As
filed with the Securities and Exchange Commission on March 3, 2010
Registration
No. 333-153135
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1 TO
FORM
S-11
REGISTRATION
STATEMENT
Under
THE
SECURITIES ACT OF 1933
Bluerock
Enhanced Multifamily Trust, Inc.
(Exact
name of registrant as specified in its charter)
680
5
th
Avenue, 16th Floor
New
York, New York 10019
(212)
843-1601
(Address,
including zip code, and telephone number, including area code, of the
registrant’s principal executive offices)
R.
Ramin Kamfar
Bluerock
Enhanced Multifamily Trust, Inc.
680
5
th
Avenue, 16
th
Floor
New
York, New York 10019
(877) 826-2583
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
to:
Robert
H. Bergdolt, Esq.
DLA
Piper LLP (US)
4141
Parklake Avenue, Suite 300
Raleigh,
North Carolina 27612-2350
(919)
786-2000
Approximate date of
commencement of proposed sale to public:
As soon as
practicable after the effectiveness of the registration statement.
If any of
the securities being registered on this form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box:
ý
If this
form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. □
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
number of the earlier effective registration statement for the same
offering. □
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
number of the earlier effective registration statement for the same
offering. □
If
delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. □
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act (Check One):
Large accelerated
filer
¨
Accelerated
filer
¨
Non-accelerated filer
¨
Smaller
Reporting Company
ý
(Do not
check if smaller reporting company)
This
Post-Effective Amendment No. 1 consists of the following:
1. The
Registrant’s final form of prospectus dated October 15, 2009.
2. Supplement
No. 2 dated March 3, 2010 to the Registrant’s prospectus dated October 15, 2009,
which supersedes all prior supplements and which will be delivered as an
unattached document along with the prospectus.
2. Part
II, included herewith.
3. Signature,
included herewith.
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Filed Pursuant to Rule
424(b)(3)
Registration No. 333-153135
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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:
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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.
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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.
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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.
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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.
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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.
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We will rely on our advisor to manage our
business and assets. Our advisor is a newly-formed entity with no
operating history.
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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.
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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.
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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.
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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.
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We may fail to qualify as a REIT, which
may have adverse tax consequences to you.
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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.
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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.
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Price to Public
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Selling
Commissions
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Dealer
Manager
Fee
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Net Proceeds
(Before
Expenses)*
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Primary Offering
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Per share price
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$
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10.00
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$
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0.70
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$
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0.26
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$
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9.04
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Total Minimum
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$
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2,500,000
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$
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175,000
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$
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65,000
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$
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2,260,000
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Total Maximum
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$
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1,000,000,000
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$
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70,000,000
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$
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26,000,000
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$
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904,000,000
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Distribution Reinvestment Plan
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Per Share
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$
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9.50
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$
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0
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$
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0
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$
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9.50
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Total Maximum
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$
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285,000,000
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$
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0
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$
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0
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$
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285,000,000
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* 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
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TABLE OF CONTENTS
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1
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15
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37
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38
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39
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42
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59
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71
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76
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78
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83
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86
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89
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91
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92
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99
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106
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109
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126
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129
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135
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135
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135
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135
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136
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A-1
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B-1
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C-1
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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:
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a net worth of at least $250,000;
or
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a gross annual income of at least $70,000
and a net worth of at least $70,000.
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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:
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Read this entire prospectus and any
appendices and supplements accompanying this prospectus.
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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.
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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.”
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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.
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Q:
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What is a REIT?
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A:
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REIT stands for “real estate investment
trust.” In general, a REIT is a company that:
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pools the capital of many investors to
acquire or provide financing for real estate properties;
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allows individual investors to invest in a
diversified real estate portfolio managed by a professional management
team;
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is required to pay distributions to
investors of at least 90% of its taxable income (excluding net capital
gains) each year; and
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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.
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What is the experience of your management?
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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.
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What is the advisor’s “Enhanced Multifamily” strategy?
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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.
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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.
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What types of real property will you acquire?
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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.
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Will you invest in anything other than real property?
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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:
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What is an UPREIT?
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A:
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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.
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If I buy shares of your common stock, will I receive distributions
and how often?
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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.
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Q:
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Can I reinvest my distributions in additional shares of common
stock?
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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.
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Will the distributions I receive be taxable as ordinary
income?
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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.
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How does a “best efforts” offering work?
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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.
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Who can buy shares of your common stock?
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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.
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Is there any minimum investment required?
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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:
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How do I subscribe for shares?
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A:
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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.
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Q:
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If I buy shares of common stock in this offering, how can I sell
them?
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A:
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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.
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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.
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Q:
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Do you intend to list your common stock? If not, is there any other
planned liquidity event?
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A:
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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.
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Q:
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Will I receive notification as to how my investment is
doing?
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A:
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You will receive periodic reports on the
performance of your investment with us, including:
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an annual report that updates and details
your investment;
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an annual report, including audited
financial statements, as filed with the Securities and Exchange
Commission, or the SEC;
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an annual IRS Form 1099-DIV; and
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supplements to the prospectus, as the same
may be required by the federal securities laws.
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Q:
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When will I receive my tax information?
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A:
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We intend to mail your Form 1099-DIV tax
information by January 31 of each year.
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Q:
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Who can I contact to answer my questions?
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A:
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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:
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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)
v
[This page intentionally left blank]
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:
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preserve and protect your capital
investment;
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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.
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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:
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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.”
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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.
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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.
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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:
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the performance and risk characteristics
of that investment;
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how that investment will fit within our
target portfolio objectives; and
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the expected returns of that investment on
a risk-adjusted basis, relative to other investment alternatives.
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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
2
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:
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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).
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
4
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:
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Starwood Funds:
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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;
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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;
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Starwood Hotels
& Resorts Worldwide, Inc. (NYSE: HOT):
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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;
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i
Star Financial (NYSE:
SFI):
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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
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Star Financial, the
largest publicly owned finance company at that time focused exclusively on
commercial real estate;
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Through the Starwood Funds, raising over
$2.6 billion of equity from institutional investors.
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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.”
5
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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Estimated Amount if
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Description of Fee
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Calculation of Fee
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Minimum/Maximum Sold
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Offering
Stage
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Selling Commissions
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We will pay the dealer manager up to 7% of
the gross proceeds of our primary offering, a portion of which may be
reallowed to participating broker-dealers. No selling commissions are
payable on shares sold under the distribution reinvestment
plan.
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$175,000/$70,000,000
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Dealer Manager Fee
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We will pay the dealer manager 2.6% of the
gross proceeds of our primary offering. No dealer manager fee is payable
on shares sold under the distribution reinvestment plan. The dealer
manager expects to reallow a portion of the dealer manager fee to
participating broker-dealers.
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$65,000/$26,000,000
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Additional
Underwriting
Expenses
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Our advisor or its affiliates may advance,
and we will reimburse, underwriting expenses (in addition to selling
commissions and the dealer manager fee) but only to the extent that such
payments would not cause the total amount of underwriting compensation
paid in connection with this offering to exceed 10% of the gross proceeds
of our primary offering as of the date of termination. 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. These additional underwriting
expenses may include (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.
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$10,000/$4,000,000
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Issuer Organization and
Offering
Costs
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Our advisor or its affiliates may advance,
and we will reimburse, 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% of the gross proceeds of our primary offering as of
the date of the reimbursement. We estimate such expenses will be
approximately 1.5% of the gross proceeds of the primary offering if the
maximum offering is sold.
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$125,000/$15,000,000
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Acquisition
and Development Stage
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Acquisition Fees
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For its services in connection with the
selection, due diligence and acquisition of a property or investment, our
advisor will receive an acquisition fee equal to 1.75% of the purchase
price. The purchase price of a property or investment shall equal the
amount paid or allocated to the purchase, development, construction or
improvement of a property, inclusive of expenses related thereto, and the
amount of debt associated with such real property or investment. The
purchase price allocable for a joint venture investments shall equal the
product of (1) the purchase price of the underlying property and (2) our
ownership percentage in the joint venture. With respect to investments in
and originations of loans, we will pay an origination fee in lieu of an
acquisition fee.
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$29,750/$16,380,000
(assuming no
debt)/
$119,000/$65,520,000
(assuming leverage of 75%
of
cost).
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Estimated Amount if
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Description of Fee
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Calculation of Fee
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Minimum/Maximum Sold
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Origination Fees
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For its services in connection with the
selection, due diligence and acquisition or origination of mortgage,
subordinated, bridge or other loans, our advisor will receive an
origination fee equal to 1.75% of the greater of the amount funded by us
to originate such loans or the purchase price of any loan we purchase,
including third-party expenses. We will not pay an acquisition fee with
respect to such loans.
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$7,438/$4,095,000 (assuming no debt)/
$29,750/$16,380,000 (assuming leverage of 75% of the cost).
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Operating
Stage
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Asset Management Fee
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We will pay our advisor a monthly asset
management fee for managing our day-to-day assets and operations, which
will be equal to one-twelfth of 1% of the higher of the cost or the value
of each asset, where (A) cost equals the amount actually paid, excluding
acquisition fees and expenses, to purchase each asset we acquire,
including any debt attributable to the asset (including debt encumbering
the asset after its acquisition), provided that, with respect to any
properties we develop, construct or improve, cost will include the amount
expended by us for the development, construction or improvement, and (B)
the value of an asset is the fair market value established by the most
recent independent valuation report, if available, without reduction for
depreciation, bad debts or other non-cash reserves; provided, however,
that 50% of the advisor’s asset management fee will not be payable until
stockholders have received distributions in an amount equal to at least a
6% per annum cumulative, non-compounded return on invested capital, at
which time all such amounts will become due and payable. For these
purposes, “invested capital” means the original issue price paid for the
shares of our common stock reduced by prior distributions identified as
special distributions from the sale of our assets. The asset management
fee will be based only on the portion of the cost or value attributable to
our investment in an asset if we do not own all of an asset.
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Actual amounts depend upon the assets we
acquire and, therefore, cannot be determined at the present
time.
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Property Management Fee
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We will pay Bluerock REIT Property
Management, LLC, a wholly-owned subsidiary of our advisor, a property
management fee equal to 4% of the monthly gross revenues from any
properties it manages. Alternatively, we may contract property management
services for certain properties directly to non-affiliated third parties,
in which event we will pay our advisor an oversight fee equal to 1% of
monthly gross revenues of such properties.
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Actual amounts depend upon the gross
revenues of the properties and, therefore, cannot be determined at the
present time.
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Financing Fee
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We will pay our advisor a financing fee
equal to 1% of the amount available under any loan or line of credit made
available to us. The advisor may reallow some or all of this fee to
reimburse third parties with whom it may subcontract to procure such
financing for us.
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Actual amounts depend upon the amount of
indebtedness incurred to acquire an investment and, therefore, cannot be
determined at the present time.
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Reimbursable Expenses
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We will reimburse our advisor for all
reasonable and actually incurred expenses in connection with the services
provided to us, including related personnel, rent, utilities and
information technology costs, subject to the limitation that we will not
reimburse our advisor for any amount which would cause our total operating
expenses (including the asset management fee) at the end of the four
preceding fiscal quarters to exceed the greater of 2% of our average
invested assets or 25% of our net income, unless a majority of our
independent directors has determined that such excess expenses were
justified based on unusual and nonrecurring factors. We will not reimburse
for personnel costs in connection with services for which our advisor
receives acquisition, origination or disposition fees.
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Actual amounts depend upon expenses paid
or incurred and, therefore, cannot be determined at the present
time.
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Description of Fee
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Calculation of Fee
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Estimated Amount
if
Minimum/Maximum Sold
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Disposition/Liquidation/Listing
Stage
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Disposition Fee
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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.
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Actual amounts depend upon the sale price
of investments and, therefore, cannot be determined at the present
time.
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Common Stock Issuable Upon Conversion of
Convertible Stock
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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.
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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.
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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.
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All of this
compensation is more fully described under “Management
Compensation.”
8
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:
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
9
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:
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our cash available for distribution;
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our overall financial
condition;
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our capital requirements;
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the annual distribution requirements
applicable to REITs under the federal income tax laws; and
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such other considerations as our board of
directors may deem relevant.
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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:
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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;
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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
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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.
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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.
14
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
16
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
17
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
18
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.
19
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.
20
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
21
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.
22
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:
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make it more difficult for us to find
tenants to lease units in our apartment properties;
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force us to lower our rental prices in
order to lease units in our apartment properties; and/or
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substantially reduce our revenues and cash
available for distribution to our stockholders.
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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:
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purchase additional properties;
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repay debt, if any;
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buy out interests of any co-venturers or
other partners in any joint venture in which we are a party;
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create working capital reserves;
and/or
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make repairs, maintenance, tenant
improvements or other capital improvements or expenditures to our
remaining properties.
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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:
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joint venturers may share certain approval
rights over major decisions;
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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;
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the possibility that our co-venturer,
co-owner or partner in an investment might become insolvent or bankrupt;
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the possibility that we may incur
liabilities as a result of an action taken by our co-venturer, co-owner or
partner;
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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;
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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.
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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.
30
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:
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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;
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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;
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we would have less cash to make
distributions to our stockholders; and
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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.
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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.”
32
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
33
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.
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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%).
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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.
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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:
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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);
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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
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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:
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your investment is consistent with your
fiduciary obligations under ERISA and the Code;
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your investment is made in accordance with
the documents and instruments governing the Benefit Plan, including the
Plan’s investment policy;
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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;
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your investment will not impair the
liquidity of the Benefit Plan;
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your investment will not produce
“unrelated business taxable income” for the Benefit Plan;
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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
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your investment will not constitute a
prohibited transaction under Section 406 of ERISA or Section 4975 of the
Code.
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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:
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a value included in the annual statement
could actually be realized by us or by our stockholders upon liquidation;
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stockholders could realize that value if
they were to attempt to sell their stock; or
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an annual statement of value would comply
with any reporting and disclosure or annual valuation requirements under
ERISA or other applicable law.
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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.
36
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:
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our ability to effectively deploy the
proceeds raised in this offering;
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changes in economic conditions generally
and the real estate and debt markets specifically;
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legislative or regulatory changes
(including changes to the laws governing the taxation of REITs);
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the availability of capital;
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interest rates; and
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changes to generally accepted accounting
principles, or GAAP.
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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.
37
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.
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Minimum Offering
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Maximum Offering
(Not
Including Distribution
Reinvestment Plan)
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Maximum Offering
(Including
Distribution
Reinvestment Plan)
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Amount
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Percent
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Amount
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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.
|
38
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
|
39
|
|
|
|
|
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.
40
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.
41
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.
42
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.
43
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:
|
|
Western Region
|
MSA
|
|
|
Greater Los Angeles
|
2
|
Dallas/Fort Worth
|
4
|
Houston
|
6
|
San Francisco Bay Area
|
12
|
Phoenix
|
13
|
Seattle/Tacoma/Bellevue
|
15
|
Minneapolis
|
16
|
San Diego County
|
17
|
Denver
|
21
|
Portland
|
23
|
San Antonio
|
28
|
Kansas City
|
29
|
San Jose
|
31
|
Eastern
Region
|
MSA
|
|
|
Greater New York
|
1
|
Chicago
|
3
|
Washington/N.
Virginia/Maryland
|
8
|
Atlanta
|
9
|
Boston
|
10
|
Orlando
|
27
|
Indianapolis
|
33
|
Charlotte
|
35
|
Austin
|
37
|
Nashville
|
39
|
Louisville
|
42
|
Richmond
|
43
|
Raleigh-Durham
|
49
|
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.
44
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;
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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
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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:
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investment of additional
funds;
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aggressive marketing and management to
increase rental revenue;
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create incremental sources of revenue;
and
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disciplined management procedures to
reduce operating costs.
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We may
employ one or more of the following strategies with respect to the
acquisition and management of these properties:
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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.
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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.
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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.
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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.
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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.
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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.
46
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:
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Second
Mortgages
.
Second mortgages are secured by second deeds of
trust on real property that is already subject to prior mortgage
indebtedness.
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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.
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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.
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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.
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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.
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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.
47
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:
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the ratio of the amount of the investment
to the value of the property by which the note is secured;
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the property’s potential for appreciation;
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the stability and economic strength of the
market, submarket and property;
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the debt coverage ratio provided by
historical and projected net operating income;
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historical and projected levels of rental
increase and occupancy rates;
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the liquidity of the
investment;
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the current and future quality of the
location;
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the condition and use of the
property;
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the property’s income-producing
capacity;
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the quality, experience, creditworthiness
and liquidity of the borrower;
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the ability to acquire the underlying real
estate; and
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general economic condition of the macro
and micro market of the property.
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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;
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the diversification benefits of the loans
relative to the rest of the portfolio;
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the potential for the investment to
deliver high current income and attractive risk-adjusted total returns;
and
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other factors considered important to
meeting our investment objectives.
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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:
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increase the return on our invested
capital;
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diversify our access to equity
capital;
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broaden our invested capital into
additional projects in order to promote our brand and increase market
share; and
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obtain the participation of sophisticated
partners in our real estate decisions.
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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.
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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.
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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.
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Our
Advisor’s Approach to Evaluating Potential Investments
Our advisor
has developed a disciplined investment approach that combines its experience
with a structure that emphasizes thorough market research, local market
knowledge, underwriting discipline, and risk management in evaluating potential
investments, as follows:
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National Market Research.
The investment team extensively researches the acquisition and
underwriting of each transaction, utilizing both real-time market data and
the transactional knowledge and experience of Bluerock’s network of
professionals.
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Local Market Knowledge.
The expertise, and access to coveted off-market opportunities, is
provided by our local partners or real estate professionals with whom
Bluerock has developed strong relationships over the years.
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Underwriting Discipline.
Our advisor follows a disciplined process to examine and evaluate a
potential investment in terms of its income-producing capacity and
prospects for capital appreciation, which includes a review of property
fundamentals, such as tenant/lease base, lease rollover, expense
structure, occupancy, and property capital expenditure; capital markets
fundamentals, including cap rates, interest rates and holding period; and
market fundamentals, such as rental rates, concession and occupancy levels
at comparable properties, along with projected product delivery and
absorption rates. Our advisor will strive to verify all assumptions by
third-party research from credible sources, to the extent practical, in
order to ensure consistency in the underwriting approach. Only those real
estate assets meeting our investment criteria will be accepted for
inclusion in our portfolio.
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Risk Management.
Risk
management is a fundamental principle in our advisor’s construction of our
portfolio and in the management of each investment. Diversification of our
portfolio by investment type, investment size and investment risk is
critical to controlling portfolio-level risk.
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When
evaluating potential acquisitions, developments and dispositions, we generally
consider the following factors as relevant:
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strategically targeted
markets;
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income levels and employment growth trends
in the relevant market;
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employment, household growth and net
migration of the relevant market’s population;
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barriers to entry that would limit
competition (zoning laws, building permit availability, supply of
undeveloped or developable real estate, local building costs and
construction costs, among other factors);
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the location, construction quality,
condition and design of the property;
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the current and projected cash flow of the
property and the ability to increase cash flow;
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the potential for capital appreciation of
the property;
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purchase price relative to the replacement
cost of the property;
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the terms of resident leases, including
the potential for rent increases;
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the potential for economic growth and the
tax and regulatory environment of the community in which the property is
located;
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the occupancy and demand by residents for
properties of a similar type in the vicinity (the overall market and
submarket);
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the prospects for liquidity through sale,
financing or refinancing of the property;
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the benefits of integration into existing
operations;
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purchase prices and yields of available
existing stabilized properties, if any;
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competition from existing properties and
properties under development and the potential for the construction of new
properties in the area; and
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potential for opportunistic selling based
on demand and price of high quality assets, including condominium
conversions.
