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Non-accelerated filer   ¨                                                                            Smaller Reporting Company    ý

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	Filed Pursuant to Rule 424(b)(3) Registration No. 333-153135

BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
Maximum Offering of $1,285,000,000 in Shares of Common Stock
Minimum Offering of $2,500,000 in Shares of Common Stock

 

          Bluerock Enhanced Multifamily Trust, Inc. was formed to acquire a diversified portfolio of real estate and real estate-related investments, with a primary focus on well-located, institutional quality apartment properties with strong and stable cash flows, and to implement our advisor’s “Enhanced Multifamily’’ strategy which we believe will increase rents, tenant retention and property values, and generate attractive returns for our investors. We also intend to acquire well-located residential properties that we believe present significant opportunities for short-term capital appreciation, such as those requiring repositioning, renovation or redevelopment, and properties available at opportunistic prices from distressed or time-constrained sellers. In addition, we will seek to originate or invest in real estate-related securities that we believe present the potential for high current income or total return, including but not limited to mortgage, bridge or subordinated loans, debt securities and preferred or other equity securities of other real estate companies, which we refer to as real estate-related investments, and may invest in entities that make similar investments. We intend to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

 

          We are offering a maximum of $1,000,000,000 in shares and a minimum of $2,500,000 in shares of our common stock in our primary offering, at an offering price of $10.00 per share. Discounts are available to investors who purchase more than 50,000 shares and to other categories of purchasers. We also are offering up to $285,000,000 in shares pursuant to our distribution reinvestment plan at $9.50 per share. We expect to offer shares of common stock in our primary offering over a two-year period, or until October 15, 2011. If we have not sold all of the shares within two years, we may extend the primary offering for an additional year until October 15, 2012. We reserve the right to reallocate the shares we are offering between our primary offering and our distribution reinvestment plan. The minimum investment in our shares for initial purchases is $2,500 except for certain states as described in this prospectus.

 

          This investment involves a high degree of risk. You should purchase our shares only if you can afford a complete loss of your investment. See “Risk Factors” beginning on page 15 for a discussion of material risks related to an investment in our shares, which include the following:

 

	•	Because there is no current public trading market for our stock, it may be difficult for you to sell your stock. If you sell your stock, it may be at a substantial discount.
	•	We are a newly-formed entity. As of the date of this prospectus, we do not own any investments, have no operating history, and our advisor has not identified any investments for us to acquire. If we are unable to acquire suitable properties or investments, or suffer a delay in doing so, we may not have cash flow available for distribution to you as a stockholder.
	•	We set the offering price of our shares arbitrarily. This price is unrelated to the book value or net asset value of our shares or to our expected operating income.
	•	During the early stages of our operations until the proceeds of this offering are invested in real estate and real estate-related investments, we expect to fund distributions from the uninvested proceeds of this offering and borrowings. Thereafter, we may pay distributions from the uninvested proceeds of this offering, borrowings and the sale of assets to the extent distributions exceed our earnings or cash flows from operations. Rates of distribution to you will not necessarily be indicative of our operating results.
	•	This is a “blind pool” offering, and investors will not be able to evaluate the economic or other merits of any of our investments prior to our making them.
	•	We will rely on our advisor to manage our business and assets. Our advisor is a newly-formed entity with no operating history.
	•	You will have limited control over changes in our policies and day-to-day operations, which increases the uncertainty and risks you face as a stockholder. In addition, our board of directors may approve changes to our policies without your approval.
	•	Our officers and non-independent directors also serve as officers and owners of our advisor and its affiliates, and will experience significant conflicts created by our advisor’s compensation arrangements with us and other programs advised by them, by their affiliates and by affiliates of our advisor. Our agreements with our advisor and its affiliates were not the result of arm’s-length negotiations by an independent person.
	•	Other programs owned or advised by our officers and non-independent directors or their affiliates may compete with us for the time and attention of these executives, and our officers and non-independent directors will experience conflicts of interest in allocating investment opportunities among other affiliated entities and us.
	•	We may incur debt exceeding 300% of our net assets in certain circumstances, which could lead to losses on certain highly leveraged assets and to an inability to pay distributions to our stockholders.
	•	We may fail to qualify as a REIT, which may have adverse tax consequences to you.
	•	Our board of directors may elect not to implement our policy to provide liquidity to stockholders by listing its shares of common stock or liquidating its assets within four to six years from the termination of our offering stage. As such, you may have to hold your shares for an indefinite period of time.
	•	To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective, may reduce the overall returns on your investment and may expose us to the credit risk of counterparties.

* We will pay underwriting compensation in addition to selling commissions and the dealer manager fee in connection with this offering, which will reduce the net proceeds to us, before expenses. The maximum amount of underwriting compensation (including selling commissions and dealer manager fee) that we will pay in connection with this offering is 10% of gross proceeds of our primary offering. See “Plan of Distribution.”

 

Neither the Securities and Exchange Commission, the Attorney General of the State of New York nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The use of forecasts in this offering is prohibited. Any representation to the contrary and any predictions, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence which may flow from your investment in our shares of common stock is prohibited.

 

The dealer manager for this offering is Select Capital Corporation, which is not affiliated with our company or our advisor. The dealer manager will use its best efforts to sell the shares. Prior to the minimum amount being sold, your investment will be placed in an interest-bearing escrow account with UMB Bank, N.A., as escrow agent, with interest accruing to the benefit of investors. No funds will be disbursed in accordance with this prospectus until we have received and accepted subscriptions for at least $2,500,000 in shares. If we do not sell $2,500,000 in shares before October 15, 2010, this offering will be terminated and our escrow agent will promptly send you a full refund of your investment with interest and without deduction for escrow expenses.

 

The date of this prospectus is October 15, 2009

 

 

TABLE OF CONTENTS
PROSPECTUS SUMMARY	1
RISK FACTORS	15
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS	37
ESTIMATED USE OF PROCEEDS	38
MULTIFAMILY MARKET OVERVIEW	39
INVESTMENT STRATEGY, OBJECTIVES AND POLICIES	42
MANAGEMENT	59
MANAGEMENT COMPENSATION	71
PRIOR PERFORMANCE SUMMARY	76
CONFLICTS OF INTEREST	78
SUMMARY OF DISTRIBUTION REINVESTMENT PLAN	83
SHARE REPURCHASE PLAN	86
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	89
PRINCIPAL STOCKHOLDERS	91
DESCRIPTION OF CAPITAL STOCK	92
IMPORTANT PROVISIONS OF MARYLAND CORPORATE LAW AND OUR CHARTER AND BY LAWS	99
THE OPERATING PARTNERSHIP AGREEMENT	106
FEDERAL INCOME TAX CONSIDERATIONS	109
ERISA CONSIDERATIONS	126
PLAN OF DISTRIBUTION	129
SALES LITERATURE	135
EXPERTS	135
LEGAL MATTERS	135
ADDITIONAL INFORMATION	135
INDEX TO FINANCIAL STATEMENTS	136
EXHIBIT A PRIOR PERFORMANCE TABLES	A-1
EXHIBIT B SUBSCRIPTION AGREEMENT	B-1
EXHIBIT C DISTRIBUTION REINVESTMENT PLAN	C-1

 

INVESTOR SUITABILITY STANDARDS

 

          An investment in our common stock is suitable only for persons who have adequate financial means and desire a relatively long-term investment. We have established suitability standards for initial stockholders and subsequent purchasers of shares from our stockholders. These suitability standards are intended to help ensure, given the high degree of risk inherent and the long-term nature of an investment in our shares and the relative illiquidity of our shares, that shares of our common stock are an appropriate investment for those of you who become investors. Our suitability standards require that a purchaser of shares have either:

 

	•	a net worth of at least $250,000; or
	•	a gross annual income of at least $70,000 and a net worth of at least $70,000.

          The following states have established suitability standards in addition to or that are different from those set forth above. In the following states, we will only sell shares to those investors who meet the standards set forth below:

 

          Alabama — In addition to the suitability standards set forth above, investors must have a liquid net worth of at least 10 times their investment in this program and similar programs.

 

          California — Investors must have either (1) a net worth of at least $250,000 or (2) a gross annual income of at least $75,000 and a net worth of at least $100,000. In addition, investors may not invest more than 10% of their net worth in us.

 

           Iowa — Investors must have either (1) a net worth of $350,000 or (2) a gross annual income of $70,000 and a net worth of at least $100,000. In addition, investors may not invest more than 10% of their net worth in this program or in any of our affiliates.

 

          Kansas — In addition to the suitability standards set forth above, it is recommended by the office of the Kansas Securities Commissioner that investors may not invest, in the aggregate, more than 10% of their liquid net worth in this and similar direct participation investments. Liquid net worth is defined as that portion of net worth that consists of cash, cash equivalents and readily marketable securities.

 

           Kentucky — In addition to the suitability standards set forth above, investors may not invest more than 10% of their net worth in this program.

 

          Michigan — In addition to the suitability standards set forth above, investors may not invest more than 10% of their net worth in this program or in any of our affiliates.

 

           Missouri — In addition to the suitability standards set forth above, investors may not invest more than 10% of their liquid net worth in this program.

 

          Ohio — In addition to the suitability requirements set forth above, investors may not invest more than 10% of their liquid net worth in this program or in any of our affiliates.

 

           Oregon — In addition to the suitability requirements set forth above, investors may not invest more than 10% of their liquid net worth in this program. Oregon defines “liquid net worth” as the remaining balance of cash and other assets easily converted to cash after subtracting the investor’s total liabilities from total assets.

 

           New Jersey and Tennessee — Investors must have either (1) a net worth of at least $500,000, or (2) a gross annual income of at least $100,000 and a net worth of at least $100,000. In addition, investors may not invest more than 10% of their liquid net worth in this program.

 

          For purposes of determining suitability of an investor, net worth in all cases referenced above should be calculated excluding the value of an investor’s home, furnishings and automobiles.

 

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          In the case of sales to fiduciary accounts, these suitability standards must be met by one of the following: (1) the fiduciary account, (2) the person who directly or indirectly supplied the funds for the purchase of the shares or (3) the beneficiary of the account.

 

          In order to assure adherence to the suitability standards described above, requisite suitability standards must be met as set forth in the subscription agreement. See Exhibit B. We, our sponsor Bluerock Real Estate L.L.C. and each person selling common stock on our behalf are required to make reasonable efforts to assure that the purchase of our common stock is a suitable and appropriate investment for each stockholder in light of such person’s age, educational level, knowledge of investments, financial means and other pertinent factors. Our dealer manager and each person selling shares on our behalf must maintain records for at least six years of the information used to determine that an investment in our common stock is suitable and appropriate for each investor. Our dealer manager’s agreements with the participating broker-dealers require such broker-dealers to make inquiries diligently as required by law of all prospective investors in order to ascertain whether an investment in our company is suitable for the investor.

 

HOW TO SUBSCRIBE

 

          Investors seeking to purchase shares of our common stock should proceed as follows:

 

	•	Read this entire prospectus and any appendices and supplements accompanying this prospectus.
	•	Complete an execution copy of the subscription agreement. A specimen copy of the subscription agreement, including instructions for completing it, is included in this prospectus as Exhibit B.
	•	Deliver a check for the full purchase price of the shares of our common stock being subscribed for along with the completed subscription agreement to the selling broker-dealer. Initially, your check should be made payable to “UMB Bank, N.A., as escrow agent for Bluerock Enhanced Multifamily Trust, Inc.” or “UMB Bank, N.A. as escrow agent for BEMTI.” After we meet the minimum offering requirements, your check should be made payable to “Bluerock Enhanced Multifamily Trust, Inc.” or “BEMTI.”

          In general, the minimum investment for initial purchases of shares of our common stock is $2,500 except Tennessee residents must invest at least $5,000. For purposes of satisfying the minimum investment requirement for retirement plans, unless otherwise prohibited by state law, a husband and wife may jointly contribute funds from their separate IRAs provided that each such contribution is made in increments of at least $500. However, an investment in shares of our company will not, in itself, create a retirement plan for you and, in order to create a retirement plan, you must comply with all applicable provisions of the federal income tax laws. After your initial purchase, any additional investments must be made in increments of at least $100, except for purchases of shares under our distribution reinvestment plan, which may be in lesser amounts.

 

          By signing the subscription agreement, you will be representing and warranting to us that you have received a copy of this prospectus, that you meet the net worth and annual gross income requirements described above and, if applicable, that you will comply with all federal and state law requirements with respect to resale of our shares of common stock. The representations and warranties made by you will be relied upon by us to help ensure that you are fully informed about an investment in our company and that we adhere to our suitability standards regarding your investment. By making those representations and warranties to us, you will not, however, waive any rights that you may have under federal or state securities laws.

 

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QUESTIONS AND ANSWERS ABOUT THIS OFFERING

 

          Below we have provided some of the more frequently asked questions and answers relating to an offering of this type. Please see the remainder of this prospectus for more detailed information about this offering.

 

Q:	What is a REIT?
A:	REIT stands for “real estate investment trust.” In general, a REIT is a company that:
	•	pools the capital of many investors to acquire or provide financing for real estate properties;
	•	allows individual investors to invest in a diversified real estate portfolio managed by a professional management team;
	•	is required to pay distributions to investors of at least 90% of its taxable income (excluding net capital gains) each year; and
	•	avoids the federal “double taxation” treatment of income that results from investments in a corporation because a REIT is not generally subject to federal corporate income taxes on its net income, if it complies with certain income tax requirements.
Q:	What is the experience of your management?
A:	Our advisor, Bluerock Enhanced Multifamily Advisor, LLC, is responsible for managing our affairs on a day-to-day basis and for identifying and making acquisitions and investments on our behalf. Our advisor’s senior executives collectively have over 60 years of experience in various aspects of real estate, including acquisitions, development/redevelopment, property management, financings and dispositions. See “Management — The Advisor” for complete biographies of the key personnel of our advisor.
Q:	What is the advisor’s “Enhanced Multifamily” strategy?
A:	Our advisor’s “Enhanced Multifamily” strategy consists of a series of initiatives which we believe can create a sustainable competitive advantage and sustainable long-term increases in apartment property value. The initiatives seek to transform the perception of the apartment from a purely functional one ( i.e. , as solely a place to live) to a lifestyle product / community ( i.e. , as a place to live, interact, and socialize) thereby creating an enhanced perception of value among residents, allowing for premium rental rates and improving resident retention.
	We intend to implement our advisor’s Enhanced Multifamily strategies and initiatives at our apartment properties, which we believe can create a sustainable competitive advantage and allow us to achieve long-term value enhancement at the apartment properties we acquire.
Q:	What types of real property will you acquire?
A:	We intend to acquire a diversified portfolio of real estate in the multifamily sector, with a primary focus on well-located, institutional quality apartment properties with strong and stable cash flows, and to implement the Enhanced Multifamily strategy with these properties. See “Investment Strategy, Objectives and Policies — Enhanced Multifamily Strategy.” We also intend to acquire well-located residential properties that we believe present us with significant opportunities for short-term capital appreciation, such as those requiring repositioning, renovation or redevelopment, and those available at opportunistic prices from distressed or time-constrained sellers.
Q:	Will you invest in anything other than real property?
A:	Yes. We plan to originate or invest in real estate-related securities and other real estate-related investments that we believe present the potential for high current income or total return, including but not limited to mortgage, bridge or subordinated loans, debt securities and preferred or other equity securities of other real estate companies, and may invest in entities that make similar investments. Although we do not have any policies limiting the portion of our assets that may be invested in real estate-related securities and other investments, we do not expect such investments to constitute more than 20% of our portfolio by asset value.

