16%	100%	5/31/2027	$566,514	$22.79	6.68%
"Jonesboro Property"		U.S Social Security Administration, or SSA
1809 LaTourette
Drive, Jonesboro,						1/11/2022
Arkansas 72404			16,439	4.73%	100%	1/11/2027	$618,734	$37.64	7.29%
"Lorain Property"
221 West 5th Street,						3/31/2021
Lorain, Ohio 44052		SSA	11,607	3.34%	100%	3/31/2024	$440,763	$37.97	5.19%
"Port Canaveral Property"		U.S Customs and Border Protection, or CBP
200 George King
Boulevard, Cape
Canaveral, Florida						7/15/2022
32920			14,704	4.23%	100%	7/15/2027	$649,476	$44.17	7.65%
"Johnson City Property"		U.S Federal Bureau of Investigation, or FBI
2620 Knob Creek
Road, Johnson City,						8/20/2022
Tennessee 37604			10,115	2.91%	100%	8/20/2027	$393,454	$38.90	4.64%
"Fort Smith Property"		U.S. Citizenship and Immigration Services, or CIS
4624 Kelley Highway,						No Early
Ft. Smith, Arkansas						Termination
72904			13,816	3.98%	100%	10/30/2029	$423,184	$30.63	4.99%
"Silt Property" 2300		U.S. Bureau of Land Management, or BLM
River Frontage Road,						9/30/2024
Silt, Colorado 81652			18,813	5.42%	100%	9/30/2029	$386,605	$20.55	4.56%

"Lakewood		U.S. Department of Transportation, or DOT
Property" 12305 West
Dakota Avenue,						No Early
Lakewood, Colorado						Termination
80228			19,241	5.54%	100%	6/20/2024	$461,996	$24.01	5.44%
"Moore Property"
200 NE 27th Street,						4/9/2022
Moore, OK 73160		SSA	17,058	4.91%	100%	4/9/2027	$526,517	$30.87	6.20%
"Lawton
Property" 1610 SW
Lee Boulevard,						8/17/2020
Lawton, OK 73501		SSA	9,298	2.68%	100%	8/16/2025	$282,285	$30.36	3.33%
"Norfolk Property"
5850 Lake Herbert						No Early
Drive, Norfolk, VA						Termination
23502		SSA	53,917	15.53%	100%	6/26/2027	$1,297,153	$24.06	15.29%
"Montgomery
Property"
3391 Atlanta
Highway,
Montgomery, AL						12/8/2026
36109		CIS	21,420	6.17%	74.86%	12/8/2031	$446,793	$20.86	5.27%
"San Antonio		U.S. Immigration and Customs Enforcements, or ICE
Property"
1015 Jackson Keller
Road,
San Antonio, TX						4/30/2022
78213			38,756	11.16%	100%	4/30/2027	$1,085,323	$28.00	12.79%
"Knoxville		U.S. Department of Veterans Affairs, or VA
Property" 1607
North Lincoln
Street,						No Early
Knoxville,						Termination
Iowa 50138			16,731	4.82%	100%	1/11/2032	$646,830	$38.66	6.31%

"Champaign		U.S. Federal Bureau of Investigation, or FBI
Property"
2117 West Park
Court, Champaign, IL						4/12/2028
61821			11,180	3.22%	100%	4/12/2033	$370,240	$33.12	3.61%
"Sarasota		U.S. Department of Agriculture, or USDA
Property"
7525 Commerce
Court,
Sarasota, FL						7/19/2028
34243			28,210	8.12%	100%	7/19/2038	$906,952	$32.15	8.85%
Total - Our
Portfolio			326,163	94%	98.35%		$9,502,819	$29.14	92.72%
Our Pipeline
"Monroe		U.S. Department of Veterans Affairs, or VA
Property"
1691 Bienville
Drive, Monroe,						9/30/2023
LA 71201			21,124	6.08%	100%	9/30/2033	$745,592	$35.30	7.28%
Total - Our
Pipeline			21,124	6.08%	100%		$745,592	$35.30	7.28%
Total - Our
Portfolio and
Pipeline			347,287	100%	98.45%		$10,248,411	$29.51	100%

 

1 By rentable square footage.

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 the date of this offering circular, the weighted average remaining lease term of our portfolio and pipeline is 10.4 years if none of the early termination rights are exercised and 6.6 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. 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. We paid off the balance of the Standridge Note on December 29, 2017 with a payment of $442,092. The prepayment of the Standridge Note was financed in large part by four promissory notes in the aggregate principal amount of $1,500,000, including $500,000 payable to BH, or the Promissory Notes. The remainder of the Standridge Note was paid off 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, and do not expect to receive 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.

 

On July 27, 2018, the Company acquired the Knoxville Property, a property leased to United States of America and occupied by the United States Department of Veterans Affairs, or USDVA. The contract purchase price was $7,150,000 and was financed by secured mortgage debt in original principal amount of $5,360,000 and with mezzanine debt of $1,790,000.

 

On August 30, 2018, the Company acquired the Champaign Property, a property leased to United States of America and occupied by the United States Federal Bureau of Investigation. The contract purchase price was $3,445,000 and was financed by secured mortgage debt in original principal amount of $2,580,000 and with mezzanine debt of $800,000.

 

On October 15, 2018, the Company acquired the Sarasota Property, a property leased to United States of America and occupied by the United States Department of Agriculture. The contract purchase price was $11,000,000 and was financed by secured mortgage debt in original principal amount of $8,250,000, mezzanine debt of $2,470,000 and the issuance of 40,000 OP Units to an affiliate of the seller in partial payment of the purchase price.

 

Our Pipeline

 

The Company has entered into a separate purchase and sale agreement to acquire the Monroe Property, a property leased to the United States of America and occupied by the USDVA. The contract purchase price is $5,150,000 and is expected to close in December 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 295% of our estimated cash available for distribution for the twelve months ending June 30, 2019, 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 costlier.
	●	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 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 Manager1

 

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 $1,459,479 as organizational and offering costs. We anticipate no further organizational and offering expenses. 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 $25,915,521 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. We also issued 40,000 OP Units valued at $400,000 in connection with the purchase of the Sarasota Property. Accordingly, we estimate that our Manager would receive an annual asset management fee of approximately $727,923 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 American, 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 $25,915,521 in net proceeds, and that we buy properties using our target leverage of up to 80%, and given that we have paid off the Holmwood Loan, the Citizens Loan, interim loans from an affiliate of our CEO, and the Standridge Note, and anticipate paying off the interim loans incurred in connection with the acquisition of the Norfolk Property, the Promissory Notes, the BH Notes, and certain additional related party loans and payables with proceeds from this offering (See “INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS”), ,we anticipate that acquisition fees of approximately $879,070 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 $490,295 from our acquisition of the Norfolk Property, the Montgomery Property, the San Antonio Property, the Knoxville Property, the Champaign Property and the Sarasota 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 LTIPs, 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 81,029 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 $287,963 to our Manager as accountable expense reimbursements.

 

 

		Termination and Liquidation Stage
Termination Fee2		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 All calculations assume that we raise the maximum offering amount and issue no shares through the DRIP.

2 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.