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Conditions to Closing Real Property Investments
Our advisor
will perform a diligence review on each property that we purchase. All of our
property acquisitions will also be supported by an appraisal prepared by an
independent appraiser who is a member-in-good standing of the Appraisal
Institute. Our investment policy currently provides that the purchase price of
each property will not exceed its appraised value at the time of our acquisition
of the property. We will also generally seek to condition our obligation to
close the purchase of any property on the delivery of certain documents from the
seller or developer. Such documents, where available, include, but are not
limited to:
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historical operating statements from
ownership for the past three years, with month and year-to-date for last
year and the current year;
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detailed rent roll for the most recent
month, including concessions, security deposits, delinquencies, in place
rents and street rents, including updated rent rolls as
appropriate;
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capital expenditure history through the
current year-to-date, including detail of any exterior work;
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personal property inventory;
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tax bills and assessment notices for the
property for the past three years, including any correspondence relating
to tax appeals;
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utility bills (gas, electric, water and
sewer) for the past year, as well as current year-to-date;
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aged receivables;
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all contracts and service agreements,
including equipment leases;
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tenant and vendor correspondence
files;
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correspondence with government agencies;
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any current or prior code violations;
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environmental, asbestos, soil, physical
and engineering reports;
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surveys;
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form leases;
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list of personnel, wages &
benefits;
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plans and specifications (including
as-built);
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certificates of occupancy;
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unexpired warranties;
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corporate Units Agreements;
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list of any pending litigation affecting
either the property or the residents;
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title commitment and copies of underlying
recorded documents; and
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business licenses and
permits.
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In order to
be as thorough as reasonably possible in our due diligence, our advisor will
typically obtain additional third-party reports. Such reports may include,
property condition, soil, mechanical-electrical-plumbing, structural, roof, air
quality, mold, termite, radon, seismic, lease audit, net operating income audit
and others. We will not purchase any property unless and until we obtain what is
generally referred to as a “Phase I” environmental site assessment and are
generally satisfied with the environmental status of the property.
Asset-Level Business Strategy
Our advisor’s
investment approach also includes active and aggressive management of each asset
acquired. Our advisor believes that active management is critical to creating
value.
Prior to the
purchase of an individual asset or portfolio, our asset managers will work
closely with our advisor’s acquisition officer and underwriting teams to develop
an asset-level business strategy. This is a forecast of the action items to be
taken and the capital needed to achieve the anticipated returns. Our advisor
will review asset-level business strategies quarterly to anticipate changes or
opportunities in the market during a given phase of a real estate cycle. Our
advisor will design this process to allow for realistic yet aggressive
enhancement of value throughout the investment period. Furthermore,
implementation of our Enhanced Multifamily operating and property initiatives
will play an important role to increase property values and to standardize asset
management procedures at a high level of performance.
In an effort
to keep an asset in compliance with our underwriting standards, our advisor’s
acquisition officers will remain involved through the investment life cycle of
the acquired asset and will actively consult with our asset managers throughout
the hold period. Our asset managers typically will be responsible for
investments in only a few markets, which allow them to have in-depth knowledge
of each market for which they will be responsible. This focus also allows the
asset managers to establish networks of relationships with each market’s
competitive
52
property set. In addition, our advisor’s
executive officers will continuously review the operating performance of
investments against projections, and will provide the oversight necessary to
detect and resolve issues as they arise.
Dispositions
We intend to
hold our properties for an extended period, typically two to six years depending
on the asset, which we believe is the optimal period to enable us to, as
appropriate, implement our advisor’s Enhanced Multifamily strategy and
capitalize on the potential for increased income and capital appreciation. The
period that we will hold our investments will vary depending on the type of
asset, interest rates and other factors.
Our advisor
will develop a well-defined exit strategy for each investment. Specifically, our
advisor will assign a sale date to each asset we acquire prior to its purchase
as part of the original business plan for the asset. Our advisor will thereafter
continually re-evaluate the exit strategy of each asset in response to the
performance of the individual asset, market conditions and our overall portfolio
objectives, to determine the optimal time to sell the asset in order to maximize
stockholder value and returns. Periodic reviews of each asset will focus on the
remaining available value enhancement opportunities for the asset and the demand
for the asset in the marketplace.
Economic and
market conditions may influence us to hold our investments for different periods
of time. We may sell an asset before the end of the expected holding period if
we believe that market conditions and asset positioning have maximized its value
to us or the sale of the asset would otherwise be in the best interests of our
stockholders.
Borrowing Policies
We may incur
indebtedness in the form of bank borrowings, purchase money obligations to the
sellers of properties we purchase, publicly and privately-placed debt
instruments or financings from institutional investors or other lenders. This
indebtedness may be unsecured or secured by mortgages or other interests in our
properties, or may be limited to the particular property to which the
indebtedness relates. We may finance the acquisition or origination of certain
real estate-related investments with warehouse lines of credit. Our
indebtedness, including our warehouse facilities and bank credit facilities, may
include a recourse component, meaning that lenders retain a general claim
against us as an entity. Further, such borrowings may also provide the lender
with the ability to make margin calls and may limit the length of time which any
given asset may be used as eligible collateral. The form of our indebtedness may
be long-term or short-term, fixed or floating rate, or in the form of a
revolving credit facility. Our advisor will seek to obtain financing on our
behalf on the most favorable terms available. We may use borrowing proceeds to:
finance acquisitions of new properties or assets or originations of new loans;
to pay for capital improvements, or repairs; to refinance existing indebtedness;
to pay distributions; or to provide working capital.
We intend to
focus our investment activities on obtaining a diverse portfolio of real estate
investments. Careful use of debt will help us to achieve our diversification
goals because we will have more funds available for investment. We expect that
once we have fully invested the proceeds of this offering, our debt financing
will be approximately 50% of the cost of our real estate investments (before
deducting depreciation or other non-cash reserves) plus 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 charter limits our borrowings to
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 a majority of our independent directors approves each
borrowing in excess of our charter limitation and we disclose such borrowing to
our stockholders in our next quarterly report with an explanation from our
independent directors of the justification for the excess borrowing. We do not
intend to exceed the leverage limit in our charter except in the early stages of
our development when the costs of our investments are most likely to exceed our
net offering proceeds. Our board of directors must review our aggregate
borrowings at least quarterly. We have no agreements or letters of intent in
place for any financing sources at this time.
By operating
on a leveraged basis, we expect that we will have more funds available to us for
investments. This will allow us to make more investments than would otherwise be
possible, resulting in a more diversified portfolio. Although we expect our
liability for the repayment of indebtedness to be limited to the value of the
property securing the liability and the rents or profits derived therefrom, our
use of leverage increases the risk of default on the mortgage payments and a
resulting foreclosure of a particular property. Lenders may have recourse to
assets not securing the repayment of the indebtedness. To the extent that we do
not obtain mortgage loans on our
53
properties, our ability to acquire additional
properties will be limited. Our advisor will use its best efforts to obtain
financing on the most favorable terms available to us.
When interest
rates are high or financing is otherwise unavailable on a timely basis, we may
purchase certain properties and other assets for cash with the intention of
obtaining a loan for a portion of the purchase price at a later time. Our
advisor will refinance properties during the term of a loan only in limited
circumstances, such as when a decline in interest rates makes it beneficial to
prepay an existing mortgage, when an existing mortgage matures or if an
attractive investment becomes available and the proceeds from the refinancing
can be used to purchase such investment. The benefits of the refinancing may
include an increased cash flow resulting from reduced debt service requirements,
an increase in distributions from proceeds of the refinancing, and an increase
in property ownership if refinancing proceeds are reinvested in real
estate.
Except with
respect to the borrowing limits contained in our charter, we may reevaluate and
change our debt policy in the future without a stockholder vote. Factors that we
would consider when reevaluating or changing our debt policy include:
then-current economic conditions, the relative cost of debt and equity capital,
any acquisition opportunities, the ability of our properties and other
investments to generate sufficient cash flow to cover debt service requirements
and other similar factors. We will not borrow from our advisor or its affiliates
to purchase properties or make other investments unless a majority of our
independent directors approves the transaction as being fair, competitive and
commercially reasonable and no less favorable to us than comparable loans
between unaffiliated parties under the same circumstances.
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. 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 offerings and have not done so for one
year. 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. In making the decision to apply for listing of our shares, our
directors will try to determine whether listing our shares or liquidating our
assets will result in greater value for our stockholders. One of the factors our
board of directors will consider when making this determination is the liquidity
needs of our stockholders. 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 or to delay the listing of our shares on a
national securities exchange 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 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
54
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.
Charter Imposed Investment Limitations
Our charter
places numerous limitations on us with respect to the manner in which we may
invest our funds or issue securities prior to our shares being listed on a
national securities exchange. Prior to such date, we will not:
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borrow in excess of 300% of our “net
assets,” as defined by the NASAA Statement of Policy Regarding Real Estate
Investment Trusts, as amended from time to time, which we refer to as the
NASAA REIT Guidelines; however, we may exceed that limit if a majority of
our independent directors approves each borrowing in excess of our charter
limitation and we disclose such borrowing to our stockholders in our next
quarterly report with an explanation from our independent directors of the
justification for the excess borrowing;
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invest more than 10% of our total assets
in unimproved property or mortgage loans on unimproved property, which we
define as property not acquired for the purpose of producing rental or
other operating income or on which there is no development or construction
in progress or planned to commence within one year;
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make or invest in mortgage loans unless an
appraisal is obtained concerning the underlying property, except for those
mortgage loans insured or guaranteed by a government or government
agency;
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make or invest in mortgage loans,
including construction loans, on any one property if the aggregate amount
of all mortgage loans on such property would exceed an amount equal to 85%
of the appraised value of such property as determined by appraisal, unless
substantial justification exists for exceeding such limit because of the
presence of other underwriting criteria;
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invest in indebtedness secured by a
mortgage on real property which is subordinate to the lien or other
indebtedness of our advisor, our directors or any of our
affiliates;
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pay acquisition fees and acquisition
expenses that are unreasonable or exceed 6% of the purchase price of the
property; in the case of a loan, acquire or originate a loan if the
related origination fees and expenses are not reasonable or exceed 6% of
the funds advanced; or, in the case of an equity investment or other
investment in securities, pay acquisition fees and acquisition expenses
that are unreasonable or exceed 6% of the value of the investment as
determined by a majority of our independent directors, provided that,
notwithstanding the above, we may pay in excess of 6% if a majority of our
independent directors determines that the transaction is commercially
competitive, fair and reasonable to us;
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acquire equity securities unless a
majority of our directors (including a majority of our independent
directors) not otherwise interested in the transaction approve such
investment as being fair, competitive and commercially reasonable,
provided however, that investments in equity securities in “publicly
traded entities” that are otherwise approved by a majority of our
directors (including a majority of our independent directors) will be
deemed fair, competitive and commercially reasonable if we acquire the
equity securities through a trade that is effected in a recognized
securities market (a “publicly traded entity” shall mean any entity having
securities listed on a national securities exchange or included for
quotation on an inter-dealer quotation system);
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invest in real estate contracts of sale,
otherwise known as land sale contracts, unless the contract is in
recordable form and is appropriately recorded in the chain of title;
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invest in commodities or commodity futures
contracts, except for futures contracts when used solely for the purpose
of hedging in connection with our ordinary business of investing in real
estate assets and mortgages;
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issue options or warrants to our advisor,
our directors or any of their affiliates except on the same terms as such
options or warrants are sold to the general public;
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issue equity securities on a deferred
payment basis or other similar arrangement;
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55
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issue debt securities in the absence of
adequate cash flow to cover debt service unless the historical debt
service coverage (in the most recently completed fiscal year), as adjusted
for known changes, is sufficient to service that higher level of debt as
determined by the board of directors or a duly authorized executive
officer;
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issue equity securities redeemable solely
at the option of the holder, which restriction has no effect on our share
repurchase plan or the ability of our operating partnership to issue
redeemable partnership interests; or
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make any investment that we believe will
be inconsistent with our objectives of qualifying and remaining qualified
as a REIT unless and until our board of directors determines, in its sole
discretion, that REIT qualification is not in our best
interests.
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In addition,
our charter includes many other investment limitations in connection with
conflict-of-interest transactions, which limitations are described herein under
“Conflicts of Interest.” Our charter also includes restrictions on roll-up
transactions, which are described under “Description of Capital Stock”
below.
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.
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 investment company as we intend to invest primarily in real
property, through our wholly or majority-owned subsidiaries, the majority of
which we expect will 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 not be within 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 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.
Even if the
value of investment securities held by our subsidiaries 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 our
subsidiaries 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.
For purposes
of the exclusions provided by Sections 3(c)(5)(C), we will classify the
investments made by our subsidiaries based on no-action letters issued by the
SEC staff and other SEC interpretive guidance. Whole loans will
56
be classified as qualifying real estate assets,
as long as the loans are “fully secured” by an interest in real estate at the
time our subsidiary originates or acquires the loan but will consider loans with
loan-to-value ratios in excess of 100% to be real estate-related assets. We will
treat mezzanine loan investments as qualifying real estate assets so long as
they are structured as “Tier 1” mezzanine loans in accordance with the criteria
set forth in the Capital Trust, Inc., SEC No-Action Letter (May 24,
2007).
Consistent
with the guidance provided by the staff of the Division of Investment Management
of the SEC, we will consider a participation in a whole mortgage loan and
subordinate loans to be a qualifying real estate asset only if (1) our
subsidiary has a participation interest in a mortgage loan that is fully secured
by real property; (2) our subsidiary has the right to receive its proportionate
share of the interest and the principal payments made on the loan by the
borrower, and its returns on the loan are based on such payments; (3) our
subsidiary invests only after performing the same type of due diligence and
credit underwriting procedures that it would perform if it were underwriting the
underlying mortgage loan; (4) our subsidiary has approval rights in connection
with any material decisions pertaining to the administration and servicing of
the loan and with respect to any material modification to the loan agreements;
and (5) in the event that the loan becomes non-performing, our subsidiary has
effective control over the remedies relating to the enforcement of the mortgage
loan, including ultimate control of the foreclosure process, by having the right
to: (a) appoint the special servicer to manage the resolution of the loan; (b)
advise, direct or approve the actions of the special servicer; (c) terminate the
special servicer at any time with or without cause; (d) cure the default so that
the mortgage loan is no longer non-performing; and (e) purchase the senior loan
at par plus accrued interest, thereby acquiring the entire mortgage loan. With
respect to construction loans which are funded over time, we will consider the
outstanding balance (i.e., the amount of the loan actually drawn) as a
qualifying real estate asset. The SEC has not issued no-action letters
specifically addressing construction loans. If the SEC takes a position in the
future that is contrary to our classification, we will modify our classification
accordingly.
We will treat
investments by our subsidiaries in securities issued by companies primarily
engaged in the real estate business, interests in securitized real estate loan
pools, loans fully secured by a lien on the subject real estate and additional
assets of the real estate developer (which may include equity interests in the
developer entity and a pledge of additional assets of the developer including
parcels of undeveloped or developed real estate), and any loans with a
loan-to-value ratio in excess of 100% as real estate-related assets. Commercial
mortgage-backed securities and collateralized debt obligations will also be
treated as real-estate related assets.
Consistent
with guidance issued by the SEC, we will treat our subsidiaries’ joint venture
investments as qualifying assets that come within the 55% basket only if we have
the right to approve major decisions affecting the joint venture; otherwise,
they will be classified as real-estate related assets.
The treatment
of any other investments as qualifying real estate assets and real
estate-related assets will be based on the characteristics of the underlying
collateral and the particular type of loan (including whether we have
foreclosure rights with respect to those securities or loans that have
underlying real estate collateral) and will be consistent with SEC guidance.
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 investment assets owned by wholly owned or
majority-owned subsidiaries of our operating partnership.
57
Finally, to
maintain compliance with the Investment Company Act exceptions, we, our
operating company or our subsidiaries may be unable to sell assets we would
otherwise want to sell and may need to sell assets we would otherwise wish to
retain. In addition, we, our operating partnership or our subsidiaries may have
to acquire additional income-or loss-generating assets that we might not
otherwise have acquired or may have to forego opportunities to acquire interest
in companies that we would otherwise want to acquire and that may be important
to our investment strategy. If our subsidiaries fail to satisfy the requirements
of Section 3(c)(5)(C) and cannot rely on any other exemption or exclusion under
the Investment Company Act, we could be characterized as an investment company.
Our adviser will continually review our investment activity to attempt to ensure
that we will not be regulated as an investment company. Among other things, our
advisor will attempt to monitor the proportion of our portfolio that is placed
in investments in securities.
Disclosure Policies with Respect to Future Probable
Acquisitions
As of the
date of this prospectus, we have not acquired or contracted to acquire any
specific assets. Affiliates of our advisor are continually evaluating various
potential investments and engaging in discussions and negotiations with sellers,
developers and potential tenants regarding the purchase and development of
properties and other investments for us and other programs sponsored by
Bluerock. While this offering is pending, if we believe that a reasonable
probability exists that we will acquire a property, group of properties or other
assets, the purchase price of which exceeds 10% of our total assets, based on
our most recent balance sheet that gives effect to any previous acquisitions,
that were probable or completed since the date of the last balance sheet, this
prospectus will be supplemented to disclose the probability of acquiring the
asset. We expect that this will normally occur upon the signing of a purchase
agreement for the acquisition of a specific asset, but may occur before or after
such signing or upon the satisfaction or expiration of major contingencies in
any such purchase agreement, depending on the particular circumstances
surrounding each potential investment. A supplement to this prospectus will
describe any improvements proposed to be constructed thereon and other
information that we consider appropriate for an understanding of the
transaction. Further data will be made available after any pending acquisition
is consummated, also by means of a supplement to this prospectus, if
appropriate.
You should
understand that the disclosure of any proposed acquisition cannot be relied upon
as an assurance that we will ultimately consummate such acquisition or that the
information provided concerning the proposed acquisition will not change between
the date of the supplement and any actual purchase.
58
Our
Board of Directors
We operate
under the direction of our board of directors. The board is responsible for the
management and control of our affairs. The board has retained our advisor to
manage our day-to-day operations and our portfolio of real estate assets,
subject to the board’s supervision.
Our directors
are accountable to us and our stockholders as fiduciaries. This means that our
directors must perform their duties in good faith and in a manner each director
believes to be in our and our stockholders’ best interests. Further, our
directors must act with such care as an ordinarily prudent person in a similar
position would use under similar circumstances. However, our directors and
executive officers are not required to devote all of their time to our business
and must only devote such time to our affairs as their duties may require. We do
not expect that our directors will be required to devote a substantial portion
of their time to us in discharging their duties.
In general, a
majority of the independent directors must approve matters relating to minimum
capital, duties of directors, the advisory agreement, liability and
indemnification of directors, advisor or affiliate fees, compensation and
expenses, investment policies, leverage and borrowing policies, meetings of
stockholders, stockholders’ election of directors, and our distribution
reinvestment plan. At the first meeting of our board of directors consisting of
a majority of independent directors, our charter and each of the above matters
will be reviewed and ratified by a vote of the directors and at least a majority
of the independent directors.
Upon the
commencement of this offering, we will have five directors, three of whom will
be independent directors. An “independent” director is a person who is not one
of our officers or employees or an officer or employee of our advisor or its
affiliates and has not been so for the previous two years. Serving as a director
of, or having an ownership interest in, another program sponsored by Bluerock
will not, by itself, preclude independent director status.
Each director
will serve until the next annual meeting of stockholders and until his successor
has been duly elected and qualifies. The presence in person or by proxy of
stockholders entitled to cast 50% of all the votes entitled to be cast at any
stockholder meeting constitutes a quorum. With respect to the election of
directors, each candidate nominated for election to the board of directors must
receive a majority of the votes present, in person or by proxy, in order to be
elected.
Although our
board of directors may increase or decrease the number of directors, a decrease
may not have the effect of shortening the term of any incumbent director. Any
director may resign at any time or may be removed with or without cause by the
stockholders upon the affirmative vote of at least a majority of all the votes
entitled to be cast generally in the election of directors. The notice of the
meeting will indicate that the purpose, or one of the purposes, of the meeting
is to determine if the director shall be removed.