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Q:	What is an UPREIT?
A:	UPREIT stands for “Umbrella Partnership Real Estate Investment Trust.” An UPREIT is a REIT that holds all or substantially all of its properties through a partnership in which the REIT holds a general partner and/or limited partner interest, approximately equal to the value of capital raised by the REIT through sales of its capital stock. Using an UPREIT structure may give us an advantage in acquiring properties from persons who may not otherwise sell their properties because of unfavorable tax results. Generally, a sale of property directly to a REIT is a taxable transaction to the selling property owner. In an UPREIT structure, a seller of a property who desires to defer taxable gain on the sale of his property may transfer the property to the UPREIT in exchange for limited partnership units in the partnership and defer taxation of gain until the seller later exchanges his limited partnership units on a one-for-one basis for REIT shares or for cash pursuant to the terms of the limited partnership agreement.
Q:	If I buy shares of your common stock, will I receive distributions and how often?
A:	To maintain our qualification as a REIT, we are required to make annual aggregate distributions to our stockholders of at least 90% of our taxable income (excluding net capital gains). We intend to make distributions to our stockholders on a monthly basis.
Q:	Can I reinvest my distributions in additional shares of common stock?
A:	Yes, you may elect to participate in our distribution reinvestment plan by checking the appropriate box on the subscription agreement, or by filling out an enrollment form we will provide you at your request. The purchase price for shares purchased under the distribution reinvestment plan will be $9.50 per share.
Q:	Will the distributions I receive be taxable as ordinary income?
A:	Generally, distributions that you receive, including distributions reinvested pursuant to our distribution reinvestment plan, or DRIP, should be taxed as ordinary income to the extent that they are paid from current or accumulated earnings and profits. We expect that some portion of your distributions may not be subject to tax in the year in which they are received because depreciation expense reduces the amount of taxable income but does not reduce cash available for distribution. The portion of your distribution which is not subject to tax immediately is considered a return of capital for tax purposes and will reduce the tax basis of your investment. This, in effect, defers a portion of your tax until your investment is sold or our company is liquidated, at which time you will be taxed at capital gains rates. However, because each investor’s tax considerations are different, we suggest that you consult with your tax advisor.
Q:	How does a “best efforts” offering work?
A:	When securities are offered to the public on a “best efforts” basis, the broker-dealers participating in the offering are only required to use their best efforts to sell the securities and have no firm commitment or obligation to purchase any securities. Therefore, no specified dollar amount is guaranteed to be raised.
Q:	Who can buy shares of your common stock?
A:	You can buy shares of our common stock pursuant to this prospectus provided that you have either (1) a net worth of at least $250,000 or (2) an annual gross income of at least $70,000 and a net worth of at least $70,000. For this purpose, net worth does not include your home, home furnishings or personal automobiles. Please note that these minimum levels are higher in certain states and some states may impose additional restrictions on your investment, so you should read the more detailed descriptions in the “Investor Suitability Standards” section of this prospectus.
Q:	Is there any minimum investment required?
A:	Yes. Generally, the minimum investment is $2,500, except for purchases by our existing stockholders, including purchases made pursuant to our distribution reinvestment plan. Please note that certain states have imposed higher minimum investment amounts, so you should read the more detailed descriptions in the “How to Subscribe” section of this prospectus.

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Q:	How do I subscribe for shares?
A:	In order to purchase shares of our common stock in this offering, you should review this prospectus in its entirety and complete a subscription agreement for a specific number of shares. You will need to pay for the shares at the time you subscribe.
Q:	If I buy shares of common stock in this offering, how can I sell them?
A:	At the time you purchase the shares of common stock, they will not be listed for trading on any national securities exchange or national market system. In fact, there will not be any public market for the shares when you purchase them and we cannot be sure if one will ever develop. As a result, it may be difficult to find a buyer for your shares and realize a return on your investment. You may sell your shares to any buyer unless such sale would violate federal or state securities laws or cause any person or entity to directly or indirectly own more than 9.8% of our outstanding stock or more than 9.8% in value or in number of shares, whichever is more restrictive, of outstanding shares of our common stock, unless otherwise excepted by our board of directors or charter.
	Our board of directors has adopted a share repurchase plan that permits you to sell your shares back to us, subject to conditions and limitations of the program. Our board of directors can amend the provisions of our share repurchase plan without the approval of our stockholders.
Q:	Do you intend to list your common stock? If not, is there any other planned liquidity event?
A:	We presently intend to complete a transaction providing liquidity for our stockholders within four to six years from the completion of our offering stage. If we do not begin the process of listing our shares of common stock on a national securities exchange by the end of that period, or have not otherwise completed a liquidity event by such date, our charter requires that we seek stockholder approval of the liquidation of the company, unless a majority of our board of directors, including a majority of independent directors, determines that liquidation is not then in the best interests of our stockholders.
Q:	Will I receive notification as to how my investment is doing?
A:	You will receive periodic reports on the performance of your investment with us, including:
	•	an annual report that updates and details your investment;
	•	an annual report, including audited financial statements, as filed with the Securities and Exchange Commission, or the SEC;
	•	an annual IRS Form 1099-DIV; and
	•	supplements to the prospectus, as the same may be required by the federal securities laws.
Q:	When will I receive my tax information?
A:	We intend to mail your Form 1099-DIV tax information by January 31 of each year.
Q:	Who can I contact to answer my questions?
A:	If you have any questions regarding the offering or if you would like additional copies of this prospectus, you should contact your registered representative or:

Bluerock Enhanced Multifamily Trust, Inc.
c/o Bluerock Real Estate, L.L.C.
680 Fifth Avenue, 16th Floor
New York, New York 10019
(877) 826-BLUE (2583)

 

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PROSPECTUS SUMMARY

 

          This summary highlights the material information from this prospectus. Because it is a summary, it may not contain all the information that is important to you. To fully understand this offering, you should carefully read this entire prospectus, including the “Risk Factors” section beginning on page 15. References in this prospectus to “us,” “we,” “our” or “our company” refer to both Bluerock Enhanced Multifamily Trust, Inc. and our operating partnership, Bluerock Enhanced Multifamily Holdings, L.P., unless the context otherwise requires.

 

Bluerock Enhanced Multifamily Trust, Inc.

 

          Bluerock Enhanced Multifamily Trust, Inc. is a recently formed Maryland corporation that intends to qualify as a real estate investment trust, or a REIT, under the Internal Revenue Code, which we refer to as the Code commencing with the taxable year in which we satisfy the minimum offering requirement.

 

          We intend to acquire a diversified portfolio of real estate and real estate-related investments, with a primary focus on well-located, institutional quality apartment properties with strong and stable cash flows. We intend to implement what we refer to as the “Enhanced Multifamily” strategy at these apartment properties, which we believe will increase rents, tenant retention and property values, and generate attractive returns for our investors. We also intend to acquire well-located residential properties that we believe present significant opportunities for short-term capital appreciation, such as those requiring repositioning, renovation or redevelopment, and properties available at opportunistic prices from distressed or time-constrained sellers. In addition, we will seek to originate or invest in real estate-related securities that we believe present the potential for high current income or total return, including but not limited to mortgage, bridge or subordinated loans, debt securities and preferred or other equity securities of other real estate companies, which we refer to as real estate-related investments, and may invest in entities that make similar investments.

 

          We have not acquired, or entered into agreements to acquire, any specific investments as of the date of this prospectus. The volume and value of properties and real estate-related investments we acquire will depend initially on the proceeds of this offering.

 

          The principal executive offices of our company and our advisor are located at 680 Fifth Avenue, 16th Floor, New York, New York 10019. Our telephone number is (877) 826-BLUE (2583). Information regarding our sponsor is also available at www.bluerockre.com.

 

Plan of Distribution

 

          We are offering for sale a maximum of $1,000,000,000 in shares of our common stock to the public at a price of $10.00 per share. This offering is being conducted on a “best efforts” basis, which means that the broker-dealers participating in this offering are under no obligation to purchase any of the shares and, therefore, no specified dollar amount is guaranteed to be raised. In addition, we are offering up to $285,000,000 in shares at $9.50 per share to stockholders who elect to participate in our distribution reinvestment plan, described below. We reserve the right to reallocate the shares we are offering between the primary offering and our distribution reinvestment plan.

 

          If we do not sell the minimum of $2,500,000 in shares before October 15, 2010, this offering will be terminated and our escrow agent will promptly send you a full refund of your investment (with interest) and without deduction for escrow expenses.

 

          In addition to the shares to be issued pursuant to this offering, we have issued to our advisor 1,000 shares of non-participating, non-voting, convertible stock. The convertible stock is non-voting, is not entitled to any distributions and is a separate class of stock from the common stock to be issued in this offering.

 

Our Investment Objectives

 

          Our primary investment objectives are to:

 

	•	preserve and protect your capital investment;
	•	provide you with attractive and stable cash distributions; and

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	•	increase the value of our assets in order to generate capital appreciation for you.

Our Investment Strategy

 

          We intend to achieve our investment objectives by acquiring a diverse portfolio of real estate, as well as real estate-related investments. We plan to diversify our portfolio by investment type, size, property location and risk with the goal of attaining a portfolio of real estate and real estate-related investments that will generate attractive returns for our investors, with the potential for capital appreciation. Our targeted portfolio allocation is as follows:

 

	•	Enhanced Multifamily. We intend to allocate approximately 50% of our portfolio to investments in well-located, institutional quality apartment properties with strong and stable cash flows, typically located in supply constrained sub-markets with relatively high expectations of rent growth. As appropriate, we intend to implement our advisor’s Enhanced Multifamily strategy at these properties, which we anticipate will create sustainable long-term increases in property value and generate attractive returns for our investors by, among other benefits, generating higher rental revenue and reducing resident turnover. See “Investment Strategy, Objectives and Policies — Our Target Portfolio” and “Investment Strategy, Objectives and Policies —Enhanced Multifamily Strategy.”
	•	Value-Added Residential. We intend to allocate approximately 30% of our portfolio to investments in well-located residential properties that offer a significant potential for short-term capital appreciation through repositioning, renovation or redevelopment. In addition, we will seek to acquire properties available at opportunistic prices from distressed or time-constrained sellers in need of liquidity. As appropriate, we intend to implement our advisor’s Enhanced Multifamily strategy to these properties as well.
	•	Real Estate-Related Investments. We intend to allocate approximately 20% of our portfolio to other real estate-related investments with the potential for high current income or total returns. These allocations may include first and second mortgages, subordinated, bridge and other loans; debt or other securities related to or secured by real estate assets; and common and preferred equity securities, which may include securities of other REITs or real estate companies. See “Investment Strategy, Objectives and Policies — Investments in and Originating Real Estate-Related Investments.” Subject to the provisions of our charter, some of these investments may be made in connection with other programs sponsored, managed or advised by our affiliates, including our advisor.

          We may adjust our targeted portfolio allocation based on, among other things, prevailing real estate market conditions and the availability of attractive investment opportunities. We will not forego an attractive investment because it does not fit within our targeted asset class or portfolio composition.

 

          We believe the probability of meeting our investment objectives will be maximized through the careful selection and underwriting of assets. When considering an investment opportunity, we will generally evaluate the following:

 

	•	the performance and risk characteristics of that investment;
	•	how that investment will fit within our target portfolio objectives; and
	•	the expected returns of that investment on a risk-adjusted basis, relative to other investment alternatives.

          As such, our portfolio composition may vary substantially from the target portfolio described above.

 

Enhanced Multifamily Strategy

 

          Our advisor’s Enhanced Multifamily strategy consists of a series of initiatives which we believe can create a sustainable competitive advantage and allow us to realize long-term increases in apartment property value. This strategy seeks to transform the perception of the apartment from a purely functional one ( i.e., as solely a place to live) to a lifestyle product / community ( i.e., as a place to live, interact, and socialize) thereby creating an enhanced perception of value among residents, allowing for premium rental rates, and improving resident retention.

 

          The initiatives consist of amenities and attributes that go beyond traditional features, and incorporate cosmetic and architectural improvements along with technology, music and activities to establish an enhanced sense of comfort and appeal to our target residents’ desire for a “sense of community” by creating places to gather, socialize and

 

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interact in a highly amenitized environment. This strategy is specifically targeted to appeal to the following two lucrative and rapidly growing segments of the multifamily market:

 

	•	Lifestyle Renters are generally established, adult households with multiple housing choices open to them, which choose to rent an apartment for primarily nonfinancial reasons. They include Baby Boomers (individuals born in the U.S. between 1946 and 1964), who have become empty nesters and are seeking to live a simpler lifestyle without the responsibilities of home ownership, as well as those older members of the Echo Boomers (the generation born in the U.S. between 1981 and 2000).
	•	Middle Market Renters are generally younger and more mobile than Lifestyle Renters, and while they can generally afford to own, they have chosen either to save their money (perhaps to purchase a larger house at a later date), to spend it on other goods and services or to invest in something other than housing, or they are in a personal or job transition. For Middle Market Renters an apartment can provide an inexpensive and maintenance-free residence.

          As a further benefit, by appealing to and attracting the Lifestyle Renters and Middle Market renters, we believe the Enhanced Multifamily strategy can generate significant additional revenue-enhancing options at our properties, including the ability to provide and charge for premium units, upgrade packages and equipment rentals such as washer and dryers, flat screen televisions and premium sound systems.

 

Borrowing Policies

 

          Under our charter, the maximum amount of our indebtedness may not exceed 300% of our net assets as of the date of any borrowing, which is generally expected to approximate 75% of the cost of our investments; however, we may exceed that limit if approved by a majority of our independent directors. We expect that once we have fully invested the proceeds of this offering, our indebtedness will be approximately 50% of the sum of the value of our real properties (before deducting depreciation and other non-cash reserves) and the value of our other assets. There is no limitation on the amount we may borrow for the purchase of any single property or other investment. Our board of directors must review our aggregate borrowings at least quarterly. We have not established any financing sources at this time.

 

Summary Risk Factors

 

          An investment in our common stock involves a number of risks. See “Risk Factors,” beginning on page 15 of this prospectus. Some of the more significant risks include those set forth below.

 

	•	We are a newly-formed entity. As of the date of this prospectus, we do not own any properties and our advisor has not identified any properties for us to acquire.
	•	Our officers and non-independent directors have substantial conflicts of interest because they also are officers and owners of our advisor and its affiliates, including our sponsors.
	•	During the early stages of our operations until the proceeds of this offering are invested in real estate and real estate-related investments, we expect to fund distributions from the uninvested proceeds of this offering and borrowings. Thereafter, we may pay distributions from uninvested proceeds of this offering, borrowings and the sale of assets to the extent distributions exceed our earnings or cash flows from operations. Rates of distribution to you will not necessarily be indicative of our operating results.
	•	We will rely on our advisor, an affiliate of our officers and non-independent directors, to manage our business and select and manage investments. Our advisor is a newly-formed entity. The success of our business will depend on the success of our advisor in performing these duties.
	•	You will have limited control over changes in our policies and day-to-day operations, which increases the uncertainty and risks you face as a stockholder. In addition, our board of directors may approve changes to our policies without your approval.
	•	To the extent we sell substantially less than the maximum number of shares in this offering, we may not have sufficient funds, after the payment of offering and related expenses, to acquire a diverse portfolio of properties.
	•	Under our charter, the maximum amount of our indebtedness may not exceed 300% of our net assets, as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors and if the excess borrowing is disclosed to stockholders along with justification for the excess.

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	•	We may fail to qualify 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.
	•	There is no public market for our common stock and it may never be listed on a national securities exchange or quoted on a national market system. You may not be able to easily resell your shares or to resell your shares at a price that is equal to or greater than the price you paid for them.
	•	We have issued 1,000 shares of non-participating, non-voting, convertible stock to our advisor, at a price of $1.00 per share. Upon certain events, the convertible stock will convert into shares of our common stock with a value equal to 15% of the excess of (i) our enterprise value plus the aggregate value of distributions paid to stockholders over (ii) the aggregate purchase price paid by stockholders for our shares plus a 8% cumulative, non-compounded annual return. The interests of stockholders purchasing in this offering will be diluted upon such conversion.
	•	We anticipate that we will invest in multifamily development projects. These investments involve risks beyond those presented by stabilized, income-producing properties. These risks may diminish the return to our stockholders.
	•	We anticipate that we will invest in subordinated and bridge loans originated for multifamily acquisitions and for multifamily development projects. Subordinated and bridge loans involve greater risk of loss than senior secured loans because such investments may be partially or entirely lost as a result of foreclosure by the senior lender.
	•	Our board of directors may elect not to implement, or may delay, our listing or liquidation policy within the contemplated four to six years from the termination of our offering stage. As such, you may have to hold your shares for an indefinite period of time.
	•	To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective, may reduce the overall returns on your investment and may expose us to the credit risk of counterparties.

          If we are unable to effectively manage the impact of these and other risks, our ability to meet our investment objectives would be substantially impaired. In turn, the value of our common stock and our ability to make distributions would be materially reduced.

 

Our Board of Directors

 

          We operate under the direction of our board of directors, the members of which are accountable as fiduciaries to us and to our stockholders. Prior to the commencement of this offering, our board of directors will consist of five members, three of whom will be independent of us and our advisor. Our directors will be elected annually by our stockholders.

 

          Our board of directors has adopted our investment policies and will review these investment policies at least annually to determine whether our policies continue to be in the best interests of our stockholders.

 

Our Sponsor — Bluerock

 

          Bluerock Real Estate, L.L.C., our affiliate, which we refer to as our sponsor or Bluerock, is a national real estate investment firm headquartered in Manhattan with regional offices in Phoenix, Arizona and Southfield, Michigan. Bluerock focuses on acquiring, managing, developing and syndicating stabilized, value-added and opportunistic multifamily and commercial properties throughout the United States. Bluerock and its principals have collectively sponsored or structured real estate transactions totaling approximately 25 million square feet and with approximately $3 billion in value. Bluerock currently serves as the manager of three private real estate funds. See “Management — Our Sponsor — Bluerock Real Estate, L.L.C.”

 

          R. Ramin Kamfar is the Chief Executive Officer of Bluerock, and has approximately 20 years of experience in building operating companies, and in various aspects of real estate, mergers and acquisitions, private equity investing, investment banking, public and private financings and retail operations.