A vacancy
created by an increase in the number of directors or the death, resignation,
removal, adjudicated incompetence or other incapacity of a director may be
filled only by a vote of a majority of the remaining directors, even if the
remaining directors do not constitute a quorum, and any director elected to fill
a vacancy will serve for the remainder of the full term of the directorship in
which the vacancy occurred.
In addition
to meetings of the various committees of the board, which committees we describe
below, we expect our directors to hold at least four regular board meetings each
year.
Committees of the Board of Directors
Our board of
directors may establish committees it deems appropriate to address specific
areas in more depth than may be possible at a full board meeting, provided that
the majority of the members of each committee are independent directors. Our
board of directors has established an audit committee and an investment
committee.
We do not
currently have a compensation committee because we do not plan to pay any
compensation to our officers since we are externally managed by our advisor and
have no employees.
59
Audit
Committee
Our board of
directors has established an audit committee. The audit committee will meet on a
regular basis, at least quarterly and more frequently as necessary. The audit
committee’s primary functions will be:
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to evaluate and approve the services and
fees of our independent registered public accounting firm;
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to periodically review the auditors’
independence; and
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to assist the board of directors in
fulfilling its oversight responsibilities by reviewing the financial
information to be provided to the stockholders and others, management’s
system of internal controls and the audit and financial reporting process.
Prior to the commencement of this offering, the audit committee will be
comprised of three individuals, all of whom will be independent
directors.
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The audit
committee will also consider and approve the audit and non-audit services and
fees provided by the independent public accountants.
The initial
members of our audit committee are our three independent directors, Brian D.
Bailey, I. Bobby Majumder and Romano Tio.
The
background and experience of Messrs. Bailey, Majumder and Tio are described
below in “Management —Our Executive Officers and Directors.”
Investment
Committee
Our board of
directors intends to delegate to the investment committee (1) certain
responsibilities with respect to investments in specific real estate and real
estate-related investments proposed by our advisor and (2) the authority to
review our investment policies and procedures on an ongoing basis and recommend
any changes to our board of directors.
Our board of
directors intends to delegate to the investment committee the authority to
approve all real property acquisitions, developments and dispositions, including
real property portfolio acquisitions, developments and dispositions, as well as
all real estate-related investments and all other investments in real estate
consistent with our investment objectives, for investment cost of up to $50
million, including any financing of such investment. The board of directors,
including a majority of the independent directors, must approve all investments
for an investment cost greater than $50 million, including the financing of such
investment. Our advisor will recommend suitable investments for consideration by
the investment committee. If the members of the investment committee approve a
given investment, then our advisor will be directed to make such investment on
our behalf, if such investment can be completed on terms approved by the
committee. Investments may be acquired from our advisor or its affiliates or our
officers and directors or their affiliates, provided that a majority of our
board of directors (including a majority of the independent directors), not
otherwise interested in the transaction, approves the transaction as being fair
and reasonable to our company and at a price to our company no greater than the
cost of the investments to our advisor, its affiliates or any of our officers
and directors, unless substantial justification exists for a price in excess of
the cost to the affiliate and the excess is reasonable.
The initial
members of our Investment Committee are James G. Babb, III, Brian D. Bailey and
Romano Tio.
The
background and experience of Messrs. Babb, Bailey and Tio are described below in
“Management — Our Executive Officers and Directors.”
Our
Executive Officers and Directors
The
individuals listed as our executive officers below will also serve as officers
and employees of our advisor. As executive officers of the advisor, they will
serve to manage the day-to-day affairs and carry out the directives of our board
of directors in the review, selection and recommendation of investment
opportunities and operating acquired investments and monitoring the performance
of those investments to ensure that they are consistent with our investment
objectives. The duties that these executive officers will perform on our behalf,
on the other hand, will not involve the review, selection and recommendation of
investment opportunities, but rather the performance of corporate governance
activities on our behalf that require the attention of one of our corporate
officers, including signing certifications required under Sarbanes-Oxley Act of
2002, as amended, for filing with the our periodic reports.
60
The following
table and biographical descriptions set forth certain information with respect
to the individuals who are our executive officers and directors:
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Name
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Age
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Position
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R. Ramin Kamfar
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Chairman of the Board and Chief Executive
Officer
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James G. Babb, III
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44
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President, Chief Investment Officer and
Director
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Jordan B. Ruddy
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46
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Senior Vice President and Chief Operating
Officer
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Jerold E. Novack
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53
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Senior Vice President and Chief Financial
Officer
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Michael L. Konig
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48
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Senior Vice President, Secretary and
General Counsel
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Brian D. Bailey
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43
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Independent Director
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I. Bobby Majumder
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40
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Independent Director
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Romano Tio
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48
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Independent Director
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R.
Ramin Kamfar, Chairman of the Board and Chief Executive Officer.
Mr.
Kamfar serves as our Chairman of the Board and Chief Executive Officer, and is
the Chief Executive Officer of our advisor. He has also served as the Chairman
and Chief Executive Officer of Bluerock since its inception in October 2002. Mr.
Kamfar 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.
From 1988 to
1993, Mr. Kamfar worked as an investment banker at Lehman Brothers Inc., New
York, New York, where he specialized in mergers and acquisitions, corporate
finance and private placements. From 1993 to 2002, Mr. Kamfar was the CEO and
Chairman of New World Restaurant Group, Inc. (now known as Einstein Noah
Restaurant Group, Inc (NASDAQ: BAGL)), a company he founded and grew through a
consolidation and turnaround of several companies to approximately 800 locations
and $400 million in gross revenues and a portfolio of brands which included
Einstein Bros.
®
and Noah’s NY Bagels
®
. From 1999 to 2002,
Mr. Kamfar served as an active investor, advisor and member of the Board of
Directors of Vsource, Inc., a technology company subsequently sold to Symphony
House (KL: SYMPHNY), a leading business process outsourcing company focused on
the Fortune 500 and Global 500. Mr. Kamfar received an M.B.A. degree with
distinction in Finance in 1988 from The Wharton School of the University of
Pennsylvania, located in Philadelphia, Pennsylvania, and a B.S. degree with
distinction in Finance in 1985 from the University of Maryland located in
College Park, Maryland.
James
G. Babb, III, President and Chief Investment Officer.
Mr. Babb serves as
our President and Chief Investment Officer and is on our board of directors, and
is the President and Chief Investment Officer of our advisor. Mr. Babb is also
the Managing Director and Chief Investment Officer of Bluerock, which he joined
in July 2007. He oversees all real estate sourcing, diligence, structuring and
acquisitions for Bluerock. He 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.
From 1992 to
August 2003, Mr. Babb helped lead the residential and office acquisitions
initiatives for Starwood Capital Group, or Starwood Capital, most recently as a
Senior Vice President. Starwood Capital was formed in 1992 and during his tenure
raised and invested funds on behalf of institutional investors through seven
private real estate funds, each of which had investment objectives similar to
ours (but not limited to multifamily investments), and which in the aggregate
ultimately invested approximately $8 billion in approximately 250 separate
transactions. During such period, Mr. Babb led over 75 investment transactions
totaling approximately $2.5 billion of asset value in more than 20 million
square feet of residential, office and industrial properties located in 25
states and seven foreign countries, including a significant number of
transactions that were contributed to the initial public offering of Equity
Residential Properties Trust (NYSE: EQR), and to create
i
Star Financial Inc. (NYSE:
SFI). Mr. Babb also led Starwood Capital’s efforts to expand its platform to
invest in England and France. From August 2003 to July 2007, Mr. Babb founded
his own principal investment company, Bluepoint Capital, LLC. Bluepoint was a
private real estate investment company focused on the acquisition, development
and/or redevelopment of residential and commercial properties in the Northeast
United States and Western Europe. Mr. Babb received a B.A. degree in Economics
in 1987 from the University of North Carolina at Chapel Hill.
61
Jordan
B. Ruddy, Senior Vice President and Chief Operating Officer.
Jordan Ruddy
serves as the Senior Vice President and Chief Operating Officer of our company
and of our advisor. Mr. Ruddy is also the President and Chief Operating Officer
for Bluerock, which he joined in 2002. Mr. Ruddy has 20 years of experience in
real estate acquisitions, financings, management and dispositions.
From 2000 to
2001, Mr. Ruddy served as an investment banker at Banc of America Securities
LLC, where he was responsible for various types of real estate investment
banking transactions including equity offerings, debt placements and asset
sales. From 1997 to 2000, Mr. Ruddy served as Vice President of Amerimar
Enterprises, a real estate company specializing in value-added investments
nationwide, where he managed acquisitions, financings, leasing, asset management
and dispositions involving over 1,500,000 square feet of commercial and
multifamily real estate. From 1995 to 1997, Mr. Ruddy served as an investment
banker at Smith Barney Inc., where he was responsible for various types of real
estate investment banking transactions including equity offerings, debt
placements and asset sales. From 1988 to 1993, Mr. Ruddy served in the real
estate department of The Chase Manhattan Bank, most recently as a Second Vice
President. Mr. Ruddy received an M.B.A. degree in Finance and Real Estate in
1995 from The Wharton School of the University of Pennsylvania, located in
Philadelphia, Pennsylvania, and a B.S. degree with high honors in Economics in
1986 from the London School of Economics, located in London,
England.
Jerold
E. Novack, Senior Vice President and Chief Financial Officer.
Mr. Novack
serves as Senior Vice President and Chief Financial Officer of our company and
our advisor. Mr. Novack has also served as the Senior Vice President — Chief
Financial Officer of Bluerock since October 2004. Mr. Novack has over 25 years
of experience in public and private financings, operations and
management.
From June
1994 to April 2002, Mr. Novack served in senior financial positions of New World
Restaurant Group, Inc. (now known as Einstein Noah Restaurant Group, Inc.
(NASDAQ: BAGL)), including as its Executive Vice President and Chief Financial
Officer. From 1982 to 1993, Mr. Novack held various senior financial positions
at several specialty retail chains, including Mercantile Department Stores and
Brooks Fashion Stores. Mr. Novack received a B.S. degree in Accounting in 1976
from Brooklyn College, City University of New York.
Michael
L. Konig, Senior Vice President, Secretary and General Counsel.
Mr. Konig
serves as the Senior Vice President and General Counsel of our company and our
advisor. Mr. Konig has also served as counsel for Bluerock and its affiliates
since December 2004. Mr. Konig has over 20 years of experience in law and
business.
From 1987 to
1997, Mr. Konig was an attorney at the firms of Greenbaum Rowe Smith & Davis
and Ravin Sarasohn Cook Baumgarten Fisch & Baime, representing borrowers and
lenders in numerous financing transactions, primarily involving real estate,
distressed real estate and Chapter 11 reorganizations, as well with respect to a
broad variety of litigation and corporate law matters. From 1998 to 2002, Mr.
Konig served as legal counsel, including as General Counsel, at New World
Restaurant Group, Inc. (now known as Einstein Noah Restaurant Group, Inc.
(NASDAQ: BAGL)). From 2002 to December 2004, Mr. Konig served as Senior Vice
President of Roma Food Enterprises, Inc. where he led operations and the
restructuring and sale of the privately held company with approximately $300
million in annual revenues. Mr. Konig received a J.D. degree cum laude in 1987
from California Western School of Law, located in San Diego, California, and an
M.B.A. degree in Finance in 1988 from San Diego State University.
Brian
D. Bailey, Independent Director.
Mr. Bailey has served as one of our
independent directors since January 2009. Mr. Bailey has more than 15 years of
experience in sourcing, evaluating, structuring and managing private
investments, as well as 8 years of experience with real estate and real
estate-related debt financing. Mr. Bailey founded and currently serves as the
Managing Member of Carmichael Partners, LLC, a newly formed investment
management firm. From December 2008 to September 2009, Mr. Bailey served as a
Senior Advisor of Carousel Capital LLC, a private equity investment firm with
more than $500 million of capital commitments under management based in
Charlotte, North Carolina. From April 2000 to December 2008, Mr. Bailey served
as a Managing Partner of Carousel Capital. Since its inception, Carousel has
made portfolio investments in more than 25 operating companies and has completed
numerous additional acquisitions and financings related to these portfolio
companies, including sale leaseback transactions, and has utilized such
financings in several of its investments. Mr. Bailey’s duties at Carousel
Capital included sourcing and evaluating investment opportunities, managing the
firm’s investment process, serving on the firm’s Investment Committee, managing
the firm’s fundraising efforts and communications with its limited partners and
Board of Advisors, and serving as a director on the boards of certain portfolio
companies, some of which have meaningful real estate assets on their balance
sheets. Thus, Mr. Bailey has been involved in the management of numerous real
estate issues over the course of his involvement with such portfolio companies.
From 1999 to 2000, Mr. Bailey was a team member of Forstmann Little
62
& Co., a leading private equity firm in New
York, New York. From 1996 to 1999, Mr. Bailey was a Principal at the Carlyle
Group in Washington, D.C., a global private equity firm which manages
approximately $90 billion in capital. Earlier in his career, Mr. Bailey worked
in the leveraged buyout group at CS First Boston in New York, New York and in
the mergers and acquisitions group at Bowles Hollowell Conner & Company in
Charlotte, North Carolina. Mr. Bailey has also worked in the public sector, as
Assistant to the Deputy Chief of Staff and Special Assistant to the President at
the White House from 1994 to 1996 and as Director of Strategic Planning and
Policy at the U.S. Small Business Administration in 1994. He currently serves as
a director of the Telecommunications Development Fund, a private equity
investment fund headquartered in Washington, DC, and as a trustee at the North
Carolina School of Science and Mathematics. Mr. Bailey received a B.A. degree in
Mathematics and Economics in 1988 from the University of North Carolina at
Chapel Hill and an M.B.A. degree in 1992 from the Stanford Graduate School of
Business, located in Stanford, California.
I.
Bobby Majumder, Independent Director.
Mr. Majumder has served as one of
our independent directors since January 2009. Mr. Majumder became a partner at
the law firm of K&L Gates LLP in May 2005, where he specializes in corporate
and securities transactions with an emphasis on the representation of
underwriters, placement agents and issuers in both public and private offerings,
private investment in public equity (PIPE) transactions and venture capital and
private equity funds. From January 2000 to April 2005, Mr. Majumder was a
partner at the firm of Gardere Wynne Sewell LLP. Through his law practice, Mr.
Majumder has gained significant experience relating to the acquisition of a
number of types of real property assets including raw land, improved real estate
and oil and gas interests. He is an active member of the Park Cities Rotary
Club, a charter member of the Dallas Chapter of The Indus Entrepreneurs and an
Associates Board member of the Cox School of Business at Southern Methodist
University. Mr. Majumder received a J.D. degree in 1993 from Washington and Lee
University School of Law, located in Lexington, Virginia, and a B.A. degree in
1990 from Trinity University, located in San Antonio, Texas.
Romano
Tio, Independent Director.
Mr. Tio has served as one of our independent
directors since January 2009. Mr. Tio serves as Managing Director at RM Capital
Management LLC, a boutique investment and advisory firm focused on investing in
distressed commercial mortgages at discounts that provide attractive risk
adjusted returns. From January 2008 to May 2009, Mr. Tio served as a Managing
Director and co-head of the commercial real estate efforts of HCP Real Estate
Investors, LLC, an affiliate of Harbinger Capital Partners Funds, a $10+ billion
private investment firm specializing in event/distressed strategies. From August
2003 until December 2007, Mr. Tio was a Managing Director at Carlton Group Ltd.,
a boutique real estate investment banking firm where he was involved in over
$2.5 billion worth of commercial real estate transactions. Earlier in his
career, Mr. Tio was involved in real estate sales and brokerage for 25 years.
Mr. Tio received a B.S. degree in Biochemistry in 1982 from Hofstra University
located in Hempstead, New York.
Our
Advisor
We are
externally managed and advised by Bluerock Enhanced Multifamily Advisor, LLC.
Our officers and two of our directors are also officers of our advisor. Our
advisor is primarily responsible for managing our day-to-day business affairs
and assets and carrying out the directives of our board of directors. Our
advisor has contractual and fiduciary responsibilities to us and our
stockholders. Bluerock serves as the manager of our advisor. Our advisor will
conduct our operations and manage our portfolio of real estate and real
estate-related investments. We have no paid employees.
The executive
officers of our advisor are as follows:
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Name
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Age
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Position
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R. Ramin Kamfar
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45
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Chief Executive Officer
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James G. Babb, III
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44
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President and Chief Investment
Officer
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Jordan B. Ruddy
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46
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Senior Vice President and Chief Operating
Officer
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Jerold E. Novack
|
53
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Senior Vice President and Chief Financial
Officer
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Michael L. Konig
|
48
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Senior Vice President and General
Counsel
|
The
background and experience of Messrs. Kamfar, Babb, Novack, Ruddy and Konig are
described above in “Management — Our Executive Officers and
Directors.”
63
Our Sponsor — Bluerock Real Estate,
L.L.C.
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. Mr. Kamfar controls Bluerock. Mr. Babb is
Bluerock’s Chief Investment Officer and Managing Director. 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, including as a founder and Senior Vice President of Starwood
Capital, an investment management firm specializing in real estate and real
estate-related investments on behalf of institutional investors. Mr. Babb is the
President and Chief Investment Officer of our company and of our advisor. See “—
Our Advisor’s Chief Investment Officer.”
Our
Advisor’s Chief Investment Officer
Mr. Babb is
the President and Chief Investment Officer of our company and of our advisor.
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 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 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:
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•
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Starwood
Funds:
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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;
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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;
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•
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Starwood Hotels
& Resorts Worldwide, Inc. (NYSE: HOT):
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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;
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•
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i
Star Financial (NYSE:
SFI):
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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;
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•
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Through the Starwood Funds, raising over
$2.6 billion of equity from third-party investors, including such firms
as:
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•
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Pennsylvania State Employees’ Retirement
System (PSERS)
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•
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Allstate Insurance Company
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64
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•
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New York State Teacher’s Retirement System
(NYSTRS)
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•
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Bellsouth Corp. (now
AT&T)
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•
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Howard Hughes Medical
Institute
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•
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The Walt Disney Company
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•
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General Motors Corp.
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•
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Teachers Retirement System of
Louisiana
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•
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University of North Carolina
Endowment
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•
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Sun America Life
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None of the
institutional investors named in this prospectus have endorsed this offering. By
including their names, we do not suggest that any of these investors approved of
the services provided by any affiliate of our advisor. We included their names
only for purposes of your evaluation of the experience and reputation of certain
officers of our advisor. You should also note that we believe that the
institutional investors named in this prospectus and that invested in the
Starwood Funds or private programs sponsored by Bluerock are more likely to
invest in offerings that can be conducted with lower offering expenses than
those found in a public offering, such as this one, in which the securities are
sold by participating broker-dealers on a best-efforts basis. If institutional
investors do participate in this offering, they would likely invest in amounts
entitling them to volume discounts such that their returns, if any, would likely
be greater than those who purchase shares in this offering at $10 per
share.
In addition,
you should note that Bluerock has not sponsored the funds and programs formed or
participated in by Mr. Babb, and you should not assume that you will experience
returns comparable to those experienced by investors in those programs, or that
the investment opportunities similar to those available to those programs will
be available to us. Investors who purchase shares of our common stock will not
thereby acquire any ownership interest in Starwood Capital or the Starwood
Funds, and the information presented here regarding Starwood Capital and
Starwood Funds is provided solely for you to evaluate Mr. Babb’s experience and
expertise.
Compensation of Directors and Officers
Director
Compensation
We intend to
pay each of our independent directors an annual retainer of $25,000. In
addition, we will pay our independent directors $2,500 in cash per board meeting
attended, $2,000 in cash for each committee meeting attended, and $1,000 in cash
for each teleconference meeting of the board or any committee. All directors
will receive reimbursement of reasonable out-of-pocket expenses incurred in
connection with attendance at meetings of the board of directors.
We intend to
approve and adopt an independent directors compensation plan, which will operate
as a sub-plan of our Incentive Plan as described below. See“—Incentive Stock
Plan.” Under the independent directors compensation plan and subject to such
plan’s conditions and restrictions, each of our current independent directors
will receive, in connection with the commencement of this offering, 5,000 shares
of restricted stock. Going forward, each new independent director that joins the
board will receive 5,000 shares of restricted stock upon election or appointment
to the board. In addition, on the date following an independent director’s
re-election to the board, he or she will receive 2,500 shares of restricted
stock. Restricted stock will generally vest as to 20% of the shares on the date
of grant and as to 20% of the shares on each of the first four anniversaries of
the date of grant. Notwithstanding the foregoing, the restricted stock will
become fully vested on the earlier occurrence of (1) the termination of the
grantee’s service as a director due to his or her death, disability or
termination without cause or (2) the occurrence of a change in our
control.
Executive
Officer Compensation
We do not
currently have any employees and our company’s executive officers are employed
by our advisor. We will not reimburse our advisor for compensation paid to our
executive officers. Officers will be eligible for awards under our Incentive
Plan, however, we currently do not intend to grant any such awards. As of the
commencement of this offering, no awards have been granted to our executive
officers under our Incentive Plan.
65
The
Advisory Agreement
Under the
terms of the advisory agreement, our advisor will use its reasonable efforts to
present us with investment opportunities that provide a continuing and suitable
investment program for us consistent with our investment policies and objectives
as adopted by our board of directors. Pursuant to the advisory agreement, our
advisor will manage our day-to-day operations, retain the property managers for
our property investments (subject to the authority of our board of directors and
officers) and perform other duties, including:
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•
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finding, presenting and recommending to us
real estate investment opportunities consistent with our investment
policies and objectives;
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•
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structuring the terms and conditions of
our real estate investments, sales and joint ventures;
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•
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acquiring properties and other investments
on our behalf in compliance with our investment objectives and
policies;
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•
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sourcing and structuring our loan
originations;
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•
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arranging for financing and refinancing of
properties and our other investments;
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•
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entering into leases and service contracts
for our properties;
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•
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supervising and evaluating each property
manager’s performance;
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•
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reviewing and analyzing the properties’
operating and capital budgets;
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•
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assisting us in obtaining
insurance;
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•
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generating an annual budget for
us;
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•
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reviewing and analyzing financial
information for each of our assets and the overall portfolio;
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•
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formulating and overseeing the
implementation of strategies for the administration, promotion,
management, operation, maintenance, improvement, financing and
refinancing, marketing, leasing and disposition of our properties and
other investments;
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•
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performing investor-relations services;
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•
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maintaining our accounting and other
records and assisting us in filing all reports required to be filed with
the SEC, the IRS and other regulatory agencies;
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•
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engaging and supervising the performance
of our agents, including our registrar and transfer agent; and
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•
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performing any other services reasonably
requested by us.
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The advisory
agreement has a one-year term but may be renewed for an unlimited number of
successive one-year periods upon the mutual consent of our advisor and us.
Additionally, either party may terminate the advisory agreement without penalty
upon 60 days’ written notice and, in such event, our advisor must cooperate with
us and our directors in making an orderly transition of the advisory function.
Upon termination of the advisory agreement, our advisor may be entitled to
previously earned but unpaid fees and to convert the convertible stock it holds.
See “Management Compensation” for a detailed discussion of the fees payable to
our advisor under the advisory agreement. We also describe in that section our
obligation to reimburse our advisor for organization and offering expenses, the
costs of providing services to us (other than for services for which it earns
specified fees) and payments made by our advisor to third parties in connection
with potential investments.
Our advisor
and its affiliates may engage in other business ventures, and, as a result, they
will not dedicate their resources exclusively to our business. However, pursuant
to the advisory agreement, our advisor must devote sufficient resources to our
business to discharge its obligations to us. Our advisor may assign the advisory
agreement to an affiliate upon our approval. We may assign or transfer the
advisory agreement to a successor entity.
Our advisor
is subject to the supervision of our board of directors and, except as expressly
provided in the advisory agreement, has only such additional functions as are
delegated to it. In addition, our advisor will have a fiduciary duty to our
company’s stockholders. A copy of the advisory agreement has been filed as an
exhibit to the registration statement, of which this prospectus is a part, and
you may obtain a copy from us.
66
Other
Services
In addition
to the services described above to be provided by our advisor and its
affiliates, affiliates of our advisor may provide other property-level services
to our company and may receive compensation for such services, including
leasing, loan servicing, property tax reduction and risk management fees.
However, under no circumstances will such compensation exceed an amount that
would be paid to non-affiliated third parties for similar services. A majority
of the independent directors must approve all compensation for such other
services paid to our advisor or any of its affiliates.
Annual Determination of Fees and Expenses by Independent
Directors
The
independent directors will determine, from time to time but at least annually,
that the total fees and expenses of our company are reasonable in light of our
investment performance, our net assets, our net income and the fees and expenses
of other comparable unaffiliated REITs. This determination will be reflected in
the minutes of the meetings of our board of directors. For purposes of this
determination, net assets are our company’s total assets, other than
intangibles, calculated at cost before deducting depreciation, bad debt or other
non-cash reserves, less total liabilities and computed at least quarterly on a
consistently-applied basis.
In addition,
the independent directors will determine from time to time, but at least
annually, that the compensation that we contract to pay to our advisor is
reasonable in relation to the nature and quality of the services performed and
that such compensation is within the limits prescribed by any applicable state
regulatory authorities. The independent directors will also supervise the
performance of our advisor and the compensation paid to it to determine that the
provisions of the advisory agreement are being carried out. The independent
directors will base each determination on the factors set forth below and other
factors that they deem relevant. This determination also will be reflected in
the minutes of the meetings of the board of directors. Such factors
include:
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•
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the size of the advisory fee in relation
to the size, composition and profitability of our portfolio of properties;
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•
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the success of our advisor in generating
opportunities that meet our investment objectives;
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•
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the fees charged to similar REITs and to
investors other than REITs by advisors performing similar services;
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•
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additional revenues realized by our
advisor and any affiliate through their relationship with us, including
real estate commissions, servicing and other fees, whether paid by us or
by others with whom we do business;
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•
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the quality and extent of the service and
advice furnished by our advisor;
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•
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the performance of our portfolio of
properties, including income, conservation or appreciation of capital,
frequency of problem investments and competence in dealing with distress
situations; and
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•
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the quality of our portfolio of properties
in relationship to the investments generated by our advisor for its own
account or for the account of other entities it advises.
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Possible Internalization
Many REITs
that are listed on a national securities exchange or included for quotation on a
national market system are considered “self-administered” because the employees
of the REIT perform all significant management functions. In contrast, REITs
that are not self-administered, like our company, typically engage a third-party
to perform management functions on its behalf. Accordingly, if we apply to have
our shares listed for trading on a national securities exchange or included for
quotation on a national market system, it may be in our best interest to become
self-administered. The method by which we could internalize these functions
could involve one of several different forms. If the independent directors
determine that we should become self-administered, the advisory agreement
contemplates the internalization of our advisor into our company and the
termination of the advisory agreement and property management agreement, with
the consideration in such internalization and for such termination to be
determined by our company and our advisor. In the event our advisor is
internalized into our company, many of our advisor’s key employees will become
employees of our company. In such an internalization transaction, there is no
assurance that we will realize the perceived benefits of such a transaction or
that we will be able to integrate a new staff of managers or employees. While we
would then be relieved of paying fees to our advisor under the advisory
agreement, we would be required to pay the salaries of our advisor’s employees
and related costs and expenses formerly absorbed by our advisor under the
advisory agreement. Finally, internalization transactions have been the subject
of litigation, and defending against claims from such litigation could reduce
the amounts
67
available for investment. See “Risk Factors —
Investment Risks — 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.”
Incentive Stock Plan
We intend to
approve and adopt the Bluerock Enhanced Multifamily Trust, Inc. Long Term
Incentive Plan, which we refer to as the Incentive Plan, in order to enable us
to (1) provide an incentive to our employees, officers, directors, and
consultants and employees and officers of our advisor to increase the value of
our common stock, (2) give such persons a stake in our future that corresponds
to the stake of each of our stockholders, and (3) obtain or retain the services
of these persons who are considered essential to our long-term success, by
offering such persons an opportunity to participate in our growth through
ownership of our common stock or through other equity-related awards. We
currently intend to issue awards only to our independent directors under our
Incentive Plan (which awards will be granted under the sub-plan as discussed
above under “— Compensation of Directors and Officers”).
We intend to
reserve and authorize an aggregate number of 2,000,000 shares of our common
stock for issuance under the Incentive Plan. In the event of a transaction
between our company and our stockholders that causes the per-share value of our
common stock to change (including, without limitation, any stock dividend, stock
split, spin-off, rights offering, or large nonrecurring cash dividend), the
share authorization limits under the Incentive Plan will be adjusted
proportionately, and the board of directors must make such adjustments to the
Incentive Plan and awards as it deems necessary, in its sole discretion, to
prevent dilution or enlargement of rights immediately resulting from such
transaction. In the event of a stock split, a stock dividend or a combination or
consolidation of the outstanding shares of common stock into a lesser number of
shares, the authorization limits under the Incentive Plan will automatically be
adjusted proportionately, and the shares then subject to each award will
automatically be adjusted proportionately without any change in the aggregate
purchase price.
Our board of
directors, or a committee of the board, will administer the Incentive Plan, with
sole authority to determine all of the terms and conditions of the awards,
including whether the grant, vesting or settlement of awards may be subject to
the attainment of one or more performance goals. The Incentive Plan provides for
the granting of awards in the following forms to persons selected by the plan
administrator for participation in the Incentive Plan:
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•
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options to purchase shares of our common
stock, which may be designated under the Code as nonstatutory stock
options (which may be granted to all participants) or incentive stock
options (which may be granted to officers and employees but not to
non-employee directors);
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•
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stock appreciation rights, which give the
holder the right to receive the difference (payable in cash or stock, as
specified in the award certificate) between the fair market value per
share of our common stock on the date of exercise over the base price of
the award;
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•
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restricted stock, which is subject to
restrictions on transferability and other restrictions set by the plan
administrator;
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•
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restricted or deferred stock units, which
represent the right to receive shares of stock (or an equivalent value in
cash or other property, as specified in the award certificate) in the
future, based upon the attainment of stated vesting or performance
criteria in the case of restricted stock units;
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performance awards, which are awards
payable in cash or stock upon the attainment of specified performance
goals (any award that may be granted under the plan may be granted in the
form of a performance award);
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dividend equivalents, which entitle the
holder of a full-value award to cash payments (or an equivalent value
payable in stock or other property) equal to any dividends paid on the
shares of stock underlying the full-value award;
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other stock based awards in the discretion
of the plan administrator, including unrestricted stock grants; and/or
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cash-based awards.
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Any stock
options and stock appreciation rights granted under the Incentive Plan will have
an exercise price or base price that is not less than the fair market value of
our common stock on the date of grant.
68
As described
above under “— Compensation of Directors and Officers”, the board of directors
intends to adopt a sub-plan to provide for regular grants of restricted stock to
our independent directors.
No awards
will be granted under either plan if the grant or vesting of the awards would
jeopardize our status as a REIT under the Code or otherwise violate the
ownership and transfer restrictions imposed under our charter. Unless otherwise
determined by our board of directors, no award granted under the Incentive Plan
will be transferable except through the laws of descent and
distribution.
The Incentive
Plan will automatically expire on the tenth anniversary of the date on which it
is adopted, unless extended or earlier terminated by our board of directors. Our
board of directors may terminate the Incentive Plan at any time. The expiration
or other termination of the Incentive Plan will have no adverse impact on any
award previously granted. The board of directors may amend the Incentive Plan at
any time, but no amendment will adversely affect any award previously granted,
and no amendment to the Incentive Plan will be effective without the approval of
our stockholders if such approval is required by any law, regulation or rule
applicable to the Incentive Plan.
Limited Liability and Indemnification of Directors, Officers, Employees
and Other Agents
Our charter
limits the personal liability of our directors and officers to us and our
stockholders for monetary damages and requires us to indemnify and advance
expenses to our directors, our officers, our advisor and its affiliates except
to the extent prohibited by the Maryland General Corporation Law and as set
forth below.
Under the
Maryland General Corporation Law, a Maryland corporation may limit in its
charter the liability of directors and officers to the corporation and its
stockholders for money damages unless such liability results from actual receipt
of an improper benefit or profit in money, property or services or active and
deliberate dishonesty established by a final judgment and which is material to
the cause of action.
In addition,
the Maryland General Corporation Law allows directors and officers to be
indemnified against judgments, penalties, fines, settlements, and expenses
actually incurred in a proceeding unless the following can be
established:
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the act or omission of the director or
officer was material to the cause of action adjudicated in the proceeding,
and was committed in bad faith or was the result of active and deliberate
dishonesty;
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•
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the director or officer actually received
an improper personal benefit in money, property or services; or
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with respect to any criminal proceeding,
the director or officer had reasonable cause to believe his or her act or
omission was unlawful.
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However,
under the Maryland General Corporation Law, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses.
Finally, the
Maryland General Corporation Law permits a Maryland corporation to advance
reasonable expenses to a director or officer upon receipt of a written
affirmation by the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for indemnification and a
written undertaking by him or her or on his or her behalf to repay the amount
paid or reimbursed if it is ultimately determined that the standard of conduct
was not met.
However, our
charter provides that a director, our advisor and any affiliate of our advisor
will be indemnified by us for losses suffered by such person and held harmless
for losses suffered by us only if all of the following conditions are
met:
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the party seeking indemnification has
determined, in good faith, that the course of conduct that caused the loss
or liability was in our best interests;
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the party seeking indemnification was
acting on our behalf or performing services for us;
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69
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in the case of an independent director,
the liability or loss was not the result of gross negligence or willful
misconduct by the independent director;
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in the case of a non-independent director,
our advisor or one of its affiliates, the liability or loss was not the
result of negligence or misconduct by the party seeking indemnification;
and
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the indemnification or agreement to hold
harmless is recoverable only out of our net assets and not from the
stockholders.
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The SEC takes
the position that indemnification against liabilities arising under the
Securities Act of 1933 is against public policy and unenforceable. Furthermore,
our charter prohibits the indemnification of our directors, our advisor, its
affiliates or any person acting as a broker-dealer for liabilities arising from
or out of a violation of state or federal securities laws, unless one or more of
the following conditions are met:
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there has been a successful adjudication
on the merits of each count involving alleged securities law violations;
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such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction; or
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a court of competent jurisdiction approves
a settlement of the claims against the indemnitee and finds that
indemnification of the settlement and the related costs should be made,
and the court considering the request for indemnification has been advised
of the position of the SEC and of the published position of any state
securities regulatory authority in which the securities were offered as to
indemnification for violations of securities laws.
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Our charter
further provides that the advancement of funds to our directors and to our
advisor and its affiliates for reasonable legal expenses and other costs
incurred in advance of the final disposition of a proceeding for which
indemnification is being sought is permissible only if all of the following
conditions are satisfied: the proceeding relates to acts or omissions with
respect to the performance of duties or services on our behalf; the person
seeking the advancement has provided us with written affirmation of such
person’s good faith belief that the standard of conduct necessary for
indemnification has been met; the legal proceeding was initiated by a third
party who is not a stockholder or, if by a stockholder acting in his or her
capacity as such, a court of competent jurisdiction approves such advancement;
and the person seeking the advancement undertakes in a written agreement to
repay the amount paid or reimbursed by us, together with the applicable legal
rate of interest thereon, if it is ultimately determined that such person is not
entitled to indemnification.
We will also
purchase and maintain insurance on behalf of all of our directors and executive
officers against liability asserted against or incurred by them in their
official capacities with us, whether or not we are required or have the power to
indemnify them against the same liability.
70
The
Compensation Table below outlines all the compensation that we will pay to our
advisor and its affiliates, the dealer manager and the broker-dealers
participating in this offering during the stages in the life of our company and
other payments that are subordinated to achieving the returns listed in the
table.
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Type of Compensation
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Method of Compensation
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Estimated Amount
of
Minimum/Maximum
Offering (1)
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Offering
Stage
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Selling Commissions (2)
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We will pay the dealer manager up to 7.0%
of the gross proceeds of our primary offering, a portion of which may be
reallowed to participating broker-dealers. No selling commissions are
payable on shares sold under the distribution reinvestment
plan.
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$175,000/$70,000,000
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Dealer Manager Fee (2)
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We will pay the dealer manager 2.6% of the
gross proceeds of our primary offering. No dealer manager fee is payable
on shares sold under the distribution reinvestment plan. The dealer
manager expects to reallow a portion of the dealer manager fee to
participating broker-dealers.
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$65,000/$26,000,000
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Additional Underwriting
Expenses
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Our advisor or its affiliates may advance,
and we will reimburse, underwriting expenses (in addition to selling
commissions and the dealer manager fee) but only to the extent that such
payments would not cause the total amount of underwriting compensation
paid in connection with this offering to exceed 10.0% of the gross
proceeds of our primary offering as of the date of termination. 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. These
additional underwriting expenses may include (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.
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$10,000/$4,000,000
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Issuer Organization and Offering Costs
(3)
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Our advisor or its affiliates may advance,
and we will reimburse, 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 borne
by us to exceed 15.0% of the gross proceeds of our primary offering as of
the date of the reimbursement. We estimate such expenses will be
approximately 1.5% of the gross proceeds of the primary offering if the
maximum offering is sold.
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$125,000/$15,000,000
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Acquisition
and Development Stage
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Acquisition Fees (4)
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For its services in connection with the
selection, due diligence and acquisition of a property or investment, our
advisor will receive an acquisition fee equal to 1.75% of the purchase
price. The purchase price of a property or investment shall equal the
amount paid or allocated to the purchase, development, construction or
improvement of a property, inclusive of expenses related thereto, and the
amount of debt associated with such property or investment. The purchase
price allocable for a joint venture investment shall equal the product of
(1) the purchase price of the underlying property and (2) our ownership
percentage in the joint venture. With respect to investments in and
originations of loans, we will pay an origination fee in lieu of an
acquisition fee.
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$29,750/$16,380,000 (assuming no debt)/
$119,000/$65,520,000 (assuming leverage of 75% of the cost).
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71
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Type of Compensation
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Method of Compensation
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Estimated Amount
of
Minimum/Maximum
Offering (1)
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Origination Fees (4)
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For its services in connection with the
selection, due diligence and acquisition or origination of mortgage,
subordinated, bridge or other loans, our advisor or its affiliate(s) will
receive an origination fee equal to 1.75% of the greater of the amount
funded by us to originate such loans or of the purchase price of any loan
we purchase, including third-party expenses. We will not pay an
acquisition fee with respect to such loans.
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$7,438/$4,095,000 (assuming no debt)/
$29,750/$16,380,000 (assuming leverage of 75% of the cost).
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Operating
Stage
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Asset Management Fee
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We will pay our advisor a monthly asset
management fee for managing our day-to-day assets and operations, which
will be equal to one-twelfth of 1% of the higher of the cost or the value
of each asset, where (A) cost equals the amount actually paid, excluding
acquisition fees and expenses, to purchase each asset we acquire,
including any debt attributable to the asset (including debt encumbering
the asset after its acquisition), provided that, with respect to any
properties we develop, construct or improve, cost will include the amount
expended by us for the development, construction or improvement, and (B)
the value of an asset is the fair market value established by the most
recent independent valuation report, without reduction for depreciation,
bad debts or other non-cash reserves; provided, however, that 50% of the
advisor’s asset management fee will not be payable until stockholders have
received distributions in an amount equal to at least a 6.0% per annum
cumulative, non-compounded return on invested capital, at which time all
such amounts will become due and payable. For these purposes, “invested
capital” means the original issue price paid for the shares of our common
stock reduced by prior distributions identified as special distributions
from the sale of our assets. The asset management fee will be based only
on the portion of the cost or value attributable to our investment in an
asset if we do not own all of an asset.