 

          James G. Babb, III is the Chief Investment Officer and Managing Director of Bluerock. Mr. Babb has been involved exclusively in real estate acquisition, management, financing and disposition for more than 20 years, primarily on behalf of investment funds since 1992. Prior to his tenure with Bluerock, Mr. Babb was a founder and Senior Vice President of Starwood Capital where he was involved in the formation of seven private real estate funds, which we refer to as the Starwood Funds, with investment objectives similar to ours (but not focused solely on apartment sector investments) and that have invested an aggregate of approximately $8 billion (including equity, debt

 

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and investment of income and sales proceeds) in approximately 250 separate transactions. During his tenure with Starwood Capital, Mr. Babb either personally led or shared investment responsibility for the following:

 

	•	Starwood Funds:
		The structuring of over 75 real estate investment transactions totaling $2.5 billion of asset value in transactions comprising more than 20 million square feet of residential, office and industrial properties located in 25 states and seven foreign countries;
		The first two Starwood Funds were almost exclusively focused on multifamily assets, acquired primarily through the purchase of equity and distressed debt from the Resolution Trust Corporation, the Federal Deposit Insurance Corporation, various savings and loan associations, over-leveraged partnerships and tax-exempt bondholders during the real estate credit crunch of the early 1990s. A significant number of the properties were later contributed to the initial public offerings of Equity Residential Properties Trust (NYSE: EQR), the nation’s largest multifamily REIT at that time;
	•	Starwood Hotels & Resorts Worldwide, Inc. (NYSE: HOT):
		Substantially all of the hotel investments made by a global owner/operator of hotels with brands such as Sheraton, Westin, the St. Regis Luxury Collection, and the W, which incorporated an “Enhanced” strategy to transform the concept of a hotel from a functional product to a lifestyle product in order to increase room rates, market share, and customer loyalty;
	•	i Star Financial (NYSE: SFI):
		The creation and launch of a separate private fund focused on tailored high-yield debt and debt/equity investments backed by commercial real estate, many with control or participation features that enabled the fund to enhance yield at a lower risk profile in the capital structure, in addition to acquiring commercial bank debt obligations that were restructured or converted to an ownership position at substantial discounts to replacement cost. The investments in the fund were subsequently used to sponsor the public offering of i Star Financial, the largest publicly owned finance company at that time focused exclusively on commercial real estate;
	•	Through the Starwood Funds, raising over $2.6 billion of equity from institutional investors.

          Bluerock utilizes the Enhanced Multifamily strategy at select apartment properties that it owns or manages. This strategy focuses on creating a sustainable competitive advantage in the multifamily sector by implementing property improvements and operating initiatives designed to foster a “sense of community” among residents of the properties. It focuses on a targeted demographic of residents who desire superior amenities, including cosmetic and architectural improvements, as well as the incorporation of technology, music and activites to create a sense of comfort in their community.

 

Our Advisor

 

          We are externally managed and advised by Bluerock Enhanced Multifamily Advisor, LLC, a Delaware limited liability company formed in July 2008 to serve as our advisor. Our advisor is owned by BER Holdings, LLC, which is a wholly-owned affiliate of Bluerock.

 

          Our advisor will conduct our operations and manage our portfolio of real estate and real estate-related investments. Our advisor will have substantial discretion with respect to the selection of specific investments consistent with our investment objectives and strategy, subject to the approval of our board of directors.

 

          Our advisor performs its duties and responsibilities as our fiduciary under an advisory agreement. The term of the current advisory agreement ends one year after the date of this prospectus, subject to renewals by our board of directors for an unlimited number of successive one-year periods.

          Our officers and our affiliated directors are all officers of our advisor. Our advisor’s management team will draw upon relationships and resources of Bluerock in order to provide us with extensive experience in the multifamily sector of the real estate industry, including application of Enhanced Multifamily strategies and initiatives as appropriate to particular properties. The names and biographical information of our directors and officers are set forth under “Management – Our Executive Officers and Directors.”

 

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Compensation to Our Advisor and its Affiliates

 

          Set forth below is a summary of the fees and compensation we expect to pay our advisor and its affiliates for services related to this offering and to our advisor and its affiliates for managing our business and assets.

 

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Description of Fee		Calculation of Fee		Estimated Amount if Minimum/Maximum Sold
		Disposition/Liquidation/Listing Stage
Disposition Fee		To the extent it provides a substantial amount of services in connection with the disposition of one or more of our properties or investments (except for securities that are traded on a national securities exchange), our advisor will receive fees equal to the lesser of (A) 1.5% of the sales price of each property or other investment sold or (B) 50% of the selling commission that would have been paid to a third-party sales broker in connection with such disposition. However, in no event may the disposition fees paid to our advisor or its affiliates and to unaffiliated third parties exceed in the aggregate 6% of the contract sales price.		Actual amounts depend upon the sale price of investments and, therefore, cannot be determined at the present time.
Common Stock Issuable Upon Conversion of Convertible Stock		Our convertible stock will convert to shares of common stock if and when: (A) we have made total distributions on the then outstanding shares of our common stock equal to the original issue price of those shares plus an 8% cumulative, non-compounded, annual return on the original issue price of those shares or (B) subject to the conditions described below, we list our common stock for trading on a national securities exchange. For these purposes and elsewhere in this prospectus, a “listing” which will result in conversion of our convertible stock to common stock also will be deemed to have occurred on the effective date of any merger of our company in which the consideration received by the holders of our common stock is cash and/or the securities of another issuer that are listed on a national securities exchange.		Actual amounts depend on the value of our company at the time the convertible stock converts or becomes convertible and, therefore, cannot be determined at the present time.
		In general, each share of our convertible stock will convert into a number of shares of common stock equal to 1/1000 of the quotient of (A) 15% of the excess of (1) our “enterprise value” (as defined in our charter) plus the aggregate value of distributions paid to date on the then outstanding shares of our common stock over the (2) aggregate purchase price paid by stockholders for those shares plus an 8% cumulative, non-compounded, annual return on the original issue price of those shares, divided by (B) our enterprise value divided by the number of outstanding shares of common stock, in each case calculated as of the date of the conversion. In the event that either of the events triggering the conversion of the convertible stock occurs after our advisory agreement with our advisor is not renewed or terminates (other than because of a material breach by our advisor), the number of shares of common stock that our advisor will receive upon the conversion will be prorated to account for the period of time that the advisory agreement was in force.

          All of this compensation is more fully described under “Management Compensation.”

 

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Conflicts of Interest

 

          Our officers and directors, and the owners and officers of our advisor, are also involved in the ownership and advising of other real estate entities and programs, including those sponsored by Bluerock and its affiliates or in which Bluerock is a manager or participant. These pre-existing interests, and similar additional interests as may arise in the future, may give rise to conflicts of interest with respect to our business, our investments and our investment opportunities. In particular, but without limitation:

 

	•	Our advisor, its officers and their respective affiliates will face conflicts of interest relating to the purchase and leasing of properties and the acquisition of real estate-related 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.
	•	If we acquire properties from or make investments in entities owned or sponsored by affiliates of our advisor, the price may be higher than we would pay if the transaction was the result of arm’s-length negotiations with a third-party, but we would do so only if our board of directors, including a majority of our independent directors, approves the investment and only if there is substantial justification for such excess price and such excess is reasonable.
	•	The absence of arm’s-length bargaining may mean that our agreements with our advisor and its affiliates may not be as favorable to you as a stockholder as they otherwise might have been if negotiated at arm’s-length.
	•	Our advisor and its affiliates will receive substantial fees and other compensation, including those based upon our acquisitions, the assets we own, manage and develop, and dispositions of such assets. Therefore our advisor and its affiliates may make recommendations to us that we buy, hold or sell property or other investments in order to increase their own compensation. Further, our advisor will have considerable discretion with respect to the terms and timing of our acquisition, disposition and leasing transactions.
	•	Our advisor and its affiliates, including our officers, some of whom are also our directors, will face conflicts of interest caused by their ownership of our advisor 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 advisor, 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.
	•	Our officers, some of whom are also directors, are also owners, officers and directors of our advisor and are also affiliates of our advisor, including Bluerock, face conflicts of interest related to the positions they hold with those other entities, which could hinder our ability to successfully implement our business strategy or to generate returns to our stockholders.

          These conflicts of interest, among others, could limit the time and quality of services that our officers and directors and our advisor and its officers devote to our company, because of the similar services they will be providing to other real estate entities, could impair our ability to find or compete for acquisitions and tenants with such entities.

 

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Organizational Chart for Our Company, Our Advisor and Affiliates

 

          The following chart shows our ownership structure and our relationship with our advisor and its affiliates.

 

 

Our Dealer Manager

 

          Select Capital Corporation will serve as the dealer manager of this offering. Select Capital Corporation is located at 3070 Bristol Street, Suite 500, Costa Mesa, California 92626, and its telephone number is (866) 699-5338.

 

Distributions to Stockholders

 

          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). Because we have not yet identified any properties or other investments which we intend to acquire, we cannot give any assurances as to when or if we will make distributions. However, when we have actually made investments, we intend to pay regular monthly distributions to our stockholders out of our cash available for distribution, in an amount determined by our board of directors. Generally, our policy will be to pay distributions from cash flow from operations. However, some or all of our distributions may be paid from sources other than cash flows from

 

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operations, such as from the proceeds of this offering, borrowings, advances from our advisor or from our advisor’s deferral of its fees and expense reimbursements. The amount of distributions will depend upon a variety of factors, including:

 

	•	our cash available for distribution;
	•	our overall financial condition;
	•	our capital requirements;
	•	the annual distribution requirements applicable to REITs under the federal income tax laws; and
	•	such other considerations as our board of directors may deem relevant.

Distribution Reinvestment Plan

 

          You may participate in our distribution reinvestment plan pursuant to which you may have the distributions payable to you reinvested in shares of our common stock at $9.50 per share. Regardless of whether you participate in our distribution reinvestment plan, you will be taxed on your distributions to the extent they constitute taxable income. If you elect to participate in the distribution reinvestment plan and are subject to federal income taxation, you will incur a tax liability for distributions allocated to you even though you have elected not to receive the distributions in cash but rather to have the distributions withheld and reinvested pursuant to the distribution reinvestment plan. Specifically, you will be treated as if you have received the distribution from us in cash and then applied such distribution to the purchase of additional shares. In addition, to the extent you purchase shares through our distribution reinvestment plan at a discount to their fair market value, you will be treated for tax purposes as receiving an additional distribution equal to the amount of the discount. In other words, based on the current offering price, participants in our distribution reinvestment plan will be treated as having received a distribution of $10.00 for each $9.50 reinvested by them under our distribution reinvestment plan. You will be taxed on the amount of such distribution as a dividend to the extent such distribution is from current or accumulated earnings and profits, unless we have designated all or a portion of the distribution as a capital gain dividend.

 

Share Repurchase Plan

 

          Our board of directors has adopted a share repurchase plan that will permit you to sell your shares back to us, subject to the significant conditions and limitations described below. Our board of directors can amend or terminate our share repurchase plan upon 30 days’ prior notice without the approval of our stockholders.

 

          The repurchase price for repurchases sought upon a stockholder’s death or “qualifying disability,” as defined in “Share Repurchase Plan,” will be the amount paid to acquire the shares from us, subject to certain conditions.

 

          Stockholders seeking to have shares repurchased by us pursuant to our share repurchase plan must present for repurchase a minimum of 25% of their shares. The purchase price for shares repurchased under the share repurchase plan will be as set forth below until we establish an estimated value of our shares. We do not currently anticipate obtaining appraisals for our investments and, accordingly, the estimates should not be viewed as an accurate reflection of the fair market value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets. We expect to begin establishing such estimated value of our shares based on the value of our real estate and real estate-related investments beginning 18 months after the completion of our offering stage. We will consider our offering stage complete when we are no longer publicly offering equity securities that are not listed on a national securities exchange, whether through this offering or follow-on public equity offerings, and have not done so for one year. (For purposes of this definition, we do not consider “public equity offerings” to include offerings on behalf of selling stockholders or offerings related to a distribution reinvestment plan, employee benefit plan or the redemption of interests in the operating partnership.) We will retain persons independent of us and our advisor to prepare the estimated value of our shares. Prior to establishing the estimated value of our shares, the prices at which we will initially repurchase shares are as follows:

 

	•	the lower of $9.25 or 92.5% of the price paid to acquire the shares from us for stockholders who have held their shares for at least one year;

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	•	the lower of $9.50 or 95% of the price paid to acquire the shares from us for stockholders who have held their shares for at least two years;
	•	the lower of $9.75 or 97.5% of the price paid to acquire the shares from us for stockholders who have held their shares for at least three years; and
	•	the lower of $10.00 or 100% of the price paid to acquire the shares from us for stockholders who have held their shares for at least four years.

          The purchase price per share as described above for shares repurchased prior to establishing the estimated value of our shares will be reduced by the aggregate amount of net proceeds per share, if any, distributed to the investors prior to the repurchase date as a result of a sale of one or more of our assets that constitute a return of capital distributed to investors as a result of such sales, which we refer to as a “special distribution.” After we begin establishing the estimated value of our shares, we will repurchase shares at the lesser of (1) 100% of the average price per share the original purchaser or purchasers of your shares paid to us, for all of your shares (as adjusted for any stock distributions, combinations, splits, recapitalizations, special distributions and the like with respect to our common stock) or (2) 90% of the net asset value per share, as determined by the most recent estimated value of such shares.

 

          We intend to repurchase shares quarterly under the plan. We will not repurchase in excess of 5% of the number of outstanding shares of common stock as of the same date in the prior calendar year. Generally, the cash available for repurchase will be limited to the net proceeds from the sale of shares under our distribution reinvestment plan during the previous fiscal year. However, to the extent that the aggregate proceeds received from the sale of shares pursuant to our distribution reinvestment plan are not sufficient to fund repurchase requests pursuant to the limitations outlined above, the board of directors may, in its sole discretion, choose to use other sources of funds to repurchase shares of our common stock. Such sources of funds could include cash on hand, cash available from borrowings and cash from liquidations of securities investments as of the end of the applicable month, to the extent that such funds are not otherwise dedicated to a particular use, such as working capital, cash distributions to stockholders or purchases of real estate assets. You will have no right to request repurchase of your shares if the shares are listed for trading on a national securities exchange.

 

ERISA Considerations

 

          The section of this prospectus entitled “ERISA Considerations” describes the effect the purchase of shares will have on individual retirement accounts, or IRAs, and retirement plans subject to ERISA and/or the Code. ERISA refers to the Employee Retirement Income Security Act of 1974, as amended, and is a federal law that regulates the operation of certain retirement plans. Any retirement plan trustee, fiduciary or other person considering purchasing shares for a retirement plan or an IRA should read carefully that section of this prospectus. This section of the prospectus should also be reviewed by fiduciaries of other retirement plans, such as governmental plans and church plans, that are not subject to ERISA but may be subject to similar state laws.

 

Restriction on Share Ownership

 

          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 outstanding shares of our stock and more than 9.8% in value or in number of shares, whichever is more restrictive, of outstanding shares of our common stock, unless otherwise excepted by our board of directors or charter. See “Description of Capital Stock — Restrictions on Ownership and Transfer.”

 

Listing or Liquidation Policy

 

          We presently intend to complete a transaction providing liquidity for our stockholders within four to six years from the completion of our offering stage. A liquidity event could include (1) the sale of all or substantially all of our assets either on a portfolio basis or individually followed by a liquidation, (2) a merger or another transaction approved by our board of directors in which our stockholders will receive cash and/or shares of a publicly traded company or (3) a listing of our shares on a national securities exchange. We cannot predict the exact date by which we will complete a liquidity event, as market conditions and other factors could cause us to delay the listing of our shares on a national securities exchange or delay the commencement of our liquidation beyond six years from the termination of our offering stage. The sale of all, or substantially all, of our assets as well as liquidation would

 

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require the affirmative vote of a majority of our then outstanding shares of common stock. A public market for our shares may allow us to increase our size, portfolio diversity, stockholder liquidity and access to capital. There is no assurance however that we will list our shares or that a public market will develop if we list our shares.

 

          If we do not begin the process of listing our shares of common stock on a national securities exchange by the end of that period, or have not otherwise completed a liquidity event by such date, our charter requires that we seek stockholder approval of the liquidation of the company, unless a majority of our board of directors, including a majority of independent directors, determines that liquidation is not then in the best interests of our stockholders. If a majority of our board of directors, including a majority of our independent directors, does determine that liquidation is not then in the best interests of our stockholders, our charter requires that a majority of our board of directors, including a majority of our independent directors, revisit the issue of liquidation at least annually. Further postponement of listing or stockholder action regarding liquidation would only be permitted if a majority of our board of directors, including a majority of our independent directors, again determined that liquidation would not be in the best interest of our stockholders. If we sought and failed to obtain stockholder approval of our liquidation, our charter would not require us to list or liquidate, and we could continue to operate as before. If we sought and obtained stockholder approval of our liquidation, we would begin an orderly sale of our properties and other assets.

 

          Even if we decide to liquidate, we are under no obligation to conclude our liquidation within a set time because the timing of the sale of our assets will depend on real estate and financial markets, economic conditions of the areas in which the properties are located, and federal income tax effects on stockholders that may prevail in the future. We cannot assure you that we will be able to liquidate all of our assets. After commencing a liquidation, we would continue in existence until all properties and other assets are liquidated.

 

Investment Company Act Considerations

 

          We intend to conduct our operations so that neither we, nor our operating partnership nor the subsidiaries of our operating partnership are required to register as investment companies under the Investment Company Act of 1940, as amended, or the Investment Company Act.