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Actual amounts depend upon the assets we acquire and,
therefore, cannot be determined at the present time.
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Property Management Fee
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We will pay Bluerock REIT Property
Management, LLC, a wholly-owned subsidiary of our advisor, a property
management fee equal to 4% of the monthly gross revenues from any
properties it manages. Alternatively, we may contract property manager
services for certain properties directly to non-affiliated third parties,
in which event we will pay our advisor an oversight fee equal to 1% of
monthly gross revenues of such properties.
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Actual amounts to be paid depend upon the gross revenues
of the properties and, therefore, cannot be determined at the present
time.
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Financing Fee
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We will pay our advisor a financing fee
equal to 1% of the amount available under any loan or line of credit made
available to us. The advisor may reallow some or all of this fee to
reimburse third parties with whom it may subcontract to procure such
financing for us.
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Actual amounts depend upon the amount of
indebtedness incurred to acquire an investment and, therefore, cannot be
determined at the present time.
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Reimbursable Expenses (4)
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We will reimburse our advisor or its
affiliates for all reasonable and actually incurred expenses in connection
with the services provided to us, including related personnel, rent,
utilities and information technology costs.
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Actual amounts to be paid depend upon
expenses paid or incurred and therefore cannot be determined
now.
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72
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Type of Compensation
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Method of Compensation
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Estimated Amount
of
Minimum/Maximum
Offering (1)
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Disposition/Liquidation/Listing
Stage
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Disposition Fee (5)
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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 6.0% of the
contract sales price.
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Actual amounts depend upon the sale price of investments
and, therefore, cannot be determined at the present time.
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Common Stock Issuable Upon Conversion of
Convertible Stock
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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.
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)
15.0% 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 outstanding shares of common
stock plus an 8.0% cumulative, non-compounded, annual return on the
original issue price of those outstanding 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 conversion will be prorated to account for the period of time
that the advisory agreement was in force.
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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.
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(1)
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The estimated minimum dollar amounts are
based on the sale of the minimum of $2,500,000 in shares to the public and
the maximum dollar amounts are based on the sale of the maximum of
$1,000,000,000 in shares to the public, and an additional $285,000,000 in
shares through our distribution reinvestment plan.
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(2)
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All or a portion of the selling
commissions or, in some cases, the dealer manager fee may be reduced or
waived in connection with certain categories of sales, such as sales for
which a volume discount applies, sales through registered investment
advisors or banks acting as trustees of fiduciaries, sales to our
affiliates and sales under our distribution reinvestment plan. See “Plan
of Distribution.”
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73
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(3)
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“Issuer Organization and Offering Costs”
include all organization and offering expenses (other than selling
commissions, the dealer manager fee and additional underwriting expenses)
to be paid by us in connection with the offering, including our legal,
accounting, printing, mailing, technology, filing fees, charges of our
escrow holder and transfer agent, charges of our advisor for
administrative services related to the issuance of shares in the offering,
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 and
bona fide
training and
education meetings hosted by our advisor or its affiliates.
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(4)
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We will not reimburse our advisor for any
amount by which our total operating expenses (including the asset
management fee) at the end of the four preceding fiscal quarters exceeds
the greater of: (A) 2% of our average invested assets, or (B) 25% of our
net income determined (1) without reduction for any additions to reserves
for depreciation, bad debts or other similar non-cash reserves and (2)
excluding any gain from the sale of our assets for that period. We will
not reimburse for personnel costs in connection with services for which
our advisor receives acquisition, origination or disposition fees. In
addition, our charter limits our ability to make or purchase property or
other investments if the total of all acquisition or origination fees and
expenses relating to the investment exceed 6% of the contract purchase
price or 6% of the total funds advanced. “Average invested assets” means
the average monthly book value of our assets during the 12-month period
before deducting depreciation, bad debts or other non-cash reserves. See
“Investment Strategy, Objectives and Policies — Charter Imposed Investment
Limitations.” “Total operating expenses” means all expenses paid or
incurred by us, as determined under GAAP, that are in any way related to
our operation, including advisory fees, but excluding (1) the expenses of
raising capital such as organization and offering expenses, legal, audit,
accounting, underwriting, brokerage, listing, wholesaling, registration
and other fees, printing and other such expenses and taxes incurred in
connection with the issuance, distribution, transfer, registration and
stock exchange listing of our stock; (2) interest payments; (3) taxes; (4)
non-cash expenditures such as depreciation, amortization and bad debt
reserves; (5) reasonable incentive fees based on the gain in the sale of
our assets; and (6) acquisition fees, origination fees, acquisition and
origination expenses (including expenses relating to potential investments
that we do not close), disposition fees on the resale of property and
other expenses connected with the acquisition, origination, disposition
and ownership of real estate interests, loans or other property (including
the costs of foreclosure, insurance premiums, legal services, maintenance,
repair and improvement of property). If we have already reimbursed our
advisor for such excess operating expenses, our advisor will be required
to repay such amount to us. Notwithstanding the above, we may reimburse
our advisor for expenses in excess of this limitation if a majority of the
independent directors determines that such excess expenses are justified
based on unusual and non-recurring factors.
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(5)
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Although we are most likely to pay
disposition fees to our advisor or an affiliate in the event of our
liquidation, these fees may also be earned during our operational stage.
In addition, the disposition fee paid upon the sale of any assets other
than real property will be included in the calculation of operating
expenses for purposes of the limitation on total operating expenses
described above.
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In addition
to the services described above to be provided by our advisor and its
affiliates, affiliates of our advisor may provide other property-level services
to our company and may receive compensation for such services, including
leasing, loan servicing, property tax reduction, development, construction
management and risk management fees. However, under no circumstances will such
compensation exceed an amount that would be paid to non-affiliated third parties
for similar services. A majority of the independent directors must approve all
compensation for such other services paid to our advisor or any of its
affiliates.
We do not
intend to pay our affiliates in shares of our common stock or units of limited
partnership interests in our operating partnership for the services they provide
to us, but we reserve the right to do so if our board of directors, including a
majority of our independent directors, determines that it is prudent to do so
under the circumstances.
In those
instances in which there are maximum amounts or ceilings on the compensation
which may be received by our advisor for services rendered, our advisor may not
recover any amounts in excess of such ceilings or maximum amounts for those
services by reclassifying such services under a different compensation or fee
category.
Limitation on Operating Expenses
In the
absence of a showing to the contrary, satisfactory to a majority of our
independent directors, our total operating expenses will be deemed to be
excessive if, in any fiscal year, they exceed the greater of:
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2% of our average invested assets;
or
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25% of our net income for such
year.
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Absent a
satisfactory rationale, the independent directors have a fiduciary
responsibility to limit such expenses to amounts that do not exceed these
limitations.
74
Within 60
days after the end of any fiscal quarter for which our total operating expenses
for the 12 months then ended exceeded the greater of 2% of our average invested
assets or 25% of net income, we will send our stockholders a written disclosure
of such fact. Our advisor will reimburse us at the end of the calendar year the
amount by which the aggregate annual expenses paid or incurred by us exceed the
limitations provided above, if such excess amount is not approved by a majority
of our independent directors.
Total
operating expenses include aggregate expenses of every character paid or
incurred by us as determined under GAAP, including the fees we pay to our
advisor. However, total operating expenses do not include:
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the expenses we incur in raising capital
such as organization and offering expenses, legal, audit, accounting,
wholesaling, underwriting, brokerage, listing registration and other such
fees, printing and other expenses, and taxes incurred in connection with
the issuance, distribution, transfer, registration and stock exchange
listing of our stock;
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interest payments;
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taxes;
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non-cash expenditures, such as
depreciation, amortization and bad debt reserves;
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reasonable incentive fees based on the
gain from the sale of our assets, if any; and
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acquisition fees, origination fees,
acquisition and origination expenses (including expenses relating to
potential investments that we do not close), disposition fees on resale of
properties and other expenses connected with the acquisition, disposition
and ownership of real estate interests, mortgage loans or other property
(including the costs of foreclosure, insurance premiums, legal services,
maintenance, repair and improvement of property).
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75
Prior
Investment Programs
The
information presented in this section represents the historical experience of
real estate programs sponsored by Bluerock. These are all private programs as
Bluerock has sponsored no public programs. Investors in this offering should not
assume that they will experience returns, if any, comparable to those
experienced by investors in any of Bluerock’s prior programs. Investors who
purchase our shares will not acquire any ownership interest in any of the
programs discussed in this section.
The
information in this section and in the Prior Performance Tables included in this
prospectus as Exhibit A shows relevant summary information concerning
Bluerock-sponsored programs as of December 31, 2008.
The Prior
Performance Tables included in this prospectus as Exhibit A sets forth
information as of December 31, 2008 regarding certain of these prior programs
regarding: (1) experience in raising and investing funds (Table I); (2)
compensation to Bluerock or its affiliate (separate and distinct from any return
on its investment) (Table II); (3) annual operating results (Table III); (4)
results of completed programs (Table IV); (5) results of sales or disposals of
property (Table V). We will furnish copies of Table VI to any prospective
investor upon request and without charge.
Private
Programs
As of
December 31, 2008, Bluerock was the sponsor of seven private programs that had
closed offerings in the prior three years (see Table I). One program (Woodlands
I, LLC closed prior to December 31, 2005) had been completed (see Tables III, IV
and V).
As a
percentage of acquisition and development costs, the diversification of these
properties by geographic area is as follows:
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State
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%
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South
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61.6
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%
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Midwest
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22.0
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%
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Northeast
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16.4
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%
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As a
percentage of acquisition and development costs, the diversification of these
properties by asset class is as follows:
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Asset Class
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%
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Office
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74.8
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%
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Development
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11.0
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%
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Multifamily Residential
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14.2
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%
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As a
percentage of acquisition and development costs, 89.0% was spent on existing or
used residential and office properties, and 11.0% was spent on land acquired for
development.
As of
December 31, 2008, one of these programs had sold the properties it had
purchased, or approximately 5.5% of all Bluerock programs closed within the
prior five year period. The original purchase price of the office properties
sold was approximately $14.8 million, and the aggregate sales price was
approximately $19.3 million.
Bluerock
directly or indirectly contributed the necessary equity to acquire the
properties for these programs (ten programs in total with similar investment
objectives, including the three multifamily residential properties acquired in
2008 which have not yet closed as of the date of this prospectus and the results
of which are not included in the Prior Performance Tables, except for certain
information contained in Table VI) and the remaining portion was typically
borrowed on a non-recourse basis with the properties purchased serving as
collateral for the borrowings. Investors in these programs were not entitled to
approve property acquisitions sales or refinancings. The equity ultimately
contributed by the incoming investors for the eight programs closed within five
years of December 31, 2008 typically accounted for approximately 25% to 45% of
the entity’s total capital.
An affiliate
of Bluerock serves (or, in the case of the completed programs, served) as either
property manager or asset manager for each of its programs.
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In addition
to these programs with similar investment objectives, a notes program sponsored
by Bluerock offered notes to be issued by a limited liability company affiliated
with Bluerock. The issuer borrowed funds from investors, who invested in the
issuer’s notes. The issuer in turn contributed the note offering proceeds to a
subsidiary for investment in real estate or real estate-related debt and
investments. Investors in the notes program made loans to the issuer by
investing in its notes, and did not acquire equity interests
therein.
As of
December 31, 2008, Bluerock through this notes program had raised approximately
$11.8 million from 179 investors. Including interest accrued through December
31, 2008, a total of approximately $10.9 million of those proceeds had been
invested principally with other Bluerock affiliates.
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Our
management will be subject to various conflicts of interest arising out of our
relationship with our advisor and the advisor’s affiliates. Our independent
directors have an obligation to function on our behalf in all situations in
which a conflict of interest may arise and will have a fiduciary obligation to
act on behalf of the stockholders. The material conflicts of interest are
discussed below.
Competition for the Time and Service of Our Advisor and Its
Affiliates
We rely on
our advisor and its affiliates to select our properties and manage our assets
and daily operations. Many of the same persons serve as directors, officers and
employees of our company, our advisor and its affiliates. We estimate that our
officers will devote between 25 and 75% of their time to our business. This
amount will vary from week to week depending on our needs and the status of this
offering, as well as the needs of our affiliates for which our officers perform
functions. Certain of our advisor’s affiliates, including its principals, are
presently, and plan in the future to continue to be, and our advisor plans in
the future to be, involved with real estate programs and activities which are
unrelated to us. As a result of these activities, our advisor, its employees and
certain of its affiliates will have conflicts of interest in allocating their
time between us and other activities in which they are or may become involved.
Our advisor and its employees will devote only as much of their time to our
business as our advisor, in its judgment, determines is reasonably required,
which may be substantially less than their full time. Therefore, our advisor and
its employees may experience conflicts of interest in allocating management
time, services, and functions among us and other affiliates of our sponsors and
any other business ventures in which they or any of their key personnel, as
applicable, are or may become involved. This could result in actions that are
more favorable to other affiliates of our sponsors than to us. However, our
advisor believes that it and its affiliates have sufficient personnel to
discharge fully their responsibilities to all of the activities of affiliates of
our sponsors in which they are involved.
Allocation of 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. As a result of this competition, certain investment
opportunities may not be available to us. Our advisor and its affiliates could
be subject to conflicts of interest between our company and other real estate
programs.
Our advisor
will present an investment opportunity to the affiliate for which the investment
opportunity is most suitable in our advisor’s view. This determination is made
by our advisor. However, our advisory agreement requires that our advisor inform
our board of directors of the method to be applied by it in allocating
investment opportunities among us and its other affiliates.
Acquisitions From Our Advisor and Its Affiliates
We may
acquire properties or real estate-related investments from our advisor,
directors, officers or their respective affiliates. The prices we pay for such
properties or real estate-related investments will not be the subject of
arm’s-length negotiations. However, we will not acquire a property or a real
estate-related debt or investment from our advisor, directors, officers or its
respective affiliates, including our officers and directors, unless a competent
independent appraiser (a member in good standing of the Appraisal Institute)
confirms that our purchase price is equal to or less than the property’s fair
market value and a majority of our board of directors not otherwise interested
in the transaction, including a majority of our independent directors,
determines that the transaction and the purchase price are fair, reasonable and
in our best interests. We cannot absolutely assure that the price we pay for any
such property or real estate-related investment will not, in fact, exceed that
which would be paid by an unaffiliated purchaser. In no event, however, will the
cost of a property to our company exceed such property’s current appraised
value.
Joint
Venture Investments
We expect
that from time to time our advisor will be presented with an opportunity to
purchase all or a portion of a property. In such instances, it is possible that
we would work together with other programs sponsored by Bluerock to apportion
the assets within the property among us and the other programs in accordance
with the investment objectives of the various programs. After such
apportionment, the property would be owned by two or more programs sponsored by
Bluerock or joint ventures composed of programs sponsored by affiliates of
Bluerock. The negotiation of how to divide the property among the various
programs will not be at arm’s length and
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conflicts of interest will arise in the process.
It is possible that in connection with the purchase of a property or in the
course of negotiations with other programs sponsored by Bluerock to allocate
portions of such property, we may be required to purchase a property that we
would otherwise consider inappropriate for our portfolio, in order to also
purchase a property that our advisor considers desirable. Although independent
appraisals of the assets comprising the property will be conducted prior to
apportionment, it is possible that we could pay more for an asset in this type
of transaction than we would pay in an arm’s-length transaction with a third
party unaffiliated with our advisor.
Receipt of Fees and Other Compensation by Our Advisor and its
Affiliates
Our advisor
and its affiliates will receive the compensation as described in “Management
Compensation.” The acquisition fee described under “Management Compensation” is
based upon the purchase price of the properties we acquire and will be payable
to our advisor despite the lack of cash available to make distributions to our
stockholders. In addition, a wholly-owned subsidiary of our advisor will receive
the property management fee described under “Management Compensation” computed
based upon the amount of gross revenues generated by our properties. To that
extent, our advisor benefits from our retaining ownership of properties and
leveraging our properties, while our stockholders may be better served by our
disposing of a property or holding a property on an unleveraged
basis.
Legal
Counsel for us, Our Advisor and Some of Our Affiliates is the Same Law
Firm
Alston &
Bird LLP acts as legal counsel to us, our advisor and some of our affiliates.
Alston & Bird LLP is not acting as counsel for any specific group of
stockholders or any potential investor. There is a possibility in the future
that the interests of the various parties may become adverse and, under the Code
of Professional Responsibility of the legal profession, Alston & Bird LLP
may be precluded from representing any one or all of such parties. If any
situation arises in which our interests appear to be in conflict with those of
our advisor or our affiliates, additional counsel may be retained by one or more
of the parties to assure that their interests are adequately protected.
Moreover, should such a conflict not be readily apparent, Alston & Bird LLP
may inadvertently act in derogation of the interest of parties which could
adversely affect us, and our ability to meet our investment objectives and,
therefore, our stockholders.
Certain Conflict Resolution Measures
Allocation
of Investment Opportunitie
s
We rely on
our sponsor, Bluerock, and the executive officers and real estate professionals
of our sponsor acting on behalf of our advisor to identify suitable investments.
Our sponsor currently serves as advisor or manager for other real estate
investment programs and intends to sponsor future real estate programs with
investment objectives similar to ours. As such, many investment opportunities
may be suitable for us as well as other real estate programs sponsored by
affiliates of our advisor, and we will rely upon the same executive officers and
real estate professionals to identify suitable investments for us as such other
programs. When these real estate professionals direct investment opportunities
to any real estate program sponsored or managed by Bluerock, they, in their sole
discretion, will offer the opportunity to the program for which the investment
opportunity is most suitable based on the investment objectives, portfolio and
criteria of each program. As a result, these Bluerock real estate professionals
could direct attractive investment opportunities to other entities or
investors.
Our advisor’s
success in generating investment opportunities for us and its fair allocation of
opportunities among programs sponsored by its affiliates are important criteria
in the determination by our independent directors to continue or renew our
annual contract with our advisor. Our independent directors have a duty to
ensure that our advisor fairly applies its method for allocating investment
opportunities among the programs sponsored by our advisor or its
affiliates.
Independent
Directors
In order to
ameliorate the risks created by conflicts of interest, our charter requires our
board to be comprised of a majority of persons who are “independent” directors.
An “independent” director is a person who is not one of our officers or
employees or an officer or employee of our advisor or its affiliates and has not
been so for the previous two years. Serving as a director of, or having an
ownership interest in, another affiliated-sponsored program will not, by itself,
preclude independent director status. The independent directors are, as a group,
authorized to retain their own legal and financial advisors. Among the matters
we expect the independent directors to act upon are:
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the continuation, renewal or enforcement
of our agreements with our advisor and its affiliates, including the
advisory agreement;
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public offerings of
securities;
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sales of properties and other investments;
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investments in properties and other
assets;
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originations of loans;
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borrowings;
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transactions with affiliates;
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compensation of our officers and directors
who are affiliated with our advisor;
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whether and when we seek to list our
shares of common stock on a national securities exchange;
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whether and when we seek to become
self-managed, which decision could lead to our acquisition of our advisor
and affiliates at a substantial price; and
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whether and when our company or its assets
are sold.
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A majority of
our board of directors, including a majority of our independent directors will
approve any investments we acquire from our sponsor, advisor and director, or
any of their respective affiliates.