 

          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. Accordingly, under Section 3(a)(1) of the Investment Company Act, in relevant part, a company is not deemed to be an “investment company” if: (i) it neither is, nor holds itself out as being, engaged primarily, nor proposes to engage primarily, in the business of investing, reinvesting or trading in securities; and (ii) it neither is engaged nor proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and does not own or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets on an unconsolidated basis. We believe that we, our operating partnership and most of the subsidiaries of our operating partnership will not fall within either definition of an investment company as we intend to 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. 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. As 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 wholly and majority-owned 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 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

 

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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.

 

          Even if the value of investment securities held by our subsidiaries were to exceed 40%, we expect our subsidiaries to be able to qualify for an exemption from registration as an investment company under the Investment Company Act pursuant to Section 3(c)(5)(C) of the Investment Company Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exemption generally requires that at least 55% of our subsidiaries’ portfolios must be comprised of qualifying real estate assets and at least 80% of each of their portfolios must be comprised of qualifying real estate assets and real estate-related assets under the Investment Company Act (and no more than 20% comprised of miscellaneous assets). For purposes of the exclusions provided by Sections 3(c)(5)(C), we will classify our investments based on no-action letters issued by the SEC staff and other SEC interpretive guidance. Although we intend to monitor our portfolio periodically and prior to each investment acquisition or disposition, there can be no assurance that we will be able to maintain this exemption from registration for each of these subsidiaries.

 

          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 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.

 

          Qualification for exemption from registration under the Investment Company Act will limit our ability to make certain investments. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon such exclusions, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

 

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RISK FACTORS

 

          Before you invest in our common stock, you should be aware that your investment is subject to various risks, including those described below. You should carefully consider these risks together with all of the other information included in this prospectus before you decide to purchase any shares of our common stock.

 

Investment Risks

 

Because there is no current public trading market for our stock, it may be difficult for you to sell your stock. If you sell your stock, it may be at a substantial discount.

 

          There is no current public market for our stock and there is no assurance that a public market will ever exist for our stock. Our charter contains restrictions on the ownership and transfer of our stock, and these restrictions may inhibit your ability to sell your 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 our outstanding shares of stock and more than 9.8% in value or in number of shares, whichever is more restrictive, of our outstanding shares of common stock, unless otherwise excepted by our board of directors or charter. We plan to adopt a share repurchase plan, but it will be limited in terms of the number of shares of stock which may be repurchased annually. Our board of directors may also limit, suspend or terminate our share repurchase plan at any time.

 

          In addition, it may be difficult for you to sell your stock promptly or at all. If you are able to sell shares of stock, you may only be able to sell them at a substantial discount from the price you paid. This may be the result, in part, of the fact that the amount of funds available for investment is expected to be reduced by selling commissions, dealer manager fees, organization and offering expenses, and acquisition and origination fees and expenses. If our offering expenses are higher than we anticipate, we will have a smaller amount available for investment. You should consider our stock as an illiquid investment, and you must be prepared to hold your stock for an indefinite period of time. Please see “Description of Capital Stock — Restrictions on Ownership and Transfer” herein for a more complete discussion on certain restrictions regarding your ability to transfer your stock.

 

The per share offering prices have been established arbitrarily by us and may not reflect the true value of the shares; therefore, investors may be paying more for a share than the share is actually worth.

 

          If we listed our shares on a national securities exchange, the share price might drop below our stockholder’s original investment. Neither prospective investors nor stockholders should assume that the per share prices reflect the intrinsic or realizable value of the shares or otherwise reflect our value, earnings or other objective measures of worth. See “Plan of Distribution.”

 

Our lack of prior operating history makes it difficult for you to evaluate this investment.

 

          We and our advisor are newly formed entities with no prior operating history and may not be able to successfully operate our business or achieve our investment objectives. The past performance of other real estate investment programs sponsored by affiliates of our advisor may not be indicative of the performance we will achieve. We have no income, cash flow, funds from operations or funds from which we can make distributions to you. We may not be able to conduct our business as described in our plan of operation.

 

We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent our cash flow from operations or earnings are not sufficient to fund declared distributions. Rates of distribution to you will not necessarily be indicative of our operating results. If we make distributions from sources other than our cash flows from operations or earnings, we will have fewer funds available for the acquisition of properties and your overall return may be reduced.

 

          Our organizational documents permit us to make distributions from any source, including the net proceeds from this offering. During the early stages of our operations until the proceeds of this offering are invested in real estate and real estate-related investments, we expect to fund distributions from the uninvested proceeds of this offering and borrowings. Thereafter, we may pay distributions from uninvested proceeds of this offering, borrowings and the sale of assets to the extent distributions exceed our earnings or cash flows from operations. If we fund distributions from sources other than cash flow from operations or funds from operations, we will have fewer funds available for the acquisition of properties and your overall return may be reduced. Further, to the extent distributions exceed our

 

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earnings and profits, a stockholder’s basis in our stock will be reduced and, to the extent distributions exceed a stockholder’s basis, the stockholder will be required to recognize capital gain.

 

This is a blind pool offering, therefore you will not have the opportunity to evaluate our investments before we make them and we may make real estate investments that would have changed your decision as to whether to invest in our common stock.

 

          As of the date of this prospectus, we have not acquired any properties or made any other investments. Additionally, we have not yet identified or contracted any probable investments, and therefore are not able to provide you with information to evaluate our investments prior to acquisition. We will seek to invest substantially all of the offering proceeds available for investment, after the payment of fees and expenses, in the acquisition of real estate and real estate-related investments. We have established criteria for evaluating potential investments. See “Investment Strategy, Objectives and Policies.” However, you will be unable to evaluate the transaction terms, location, and financial or operational data concerning the investments before we invest in them. Except for any investments that may be described in supplements to this prospectus, you will have no opportunity to evaluate the terms of transactions or other economic or financial data concerning our investments prior to our investment. You will be relying entirely on the ability of our advisor to identify suitable investments and propose transactions for our board of directors to oversee and approve. These factors increase the risk that we may not generate the returns that you seek by investing in our shares.

 

We differ from prior programs sponsored by Bluerock in a number of respects, and therefore the past performance of those programs may not be indicative of our future results.

 

          The past performance of other investment programs sponsored by Bluerock may not be indicative of our future results, and we may not be able to successfully implement and operate our business, which is different in a number of respects from the operations of those programs. As our portfolio is unlikely to mirror in any of these respects the portfolios of the prior Bluerock programs, the returns to our stockholders will vary from those generated by those prior programs. We are also the first publicly-offered investment program sponsored by Bluerock or any of its affiliates. Therefore, the prior Bluerock programs, which were conducted through privately-held entities, were not subject to either the up-front commissions, fees and expenses associated with this offering or to many of the laws and regulations to which we will be subject. Bluerock has no experience making such investments or in operating a REIT or any other publicly-offered investment program. As a result of all these factors, you should not assume that you will experience returns, if any, comparable to those experienced by investors in the prior programs sponsored by Bluerock or its affiliates.

 

Because we will continue to sell shares at a fixed price during the course of this offering and, at the same time, will be acquiring real estate and real estate-related investments with the proceeds of the offering, if you purchase shares after completion of the minimum offering, you will experience dilution to the extent that future shares are issued when and if the value of our underlying net assets exceeds the price you paid for your shares in the offering.

 

          Under the terms of this offering, we will sell shares of our common stock at a fixed price of $10.00 per share. We may continue selling shares at $10.00 per share for a period of two years following the date of this prospectus or until the maximum offering is sold. During such time, we may acquire real estate or real estate-related investments. Any future issuances of our shares will have a dilutive effect on the earlier purchasers of our common stock to the extent that at the time of such future issuances, the value of our underlying net assets exceeds the price they paid for their shares.

 

If we do not raise substantial funds, we will be limited in the number and type of investments we may make, and the value of your investment in us will fluctuate with the performance of the specific properties we acquire.

 

          This offering is being made on a “best efforts” basis whereby the participating broker-dealers are only required to use their best efforts to sell our shares and have no firm commitment or obligation to purchase any of our common stock. If we are unable to raise substantially more than the minimum offering amount, we will make fewer investments resulting in less diversification in terms of the number of investments owned and the geographic regions in which our investments are located. In that case, the likelihood that any single property’s performance would materially reduce our overall profitability will increase. In addition, any inability to raise substantial funds would

 

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increase our fixed operating expenses as a percentage of gross revenues, and our net income and the distributions we make to stockholders would be reduced.

 

The cash distributions you receive may be less frequent or lower in amount than you expect.

 

          Our directors will determine the amount and timing of distributions. Our directors will consider all relevant factors, including the amount of cash available for distribution, capital expenditure and reserve requirements and general operational requirements. We cannot assure you how long it may take to generate sufficient available cash flow to make distributions nor can we assure you that sufficient cash will be available to make distributions to you. We may borrow funds, return capital or sell assets to make distributions. With no prior operations, we cannot predict the amount of distributions you may receive. We may be unable to pay or maintain cash distributions or increase distributions over time.

 

          Also, because we may receive income from interest or rents 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 distributions will be affected by many factors, such as our ability to acquire properties and real estate-related investments as offering proceeds become available, the income from those investments and yields on securities of other real estate companies that we invest in, as well as our operating expense levels and many other variables. Further, if the aggregate amount of cash distributed in any given year exceeds the amount of our “REIT taxable income” generated during the year, the excess amount will either be (1) a return of capital or (2) gain from the sale or exchange of property to the extent that a stockholder’s basis in our common stock equals or is reduced to zero as the result of our current or prior year distributions. For further information regarding the tax consequences in the event we make distributions other than from funds from operations, please see “Federal Income Tax Considerations — Taxation of Taxable U.S. Stockholders.” In addition, to the extent we make distributions to stockholders with sources other than funds from operations, the amount of cash that is distributed from such sources will limit the amount of investments in real estate assets that we can make, which will in turn negatively impact our ability to achieve our investment objectives and limit our ability to make future distributions.

 

We may not meet the minimum offering requirements for this offering. Therefore, you may not have access to your funds for one year from the date of this prospectus.

 

          If the minimum offering requirements are not met within one year from the date of this prospectus, this offering will terminate and subscribers who have delivered their funds into escrow will not have access to those funds until such time. In addition, the interest rate on the funds delivered into escrow may be less than the rate of return you could have achieved from an alternative investment.

 

The properties we acquire or develop may not produce the cash flow that we expect in order to meet our REIT minimum distribution requirements. We may decide to borrow funds to meet the REIT minimum distribution requirements, which could adversely affect our overall financial performance.

 

          We may decide to borrow funds in order to meet the REIT minimum distribution requirements even if our management believes that the then prevailing market conditions generally are not favorable for such borrowings or that such borrowings would not be advisable in the absence of such tax considerations. If we borrow money to meet the REIT minimum distribution requirement or for other working capital needs, our expenses will increase, our net income will be reduced by the amount of interest we pay on the money we borrow and we will be obligated to repay the money we borrow from future earnings or by selling assets, which may decrease future distributions to stockholders.

 

The inability of our advisor to retain or obtain key personnel, property managers and leasing agents could delay or hinder implementation of our investment strategies, which could impair our ability to make distributions and could reduce the value of your investment.

 

          Our success depends to a significant degree upon the contributions of Messrs. Kamfar, Babb and Ruddy, executive officers of our advisor. Neither we nor our advisor have employment agreements with any of the other executive officers nor do we currently have key man life insurance on any of these key personnel. If either of Messrs. Kamfar, Babb and Ruddy were to cease their affiliation with our advisor, our advisor 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 advisor’s, property managers’ and leasing agents’ ability to hire and retain highly skilled managerial, operational

 

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and marketing personnel. Competition for highly skilled personnel is intense, and our advisor and any property managers we retain may be unsuccessful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of highly skilled personnel, property managers or leasing agents, our ability to implement our investment strategies could be delayed or hindered, and the value of your investment may decline.

 

If we internalize our management functions, the percentage of our outstanding common stock owned by our other stockholders could be reduced, and we could incur other significant costs associated with being self-managed.

 

          At some point in the future, our board of directors may consider internalizing the functions performed for us by acquiring our advisor’s assets. The method by which we could internalize these functions could take many forms. There is no assurance that internalizing our management functions will be beneficial to us and our stockholders and could result in dilution of your interests as a stockholder and could reduce earnings per share and funds from operation per share. For example, we may not realize the perceived benefits or we may not be able to properly integrate a new staff of managers and employees or we may not be able to effectively replicate the services provided previously by our advisor, property manager or their affiliates. Internalization transactions involving the acquisition of advisors or property managers affiliated with entity sponsors have also, in some cases, been the subject of litigation. Even if these claims are without merit, we could be forced to spend significant amounts of money defending claims which would reduce the amount of funds available for us to invest in properties or other investments to pay distributions. All these factors could have a material adverse effect on our results of operations, financial condition and ability to pay distributions.

 

Risks Related to This Offering and Our Corporate 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 stock and 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of our common stock unless exempted 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 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 classify or reclassify any unissued common stock or preferred 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. If also approved by a majority of our independent directors not otherwise interested in the transaction, who will have access at our expense to our legal counsel or to independent legal counsel, our board of directors could authorize the issuance of up to 50,000,000 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. See “Description of Capital Stock — Preferred Stock.”

 

Because we are dependent upon our advisor and its affiliates to conduct our operations, any adverse changes in the financial health of our advisor or its affiliates or our relationship with them could hinder our operating performance and the return on your investment.

 

          We are dependent on our advisor and affiliates to manage our operations and acquire and manage our portfolio of real estate assets. Our advisor will make all decisions with respect to the management of our company. Our advisor has no operating history and no experience operating a public company. It will depend upon the fees and other compensation that it will receive from us in connection with the purchase, management and sale of our properties to

 

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conduct its operations. Any adverse changes in the financial condition of our advisor or property manager or our relationship with our advisor or property manager could hinder its ability to successfully manage our operations and our portfolio of investments.

 

You will have limited control over changes in our policies and day-to-day operations, which limited control increases the uncertainty and risks you face as a stockholder. In addition, our board of directors may change our major operational policies without your approval.

 

          Our board of directors determines our major policies, including our policies regarding financing, growth, debt capitalization, REIT qualification and distributions. Our board of directors may amend or revise these and other policies without a vote of the stockholders. Under Maryland General Corporation Law and our charter, our stockholders have a right to vote only on limited matters. See “Important Provisions of Maryland Corporate Law and Our Charter and Bylaws.”

 

          Our advisor is responsible for the day-to-day operations of our company and the selection and management of investments and has broad discretion over the use of proceeds from this offering. Accordingly, you should not purchase shares of our common stock unless you are willing to entrust all aspects of the day-to-day management and the selection and management of investments to our advisor, who will manage our company in accordance with the advisory agreement. In addition, our advisor may retain independent contractors to provide various services for our company, and you should note that such contractors will have no fiduciary duty to you or the other stockholders and may not perform as expected or desired.

 

Your investment will be diluted upon conversion of the convertible stock.

 

          Our advisor has been issued 1,000 shares of our convertible stock. Under certain circumstances, each outstanding share of our convertible stock may be converted into shares of our common stock, which will have a dilutive effect to our stockholders. Our convertible stock will be converted into shares of common stock if (1) we have made total distributions on the then outstanding shares of our common stock equal to the price paid for those shares plus an 8% cumulative, non-compounded, annual return on that price or (2) we list our common stock for trading on a national securities exchange (for this purpose, “listing” would also include a merger transaction whereby holders of our common stock receive cash and/or listed securities of another issuer). Upon the occurence of any of these events, each share of convertible stock will be converted into shares of our common stock with a value equal to 15% of excess of (i) our enterprise value plus the aggregate value of the distributions paid to date on the then outstanding shares over (ii) the aggregate purchase price paid by stockholders for those outstanding shares plus an 8% cumulative, non-compounded, annual return on that price. See “Description of Capital Stock — Convertible Stock.”

 

The conversion of the convertible stock held by our advisor due upon termination of the advisory agreement and the voting rights granted to the holder of our convertible stock, may discourage a takeover attempt or prevent us from effecting a merger that otherwise would have been in the best interests of our stockholders.

 

          If we engage in a merger in which we are not the surviving entity or our advisory agreement is terminated without cause, our advisor and its affiliates may be entitled to conversion of the convertible stock. The existence of this convertible stock may deter a prospective acquirer from bidding on our company, which may limit the opportunity for stockholders to receive a premium for their stock that might otherwise exist if an investor attempted to acquire us through a merger.

 

          The affirmative vote of two-thirds of the outstanding shares of convertible stock, voting as a separate class, will be required (1) for any amendment, alteration or repeal of any provision of our charter that materially and adversely changes the rights of the holders of the convertible stock and (2) to effect a merger of our company into another entity, or a merger of another entity into our company, unless in each case each share of convertible stock (A) will remain outstanding without a material and adverse change to its terms and rights or (B) will be converted into or exchanged for shares of stock or other ownership interest of the surviving entity having rights identical to that of our convertible stock. In the event that we propose to merge with or into another entity, including another REIT, our advisor could, by exercising these voting rights, determine whether or not we are able to complete the proposed transaction. By voting against a proposed merger, our advisor could prevent us from effecting the merger, even if the merger otherwise would have been in the best interests of our stockholders.