Charter Provisions Relating to Conflicts of Interest
In order to
reduce or eliminate certain potential conflicts of interest, our charter
contains a number of restrictions relating to conflicts of interest, including
the following:
Advisor
Compensation
Our charter
requires that our independent directors evaluate at least annually whether the
compensation that we contract to pay to our advisor and its affiliates is
reasonable in relation to the nature and quality of services performed and
whether such compensation is within the limits prescribed by our charter. Our
independent directors will supervise the performance of our advisor and its
affiliates and the compensation we pay to them to determine whether the
provisions of our compensation arrangements are being carried out. This
evaluation will be based on the following factors as well as any other factors
deemed relevant by the independent committee:
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the amount of the advisory fee in relation
to the size, composition and performance of our investments;
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the success of our advisor in generating
appropriate investment opportunities;
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the rates charged to other REITs,
especially similarly structured REITs, and to investors other than REITs
by advisors performing similar services;
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additional revenues realized by our
advisor and its affiliates through their relationship with us;
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the quality and extent of service and
advice furnished by our advisor and its affiliates;
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the performance of our investment
portfolio; and
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the quality of our portfolio relative to
the investments generated by our advisor and its affiliates for the
account of its other clients.
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Term
of Advisory Agreement
Each contract
for the services of our advisor may not exceed one year, although there is no
limit on the number of times that we may retain a particular advisor. The
independent directors or our advisor may terminate our advisory agreement with
our advisor without cause or penalty on 60 days’ written notice.
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Our
Acquisitions
We will not
purchase or lease properties in which our advisor, any of our directors or any
of their respective affiliates has an interest without a determination by a
majority of the directors, including a majority of the independent directors,
not otherwise interested in such transaction that such transaction is fair and
reasonable to us and at a price to us no greater than the cost of the property
to the seller or lessor unless there is substantial justification for any amount
that exceeds such cost and such excess amount is determined to be reasonable. In
no event will we acquire any such property at an amount in excess of its
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. We will not sell or lease
properties to our advisor, any of our directors or any of their respective
affiliates unless a majority of the directors, including a majority of the
independent directors, not otherwise interested in the transaction, determines
the transaction is fair and reasonable to us. We expect that from time to time
our advisor or its affiliates will temporarily enter into contracts relating to
investment in properties and other assets, all or a portion of which is to be
assigned to us prior to closing, or may purchase property or other investments
in their own name and temporarily hold title for us.
Loans
We will not
make any loans to our advisor, any of our directors or any of their respective
affiliates, except that we may make or invest in mortgage loans involving our
advisor, our directors or their respective affiliates, provided that an
appraisal of the underlying property is obtained from an independent appraiser
and the transaction is approved as fair and reasonable to us and on terms no
less favorable to us than those available from third parties. In addition, we
must obtain a mortgagee’s or owner’s title insurance policy or commitment as to
the priority of the mortgage and the condition of the title. Our charter
prohibits us from making or investing in any mortgage loans that are subordinate
to any mortgage or equity interest of our advisor, our directors or officers or
any of their affiliates. In addition, we will not borrow from these affiliates
unless a majority of our independent directors approves the transaction as being
fair, competitive and commercially reasonable and no less favorable to us than
comparable loans between unaffiliated parties under the same circumstances.
These restrictions on loans will only apply to advances of cash that are
commonly viewed as loans, as determined by the board of directors. By way of
example only, the prohibition on loans would not restrict advances of cash for
legal expenses or other costs incurred as a result of any legal action for which
indemnification is being sought nor would the prohibition limit our ability to
advance reimbursable expenses incurred by directors or officers or our advisor
or its affiliates.
Other
Transactions Involving Affiliates
A majority of
our independent directors must conclude that all other transactions, including
joint ventures, between us and our advisor, any of our officers or directors or
any of their affiliates are fair and reasonable to us and on terms and
conditions not less favorable to us than those available from unaffiliated third
parties.
Limitation
on Operating Expenses
Commencing
four fiscal quarters after the acquisition of our first real estate asset, our
advisor must reimburse us the amount by which our aggregate total operating
expenses for the four fiscal quarters then ended exceed the greater of 2% of our
average invested assets or 25% of our net income, unless our independent
directors has determined that such excess expenses were justified based on
unusual and non-recurring factors. “Average invested assets” means the average
monthly book value of our assets during the 12-month period before deducting
depreciation, bad debts or other non-cash reserves. “Total operating expenses”
means all expenses paid or incurred by us, as determined under GAAP, that are in
any way related to our operation, including advisory fees, but excluding (1) the
expenses of raising capital such as organization and offering expenses, legal,
audit, accounting, underwriting, brokerage, listing, registration and other
fees, printing and other such expenses and taxes incurred in connection with the
issuance, distribution, transfer, registration and stock exchange listing of our
stock; (2) interest payments; (3) taxes; (4) non-cash expenditures such as
depreciation, amortization and bad debt reserves; (5) reasonable incentive fees
based on the gain from the sale of our assets; and (6) acquisition fees,
origination fees, acquisition and origination expenses (including expenses
relating to potential investments that we do not close), disposition fees on the
resale of property and other expenses connected with the acquisition,
origination, disposition and ownership of real estate interests, loans or other
property (including the costs of foreclosure, insurance premiums, legal
services, maintenance, repair and improvement of property).
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Issuance
of Options and Warrants to Certain Affiliates
Until our
shares of common stock are listed on a national securities exchange, our charter
prohibits the issuance of options or warrants to purchase our capital stock to
our advisor, our directors or any of their affiliates (1) on terms more
favorable than we offer such options or warrants to the general public or (2) in
excess of an amount equal to 10% of our outstanding capital stock on the date of
grant.
Repurchase of Our
Shares
Our charter
prohibits us from paying a fee to our advisor or our directors or officers or
any of their affiliates in connection with our repurchase of our capital
stock.
Reports to
Stockholders
Our charter
requires that we prepare and deliver an annual report and deliver to our
stockholders within 120 days after the end of each fiscal year. Our directors
are required to take reasonable steps to ensure that the annual report complies
with our charter provisions. Among the matters that must be included in the
annual report or included in a proxy statement delivered with the annual report
are:
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financial statements prepared in
accordance with GAAP that are audited and reported on by independent
certified public accountants;
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the ratio of the costs of raising capital
during the year to the capital raised;
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the aggregate amount of advisory fees and
the aggregate amount of other fees or charges paid to our advisor and any
of its affiliates by us or third parties doing business with us during the
year;
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our total operating expenses for the year
stated as a percentage of our average invested assets and as a percentage
of our net income;
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a report from the independent directors
that our policies are in the best interests of our common stockholders and
the basis for such determination; and
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a separately stated, full disclosure of
all material terms, factors and circumstances surrounding any and all
transactions involving us and our advisor, a director or any affiliate
thereof during the year, which disclosure has been examined and commented
upon in the report by the independent directors with regard to the
fairness of such transactions.
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Voting
of Shares Owned by Affiliates
Our charter
prohibits our advisor, our directors and their affiliates from voting their
shares regarding (1) the removal of our advisor, any such directors or any of
their affiliates or (2) any transaction between any of them and us and further
provides that, in determining the requisite percentage in interest of shares
necessary to approve a matter on which our advisor, any such director and any of
their affiliates may not vote or consent, any shares owned by any of them will
not be included.
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General
We have
adopted a distribution reinvestment plan, or DRIP, that allows you the
opportunity to purchase, through reinvestment of distributions, additional
shares of common stock. The following is a summary of our DRIP. A complete copy
of our DRIP is attached as Exhibit C to this prospectus.
The DRIP
provides you with a simple and convenient way to invest your cash distributions
in additional shares of common stock. As a participant in the DRIP, you may
purchase shares at $9.50 per share until all $285,000,000 in shares that are
authorized and reserved initially for the DRIP have been purchased or until the
termination of the initial public offering, whichever occurs first. We may, in
our sole discretion, effect registration of additional shares of common stock
for issuance under the DRIP.
Eligibility
You must
participate with respect to 100% of your shares. If your shares are held of
record by a broker or nominee and you want to participate in the DRIP, you must
make appropriate arrangements with your broker or nominee. We may refuse
participation in the DRIP to stockholders residing in states where shares
offered pursuant to the DRIP are neither registered under applicable securities
laws nor exempt from registration.
Administration
As of the
date of this prospectus, the DRIP will be administered by us or our affiliate,
which we refer to as the DRIP Administrator, but a different entity may act as
DRIP Administrator in the future. The DRIP Administrator will keep all records
of your DRIP account and send statements of your account to you.
Enrollment
You may
become a participant in the DRIP by indicating your election to participate on
your signed enrollment form available from the DRIP Administrator enclosed with
this prospectus and returning it to us at the time you subscribe for
shares.
Your
participation in the DRIP will begin with the first distribution payment after
your enrollment form is received by us, provided such form is received on or
before ten days prior to the payment date established for that distribution. If
your enrollment form is received after the tenth day prior to the record date
for a distribution and before payment of that distribution, reinvestment of your
distributions will begin with the next distribution payment date.
Costs
Purchases
under the DRIP will not be subject to selling commissions or dealer manager
fees. All costs of administration of the DRIP will be paid by the
Company.
Purchases of Shares
Common stock
distributions will be invested within 30 days after the date on which common
stock distributions are paid. Payment dates for common stock distributions will
be ordinarily on or about the last calendar day of each month but may be changed
to quarterly in our sole discretion. Any distributions not so invested will be
returned to participants in the DRIP. Distributions will be paid on both full
and fractional shares held in your account and are automatically
reinvested.
Reinvested
Distributions.
We will use the aggregate amount of distributions to all
participants for each distribution period to purchase shares for the
participants. If the aggregate amount of distributions to participants exceeds
the amount required to purchase all shares then available for purchase, we will
purchase all available shares and will return all remaining distributions to the
participants within 30 days after the date such distributions are made. We will
allocate the purchased shares among the participants based on the portion of the
aggregate
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distributions received on behalf of each
participant, as reflected on our books. Distributions on all shares purchased
pursuant to the DRIP will be automatically reinvested.
Optional
Cash Purchases.
Until determined otherwise by us, DRIP participants may
not make additional cash payments for the purchase of common stock under the
DRIP.
Reports
Within 90
days after the end of the fiscal year, you will receive a report of all your
investment, including information with respect to the distributions reinvested
during the year, the number of shares purchased during the year, the per share
purchase price for such shares, the total administrative charge retained by us
or DRIP Administrator and tax information with respect to income earned on
shares purchased under the DRIP for the year. These statements are your
continuing record of the cost of your purchases and should be retained for
income tax purposes. We shall provide such information reasonably requested by
the dealer manager or a participating broker-dealer, in order for the dealer
manager or participating broker-dealer to meet its obligations to deliver
written notification to participants of the information required by Rule
10b-10(b) promulgated under the Securities Exchange Act of 1934, or the Exchange
Act.
Certificates for Shares
The ownership
of shares purchased under the DRIP will be uncertificated and noted in
book-entry form until our board of directors determines otherwise. The number of
shares purchased will be shown on your statement of account.
Termination of Participation
You may
discontinue reinvestment of distributions under the DRIP with respect to all,
but not less than all, of your shares (including shares held for your account in
the DRIP) at any time without penalty by notifying the DRIP Administrator in
writing no less than ten days prior to the next distribution payment date. A
notice of termination received by the DRIP Administrator after such cutoff date
will not be effective until the next following distribution payment date.
Participants who terminate their participation in the DRIP may thereafter rejoin
the DRIP by notifying us and completing all necessary forms and otherwise as
required by us.
We reserve
the right to prohibit certain employee benefit plans from participating in the
DRIP if such participation could cause our underlying assets to constitute “plan
assets” of such plans.
Amendment and Termination of the DRIP
The board of
directors may, in its sole discretion, terminate the DRIP or amend any aspect of
the DRIP (except for the ability of each participant to withdraw from
participation in the DRIP) without the consent of participants or other
stockholders, provided that written notice of termination or any material
amendment is sent to participants at least 10 days prior to the effective date
thereof. The board of directors also may terminate any participant’s
participation in the DRIP at any time by notice to such participant if continued
participation will, in the opinion of the board of directors, jeopardize our
status as a real estate investment trust under the Code.
Voting of Shares Held Under the DRIP
You will be
able to vote all whole shares of common stock purchased under the DRIP at the
same time that you vote the other shares registered in your name on our records.
Fractional shares will not be voted.
Responsibility of the DRIP Administrator Under the DRIP
The DRIP
Administrator will not be liable for any claim based on an act done in good
faith or a good faith omission to act. You should recognize that neither we nor
the DRIP Administrator can provide any assurance of a profit or protection
against loss on any shares purchased under the DRIP.
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Federal Income Tax Consequences of Participation in the DRIP
The following
discussion summarizes the principal federal income tax consequences, under
current law, of participation in the DRIP. It does not address all potentially
relevant federal income tax matters, including consequences peculiar to persons
subject to special provisions of federal income tax law (such as tax-exempt
organizations, insurance companies, financial institutions, broker-dealers and
foreign persons). The discussion is based on various rulings of the Internal
Revenue Service regarding several types of distribution reinvestment plans. No
ruling, however, has been issued or requested regarding the DRIP. The following
discussion is for your general information only, and you must consult your own
tax advisor to determine the particular tax consequences (including the effects
of any changes in law) that may result from your participation in the DRIP and
the disposition of any shares purchased pursuant to the DRIP.
Stockholders
subject to federal income taxation who elect to participate in the DRIP will
incur a tax liability for distributions allocated to them even though they have
elected not to receive their distributions in cash but rather to have their
distributions reinvested pursuant to the DRIP. Specifically, participants will
be treated as if they received the distribution from us and then applied such
distribution to purchase the shares in the DRIP. To the extent that a
stockholder purchases shares through the DRIP at a discount to fair market
value, the stockholder will be treated for tax purposes as receiving an
additional distribution equal to the amount of such discount. A stockholder
designating a distribution for reinvestment will be taxed on the amount of such
distribution as ordinary income 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. In such case, such designated
portion of the distribution will be taxed as a capital gain. The amount treated
as a distribution to you will constitute a dividend for federal income tax
purposes to the same extent as a cash distribution.
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Our board of
directors has adopted a share repurchase plan that will enable you to sell your
shares to us in limited circumstances. The purchase price for such shares
repurchased under the share repurchase plan will be as set forth below until we
begin providing stockholders with an estimated value of our shares. We expect to
establish an estimated value of our shares 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.
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 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.) Unless the shares
are being repurchased in connection with a stockholder’s death or “qualifying
disability” (as defined below), the prices at which we will repurchase shares
prior to the time we establish an estimated value of our shares are as
follows:
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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;
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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
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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.
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The purchase
price per share as described above for shares repurchased prior to obtaining an
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 properties 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 an 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 our shares.
There are
several limitations on our ability to have your shares repurchased under the
plan:
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Our share repurchase plan limits the
number of shares we may repurchase to those that we could purchase with
the net proceeds from the sale of shares under our distribution
reinvestment plan during the previous fiscal year;
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During any calendar year, we may 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; and
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•
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We have no obligation to repurchase shares
if the repurchase would violate the restrictions on distributions under
Maryland law, which prohibits distributions that would cause a corporation
to fail to meet statutory tests of solvency.
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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,
86
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. We intend to engage a third party to administer the share
repurchase plan and will notify you of the administrator’s name and contact
information. We intend to repurchase shares quarterly under the plan. The plan
administrator will have to receive your written request for redemption on or
before the last day of the second month of each calendar quarter in order to
have shares eligible for repurchase in that same quarter. If we could not
repurchase all shares presented for repurchase in any quarter, we would attempt
to honor repurchase requests on a pro rata basis. We will deviate from pro rata
purchases in two minor ways: (1) if a pro rata repurchase would result in you
owning less than half of the minimum purchase amount of 250 shares, then we will
repurchase all of your shares; and (2) if a pro rata repurchase would result in
you owning more than half but less than all of the minimum purchase amount, then
we will not repurchase any shares that would reduce your holdings below the
minimum purchase amount. In the event that you were selling all of your shares,
there will be no holding period requirement for shares purchased pursuant to our
distribution reinvestment plan.
If we did not
completely satisfy a stockholder’s repurchase request at quarter-end because the
plan administrator did not receive the request in time or because of the
restrictions on the number of shares we could repurchase under the plan, we will
treat the unsatisfied portion of the repurchase request as a request for
repurchase at the next repurchase date funds are available for repurchase unless
the stockholder withdrew his or her request before the next date for
repurchases. Any stockholder could withdraw a repurchase request upon written
notice to the plan administrator at any time prior to the date of
repurchase.
We will treat
repurchases sought upon a stockholder’s death or “qualifying disability”
differently from other repurchases in the following respects:
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prior to the time we begin establishing an
estimated value of our shares, which we expect to be 18 months after the
completion of our offering stage, the repurchase price is the amount paid
to acquire the shares from us reduced by the amount of any special
distributions paid to the stockholder; and
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once we begin establishing an estimated
value of our shares, the repurchase price would be the estimated value of
the shares, as determined by our advisor or another firm chosen for that
purpose.
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In order for
a disability to entitle a stockholder to the special repurchase terms described
above (a “qualifying disability”), (1) the stockholder will have to receive a
determination of disability based upon a physical or mental condition or
impairment arising after the date the stockholder acquired the shares to be
redeemed, and (2) such determination of disability would have to be made by the
governmental agency responsible for reviewing the disability retirement benefits
that the stockholder could be eligible to receive (the “applicable governmental
agency”). The “applicable governmental agencies” will be limited to the
following: (1) if the stockholder paid Social Security taxes and, therefore,
could be eligible to receive Social Security disability benefits, then the
applicable governmental agency would be the Social Security Administration or
the agency charged with responsibility for administering Social Security
disability benefits at that time if other than the Social Security
Administration; (2) if the stockholder did not pay Social Security benefits and,
therefore, could not be eligible to receive Social Security disability benefits,
but the stockholder could be eligible to receive disability benefits under the
Civil Service Retirement System, or CSRS, then the applicable governmental
agency would be the U.S. Office of Personnel Management or the agency charged
with responsibility for administering CSRS benefits at that time if other than
the Office of Personnel Management; or (iii) if the stockholder did not pay
Social Security taxes and therefore could not be eligible to receive Social
Security benefits but suffered a disability that resulted in the stockholder’s
discharge from military service under conditions that were other than
dishonorable and, therefore, could be eligible to receive military disability
benefits, then the applicable governmental agency will be the Veteran’s
Administration or the agency charged with the responsibility for administering
military disability benefits at that time if other than the Veteran’s
Administration.
Disability
determinations by governmental agencies for purposes other than those listed
above, including but not limited to worker’s compensation insurance,
administration or enforcement of the Rehabilitation Act or Americans with
Disabilities Act, or waiver of insurance premiums would not entitle a
stockholder to the special repurchase terms described above. Repurchase requests
following an award by the applicable governmental agency of disability benefits
would have to be accompanied by: (1) the investor’s initial application for
disability benefits and (2) a Social Security Administration Notice of Award, a
U.S. Office of Personnel Management determination
87
of disability under CSRS, a Veteran’s
Administration record of disability-related discharge or such other
documentation issued by the applicable governmental agency that we would deem
acceptable and would demonstrate an award of the disability
benefits.
We understand
that the following disabilities do not entitle a worker to Social Security
disability benefits:
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disabilities occurring after the legal
retirement age; and
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disabilities that do not render a worker
incapable of performing substantial gainful activity.
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Therefore,
such disabilities will not qualify for the special repurchase terms, except in
the limited circumstances when the investor would be awarded disability benefits
by the other “applicable governmental agencies” described above.
The share
repurchase plan may be suspended or terminated if:
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our shares are listed on any national
securities exchange, or are subject to
bona fide
quotes on any
inter-dealer quotation system or electronic communications network, or are
subject of
bona fide
quotes in the pink sheets; or
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our board of directors determines that it
is in our best interest to suspend or terminate the share repurchase
plan.