 

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If we sell substantially less than all of the shares we are offering, the costs we incur to comply with the rules of the SEC regarding internal control over financial reporting and other fixed costs will be a larger percentage of our net income and will reduce the return on your investment.

 

          We expect to incur significant costs in establishing and maintaining adequate internal control over our financial reporting for the company and that our management will spend a significant amount of time assessing the effectiveness of our internal control over financial reporting. We do not anticipate that these costs or the amount of time our management will be required to spend will be significantly less if we sell substantially less than all of the shares we are offering.

 

Your rights as stockholders and our rights to recover claims against our officers, directors and advisor directors are limited.

 

          Under Maryland law, our charter and under the terms of certain indemnification agreements with our directors, we may generally indemnify our directors, our advisor and their respective affiliates for any losses or liability suffered by any of them and hold these persons or entities harmless for any loss or liability suffered by us as long as: (1) these persons or entities have determined in good faith that the loss or liability was in our best interest; (2) these persons or entities were acting on our behalf or performing services for us; (3) the loss or liability was not the result of the negligence or misconduct of the directors (or, with respect to the independent directors, gross negligence or willful misconduct), the advisor or their respective affiliates or (4) the indemnity or agreement to hold harmless is recoverable only out of our net assets and not from our stockholders. As a result, we and our stockholders may have more limited rights against our directors, officers, employees and agents, and our advisor and its affiliates, than might otherwise exist under common law. In addition, we may be obligated to fund the defense costs incurred by our directors, officers, employees and agents or our advisor in some cases.

 

You may not be able to sell your stock under the proposed share repurchase plan.

 

          Our board of directors could choose to amend our share repurchase plan’s terms without stockholder approval. Our board would also be free to amend or terminate the plan at any time after its adoption. Therefore, in making a decision to purchase shares, you should not assume that you will be able to sell any of your shares back to us pursuant to our proposed stock repurchase program. If our board terminates our proposed share repurchase plan, you may not be able to sell your shares even if you deem it necessary or desirable to do so. In addition, the proposed share repurchase plan includes numerous restrictions that would limit your ability to sell your stock. If you are able to resell your shares to us pursuant to our proposed share repurchase plan, you will likely receive substantially less than the amount paid to acquire the shares from us or the fair market value of your shares, depending upon how long you owned the shares. See “Share Repurchase Plan.”

 

If we do not successfully implement our listing or liquidation policy, you may have to hold your investment for an indefinite period.

 

          Though we presently intend to complete a transaction providing liquidity to stockholders within four to six years from the completion of our offering stage, our charter does not require our board of directors to pursue such a liquidity event. We cannot predict the exact date by which we will complete a liquidity event, as market conditions and other factors could cause us to delay the listing of our shares on a national securities exchange or delay the commencement of our liquidation beyond six years from the termination of our offering stage. If our board of directors does determine to pursue our liquidation policy, we would be under no obligation to conclude the process within a set time. The timing of the sale of assets will depend on real estate and financial markets, economic conditions in the areas in which properties are located, and federal income tax effects on stockholders, that may prevail in the future. We cannot guarantee that we will be able to liquidate all assets. After we adopt a plan of liquidation, we would remain in existence until all properties and assets are liquidated. If we do not pursue a liquidity event, or delay such an event due to market conditions, your shares may continue to be illiquid and you may, for an indefinite period of time, be unable to convert your investment to cash easily and could suffer losses on your investment.

 

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Risks Related to Conflicts of Interest

 

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

 

          We rely on our advisor to identify suitable investment opportunities. We may be buying properties at the same time as other entities that are affiliated with or sponsored by our advisor. Other programs sponsored by our advisor or its affiliates also rely on our advisor, our executive officers and their affiliates for investment opportunities. Bluerock has sponsored privately offered real estate programs and may in the future sponsor privately and publicly offered real estate programs that may have investment objectives similar to ours. Therefore, our advisor and its affiliates could be subject to conflicts of interest between our company and other real estate programs. Many investment opportunities would be suitable for us as well as other programs. Our advisor could direct attractive investment opportunities or tenants to other entities. Such events could result in our investing in properties that provide less attractive returns or getting less attractive tenants, thus reducing the level of distributions which we may be able to pay to you and the value of your investment. See “Conflicts of Interest.”

 

If we acquire properties from affiliates of our advisor, the price may be higher than we would pay if the transaction was the result of arm’s-length negotiations.

 

          The prices we pay to affiliates of our advisor for our properties will be equal to the prices paid by them, plus the costs incurred by them relating to the acquisition and financing of the properties or if the price to us is in excess of such cost, substantial justification for such excess must exist and such excess must be reasonable and consistent with current market conditions as determined by a majority of our independent directors. Substantial justification for a higher price could result from improvements to a property by the affiliate of our advisor or increases in market value of the property during the period of time the property is owned by the affiliates of our advisor as evidenced by an appraisal of the property. In no event will we acquire property from an affiliate at an amount in excess of its current appraised value as determined by an independent expert selected by our independent directors not otherwise interested in the transaction. An appraisal is “current” if obtained within the prior year. These prices will not be the subject of arm’s-length negotiations, which could mean that the acquisitions may be on terms less favorable to us than those negotiated in an arm’s-length transaction. Even though we will use an independent third-party appraiser to determine fair market value when acquiring properties from our advisor and its affiliates, we may pay more for particular properties than we would have in an arm’s-length transaction, which would reduce our cash available for investment in other properties or distribution to our stockholders.

 

Payment of fees to our advisor and its affiliates will reduce cash available for investment and distribution.

 

          Our advisor and its affiliates will perform services for us in connection with the selection and acquisition of our properties and other investments, and possibly the development, management and leasing of our properties. They will be paid significant fees for these services, which will reduce the amount of cash available for investment and for distribution to stockholders. The fees to be paid to our advisor and its affiliates were not determined on an arm’slength basis. We cannot assure you that a third-party unaffiliated with our advisor would not be willing to provide such services to us at a lower price. If the maximum offering amount is raised (including shares of stock issued pursuant to our distribution reinvestment plan), we estimate that 10.82% of the gross proceeds of this offering will be paid to our advisor, its affiliates and third parties for up-front fees and expenses associated with the offer and sale of our stock and the acquisition of our assets, including estimated acquisition and origination fees of 1.75% of the cost of assets. The expenses we actually incur in connection with the offer and sale of our stock, excluding acquisition and origination fees and expenses, may exceed the amount we expect to incur.

 

          These fees increase the risk that the amount available for payment of distributions to our stockholders upon a liquidation of our portfolio would be less than the purchase price of the shares of stock in this offering. Substantial up-front fees also increase the risk that you will not be able to resell your shares of stock at a profit, even if our stock is listed on a national securities exchange. See “Management Compensation.”

 

Our advisor and its affiliates, including our officers, some of whom are also directors, will face conflicts of interest caused by compensation arrangements with us and other programs sponsored by affiliates of

 

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our advisor, including Bluerock, which could result in actions that are not in the long-term best interests of our stockholders.

 

          Our advisor and its affiliates will receive substantial fees from us. These fees could influence our advisor’s advice to us, as well as the judgment of the affiliates of our advisor who serve as our officers, some of whom are also directors. Among other matters, the compensation arrangements could affect their judgment with respect to property acquisitions from, or the making of investments in, other programs sponsored by Bluerock, which might entitle affiliates of our advisor to disposition fees and other possible fees in connection with its services for the seller.

 

          Considerations relating to their compensation from other programs could result in decisions that are not in the best interests of our stockholders, which could hurt our ability to make distributions to you or result in a decline in the value of your investment.

 

If the competing demands for the time of our advisor, 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 any employees. We rely on the employees of our advisor and its affiliates for the day-to-day operation of our business. The amount of time that our advisor and its affiliates spend on our business will vary from time to time and is expected to be more while we are raising money and acquiring properties. Our advisor and its affiliates, including our officers, have interests in other programs and engage in other business activities. As a result, they will have conflicts of interest in allocating their time between us and other programs and activities in which they are involved. Because these persons have competing interests on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than are necessary or appropriate to manage our business. We expect that as our real estate activities expand, our advisor will attempt to hire additional employees who would devote substantially all of their time to our business. There is no assurance that our advisor will devote adequate time to our business. If our advisor suffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, it may allocate less time and resources to our operations. If any of these things occur, the returns on our investments, our ability to make distributions to stockholders and the value of your investment may suffer. See “Conflicts of Interest.”

 

General Risks Related to Investments in Real Estate

 

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

 

          Our operating results will be subject to risks generally associated with the ownership of real estate, including, but not limited to changes in general economic conditions, changes in interest rates and the availability of mortgage funds that may make the sale a of property difficult.

 

          Although we intend to hold our real estate and related investments until such a time as our advisor determines that a sale or other disposition appears to be advantageous to our overall investment objectives, we cannot predict the various market conditions affecting real estate investments that will exist at any particular time in the future. Because of this uncertainty, we cannot assure you that we will realize any appreciation in the value of our real estate properties.

 

Competition from other apartment properties for tenants could reduce our profitability and the return on your investment.

 

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

 

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Increased competition and increased affordability of single-family homes could limit our ability to retain residents, lease apartment units or increase or maintain rents.

 

          Any apartment properties we may acquire will most likely compete with numerous housing alternatives in attracting residents, including single-family homes, as well as owner occupied single and multifamily homes available to rent. Competitive housing in a particular area and the increasing affordability of owner occupied single and multifamily homes available to rent or buy caused by declining mortgage interest rates and government programs to promote home ownership could adversely affect our ability to retain our residents, lease apartment units and increase or maintain rental rates.

 

Increased construction of similar properties that compete with our properties in any particular location could adversely affect the operating results of our properties and our cash available for distribution to our stockholders.

 

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

 

	•	make it more difficult for us to find tenants to lease units in our apartment properties;
	•	force us to lower our rental prices in order to lease units in our apartment properties; and/or
	•	substantially reduce our revenues and cash available for distribution to our stockholders.

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

 

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

 

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

 

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

 

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

 

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

 

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generally are not reduced when circumstances cause a reduction in income from the investment. These events would cause a significant decrease in revenues and could cause us to reduce the amount of distributions to our stockholders.

 

Short-term multifamily and apartment leases expose us to the effects of declining market rent, which could adversely impact our ability to make cash distributions to our stockholders.

 

          We expect that substantially all of our apartment leases will be for a term of one year or less. Because these leases generally permit the residents to leave at the end of the lease term without penalty, our rental revenues may be impacted by declines in market rents more quickly than if our leases were for longer terms.

 

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

 

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

 

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

 

Any uninsured losses or high insurance premiums will reduce our net income and the amount of our cash distributions to stockholders.

 

          Our advisor will attempt to obtain adequate insurance to cover significant areas of risk to us as a company and to our properties. However, there are types of losses at the property level, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.

 

We may have difficulty selling real estate investments, and our ability to distribute all or a portion of the net proceeds from such sale to our stockholders may be limited.

 

          Real estate investments are relatively illiquid. We will have a limited ability to vary our portfolio in response to changes in economic or other conditions. We will also have a limited ability to sell assets in order to fund working capital and similar capital needs. When we sell any of our properties, we may not realize a gain on such sale. We may not elect to distribute any proceeds from the sale of properties to our stockholders; for example, we may use such

 

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proceeds to:

 

	•	purchase additional properties;
	•	repay debt, if any;
	•	buy out interests of any co-venturers or other partners in any joint venture in which we are a party;
	•	create working capital reserves; and/or
	•	make repairs, maintenance, tenant improvements or other capital improvements or expenditures to our remaining properties.

          Our ability to sell our properties may also be limited by our need to avoid a 100% penalty tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property. In order to ensure that we avoid such characterization, we may be required to hold our properties for a minimum period of time, generally two years, and comply with certain other requirements in the Code.

 

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

 

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

 

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

 

Actions of our joint venture partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions which are in the best interests of our stockholders which could result in lower investment returns to our stockholders.

 

          We are likely to enter into joint ventures with affiliates and other third parties to acquire or improve properties. We may also purchase properties in partnerships, co-tenancies or other co-ownership arrangements. Such investments may involve risks not otherwise present when acquiring real estate directly, including, for example:

 

	•	joint venturers may share certain approval rights over major decisions;
	•	that such co-venturer, co-owner or partner may at any time have economic or business interests or goals which are or which become inconsistent with our business interests or goals, including inconsistent goals relating to the sale of properties held in the joint venture or the timing of termination or liquidation of the joint venture;
	•	the possibility that our co-venturer, co-owner or partner in an investment might become insolvent or bankrupt;
	•	the possibility that we may incur liabilities as a result of an action taken by our co-venturer, co-owner or partner;
	•	that such co-venturer, co-owner or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, including our policy with respect to qualifying and maintaining our qualification as a REIT;
	•	disputes between us and our joint venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the properties owned by the applicable joint venture to additional risk; or

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	•	that under certain joint venture arrangements, neither venture partner may have the power to control the venture, and an impasse could be reached which might have a negative influence on the joint venture.

          These events might subject us to liabilities in excess of those contemplated and thus reduce your investment returns. If we have a right of first refusal or buy/sell right to buy out a co-venturer, co-owner or partner, we may be unable to finance such a buy-out if it becomes exercisable or we may be required to purchase such interest at a time when it would not otherwise be in our best interest to do so. If our interest is subject to a buy/sell right, we may not have sufficient cash, available borrowing capacity or other capital resources to allow us to elect to purchase an interest of a co-venturer subject to the buy/sell right, in which case we may be forced to sell our interest as the result of the exercise of such right when we would otherwise prefer to keep our interest. Finally, we may not be able to sell our interest in a joint venture if we desire to exit the venture.

 

General Risks Related to Real Estate-Related Investments

 

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

 

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

 

Subordinated loan investments involve a greater risk of loss of investment and reductions of return than senior loans secured by income-producing properties.

 

          Subordinated loans may be secured by second mortgages on the underlying real property or by a pledge of the ownership interests of either the entity owning the real property or the entity that owns the interest in the entity owning the real property. These types of investments involve a higher degree of risk than long-term senior mortgage lending secured by income-producing real property because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our subordinated loan. If a borrower defaults on our subordinated loan or debt senior to our loan, or in the event of a borrower bankruptcy, our subordinated loan will be satisfied only after the senior debt. As a result, we may not recover some or all of our investment. In addition, subordinated loans may have higher loan-to-value ratios than conventional mortgage loans, resulting in less equity in the real property and increasing the risk of loss of principal.

 

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

 

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

 

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

 

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

 

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

 

Delays in restructuring or liquidating non-performing real estate-related securities could reduce the return on your investment.

 

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

 

Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act; if we 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. Currently, neither we, nor our operating partnership, nor any of our subsidiaries have any assets. Our operating partnership’s and subsidiaries’ intended 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 this offering ends. If we are unable to invest a significant portion of the proceeds of this offering in properties within one year of the termination of this offering, we may avoid being required to register as an investment company by temporarily investing any unused proceeds in government securities with low returns, which would reduce the cash available for distribution to investors 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. 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

 

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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 intend to 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. 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 1940 Act because neither we nor the operating partnership will engage primarily or hold itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through 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 80% 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 mortgage loans, participations in mortgage loans, mortgage-backed securities, mezzanine loans, joint venture investments and the equity securities of other entities 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 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 company 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 portfolio periodically and prior to each acquisition or dispostion, any of these entities may not be able to maintain an exclusion from registration as an investment company. If we, our operating

 

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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.

 

          For more information on issues related to compliance with the Investment Company Act, see “Investment Strategy, Objectives and Policies — Investment Company Act Considerations.”

 

Risks Associated with Debt Financing

 

We may use debt financing to acquire properties and otherwise incur other indebtedness, which will increase 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.

 

          Although our charter imposes limits on our total indebtedness, 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. Further, we may exceed the limits set forth in our charter if approved by a majority of our independent directors and the excess borrowing is disclosed to stockholders in our next quarterly report following the borrowing, along with justification for the excess. See “Investment Strategy, Objectives and Policies — Borrowing Policies.”

 

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.

 

          If, as expected, we 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.

 

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. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. Interest we pay could reduce cash available for distribution to stockholders. Additionally, if we incur variable rate debt, increases in interest rates would increase our interest costs, which would reduce 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.

 

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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 advisor. 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.

 

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.

 

To hedge against interest rate fluctuations, we may use derivative financial instruments that may be costly and ineffective, may reduce the overall returns on your investment, and may expose us to the credit risk of counterparties.

 

          We may use derivative financial instruments to hedge exposures to interest rate fluctuations on loans secured by our assets and investments in collateralized mortgage-backed securities. Derivative instruments may include interest rate swap contracts, interest rate cap or floor contracts, futures or forward contracts, options or repurchase agreements. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time of the hedge and may differ from time to time.