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We may amend
or modify any provision of the plan at any time in our board’s discretion
without prior notice to participants. In the event that we amend, suspend or
terminate the share repurchase plan, however, we will send stockholders notice
of the change(s) following the date of such amendment, suspension or
modification, and we will disclose the change(s) in a report filed with the SEC
on either Form 8-K, Form 10-Q or Form 10-K, as appropriate. During this
offering, we will also include this information in a prospectus supplement or
post-effective amendment to the registration statement, as required under
federal securities laws.
Our share
repurchase plan will only provide stockholders a limited ability to sell shares
for cash until the shares are listed for trading on a national securities
exchange, at which time the plan will terminate and you will have no right to
request repurchase of your shares. We cannot assure you that the shares will
ever be listed for trading on a national securities exchange.
You must
present for repurchase a minimum of 25% of your shares.
Qualifying
stockholders who desire to redeem their shares would have to give written notice
to us at Bluerock Enhanced Multifamily Trust, Inc. c/o DST Systems, P.O. Box
219003, Kansas City, Missouri 64121-9003.
88
General
As of the
date of this prospectus, we have not yet commenced active operations.
Subscription proceeds may be released to us after the minimum offering is
achieved and will be applied to investment in properties and the payment or
reimbursement of selling commissions and other fees and expenses. We will
experience a relative increase in liquidity as we receive additional
subscriptions for shares and a relative decrease in liquidity as we spend net
offering proceeds in connection with the acquisition, development and operation
of our assets.
As of the
date of this prospectus, we have not entered into any arrangements creating a
reasonable probability that we will acquire a specific property or other asset.
The number of properties and other assets that we will acquire will depend upon
the number of shares sold and the resulting amount of the net proceeds available
for investment in properties and other assets. Until required for the
acquisition, development or operation of assets, we will keep the net proceeds
of this offering in short-term, liquid investments.
We intend to
make reserve allocations as necessary to aid our objective of preserving capital
for our investors by supporting the maintenance and viability of properties we
acquire in the future. If reserves and any other available income become
insufficient to cover our operating expenses and liabilities, it may be
necessary to obtain additional funds by borrowing, refinancing properties or
liquidating our investment in one or more properties. There is no assurance that
such funds will be available or, if available, that the terms will be acceptable
to us.
We intend to
make an election to be taxed as a REIT under Section 856(c) of the Code. In
order to qualify as a REIT, we must distribute to our stockholders each calendar
year at least 90% of our taxable income (excluding net capital gains). If we
qualify as a REIT for federal income tax purposes, we generally will not be
subject to federal income tax on income that we distribute to our stockholders.
If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income tax on our taxable income at regular corporate rates and will not
be permitted to qualify as a REIT for four years following the year in which our
qualification is denied. Such an event could materially and adversely affect our
net income and results of operations.
Results of Operations
As of the
date of this prospectus, we have not commenced business operations as we are in
our organizational and development stage. We do not intend to begin our
operations until we have sold at least the minimum offering amount of $2,500,000
in shares of our common stock. As we have not acquired any properties or other
assets, our management is not aware of any material trends or uncertainties,
favorable or unfavorable, other than national economic conditions affecting our
targeted portfolio, the multifamily housing industry and real estate generally,
which may be reasonably anticipated to have a material impact on either capital
resources or the revenues or incomes to be derived from the operation of our
assets.
Liquidity and Capital Resources
We are
offering and selling to the public in our primary offering up to $1,000,000,000
in shares of our common stock, $.01 par value per share at $10.00 per share. We
are also offering up to $285,000,000 in shares of our common stock to be issued
pursuant to our distribution reinvestment plan under which our stockholders may
elect to have distributions reinvested in additional shares at $9.50 per
share.
Our principal
demands for cash will be for acquisition costs, including the purchase price of
any properties, loans or securities we acquire, and construction and development
costs and the payment of our operating and administrative expenses, continuing
debt service obligations and distributions to our stockholders. Generally, we
will fund our acquisitions from the net proceeds of our public offering. We
intend to acquire our assets with cash and mortgage or other debt, but we may
acquire assets free and clear of permanent mortgage or other indebtedness by
paying the entire purchase price for the asset in cash or in units of limited
partnership interest in our operating partnership. Due to the delay between the
sale of our shares and our acquisitions, there may be a delay in the benefits to
our stockholders, if any, of returns generated from our
investments.
89
We anticipate
that adequate cash will be generated from operations to fund our operating and
administrative expenses, continuing debt service obligations and the payment of
distributions. However, our ability to finance our operations is subject to
several uncertainties. Our ability to generate working capital is dependent on
our ability to attract and retain tenants and the economic and business
environments of the various markets in which our properties are located. Our
ability to sell real estate investments is partially dependent upon the state of
real estate markets and the ability of purchasers to obtain financing at
reasonable commercial rates. In general, our policy will be to pay distributions
from cash flow from operations. However, some or all of our distributions may be
paid from other sources, such as from borrowings, advances from our advisor, our
advisor’s deferral of its fees and expense reimbursements or the proceeds of
this offering.
Potential
future sources of capital include secured or unsecured financings from banks or
other lenders, establishing additional lines of credit, proceeds from the sale
of properties and undistributed cash flow. However, we currently have not
identified any additional sources of financing and there is no assurance that
such sources of financings will be available on favorable terms or at
all.
Distributions
We have not
paid any distributions as of the date of this prospectus. We intend to make
regular cash distributions to our stockholders, typically on a monthly basis.
Our board of directors will determine the amount of distributions to be
distributed to our stockholders. The board’s determination will be based on a
number of factors, including funds available from operations, our capital
expenditure requirements and the annual distribution requirements necessary to
maintain our REIT status under the Code. As a result, our distribution rate and
payment frequency may vary from time to time. However, to qualify as a REIT for
tax purposes, we must make distributions equal to at least 90% of our “REIT
taxable income” each year. During the early stages of our operations, we may
declare distributions in excess of funds from operations.
Funds
From Operations
One of our
objectives is to provide cash distributions to our stockholders from cash
generated by our operations and funds from operations. Funds from operations is
not equivalent to our net operating income or loss as determined under GAAP. Due
to certain unique operating characteristics of real estate companies, the
National Association of Real Estate Investment Trusts, or NAREIT, an industry
trade group, has promulgated a measure known as Funds From Operations, or FFO,
which it believes more accurately reflects the operating performance of a REIT
such as our company.
We define
FFO, a non-GAAP measure, consistent with the NAREIT’s definition, as net income,
computed in accordance with GAAP, excluding gains (or losses) from sales of
property, plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joints ventures will be calculated to reflect
FFO on the same basis.
We consider
FFO to be an appropriate supplemental measure of a REIT’s operating performance
as it is based on a net income analysis of property portfolio performance that
excludes non-cash items such as depreciation. The historical accounting
convention used for real estate assets requires straight-line depreciation of
buildings and improvements, which implies that the value of real estate assets
diminishes predictably over time. Since real estate values historically rise and
fall with market conditions, presentations of operating results for a REIT,
using historical accounting for depreciation, could be less informative. The use
of FFO is recommended by the REIT industry as a supplemental performance
measure.
Presentation
of this information is intended to assist the reader in comparing the operating
performance of different REITs, although it should be noted that not all REITs
calculate FFO the same way, so comparisons with other REITs may not be
meaningful. Furthermore, FFO is not necessarily indicative of cash flow
available to fund cash needs and should not be considered as an alternative to
net income as an indication of our performance.
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The following
table shows, as of the date of this prospectus, the number and percentage of
shares of our common stock owned by any person who is known by us to be the
beneficial owner of more than 5% of the outstanding shares of our common stock,
each director and executive officer, and all directors and executive officers as
a group.
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Name of Beneficial Owner(1)
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Number of
Shares
Beneficially Owned (2)
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Percent of
all
Shares
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R. Ramin Kamfar
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23,200
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100
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%
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James G. Babb, III
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—
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—
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Jordan B. Ruddy
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—
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—
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Jerold E. Novack
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—
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—
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Michael L. Konig
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—
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—
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All Named Executive Officers and Directors
as a Group
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23,200
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100
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%
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(1)
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The address of each beneficial owner
listed is 680 Fifth Avenue, 16th Floor, New York, New York
10019.
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(2)
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As of the date of this prospectus, our
advisor owns 22,200 shares of our common stock, all of which is issued and
outstanding stock, and 1,000 shares of convertible stock, all of which is
issued and outstanding. Our advisor is controlled by BER Holdings, LLC,
which is controlled by Mr. Kamfar. Thus, Mr. Kamfar has the power to
direct how our advisor votes its shares of common stock.
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91
DESCRIPTION OF CAPITAL
STOCK
General
The following
description of our capital stock highlights material provisions of our charter
and bylaws as in effect as of the date of this prospectus. Because it is a
description of what is contained in our charter and bylaws, it may not contain
all the information that is important to you.
Common Stock
Under our
charter, we will have 1,000,000,000 authorized shares of stock, consisting of
749,999,000 shares of common stock, $0.01 par value per share, 250,000,000
shares of preferred stock, par value $0.01 per share and 1,000 shares of
non-participating, non-voting convertible stock, $0.01 per share available for
issuance. We have authorized the issuance of up to 130,000,000 shares of common
stock in connection with this offering. The common stock offered by this
prospectus, when issued, will be duly authorized, fully paid and nonassessable.
The common stock is not convertible or subject to redemption.
Holders of
our common stock:
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are entitled to receive distributions
authorized by our board of directors and declared by us out of legally
available funds after payment of, or provision for, full cumulative
distributions on and any required redemptions of shares of preferred stock
then outstanding;
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are entitled to share ratably in the
distributable assets of our company remaining after satisfaction of the
prior preferential rights of the preferred stock and the satisfaction of
all of our debts and liabilities in the event of any voluntary or
involuntary liquidation or dissolution of our company; and
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do not have preference, conversion,
exchange, sinking fund, or redemption rights or preemptive rights to
subscribe for any of our securities and generally have no appraisal rights
unless our board of directors determines that appraisal rights apply, with
respect to all or any classes or series of shares, to one or more
transactions occurring after the date of such determination in connection
with which holders of such shares would otherwise be entitled to exercise
appraisal rights.
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We will
generally not issue certificates for our shares. Shares will be held in
“uncertificated” form, which will eliminate the physical handling and
safekeeping responsibilities inherent in owning transferable stock certificates
and eliminate the need to return a duly executed stock certificate to effect a
transfer. DTS Systems, Inc. acts as our registrar and as the transfer agent for
our shares. Transfers can be effected simply by mailing to DTS Systems, Inc. a
transfer and assignment form, which we will provide to you at no charge upon
written request.
Stockholder Voting
Except as
otherwise provided, all shares of common stock will have equal voting rights.
Because stockholders do not have cumulative voting rights, holders of a majority
of the outstanding shares of common stock can elect our entire board of
directors. The voting rights per share of our equity securities issued in the
future will be established by our board of directors; provided, however, that
the voting rights per share sold in a private offering will not exceed the
voting rights which bear the same relationship to the voting rights of a
publicly held share as the consideration paid to us for each privately offered
share bears to the book value of each outstanding publicly held
share.
Our charter
provides that generally we may not, without the affirmative vote of stockholders
entitled to cast at least a majority of all the votes entitled to cast on the
matter:
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amend our charter, including, by way of
illustration, amendments to provisions relating to director
qualifications, fiduciary duty, liability and indemnification, conflicts
of interest, investment policies or investment restrictions, except for
amendments with respect to increases or decreases in the number of shares
of stock of any class or series or the aggregate number of shares of
stock, a change of our name, a change of the name or other designation or
the par value of any class or series of stock and the aggregate par value
of our stock and certain reverse stock splits;
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sell all or substantially all of our
assets other than in the ordinary course of our business or in connection
with our liquidation or dissolution;
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cause a merger or consolidation of our
company; or
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dissolve or liquidate our
company.
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Our charter
further provides that, without the necessity for concurrence by our board of
directors, holders of a majority of voting shares who are present in person or
by proxy at an annual meeting at which a quorum is present may vote to elect a
director and that any or all of our directors may be removed from office at any
time by the affirmative vote of at least a majority of the votes entitled to be
cast generally in the election of directors.
Each
stockholder entitled to vote on a matter may do so at a meeting in person or by
proxy directing the manner in which he or she desires that his or her vote be
cast or without a meeting by a consent in writing or by electronic transmission.
Any proxy must be received by us prior to the date on which the vote is taken.
Pursuant to Maryland law and our charter, if no meeting is held, 100% of the
stockholders must consent in writing or by electronic transmission to take
effective action on behalf of our company.
Preferred Stock
Our charter
authorizes our board of directors without further stockholder action to provide
for the issuance of up to 250,000,000 shares of preferred stock, in one or more
series, with such voting powers and with such terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, as our
board of directors shall approve. As of the date of this prospectus, there are
no preferred shares outstanding and we have no present plans to issue any
preferred shares. However, the issuance of preferred stock must also be 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.
Issuance of Additional Securities and Debt Instruments
Our board of
directors is authorized to issue additional securities, including common stock,
preferred stock, convertible preferred stock and convertible debt, for cash,
property or other consideration on such terms as they may deem advisable and to
classify or reclassify any unissued shares of capital stock of our company
without approval of the holders of the outstanding securities. We may issue debt
obligations with conversion privileges on such terms and conditions as the
directors may determine, whereby the holders of such debt obligations may
acquire our common stock or preferred stock. We may also issue warrants, options
and rights to buy shares on such terms as the directors deem advisable, despite
the possible dilution in the value of the outstanding shares which may result
from the exercise of such warrants, options or rights to buy shares, as part of
a ratable issue to stockholders, as part of a private or public offering or as
part of other financial arrangements. Our board of directors, with the approval
of a majority of the directors and without any action by stockholders, may also
amend our charter from time to time to increase or decrease the aggregate number
of shares of our stock or the number of shares of stock of any class or series
that we have authority to issue.
Restrictions on Ownership and Transfer
In order to
qualify as a REIT under the federal tax laws, we must meet several requirements
concerning the ownership of our outstanding capital stock. Specifically, no more
than 50% in value of our outstanding capital stock may be owned, directly or
indirectly, by five or fewer individuals, as defined in the federal income tax
laws to include specified private foundations, employee benefit plans and
trusts, and charitable trusts, during the last half of a taxable year, other
than our first REIT taxable year. Moreover, 100 or more persons must own our
outstanding shares of capital stock during at least 335 days of a taxable year
of 12 months or during a proportionate part of a shorter taxable year, other
than our first REIT taxable year.
Because our
board of directors believes it is essential for our company to qualify and
continue to qualify as a REIT and for other corporate purposes, our charter,
subject to the exceptions described below, provides that no
93
person may own, or be deemed to own by virtue of
the attribution provisions of the federal income tax laws, more than 9.8%
of:
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the value of outstanding shares of our
capital stock; or
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the value or number (whichever is more
restrictive) of outstanding shares of our common stock.
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This
limitation regarding the ownership of our shares is the “9.8% Ownership
Limitation.” Further, our charter provides for certain circumstances where our
board of directors may except a holder of our shares from the 9.8% Ownership
Limitation and impose other limitations and restrictions on ownership. This
exception and these limitations regarding the ownership of our shares are the
“Excepted Holder Ownership Limitation.”
To assist us
in preserving our status as a REIT, among other purposes, our charter contains
limitations on the ownership and transfer of shares of common stock that
would:
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result in any person owning, directly or
indirectly, shares of our capital stock in excess of the foregoing
ownership limitations;
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result in our capital stock being owned by
fewer than 100 persons, determine without reference to any rules of
attribution;
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result in our company being “closely held”
under the federal income tax laws; and
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cause our company to own, actually or
constructively, 9.8% or more of the ownership interests in a tenant of our
real property, under the federal income tax laws or otherwise fail to
qualify as a REIT.
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Any attempted
transfer of our stock which, if effective, would result in our stock being
beneficially owned by fewer than 100 persons will be null and void, with the
intended transferee acquiring no rights in such shares of stock, or result in
such shares being designated as shares-in-trust and transferred automatically to
a trust effective on the day before the purported transfer of such shares. The
record holder of the shares that are designated as shares-in-trust, or the
prohibited owner, will be required to submit such number of shares of capital
stock to our company for registration in the name of the trust. We will
designate the trustee, but it will not be affiliated with our company. The
beneficiary of the trust will be one or more charitable organizations that are
named by our company.
Shares-in-trust
will remain shares of issued and outstanding capital stock and will be entitled
to the same rights and privileges as all other stock of the same class or
series. The trust will receive all dividends and distributions on the
shares-in-trust and will hold such dividends or distributions in trust for the
benefit of the beneficiary. The trust will vote all shares-in-trust. The trust
will designate a permitted transferee of the shares-in-trust, provided that the
permitted transferee purchases such shares-in-trust for valuable consideration
and acquires such shares-in-trust without such acquisition resulting in a
transfer to another trust.
Our charter
requires that the prohibited owner of the shares-in-trust pay to the trust the
amount of any dividends or distributions received by the prohibited owner that
are attributable to any shares-in-trust and the record date of which was on or
after the date that such shares of stock became shares-in-trust. The prohibited
owner generally will receive from the trust the lesser of:
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the price per share such prohibited owner
paid for the shares of capital stock that were designated as
shares-in-trust or, in the case of a gift or devise, the market price per
share on the date of such transfer; or
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the price per share received by the trust
from the sale of such shares-in-trust.
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The trust
will distribute to the beneficiary any amounts received by the trust in excess
of the amounts to be paid to the prohibited owner. The shares-in-trust will be
deemed to have been offered for sale to our company, or our designee, at a price
per share equal to the lesser of:
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the price per share in the transaction
that created such shares-in-trust or, in the case of a gift or devise, the
market price per share on the date of such transfer; or
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the market price per share on the date
that our company, or our designee, accepts such offer.
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We will have
the right to accept such offer for a period of 90 days after the later of the
date of the purported transfer which resulted in such shares-in-trust or the
date we determine in good faith that a transfer resulting in such
shares-in-trust occurred.
“Market
price” on any date means the average of the closing prices for the five
consecutive trading days ending on such date. The “closing price” refers to the
last quoted price as reported by the primary securities exchange or market on
which our stock is then listed or quoted for trading. If our stock is not so
listed or quoted at the time of determination of the market price, our board of
directors will determine the market price in good faith.
If you
acquire or attempt to acquire shares of our capital stock in violation of the
foregoing restrictions, or if you owned common or preferred stock that was
transferred to a trust, then we will require you immediately to give us written
notice of such event and to provide us with such other information as we may
request in order to determine the effect, if any, of such transfer on our status
as a REIT.
If you own,
directly or indirectly, more than 5%, or such lower percentages as required
under the federal income tax laws, of our outstanding shares of stock, then you
must, within 30 days after January 1 of each year, provide to us a written
statement or affidavit stating your name and address, the number of shares of
capital stock owned directly or indirectly, and a description of how such shares
are held. In addition, each direct or indirect stockholder shall provide to us
such additional information as we may request in order to determine the effect,
if any, of such ownership on our status as a REIT and to ensure compliance with
the ownership limit.
The ownership
limit generally will not apply to the acquisition of shares of capital stock by
an underwriter that participates in a public offering of such shares. In
addition, our board of directors, upon receipt of a ruling from the Internal
Revenue Service or an opinion of counsel and upon such other conditions as our
board of directors may direct, may exempt a person from the ownership limit.
However, the ownership limit will continue to apply until our board of directors
determines that it is no longer in the best interests of our company to attempt
to qualify, or to continue to qualify, as a REIT.
All
certificates, if any, representing our common or preferred stock, will bear a
legend referring to the restrictions described above.
The ownership
limit in our charter may have the effect of delaying, deferring or preventing a
takeover or other transaction or change in control of our company that might
involve a premium price for your shares or otherwise be in your interest as a
stockholder.