 

          To the extent that we use derivative financial instruments to hedge against interest rate fluctuations, we will be exposed to financing, basis risk and legal enforceability risks. In this context, credit risk is the failure of the counterparty to perform under the terms of the derivative contract. If the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We intend to manage credit risk by dealing only with major financial institutions that have high credit ratings. Basis risk occurs when the index upon which the contract is based is more or less variable than the index upon which the hedged asset or liability is based, thereby making the hedge less effective. We intend to manage basis risk by matching, to a reasonable extent, the contract index to the index upon which the hedged asset or liability is based. Finally, legal enforceability risks encompass general contractual risks, including the risk that the counterparty will breach the terms of, or fail to perform its obligations under, the derivative contract. We intend to manage legal enforceability risks by ensuring, to the best of our ability, that we contract with reputable counterparties and that each counterparty complies with the terms and conditions of the derivative contract. If we are unable to manage these risks effectively, our results of operations, financial condition and ability to make distributions to you will be adversely affected.

 

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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 “Federal Income Tax Considerations — 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.

 

You may not receive any profits resulting from the sale of one of our properties, or receive such profits in a timely manner, because we may provide financing for the purchaser of such property.

 

          If we liquidate our company, you may experience a delay before receiving your share of the proceeds of such liquidation. In a forced or voluntary liquidation, we may sell our properties either subject to or upon the assumption of any then outstanding mortgage debt or, alternatively, may provide financing to purchasers. We may take a purchase money obligation secured by a mortgage as partial payment. We do not have any limitations or restrictions on our taking such purchase money obligations. To the extent we receive promissory notes or other property instead of cash from sales, such proceeds, other than any interest payable on those proceeds, will not be included in net sale proceeds until and to the extent the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In certain cases, we may receive initial down payments in the year of sale in an amount less than the selling price and subsequent payments may be spread over a number of years. In such cases, you may experience a delay in the distribution of the proceeds of a sale until such time.

 

Federal Income Tax Risks

 

If we fail to qualify as a REIT, we will be subjected to tax on our income and the amount of distributions we make to our stockholders will be less.

 

          We intend to operate in a manner designed to permit us to qualify as a REIT for federal income tax purposes commencing with the taxable year in which we satisfy the minimum offering requirement. A REIT generally is not taxed at the corporate level on income and gains it currently distributes to its stockholders. Although we do not intend to request a ruling from the Internal Revenue Service as to our REIT status, we have received the opinion of Alston & Bird LLP that, commencing with the taxable year in which we satisfy the minimum offering requirement, we will be organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and our proposed method of operations will enable us to meet the requirements for qualification and taxation as a REIT. This opinion has been issued in connection with this offering. Investors should be aware, however, that opinions of counsel are not binding on the Internal Revenue Service or on any court. The opinion of Alston & Bird LLP represents only the view of our counsel based on our counsel’s review and analysis of existing law and on certain representations as to factual matters and covenants made by us, including representations relating to the values of our assets and the sources of our income. Alston & Bird LLP has no obligation to advise us or the holders of our common stock of any subsequent change in the matters stated, represented or assumed in its opinion or of any subsequent change in applicable law. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation, regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.

 

          If we elect to be taxed as a REIT and then were to fail to qualify as a REIT in any taxable year:

 

	•	we would not be allowed to deduct our distributions to our stockholders when computing our taxable income;

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	•	we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;
	•	we would be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitled to relief under certain statutory provisions;
	•	we would have less cash to make distributions to our stockholders; and
	•	we might be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of our disqualification.

          Although we intend to operate in a manner intended to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause our board of directors to determine to delay or revoke our REIT election.

 

          We encourage you to read the “Federal Income Tax Considerations” section of this prospectus for further discussion of the tax issues related to this offering.

 

To qualify as a REIT we must meet annual distribution requirements, which may result in us distributing amounts that may otherwise be used for our operations.

 

          To obtain the favorable tax treatment accorded to REITs, we normally will be required each year to distribute to our stockholders at least 90% of our real estate investment trust taxable income, determined without regard to the deduction for distributions paid and by excluding net capital gains. We will be subject to federal income tax on our undistributed taxable income and net capital gain and to a 4% nondeductible excise tax on any amount by which distributions we pay with respect to any calendar year are less than the sum of (1) 85% of our ordinary income, (2) 95% of our capital gain net income and (3) 100% of our undistributed income from prior years. These requirements could cause us to distribute amounts that otherwise would be spent on investments in real estate assets and it is possible that we might be required to borrow funds, possibly at unfavorable rates, or sell assets to fund these distributions. Although we intend to make distributions sufficient to meet the annual distribution requirements and to avoid corporate income taxation on the earnings that we distribute, it is possible that we might not always be able to do so. See “Federal Income Tax Considerations — Distribution Requirements.”

 

The failure of a subordinated loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.

 

          We may acquire subordinated loans, for which the IRS has provided a safe harbor in Revenue Procedure 2003-65. Pursuant to such safe harbor, if a subordinated loan is secured by interests in a pass-through entity, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests and interest derived from the subordinated loan will be treated as qualifying mortgage interest for purposes of the REIT 75% Income Test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We intend to make investments in loans secured by interests in pass-through entities in a manner that complies with the various requirements applicable to our qualification as a REIT. We may, however, acquire subordinated loans that do not meet all of the requirements of this safe harbor. In the event we own a subordinated loan that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a challenge were sustained, we could fail to qualify as a REIT.

 

You may have current tax liability on distributions if you elect to reinvest in shares of our common stock.

 

          If you participate in our distribution reinvestment plan, you will be deemed to have received a cash distribution equal to the fair market value of the stock received pursuant to the plan. For federal income tax purposes, you will be taxed on this amount in the same manner as if you have received cash; namely, to the extent that we have current or accumulated earnings and profits, you will have ordinary taxable income. To the extent that we make a distribution in excess of such earnings and profits, the distribution will be treated first as a tax-free return of capital, which will reduce the tax basis in your stock, and the amount of the distribution in excess of such basis will be taxable as a gain realized from the sale of your common stock. As a result, unless you are a tax-exempt entity, you may have to use funds from other sources to pay your tax liability on the value of the common stock received. See “Federal Income Tax Considerations — Distribution Requirements.”

 

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Certain of our business activities are potentially subject to the prohibited transaction tax, which could reduce the return on your investment.

 

          Our ability to dispose of property during the first few years following acquisition is restricted to a substantial extent as a result of our REIT status. Under applicable provisions of the Code regarding prohibited transactions by REITs, we will be subject to a 100% tax on any gain realized on the sale or other disposition of any property (other than foreclosure property) we own, directly or through any subsidiary entity, including our operating partnership, but excluding our taxable REIT subsidiaries, that is deemed to be inventory or property held primarily for sale to customers in the ordinary course of trade or business. Whether property is inventory or otherwise held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances surrounding each property. We intend to avoid the 100% prohibited transaction tax by (1) conducting activities that may otherwise be considered prohibited transactions through a taxable REIT subsidiary, (2) conducting our operations in such a manner so that no sale or other disposition of an asset we own, directly or through any subsidiary other than a taxable REIT subsidiary, will be treated as a prohibited transaction or (3) structuring certain dispositions of our properties to comply with certain safe harbors available under the Code for properties held at least two years. However, despite our present intention, no assurance can be given that any particular property we own, directly or through any subsidiary entity, including our operating partnership, but excluding our taxable REIT subsidiaries, will not be treated as inventory or property held primarily for sale to customers in the ordinary course of a trade or business.

 

In certain circumstances, we may be subject to federal and state income taxes as a REIT, which would reduce our cash available for distribution to you.

 

          Even if we qualify and maintain our status as a REIT, we may be subject to federal and state income taxes. For example, net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to make sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our real estate assets and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of the companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce our cash available for distribution to you.

 

The use of taxable REIT subsidiaries would increase our overall tax liability.

 

          Some of our assets may need to be owned or sold, or operations conducted, by taxable REIT subsidiaries. Any of our taxable REIT subsidiaries will be subject to federal and state income tax on their taxable income. The after-tax net income of our taxable REIT subsidiaries would be available for distribution to us. Further, we will incur a 100% excise tax on transactions with our taxable REIT subsidiaries that are not conducted on an arm’s length basis. For example, to the extent that the rent paid by one of our taxable REIT subsidiaries exceeds an arm’s length rental amount, such amount potentially is subject to the excise tax. We intend that all transactions between us and our taxable REIT subsidiaries will be conducted on an arm’s length basis and, therefore, that any amounts paid by our taxable REIT subsidiaries to us will not be subject to the excise tax.

 

To maintain our REIT status, we may be forced to forego otherwise attractive opportunities, which may delay or hinder our ability to meet our investment objectives and reduce your overall return.

 

          To qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning, among other things, the sources of our income, nature of our assets and the amounts we distribute to our stockholders. We may be required to make distributions to stockholders at times when it would be more advantageous to reinvest cash in our business or when we do not have funds readily available for distribution. Compliance with the REIT requirements may hinder our ability to operate solely on the basis of maximizing profits and the value of your investment.

 

The “taxable mortgage pool” rules may increase the taxes that we or our stockholders incur and may limit the manner in which we conduct securitizations.

 

          We may make investments in entities that own or are deemed to be taxable mortgage pools. Similarly, certain of our securitizations could be considered to result in the creation of taxable mortgage pools for federal income tax purposes. As a REIT, provided that we own 100% of the equity interests in a taxable mortgage pool, we generally

 

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would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities that are not subject to tax on unrelated business income, we will incur a corporate-level tax on a portion of our income from the taxable mortgage pool. In that case, we are authorized to reduce and intend to reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover, we would be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for federal income tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

 

	•	If we elect to treat property that we acquire in connection with a foreclosure of a mortgage loan or certain leasehold terminations as “foreclosure property,” we may thereby avoid the 100% tax on gain from a resale of that property (if the sale would otherwise constitute a prohibited transaction), but the income from the sale or operation of the property may be subject to corporate income tax at the highest applicable rate (currently 35%).
	•	If we derive “excess inclusion income” from an interest in certain mortgage loan securitization structures ( i.e., a “taxable mortgage pool” or a residual interest in a real estate mortgage investment conduit, or “REMIC”), we could be subject to corporate level federal income tax at a 35% rate to the extent that such income is allocable to specified types of tax-exempt stockholders known as “disqualified organizations” that are not subject to unrelated business income tax. See “Federal Income Tax Considerations — Taxable Mortgage Pools and Excess Inclusion Income” below.

Distributions payable by REITs do not qualify for the reduced tax rates under recently enacted tax legislation.

 

          Recently enacted tax legislation generally reduces the maximum tax rate for dividend distributions payable by corporations to individuals meeting certain requirements to 15% through 2010. Distributions payable by REITs, however, generally continue to be taxed at the normal rate applicable to the individual recipient, rather than the 15% preferential rate. Although this legislation does not adversely affect the taxation of REITs or distributions paid by REITs, the more favorable rates applicable to regular corporate distributions could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that make distributions, which could reduce the value of the stock of REITs, including our 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 the 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.

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          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 “Federal Income Tax Considerations — Taxation of Tax-Exempt Stockholders.”

 

Legislative or regulatory action could adversely affect the taxation of investors.

 

          In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future and we cannot assure you that any such changes will not adversely affect the taxation of a stockholder. Any such changes could have an adverse effect on an investment in shares of our common stock. We urge you to consult with your own tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in shares of our common stock.

 

Retirement Plan Risks

 

If you fail to meet the fiduciary and other standards under ERISA or the Code as a result of an investment in our stock, you could be subject to liability and penalties.

 

          Special considerations apply to the purchase of stock by employee benefit plans subject to the fiduciary rules of title I of 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 satisfy yourself that:

 

	•	your investment is consistent with your fiduciary obligations under ERISA and the Code;
	•	your investment is made in accordance with the documents and instruments governing the Benefit Plan, including the Plan’s investment policy;
	•	your investment satisfies 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 not impair the liquidity of the Benefit Plan;
	•	your investment will not produce “unrelated business taxable income” for the Benefit Plan;
	•	you will be able to value the assets of the plan annually in accordance with ERISA requirements and applicable provisions of the Benefit Plan; and
	•	your investment will not constitute a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code.

          Fiduciaries may be held personally liable under ERISA for losses as a result of failure to satisfy the fiduciary standards of conduct and other applicable requirements of ERISA. In addition, if an investment in our stock constitutes a prohibited transaction under ERISA or the Code, the fiduciary of the plan who authorized or directed the investment may be subject to imposition of excise taxes with respect to the amount invested and an IRA investing in the stock may lose its tax exempt status.

 

          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. Such plans should satisfy themselves that the investment satisfies applicable law.

 

An investment in our stock may not be suitable for every Benefit Plan, and may result in the plan fiduciary breaching its duty to the plan.

 

          When considering an investment in our stock, persons with investment discretion over assets of any ERISA Plan should consider whether the investment satisfies the fiduciary requirements of ERISA. In particular, attention should be paid to the diversification requirements of Section 404(a)(1)(C) of ERISA in light of all the facts and circumstances, including the portion of the plan’s portfolio of which the investment will be a part. All ERISA Plan investors should also consider whether the investment is prudent under ERISA’s fiduciary standards. All Benefit Plans should determine whether the purchase of our stock meets plan liquidity requirements as there may be only a limited market in which to sell or otherwise dispose of our stock, and whether the investment is permissible under the

 

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plan’s governing instrument. We have not, and will not, evaluate whether an investment in our stock is suitable for any particular plan. Rather, we will accept entities as stockholders if an entity otherwise meets the suitability standards set forth in the “Suitability Standards” section in this prospectus.

 

ERISA fiduciaries are required to determine annually the fair market value of each asset in the ERISA plan based on liquidation value. In addition, a trustee or custodian of an IRA must provide an IRA holder with a statement of the value of the IRA assets each year. The annual statement of value that we will be sending to stockholders subject to ERISA and the Code and to certain other plan stockholders is only an estimate and may not comply with any reporting and disclosure or annual valuation requirements under ERISA, the Code or other applicable law.

 

          To assist fiduciaries subject to the annual reporting requirements of ERISA to prepare reports relating to an investment in our shares, we intend to provide reports of our annual estimates of the current value of a share of our common stock to those fiduciaries who identify themselves to us and request the reports. Until 18 months after the completion of our offering stage, we intend to use the price paid per share as the estimated value of a share of our common stock, subject to certain reductions based on special distributions to stockholders due to sales of properties or other assets. When determining the estimated value of our shares, which we expect to provide to stockholders beginning 18 months after the completion of our offering stage, our advisor, or another firm we choose for that purpose, will estimate the value of our shares based on a number of assumptions that may not be accurate or complete. We do not currently anticipate obtaining appraisals for our investments and, accordingly, the estimates should not be viewed as an accurate reflection of the fair market value of our investments nor will they represent the amount of net proceeds that would result from an immediate sale of our assets. For these reasons, the estimated valuations should not be utilized for any purpose other than to assist plan fiduciaries in fulfilling their annual valuation and reporting responsibilities. See “Share Repurchase Plan.” We cannot assure you that:

 

	•	a value included in the annual statement could actually be realized by us or by our stockholders upon liquidation;
	•	stockholders could realize that value if they were to attempt to sell their stock; or
	•	an annual statement of value would comply with any reporting and disclosure or annual valuation requirements under ERISA or other applicable law.

          For a more complete discussion of the foregoing issues and other risks associated with an investment in our stock by retirement plans, please see the “ERISA Considerations” section of this prospectus.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

          Statements included in this prospectus that are not historical facts (including any statements concerning investment objectives, other plans and objectives of management for future operations or economic performance, or assumptions or forecasts related thereto) are forward-looking statements. These statements are only predictions. 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. Forward-looking statements are typically identified by the use of terms such as “may,” “should,” “expect,” “could,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “predict,” “potential” or the negative of such terms and other comparable terminology.

 

          The forward-looking statements included herein are based upon our current expectations, plans, estimates, assumptions and beliefs that involve numerous risks and uncertainties. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

 

	•	our ability to effectively deploy the proceeds raised in this offering;
	•	changes in economic conditions generally and the real estate and debt markets specifically;
	•	legislative or regulatory changes (including changes to the laws governing the taxation of REITs);
	•	the availability of capital;
	•	interest rates; and
	•	changes to generally accepted accounting principles, or GAAP.

          Any of the assumptions underlying forward-looking statements could be inaccurate. You are cautioned not to place undue reliance on any forward-looking statements included in this prospectus. All forward-looking statements are made as of the date of this prospectus and the risk that actual results will differ materially from the expectations expressed in this prospectus will increase with the passage of time. 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 prospectus, 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 prospectus, 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 prospectus will be achieved.

 

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ESTIMATED USE OF PROCEEDS

 

          The table below sets forth our estimated use of proceeds from this offering assuming we sell (1) only $2,500,000 in shares, the minimum offering amount, in the primary offering, (2) $1,000,000,000 in shares, the maximum offering amount, in the primary offering and no shares pursuant to our distribution reinvestment plan and (3) $1,000,000,000 in shares, the maximum offering amount, in the primary offering and $285,000,000 in shares pursuant to our distribution reinvestment plan. Shares of our common stock will be sold at $10.00 per share. We reserve the right to reallocate shares of our common stock between the primary offering and the distribution reinvestment plan.

 

          Many of the amounts set forth below represent management’s best estimate since they cannot be precisely calculated at this time. Depending primarily upon the number of shares we sell in this offering, we estimate that between approximately 89.18% (assuming all shares available under our distribution reinvestment plan are sold) and approximately 86.69% (assuming no shares available under our distribution reinvestment plan are sold) of our gross offering proceeds will be available for investments. On a per share basis, the funds available for investment would be $8.92 and $8.67 for shares sold at $10.00 per share. We will use the remainder of the offering proceeds to pay offering expenses, including selling commissions and the dealer manager fee, and, upon investment in properties and other assets, to pay a fee to our advisor for its services in connection with the selection and acquisition or origination of our real estate investments. We expect to use substantially all of the net proceeds from the sale of shares under our distribution reinvestment plan to repurchase shares under our share redemption program.

 

		Minimum Offering						Maximum Offering (Not Including Distribution Reinvestment Plan)						Maximum Offering (Including Distribution Reinvestment Plan)
		Amount			Percent			Amount			Percent			Amount			Percent
Gross Offering Proceeds		$	2,500,000			100.00	%	$	1,000,000,000			100.00	%	$	1,285,000,000			100.00	%
Selling Commissions(1)			175,000			7.00	%		70,000,000			7.00	%		70,000,000			5.45	%
Dealer Manager Fee(1)			65,000			2.60	%		26,000,000			2.60	%		26,000,000			2.02	%
Additional Underwriting Expenses(2)(3)			10,000			0.40	%		4,000,000			0.40	%		4,000,000			0.31	%
Issuer Organization and Offering Costs(3)(4)			125,000			5.00	%		15,000,000			1.50	%		15,000,000			1.17	%
Acquisition and Origination Fees(5)			37,188			1.49	%		15,487,500			1.55	%		20,475,000			1.59	%
Acquisition and Origination Expenses(5)			6,375			0.26	%		2,655,000			0.27	%		3,510,000			0.27	%
Amount Available for Investment		$	2,081,438			83.26	%	$	866,857,500			86.69	%	$	1,146,015,000			89.18	%

(1)	No selling commissions or dealer manager fees are payable on shares sold under the distribution reinvestment plan.
(2)	Includes: (a) amounts used to reimburse our dealer manager for actual costs incurred by its FINRA-registered personnel for travel, meals and lodging to attend retail seminars sponsored by participating broker-dealers; (b) sponsorship fees for seminars sponsored by participating broker-dealers; (c) amounts used to reimburse broker-dealers, including our dealer manager, for the actual costs incurred by their FINRA-registered personnel for travel, meals and lodging in connection with attending bona fide training and education meetings hosted by our advisor or its affiliates; (d) legal fees allocated to our dealer manager; and (e) certain promotional items. The maximum amount of underwriting compensation that we may pay in connection with this offering is 10.0% of gross proceeds of our primary offering. See “Plan of Distribution.” If we sell all shares in our primary offering through distribution channels associated with the highest possible selling commissions and dealer manager fee, then we will pay additional underwriting expenses up to a maximum of 0.4% of gross proceeds of our primary offering.
(3)	Our advisor or its affiliates may advance, and we will reimburse, underwriting expenses (other than selling commissions and the dealer manager fee) and issuer organization and offering costs incurred on our behalf, but only to the extent that such reimbursements do not exceed actual expenses incurred by our advisor or its affiliates and would not cause the cumulative selling commissions, dealer manager fee, additional underwriting expenses and issuer organization and offering expenses paid by us to exceed 15.0% of the gross proceeds of our primary offering as of the date of the reimbursement.
(4)	Includes all issuer organization and offering expenses to be paid by us in connection with the offering, including our legal, accounting, printing, mailing, technology, filing fees, charges of our escrow agent and transfer agent, charges of our advisor for administrative services related to the issuance of shares in the offering and amounts to reimburse costs in connection with preparing supplemental sales materials and reimbursements for actual costs incurred for travel, meals and lodging by employees of our advisor and its affiliates to attend retail seminars hosted by broker-dealers or bona fide training and education meetings hosted by our advisor or its affiliates. We expect that our issuer organization and offering expenses will represent a lower percentage of the gross proceeds of our primary offering as the amount of proceeds we raise in the primary offering increases. In the table above, we have assumed that all issuer organization and offering expenses will constitute 5.0% of gross proceeds from our primary offering if we raise the minimum offering amount, decreasing to approximately 1.5% of gross proceeds from our primary offering if we raise the maximum offering amount.
(5)	For purposes of this table, we have assumed that no debt financing is used to acquire properties or other investments. However, we intend to leverage our investments with debt.

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MULTIFAMILY MARKET OVERVIEW

 

General

 

          The multifamily market is large and growing. According to the National Multi Housing Council, there were 17.4 million apartment residences in the United States in 2008 with a value of $2 trillion, compared to 15 million apartment units in 1990 with an estimated value of $585 billion. From 1990 to 2008, a period that included two recessions, the total value of all apartments increased at a compound annual growth rate of 7.1%.

 

 

          According to the Joint Center for Housing Studies of Harvard University, which we refer to as JCHS-Harvard, apartments serve the lifestyle needs of a diverse group of community residents. With a relatively low cost-per-resident ratio due to apartments’ high density nature, apartments are better able to provide the amenities that attract upper-income households. Many households are drawn to the lack of maintenance and ability to relocate inexpensively that multifamily housing provides. Using well-planned designs and monitoring systems, apartments are also able to provide security and crime prevention for their residents. Finally, an apartment property’s proximity to employment centers, public transportation and other neighborhood services offers renters a location advantage not available in single-family developments.

 

          The multifamily market is subject to the basic forces of supply and demand.

 

Demand Overview

 

          Demographic forces are indicating strong growth for multifamily demand in the foreseeable future due to a variety of factors, including the following:

 

	•	Increasing Number of Echo Boomers. According to JCHS-Harvard in June 2009, Echo Boomers, or children of the Baby Boomers, represent the largest population block to reach adulthood in the nation’s history numbering approximately 75 million Americans. This segment of the population is currently between 14 and 28 years old and is expected to add 4 million people to the workforce every year for the next 15 years. According to Property & Portfolio Research’s “The U.S. Apartment Market – A Perspective on the Next Five

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		Years” report dated January 2009, over 75% of young adults in the “less than 25” age group and over 60% of the “25-29” age group are comprised of renter-occupied households.
	•	Propensity of Echo Boomers to Rent Longer. JCHS-Harvard observed in a National Multi Housing Council Report entitled, “Multifamily Rental Housing in the 21st Century,” that young adults are renting longer and postponing buying homes until later in life to pursue higher education, to postpone marriage and to have greater mobility in today’s economy. According to the National Association of Realtors “2008 Profile of Home Buyers and Sellers,” the overall median age of the first time buyers is 30. Since these young adult households are predominantly renting and postponing buying homes, it is expected that rental demand will surge in the coming decade as more Echo Boomers enter the workforce and seek places to live. Growing economic insecurity regarding employment prospects and a desire to avoid long-term financial commitments also provide demand for the relatively short-term financial obligations of renting.
	•	Increase in Baby Boomer Decision to Rent vs. Purchase. In the same National Multi Housing Council Report, JCHS-Harvard projects that additional demand for apartments will be generated by the Baby Boomers. As the Echo Boomer children leave home, their empty-nester parents are also expected to become renters, as they seek to simplify their lifestyles, reduce home maintenance obligations and shed home ownership chores.
	•	Immigration. Legal immigration is expected to add more than 12 million individuals to the economy over the next ten years according to a November 2007 report by Marcus and Millichap’s National Multi-Housing Group, entitled, “Multifamily Investment: the Continued Case for Optimism,” which we refer to as the Marcus and Millichap report. According to this report, approximately 85% of immigrants are expected to rent, compared with 32% of the U.S. residents overall. In addition, immigrants on average rent apartments for about eight to ten years, much longer than non-immigrants.
	•	Home Ownership Crisis. The resilient fundamentals of the national apartment market are being further bolstered by the rapidly growing number of individuals losing their home in foreclosure or being forced to sell because they can no longer afford their mortgages. According to a report by RealtyTrac, Inc., a third-party company that maintains one of the largest foreclosure activity databases for the U.S., foreclosure filings were reported for over 1.5 million U.S. properties in the first six months of 2009. It is expected that many of these individuals will enter the renter market as “renters-by-necessity” and will stay renters for the foreseeable future. Additionally, the number of renters exiting apartments to purchase single-family homes has decreased dramatically as loans for first-time home buyers become increasingly scarce and qualifying standards become increasingly more challenging. Diminishing home equity values have also quelled the desire of renters to purchase single-family homes.
	•	Increase in Market Share of Apartment Rentals vs. Single-family Rentals. According to JCHS-Harvard, single-family rentals and rental properties with less than five units are benefiting less from the renewed growth in young adult and single-adult households. As a result, large apartment properties are likely picking up the market share from these properties.
	•	Change in Demographics of Typical Households. A demographic shakeup in the traditional American household will also likely boost apartment demand. Since the 1970s, the number of married couples with children has decreased and now accounts for less than one-quarter of all U.S. households. Using data from the Census Bureau, JCHS-Harvard has observed in the above-referenced National Multi Housing Council Report that the number of these traditional families will continue to decline and will be replaced by a growing number of single-adult, single-parent and childless couple households. In the 1990s, single-adult and single-parent

		households accounted for two-thirds of all new households. These smaller households have traditionally been attracted to apartment living, and this will likely continue in the future.

          The Marcus and Millichap report projects that demand for new U.S. apartments should total 4.3 million over the decade ending 2015, or an average of 430,000 units per year.

 

Supply Overview

 

          Projections of additions to supply in the short-term are generally based on permitting and construction activity, while longer term projections are based on economics, construction cost, land availability and demand.

 

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          REIS, a leading commercial real estate research firm, projects a decline in new additions to supply over the next three years from 109,409 units in 2008 to 81,192 units in 2012. Recent challenges in the debt and equity markets and the current financial environment may cause further declines in additions to supply in the near to mid-term.

 

Multifamily Market Types

 

          According to an August 2006 RREEF Real Estate Research report, U.S. apartment markets are generally categorized either as:

 

	•	Growth Markets. “Growth Markets” include many of the historically fastest growing metropolitan areas, such as Phoenix, Atlanta and Las Vegas, in terms of population and employment. These markets often have weak barriers to entry with considerably lower housing costs.
	•	Lifestyle Markets. “Lifestyle Markets,” such as New York, San Francisco, Seattle and San Jose, are those markets where the high cost of homeownership, lengthy commutes, the local employment mix and other factors generate large numbers of “renters-by-choice.” These markets typically enjoy high barriers to entry and considerably higher housing costs.

          We intend to generally focus on Lifestyle Markets because we believe the breadth of rental demand, the relative affluence of renter households, the size and diversity of the economic base and high barriers to entry create a less volatile environment. In these markets, we intend to emphasize investments in submarkets with strong accessibility to major employment centers, direct linkages to the local transportation network and mass transit system, proximity to major shopping nodes, and other such amenities that appeal to affluent and mobile renters.

 

          We will also make selective investments in Growth Markets, targeting “lifestyle locations” within these larger Growth Markets, where such locations typically have the same relative advantages of high barriers to entry, accessibility to major employment centers, transportation systems, shopping and amenities that we look for in the Lifestyle Markets.

 

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INVESTMENT STRATEGY, OBJECTIVES AND POLICIES

 

Investment Strategy

 

          We intend to acquire a diversified portfolio of real estate and real estate-related investments, with a primary focus on well-located, institutional quality apartment properties with strong and stable cash flows. We intend to implement what we refer to as the Enhanced Multifamily strategy, which is described in more detail below.

 

          We also intend to acquire well-located residential properties that we believe present significant possibilities for short-term capital appreciation, such as those requiring repositioning, renovation or redevelopment, and those available at opportunistic prices from distressed or time-constrained sellers. As appropriate, we intend to implement Enhanced Multifamily strategies to these properties as well.

 

          We will also seek to originate or invest in real estate-related securities that we believe present the potential for high current income or total return, including but not limited to mortgage, bridge or subordinated loans, debt securities and preferred or other equity securities of other real estate companies, and may invest in entities that make similar investments. See “— Investment in and Originating Real Estate-Related Investments.” Subject to the provisions our charter, some of the above investments may be made in connection with programs sponsored, managed or advised by our affiliates or affiliates of our advisor, and we may enter into one or more joint ventures, tenant-in-common investments or other co-ownership arrangements for the acquisition, development or improvement of properties with third parties or affiliates of our advisor. We may serve as mortgage lender to, or acquire interests in or securities issued by these joint ventures, tenant-in-common investments or other joint venture arrangements or other programs sponsored by our advisor’s affiliates.

 

          Our board of directors intends to delegate to its investment committee the authority to approve all property acquisitions, developments and dispositions, as well as all real estate and real estate-related investments and all investments consistent with our investment objectives, for investment costs up to $50,000,000, including our financing of such investments. Our advisor will recommend suitable investments for consideration by the investment committee and, where required, the full board of directors. See “Management — Committees of the Board of Directors — Investment Committee.”

 

Investment Objectives

 

	Our primary investment objectives are to:
	•	preserve and protect your capital investment;
	•	provide you with attractive and stable cash distributions; and
	•	increase the value of our assets in order to generate capital appreciation for you.

Investment Approach

 

          Our board, including a majority of our independent directors, may revise our investment policies, which we describe in more detail below, without the approval of our stockholders. Our board will review our investment policies at least annually to determine whether our policies are in the best interests of our stockholders. Our charter requires that our board include the basis for their determination in minutes of their meetings and in an annual report delivered to our stockholders.

 

          Within our investment policies and objectives, our advisor will have substantial discretion with respect to the selection of specific investments and the purchase and sale of our assets, subject to the provisions in our charter that the consideration paid for each property we acquire is ordinarily based on the fair market value as determined by a majority of our directors.

 

          Our advisor’s senior executives, Messrs. Kamfar, Babb, and Ruddy, bring over 60 years of combined expertise gained through hands-on experience in acquisitions, asset management, dispositions, development/redevelopment, leasing, property management, portfolio management and in building operating and real estate companies.

 

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Our Target Portfolio

 

          We intend to achieve our investment objectives by acquiring a diverse portfolio of real estate and real estate-related investments. We plan to diversify our portfolio by investment type, size, property location and risk with the goal of attaining a portfolio that will generate attractive returns for our investors, with the potential for capital appreciation. Our targeted portfolio allocation is as follows:

 

	•	Enhanced Multifamily. We intend to allocate approximately 50% of our portfolio to investments in well-located, institutional quality apartment properties that we believe demonstrate strong and stable cash flows, typically located in supply constrained sub-markets with relatively high expectations of rent growth. As appropriate, we intend to implement our advisor’s Enhanced Multifamily strategy (as described below) at these properties, which we anticipate will create sustainable long-term increases in property value and lead to increased returns to our investors by, among other benefits, generating higher rental revenue and reducing resident turnover.
	•	Value-Added Residential. We intend to allocate approximately 30% of our portfolio to investments in well-located, residential properties that offer a significant potential for short-term capital appreciation through repositioning, renovation or redevelopment. In addition, we will seek to acquire properties available at opportunistic prices from distressed or time-constrained sellers in need of liquidity. As appropriate, we intend to implement our advisor’s Enhanced Multifamily strategy at these properties as well.
	•	Real Estate-Related Investments. We intend to allocate approximately 20% of our portfolio in other real estate-related investments with the potential for high current income or significant total returns. These investments could include first and second mortgages, subordinated, bridge and other loans, debt and other securities related to or secured by real estate assets, and common and preferred equity, which may include securities of other REITs and real estate companies. Subject to the provisions of our charter, some of these investments may be made in connection with programs sponsored, managed or advised by our affiliates or those of our advisor.

          Although the above outlines our target portfolio, we may make adjustments based on, among other things, prevailing real estate market conditions and the availability of attractive investment opportunities. We will not forego an attractive investment because it does not fit within our targeted asset class or portfolio composition. We may use the proceeds of this offering to purchase or invest in any type of real estate or real estate-related investment which we determine is in the best interest of our stockholders, subject to the provisions of our charter which limit certain types of investments.

 

          We believe the probability of meeting our investment objectives will be maximized through the careful selection and underwriting of assets. When considering an investment, we will generally evaluate the following:

 

	•	the performance and risk characteristics of that investment;
	•	how that investment will fit within our target portfolio objectives; and
	•	the expected returns of that investment on a risk-adjusted basis, relative to other investment alternatives.

          As such, our actual portfolio composition may vary substantially from the target portfolio described above.

 

          We will typically hold fee title or a long-term leasehold estate in the properties we acquire. However, subject to any required approvals and maintaining our status as a REIT, we may also invest in or acquire operating companies or other entities that own and operate assets that meet our investment objectives. We will consider doing so if we believe it more efficient to acquire an entity that already owns assets meeting our investment objectives than to acquire such assets directly. Also, we may enter into one or more joint ventures, tenant-in-common investments or other co-ownership arrangements for the acquisition, development or improvement of properties with third parties or affiliates of our advisor, including other present and future real estate programs sponsored by affiliates of our advisor. We may also serve as lender to these joint ventures, tenant-in-common programs or other programs sponsored by affiliates of our advisor.

 

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Our Target Markets

 

          Although we intend to diversify our portfolio by geographic location, we expect to focus on markets with high potential for attractive returns located in the United States. As a result, our actual investments may result in concentrations in a limited number of geographic regions. We will seek to focus on markets where affiliates of Bluerock has established relationships, transaction history, market knowledge and access to potential ‘‘off-market’’ investments directly from sellers, as well as an ability to direct property management and leasing operations efficiently. Our preferred target markets have three distinct characteristics:

 

	•	Supply. High barriers-to-entry, such as zoning, land use restrictions, cost, or other characteristics that tend to limit supply;
	•	Demand. Strong economic predictors, such as employment growth, household income, economic diversity, favorable population demographics or other characteristics that tend to generate high demand; and
	•	Retention. Attractive quality of life, such as recreation, leisure, infrastructure, education, limited home ownership opportunities ( i.e., low affordability index) or other characteristics that tend to generate high demand and retention.

          We will review and may periodically adjust our target markets in response to changing market conditions and to maintain a diverse portfolio. Our initial target markets, along with their metropolitan statistical area (MSA) rank in population, are listed below:

 

          Additionally, certain secondary markets demonstrating strong fundamentals, employment diversity and attractive pricing will be pursued on a selective basis.

 

          Economic and real estate market conditions vary widely within each region and submarket, and we intend to spread our portfolio investments both across these regions and among the submarkets within these regions.

 

Investment Size

 

          We also intend to diversify by investment size. We expect that our real property investments will typically range in size from $20 million to $150 million; however, we may make occasional investments outside of this range if we believe that the investment will help us meet our investment objectives and its projected risk-adjusted return merits such concentration.

 

Enhanced Multifamily Strategy

 

          Our advisor’s Enhanced Multifamily strategy consists of a series of initiatives which we believe can create a sustainable competitive advantage and allow us to realize long-term increases in property value. This strategy seeks to transform the perception of the apartment from a purely functional one ( i.e., as solely a place to live) to a lifestyle product/community ( i.e., as a place to live, interact and socialize) thereby creating an enhanced perception of value among residents, allowing for premium rental rates and resulting in enhanced resident retention.

 

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          The initiatives consist of amenities and attributes that go beyond traditional features, and incorporate cosmetic and architectural improvements along with technology, music and activities to establish an enhanced sense of comfort and appeal to our target residents’ desire for a “sense of community” by creating places to gather, socialize and interact in a highly amenitized environment. These initiatives may include:

 

	•	common areas with Wi-Fi allowing residents to stay connected online while socializing with friends;
	•	unique places to gather and socialize, such as outdoor kitchens and fireplaces;
	•	state-of-the-art fitness centers providing a range of fitness and wellness classes;
	•	architecturally appealing common areas designed to encourage social interaction and a “sense of community”;
	•	a state-of-the-art security system;
	•	occasional live music and other performances;
	•	group activities, such as book clubs, cooking classes and wine tastings;
	•	resort-like pools; and
	•	social activities incorporated into each property through a concierge program.

          Where appropriate, our Enhanced Multifamily initiatives may also include a “Green Lifestyle” program that incorporates environmentally sound and energy efficient products to enable the residents to live an environmentally friendly lifestyle, which we believe will further develop a “sense of community” by appealing to our target residents’ social and environmental concerns.

 

          The Enhanced Multifamily strategy is specifically targeted to appeal to the following two lucrative and rapidly growing segments of the multifamily market:

 

          Lifestyle Renters are generally established, adult households with multiple housing choices open to them, which choose to rent an apartment for primarily nonfinancial reasons. They include Baby Boomers who have become empty nesters and who are seeking to live a simpler lifestyle without the responsibilities of home ownership, as well as some older members of the Echo Boomer generation. Lifestyle Renter households generally meet three criteria:

 

	•	they are old enough to be established in the labor force and to have stopped having to move every year or two for reasons of job or school;
	•	they have adult interests and schedules; and
	•	they earn enough income to purchase a home if they choose to do so and may have been homeowners previously.

          Middle Market Renters are generally younger and more mobile than Lifestyle Renters, and while they can generally afford to own, they have chosen either to save their money (perhaps to purchase a larger house at a later date), to spend it on other goods and services or to invest it in something other than housing, or they are in a personal or job transition. For Middle Market Renters an apartment can provide an inexpensive and maintenance-free residence. This segment is made up of several main subgroups, including:

 

	•	young adults, who are in a transitional stage in terms of both their personal and work lives — they may be recent college graduates or others who are on a track to earn enough money to purchase a home, but have not yet reached that point or are too mobile to settle down;
	•	women who live alone and who may choose apartments because they require little maintenance and may offer a sense of personal security that is often lacking in single-family homes; and
	•	family households, including married couples with no children, couples with children and single-parent households.

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          As a further benefit, by appealing to and attracting the upper income segments of the rental market, we believe the initiatives can generate significant additional revenue-enhancing options at the properties, including the ability to provide and charge for premium units, upgrade packages, and equipment rentals such as washer and dryers, flat screen televisions and premium sound systems.

 

Investments in Stabilized Properties

 

          We intend to allocate approximately 50% of our portfolio to investments in well-located, institutional quality apartment properties demonstrating strong and stable cash flows, typically located in supply constrained sub-markets with relatively high expectations of rent growth. Such properties typically will have been developed after 1995 and demonstrate a high potential to increase rents and generate capital appreciation through the implementation of our Enhanced Multifamily strategy to create communities which appeal to the rapidly growing Lifestyle Renter and Middle Market Renter segments of the market, and where we seek to create sustainable long-term increases in property value and lead to increased returns for our investors by, among other benefits, enhancing rental revenue and resident retention.

 

Investments in “Value-Added” Properties

 

          We intend to allocate approximately 30% of our target portfolio in “value-added” residential properties with the potential for short-term capital appreciation. These assets generally will be well-located and fundamentally sound residential properties, but where there is an opportunity to improve net operating income and overall property value, without limitation, through:

 

	•	investment of additional funds;
	•	aggressive marketing and management to increase rental revenue;
	•	create incremental sources of revenue; and
	•	disciplined management procedures to reduce operating costs.
We may employ one or more of the following strategies with respect to the acquisition and management of these properties:
	•	Renovating/Repositioning . These properties may be poorly managed, have significant deferred maintenance and/or suffer from a rental base that is below competing properties in the market and which, through a cost-effective renovation program and implementation of institutional-quality management practices and systems, can be repositioned to attract new residents at higher rental rates.
	•	Redeveloping . These properties may have excess land or unrealized development rights allowing for additional units and/or common areas in order to generate incremental sources of revenue, increased operational efficiencies or improved land use.
	•	Opportunistic Purchase . These properties can be acquired at what we believe are opportunistic prices ( i.e., at prices below what would be available in an otherwise efficient market) from sellers who are distressed or face time-sensitive deadlines and are in need of liquidity.
	•	Value Investing . These are well-located, fundamentally sound properties that can be acquired at attractive values in markets that are temporarily overbuilt or oversold, but which have solid demographic characteristics, and where the market recovery is expected to favorably impact the value of these properties.
	•	Portfolio Purchase . Some portfolios which due to large size, overly broad asset mix or mixed investment type (stabilized vs. value-added) may attract a limited pool of qualified potential purchasers and therefore may be available with a bargain element for a well capitalized purchaser able to purchase the portfolio as a whole.

          In addition, although our Enhanced Multifamily operating and property initiatives are primarily intended for the stabilized properties we acquire, we intend to implement some or all of these initiatives where appropriate for our value-added properties.

 

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          We generally intend to hold our properties for two to six years, which we believe is the optimal period to enable us to capitalize on the potential for increased income and capital appreciation. However, economic and market conditions, and changes in REIT regulations, may cause us to adjust our expected holding period in order to maximize our potential returns. We cannot predict the various market conditions that will exist at any given time in the future. Because of this uncertainty, we cannot assure you that we will be able to sell our properties at a profit, which could adversely affect our ability to realize any potential appreciation on our investments.

 

Investments in and Originating Real Estate-Related Investments

 

          We intend to allocate approximately 20% of our target portfolio to real estate-related investments with a potential for high current income or total return, including first and second mortgages, subordinated, bridge and other real estate-related loans, debt securities related to or secured by real estate assets, and common and preferred equity securities, which may include equity securities of other REITs or real estate companies.

 

          We may originate or make investments in all types of real estate-related loans. Some of the types of loans in which we may invest or originate, other than traditional commercial mortgage loans, are described below:

 

	•	Second Mortgages . Second mortgages are secured by second deeds of trust on real property that is already subject to prior mortgage indebtedness.
	•	B-Notes . B-Notes are junior participations in a first mortgage loan on a single property or group of related properties, which share a single borrower and mortgage with the senior, participating A-Note and are secured by the same collateral.
	•	Subordinated Loans . Subordinated loans usually rank junior in priority of payment to senior secured loans and second mortgages. Subordinated loans are generally not secured by mortgage interests in the borrower’s real estate, but have a pledge of ownership interests of an entity that directly or indirectly owns real property and therefore are situated above preferred equity and common stock in the capital structure of a borrower. Due to their junior status compared to senior secured loans and second mortgages, subordinated loans typically offer the ability to achieve higher returns through both higher interest rates and possible equity ownership in the form of warrants, enabling the owner of the subordinated loan to participate in the capital appreciation of the borrower. We may hold senior or junior positions in subordinated loans, such senior or junior position denoting the particular leverage strip that may apply.
	•	Bridge Loans . Bridge loans are financing products to borrowers who are typically seeking short-term capital to be used in an acquisition, development or refinancing of a given property.
	•	Convertible Mortgages . Convertible mortgages are similar to equity participations, and generally benefit from the cash flow and/or any appreciation in the value of the subject property.

          We may invest in or originate debt securities in cases in which we believe there is a possibility of exercising our foreclosure rights against the property in order to acquire the underlying asset, where the amount of our debt investment provides an attractive cost basis for ownership.

 

          We intend to structure, underwrite and originate many of the debt products in which we invest. Our underwriting process will involve comprehensive financial, structural, operational and legal due diligence to assess the risks of investments so that we can optimize pricing and structuring. By originating loans directly, we will be able to efficiently structure a diverse range of products. For instance, we may sell some components of the debt we originate while retaining attractive, risk-adjusted components. We may fund the loans we originate with proceeds from this offering and borrowings from other lenders, including warehouse lines of credit, which we may procure. We may require other collateral to provide additional security for our loans, including letters of credit, personal guarantees or collateral unrelated to the property we finance. We may structure our loans so that we receive a stated fixed or variable interest rate. The loans also may be structured to include a percentage of gross revenues or a percentage of the increase in the fair market value of the property relating to the loan. Loans we structure may be payable upon maturity, refinancing or sale of the property. Our loans may also have prepayment lockouts, yield maintenance, prepayment penalties, minimum profit hurdles and other mechanisms to protect and enhance returns in the event of premature repayment.

 

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          These mortgage loan investments will typically range in size from $10 million to $50 million, have terms from two to six years and bear interest at a rate of 300 to 1,200 basis points over the applicable interest rate index. We will not make or invest in mortgage loans unless we obtain an appraisal concerning the underlying property from a certified independent appraiser. In addition to the appraisal, we will seek to obtain a customary lender’s title insurance policy or commitment as to the priority of the mortgage and the condition of title.

 

          We will not make or invest in mortgage loans on any one property if the aggregate amount of all mortgage loans outstanding on the property, including our borrowings, would exceed an amount equal to 85% of the appraised value of the property, unless we find substantial justification due to the presence of other underwriting criteria. For example, we may find such justification in cases in which we believe there is a high probability of our foreclosure upon the property in order to acquire the underlying assets and in which the amount of our mortgage loan investment provides an attractive cost basis for ownership of the underlying property.

 

          In evaluating prospective investments in and originations of loans, our advisor will consider factors such as the following:

 

	•	the ratio of the amount of the investment to the value of the property by which the note is secured;
	•	the property’s potential for appreciation;
	•	the stability and economic strength of the market, submarket and property;
	•	the debt coverage ratio provided by historical and projected net operating income;
	•	historical and projected levels of rental increase and occupancy rates;
	•	the liquidity of the investment;
	•	the current and future quality of the location;
	•	the condition and use of the property;
	•	the property’s income-producing capacity;
	•	the quality, experience, creditworthiness and liquidity of the borrower;
	•	the ability to acquire the underlying real estate; and
	•	general economic condition of the macro and micro market of the property.

          Our advisor will evaluate all potential loan investments to determine if the security for the loan and the loan-to-value ratio meets our investment criteria and objectives. We anticipate that most loans will have a term of five years or less. Most loans that we will consider for investment would provide for monthly payments of interest and some may also provide for principal amortization.

 

          Our mortgage loan investments may be subject to regulation by federal, state and local authorities and subject to laws and judicial and administrative decisions imposing various requirements and restrictions, including, among other things, regulating credit granting activities, establishing maximum interest rates and finance charges, requiring disclosure to customers, governing secured transactions and setting collection, repossession and claims handling procedures and other trade practices. In addition, certain states have enacted legislation requiring the licensing of mortgage bankers or other lenders, and these requirements may affect our ability to effectuate our proposed investments in mortgage loans. Commencement of operations in these or other jurisdictions may be dependent upon a finding of our financial responsibility, character and fitness. We may determine not to make mortgage loans in any jurisdiction in which the regulatory authority believes that we have not complied in all material respects with applicable requirements.

 

          Our charter does not limit the amount of gross offering proceeds that we may apply to loan investments. Our charter also does not place any limit or restriction on the percentage of our assets that may be invested in any type of loan or in any single loan, or the types of properties subject to mortgages or other loans in which we may invest. When determining whether to make investments in mortgage and other loans, we will consider such factors as:

 

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	•	positioning our overall portfolio to achieve an optimal mix of real estate investments;
	•	the diversification benefits of the loans relative to the rest of the portfolio;
	•	the potential for the investment to deliver high current income and attractive risk-adjusted total returns; and
	•	other factors considered important to meeting our investment objectives.

          Subject to any required approvals and maintaining our status as a REIT, we may also invest in or acquire operating companies or other entities that own and operate real estate or real estate-related investments that meet our investment objectives. We will consider doing so if we consider it more efficient to acquire an entity that already owns assets meeting our investment objectives than to acquire such assets directly. We may purchase the common or preferred stock or debt of these entities or options to acquire their stock. We may target a public company that owns commercial real estate or real estate-related debt or investments when we believe its stock is trading at a discount to that company’s net asset value, and may seek to obtain a controlling interest in the companies that we target.

 

Development and Construction of Properties

 

          We may invest substantial proceeds from this offering, but not more than 10% of our total assets, in unimproved properties or in mortgage loans secured by such unimproved properties. We will consider a property to be an unimproved property if it was not acquired for the purpose of producing rental or other operating income, has no development or construction in process at the time of acquisition, and no development or construction is planned to commence within one year of the acquisition.

 

Joint Venture Investments

 

          We may enter into joint ventures, partnerships, tenant-in-common investments, other co-ownership arrangements with real estate developers, owners and other third parties, including affiliates of our advisor, for the acquisition, development, improvement and operation of properties. A joint venture creates an alignment of interest with a private source of capital for the benefit of our stockholders, by leveraging our acquisition, development and management expertise in order to achieve one or more of the following four primary objectives:

 

	•	increase the return on our invested capital;
	•	diversify our access to equity capital;
	•	broaden our invested capital into additional projects in order to promote our brand and increase market share; and
	•	obtain the participation of sophisticated partners in our real estate decisions.

          We may invest in joint ventures with our affiliates or affiliates of our advisor only if a majority of our directors, including a majority of our independent directors, approve the transaction as fair and reasonable and on substantially the same terms and conditions as those received by the other joint venturers. In determining whether to invest in a particular joint venture, our advisor will evaluate the investment that such joint venture owns or is being formed to own under the same criteria described elsewhere in this prospectus for our selection of real property investments.

 

          In the event that any joint venture with an entity affiliated with our advisor holds interests in more than one property or other investment, the interest in each may be specially allocated based upon the respective proportion of funds invested by each co-venturer. Entering into joint ventures with other programs sponsored by affiliates of our advisor will result in conflicts of interest. See “Conflicts of Interest — Acquisitions from Our Advisor and Its Affiliates.”

 

          We will establish the terms with respect to any particular joint venture agreement on a case-by-case basis after our board of directors considers all of the facts that are relevant, such as the nature and attributes of our other potential joint venture partners, the proposed structure of the joint venture, the nature of the operations, the liabilities and assets associated with the proposed joint venture and the size of our interest when compared to the interests owned by other partners in the venture. With respect to any joint venture investment, we expect to consider the following:

 

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	•	Our ability to manage and control the joint venture. We will seek to obtain certain approval rights in joint ventures we do not control. For proposed joint ventures in which we are to share control with another entity, we will consider procedures to address decisions in the event of an impasse.
	•	Our ability to exit a joint venture. We will consider requiring buy/sell rights, redemption rights or forced liquidation rights to allow us to control the timing of our exit.
	•	Our ability to control transfers of interests held by other partners to the venture. We will consider requiring consent provisions, rights of first refusal, and or forced redemption rights in connection with transfers.