Distributions
Some or all
of our distributions will be paid from sources other than funds from operations,
such as from the proceeds of this offering, cash advances to us by our advisor,
cash resulting from a waiver of asset management fees and borrowings (including
borrowings secured by our assets) in anticipation of future operating cash flow
until such time as we have sufficient cash flow from operations to fully fund
the payment of distributions therefrom. Generally, our policy will be to pay
distributions from cash flow from operations. Further, because we may receive
income from interest or rents at various times during our fiscal year and
because we may need cash flow from operations during a particular period to fund
capital expenditures and other expenses, we expect that at least during the
early stages of our development and from time to time during our operational
stage, we will declare distributions in anticipation of cash flow that we expect
to receive during a later period and we will pay these distributions in advance
of our actual receipt of these funds. In these instances, we expect to look to
third-party borrowings to fund our distributions. We may also fund such
distributions from advances from our advisor or sponsors or from our advisor’s
deferral of its asset management fee. To the extent that we redeem shares
pursuant to our share repurchase plan or make payments or reimburse certain
expenses to our advisor pursuant to our advisory agreement, our cash flow and
therefore our ability to make distributions from cash flow, as well as cash flow
available for investment, will be negatively impacted. See “Share Repurchase
Plan” and “Management – The Advisory Agreement.” In addition, certain amounts we
are required to pay to our advisor, including the monthly asset management fee,
the property management fee, the financing fee, the disposition fee and the
payment made upon conversion of our convertible stock, depend on the assets
acquired, gross revenues of the properties managed, indebtedness incurred, sales
prices of investments sold or the value of our company at the time of
conversion, respectively, and therefore cannot be quantified or reserved for
until such fees have been earned. See
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“Management Compensation.” We are required to
pay these amounts to our advisor regardless of the amount of cash we distribute
to our stockholders and therefore our ability to make distributions from cash
flow, as well as cash flow available for investment, to our stockholders may be
negatively impacted. In addition, to the extent we invest in development or
redevelopment projects or in properties that have significant capital
requirements, these properties will not immediately generate operating cash
flow. Thus, our ability to make distributions may be negatively impacted,
especially during our early periods of operation.
Once our
board of directors has begun to authorize distributions, we expect to declare
distributions on a quarterly basis and to pay distributions to our stockholders
on a monthly basis. We intend to calculate these monthly distributions based on
daily record and distribution declaration dates so our investors will become
eligible for distributions immediately upon the purchase of their shares.
Distributions will be paid to stockholders as of the record dates selected by
the directors.
We are
required to make distributions sufficient to satisfy the requirements for
qualification as a REIT for tax purposes. Generally, distributed income will not
be taxable to us under the Code if we distribute at least 90% of our REIT
taxable income.
Distributions
will be authorized at the discretion of our board of directors, in accordance
with our earnings, cash flow, anticipated cash flow and general financial
condition. The board’s discretion will be directed, in substantial part, by its
intention to cause us to comply with the REIT requirements. Because we may
receive income from interest or rents at various times during our fiscal year,
distributions may not reflect our income earned in that particular distribution
period but may be made in anticipation of cash flow that we expect to receive
during a later period and may be made in advance of actual receipt of funds in
an attempt to make distributions relatively uniform. We may utilize capital,
borrow money, issue new securities or sell assets in order to make
distributions. In addition, from time to time, our advisor and its affiliates
may, but are not required to, agree to waive or defer all or a portion of the
acquisition, asset management or other fees or other incentives due to them,
enter into lease agreements for unleased space, pay general administrative
expenses or otherwise supplement investor returns in order to increase the
amount of cash available to make distributions to our stockholders.
Many of the
factors that can affect the availability and timing of cash distributions to
stockholders are beyond our control, and a change in any one factor could
adversely affect our ability to pay future distributions. There can be no
assurance that future cash flow will support distributions at the rate that such
distributions are paid in any particular distribution period.
We are not
prohibited from distributing our own securities in lieu of making cash
distributions to stockholders. We may issue securities as stock dividends in the
future.
Convertible Stock
Our
authorized capital stock includes 1,000 shares of convertible stock, par value
$0.01 per share. We have issued all of such shares to our advisor. No additional
consideration is due upon the conversion of the convertible stock. There will be
no distributions paid on shares of convertible stock. The conversion of the
convertible stock into shares of common stock will decrease the percentage of
our shares of common stock owned by persons purchasing shares in this
offering.
Except in
limited circumstances, shares of convertible stock will not be entitled to vote
on any matter, or to receive notice of, or to participate in, any meeting of our
stockholders at which they are not entitled to vote. However, the affirmative
vote of the holders of more than two-thirds of the outstanding shares of
convertible stock 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 or (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.
Each
outstanding share of our convertible stock will convert into the number of
shares of our common stock described below if:
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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 the
price paid for those outstanding shares of common stock; or
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we list our common stock for trading on a
national securities exchange. For these purposes, a “listing” also will be
deemed to occur on the effective date of any merger 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.
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Upon the
occurrence of either triggering event described above, each share of convertible
stock will be converted into a number of shares of common stock equal to 1/1000
of the quotient of (A) 15% of the amount, if any, by which (1) the enterprise
value (determined in accordance with the provisions of the charter and
summarized in the second following paragraph) as of the date of the event
triggering the conversion plus the total distributions paid to our stockholders
through such date on the then outstanding shares of our common stock exceeds (2)
the sum of the aggregate purchase price paid for those outstanding shares of
common stock plus an 8% cumulative, non-compounded, annual return on the price
paid for those outstanding shares of common stock, divided by (B) the enterprise
value divided by the number of outstanding shares of common stock, in each case,
as of the date of the event triggering the conversion. In the case of a
conversion upon a listing, the number of shares to be issued will not be
determined until the 31st trading day after the date of the
listing.
Unless the
advisory agreement is terminated or not renewed because of a material breach by
our advisor, in the event that either of the events triggering the conversion of
the convertible stock occurs after a “triggering event,” as defined below, each
share of convertible stock will be converted into that number of shares of
common stock as described in the preceding paragraph, multiplied by the quotient
of (A) the number of days since the effective date of this offering during which
the advisory agreement with our advisor was in force divided by (B) the number
of days elapsed from the effective date of this offering through the date of the
“triggering event.” As used herein and in our charter, “triggering event” means
a termination or expiration without renewal (except to the extent of a
termination or expiration with our company followed by the adoption of the same
or substantially similar advisory agreement with a successor, whether by merger,
consolidation, sale of all or substantially all of our assets, or otherwise) of
our advisory agreement with our advisor for any reason except for a termination
or expiration without renewal due to a material breach of the advisory agreement
by our advisor.
As used above
and in our charter, “enterprise value” as of a specific date means our actual
value as a going concern on the applicable date based on the difference between
(A) the actual value of all of our assets as determined in good faith by our
board, including a majority of the independent directors, and (B) all of our
liabilities as set forth on our balance sheet for the period ended immediately
prior to the determination date, provided that (1) if such value is being
determined in connection with a change of control that establishes our net
worth, then the value shall be the net worth established thereby and (2) if such
value is being determined in connection with the listing of our common stock for
trading on a national securities exchange, then the value shall be the number of
outstanding shares of common stock multiplied by the closing price of a single
share of common stock, averaged over a period of 30 trading days, as mutually
agreed upon by the board of directors, including a majority of the independent
directors and the advisor. If the holder of shares of convertible stock
disagrees with the value determined by the board, then each of the holder of the
convertible stock and us shall name one appraiser and the two named appraisers
shall promptly agree in good faith to the appointment of one other appraiser
whose determination of the value of the company shall be final and binding on
the parties. The cost of such appraisal will be shared evenly between us and our
advisor.
Our charter
provides that if we:
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reclassify or otherwise recapitalize our
outstanding common stock (except to change the par value, or to change
from no par value to par value, or to subdivide or otherwise split or
combine shares); or
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consolidate or merge with another entity
in a transaction in which we are either (1) not the surviving entity or
(2) the surviving entity but that results in a reclassification or
recapitalization of our common stock (except to change the par value, or
to change from no par value to par value, or to subdivide or otherwise
split or combine shares),
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then we or the successor or purchasing business
entity must provide that the holder of each share of our convertible stock
outstanding at the time one of the events triggering conversion described above
occurs will continue to have the right to convert the convertible stock upon
such a triggering event. After one of the above transactions occurs, the
convertible stock will be convertible into the kind and amount of stock and
other securities and property received by the holders of common stock in the
transaction that occurred, such that upon conversion, the holders of convertible
stock will realize as nearly as possible the same economic rights and effects as
described above in the description of the conversion of our convertible stock.
This right will apply to successive reclassifications, recapitalizations,
consolidations and mergers until the convertible stock is
converted.
Our board of
directors will oversee the conversion of the convertible stock to ensure that
the number of shares of common stock issuable in connection with the conversion
is calculated in accordance with the terms of our charter. Further, if in the
good faith judgment of our board of directors full conversion of the convertible
stock would cause a holder of our stock to violate the 9.8% Ownership Limitation
or the Excepted Holder Ownership Limitation (collectively referred to as the
“Convertible Stock Limitations”), then only such number of shares of convertible
stock (or fraction of a share thereof) will be converted into shares of our
common stock such that no holder of our stock would violate the Convertible
Stock Limitations. The conversion of the remaining shares of convertible stock
will be deferred until the earliest date after our board of directors determines
that such conversion will not violate the Convertible Stock Limitations. Any
such deferral will not otherwise alter the terms of the convertible
stock.
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IMPORTANT PROVISIONS OF MARYLAND
CORPORATE LAW AND
OUR CHARTER AND BYLAWS
The following
is a summary of some important provisions of Maryland law, our charter and our
bylaws in effect as of the date of this prospectus, copies of which may be
obtained from our company.
Our
Charter and Bylaws
Stockholder
rights and related matters are governed by the Maryland General Corporation Law,
or MGCL, and our charter and bylaws. Our board of directors, including our
independent directors, reviewed, ratified and unanimously approved our charter
and bylaws. Provisions of our charter and bylaws, which are summarized below,
may make it more difficult to change the composition of our board of directors
and may discourage or make more difficult any attempt by a person or group to
obtain control of our company.
Stockholders’ Meetings
An annual
meeting of our stockholders will be held upon reasonable notice and within a
reasonable period (not less than 30 days) following delivery of our annual
report for the purpose of electing directors and for the transaction of such
other business as may come before the meeting. A special meeting of our
stockholders may be called in the manner provided in the bylaws, including by
the president or a majority of our board of directors or a majority of the
independent directors, and will be called by the secretary upon written request
of stockholders holding in the aggregate at least 10% of the outstanding shares.
Upon receipt of a written request, either in person or by mail, stating the
purpose(s) of the meeting, we will provide all stockholders, within 10 days
after receipt of this request, written notice, either in person or by mail, of a
meeting and the purpose of such meeting to be held on a date not less than 15
nor more than 60 days after the distribution of such notice, at a time and place
specified in the request, or if none is specified, at a time and place
convenient to our stockholders. At any meeting of the stockholders, each
stockholder is entitled to one vote for each share owned of record on the
applicable record date. In general, the presence in person or by proxy of 50% of
the outstanding shares constitutes a quorum, and the majority vote of our
stockholders will be binding on all of our stockholders.
Our
Board of Directors
Our charter
provides that, upon this offering commencing, a majority of the directors will
be independent directors. This provision may only be amended if the amendment is
declared advisable by our board of directors and approved by stockholders
entitled to cast at least a majority of all the votes entitled to be cast on the
matter. A vacancy in our board of directors caused by the death, resignation or
incapacity of a director or by an increase in the number of directors may be
filled only by the vote of a majority of the remaining directors, even if the
remaining directors do not constitute a quorum, and any director elected to fill
a vacancy will serve for the remainder of the full term of the directorship in
which the vacancy occurred. With respect to a vacancy created by the death,
resignation or incapacity of an independent director, the remaining independent
directors will nominate a replacement. Any director may resign at any time and
may be removed with or without cause by our stockholders entitled to cast at
least a majority of the votes entitled to be cast generally in the election of
directors.
Each director
will serve a term beginning on the date of his or her election and ending on the
next annual meeting of the stockholders and when his or her successor is duly
elected and qualifies. Because holders of common stock have no right to
cumulative voting for the election of directors, at each annual meeting of
stockholders, the holders of the shares of common stock with a majority of the
voting power of the common stock will be able to elect all of the
directors.
Fiduciary Duties
Our advisor
and directors are deemed to be in a fiduciary relationship to us and our
stockholders and our directors have a fiduciary duty to the stockholders to
supervise our relationship with the advisor.
Limitation of Liability and Indemnification
Maryland law
permits us to include in our charter a provision limiting the liability of our
directors and officers to us and our stockholders for money damages, except for
liability resulting from (1) actual receipt of an improper
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benefit or profit in money, property or services
or (2) active and deliberate dishonesty established by a final judgment and
which is material to the cause of action.
Maryland law
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made or threatened to be made a party by reason of their
service in those or other capacities unless it is established that:
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the act or omission of the director or
officer was material to the matter giving rise to the proceeding and (1)
was committed in bad faith or (2) was the result of active and deliberate
dishonesty;
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the director or officer actually received
an improper personal benefit in money, property or services; or
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in the case of any criminal proceeding,
the director or officer had reasonable cause to believe that the act or
omission was unlawful.
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However, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses.
Finally,
Maryland law permits a Maryland corporation to advance reasonable expenses to a
director or officer upon receipt of a written affirmation by the director or
officer of his or her good faith belief that he or she has met the standard of
conduct necessary for indemnification and a written undertaking by him or her or
on his or her behalf to repay the amount paid or reimbursed if it is ultimately
determined that the standard of conduct was not met.
Our charter
limits the liability of our directors and officers to us and our stockholders
for monetary damages and requires us to indemnify and advance expenses to our
directors, our officers, our advisor and its affiliates (including any director
or officer who is or was serving at the request of our company as a director,
officer, partner or trustee of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise) except to the extent
prohibited by Maryland law and as set forth below.
In spite of
the above provisions of Maryland law, our charter provides that a director, our
advisor and any affiliate of our advisor will be indemnified by us for losses
suffered by such person and held harmless for losses suffered by us only if all
of the following conditions are met:
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the party was acting on behalf of or
performing services on the part of our company;
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the party has determined, in good faith,
that the course of conduct which caused the loss or liability was in the
best interests of our company;
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such indemnification or agreement to be
held harmless is recoverable only out of our net assets and not from our
stockholders; and
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such liability or loss was not the result
of:
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negligence or misconduct by our directors
(other than the independent directors) or our advisor or its affiliates;
or
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gross negligence or willful misconduct by
the independent directors.
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The SEC takes
the position that indemnification against liabilities arising under the
Securities Act of 1933 is against public policy and unenforceable. Furthermore,
our charter prohibits us from indemnifying our directors, our advisor or its
affiliates or broker-dealers for liabilities arising from or out of a violation
of state or federal securities laws, unless one or more of the following
conditions are met:
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there has been a successful determination
on the merits of each count involving alleged securities law violations as
to the party seeking indemnification;
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such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
party seeking indemnification; or
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a court of competent jurisdiction approves
a settlement of the claims against the party seeking indemnification and
finds that indemnification of the settlement and related costs should be
made and the court considering the request has been advised of the
position of the SEC and of the published opinions of any state securities
regulatory authority in which shares of our stock were offered and sold as
to indemnification for securities law violations.
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We may
advance amounts to our directors, our advisor and its affiliates for reasonable
expenses and costs incurred as a result of any proceeding for which
indemnification is being sought in advance of a final disposition of the
proceeding only if all of the following conditions are satisfied:
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the legal action relates to acts or
omissions with respect to the performance of duties or services by the
indemnified party for or on behalf of our company;
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the legal action is initiated by a third
party who is not a stockholder of our company or the legal action is
initiated by a stockholder of our company acting in his or her capacity as
such and a court of competent jurisdiction specifically approves such
advancement;
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the party receiving such advances
furnishes our company with a written statement of his or her good faith
belief that he or she has met the standard of conduct described above; and
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the indemnified party receiving such
advances furnishes to our company a written undertaking, personally
executed on his or her behalf, to repay the advanced funds to our company,
together with the applicable legal rate of interest thereon, if it is
ultimately determined that he or she did not meet the standard of conduct
described above.
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Authorizations
of payments will be made by a majority vote of a quorum of disinterested
directors.
Also, our
board of directors may cause our company to indemnify or contract to indemnify
any person not specified above who was, is, or may become a party to any
proceeding, by reason of the fact that he or she is or was an employee or agent
of our company, to the same extent as if such person were specified as one whom
indemnification is granted as described above. Any determination to indemnify or
contract to indemnify will be made by a majority vote of a quorum consisting of
disinterested directors.
We may also
purchase and maintain insurance to indemnify such parties against the liability
assumed by them whether or not we are required or have the power to indemnify
them against this same liability.
Inspection of Books and Records
Our advisor
will keep, or cause to be kept, on our behalf, full and true books of account on
an accrual basis of accounting, in accordance with GAAP. We will maintain at all
times at our principal office all of our books of account, together with all of
our other records, including a copy of our charter.
Any
stockholder or his or her agent will be permitted access to all of our records
at all reasonable times, and may inspect and copy any of them. We will permit
the official or agency administering the securities laws of a jurisdiction to
inspect our books and records upon reasonable notice and during normal business
hours. As part of our books and records, we will maintain an alphabetical list
of the names, addresses and telephone numbers of our stockholders along with the
number of shares held by each of them. We will make the stockholder list
available for inspection by any stockholder or his or her agent at our principal
office upon the request of the stockholder.
We will
update, or cause to be updated, the stockholder list at least quarterly to
reflect changes in the information contained therein.
We will mail
a copy of the stockholder list to any stockholder requesting the stockholder
list within ten days of the request, subject to verification of the purpose for
which the list is requested, as discussed below. The copy of the stockholder
list will be printed in alphabetical order, on white paper, and in a readily
readable type size. We may impose a reasonable charge for copy work incurred in
reproducing the stockholder list.
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The purposes
for which a stockholder may request a copy of the stockholder list include,
without limitation, matters relating to stockholders’ voting rights and the
exercise of stockholders’ rights under federal proxy laws.
If our
advisor or our board of directors neglects or refuses to exhibit, produce or
mail a copy of the stockholder list as requested, our advisor and our board of
directors will be liable to any stockholder requesting the list for the costs,
including attorneys’ fees, incurred by that stockholder for compelling the
production of the stockholder list, and for actual damages suffered by any
stockholder by reason of such refusal or neglect. It will be a defense that the
actual purpose and reason for the requests for inspection or for a copy of the
stockholder list is to secure such list of stockholders or other information for
the purpose of selling such list or copies thereof, or of using the same for a
commercial purpose other than in the interest of the applicant as a stockholder
relative to the affairs of our company. We may require that the stockholder
requesting the stockholder list represent that he or she is not requesting the
list for a commercial purpose unrelated to the stockholder’s interests in our
company and that he or she will not make any commercial distribution of such
list or the information disclosed through such inspection. These remedies are in
addition to, and will not in any way limit, other remedies available to
stockholders under federal law, or the laws of any state.
The list may
not be sold for commercial purposes.
Tender Offers
Our charter
provides that any tender offer made by any person, including any “mini-tender”
offer, must comply with most of the provisions of Regulation 14D of the Exchange
Act, including the notice and disclosure requirements. Among other things, the
offeror must provide us notice of such tender offer at least ten business days
before initiating the tender offer. If the offeror does not comply with the
provisions set forth above, we will have the right to redeem that offeror’s
shares, if any, and any shares acquired in such tender offer. In addition, the
non-complying offeror will be responsible for all of our expenses in connection
with that offeror’s noncompliance.
Restrictions on Roll-Up Transactions
In connection
with a proposed “roll-up transaction,” which, in general terms, is any
transaction involving the acquisition, merger, conversion or consolidation,
directly or indirectly, of our company and the issuance of securities of an
entity that would be created or would survive after the successful completion of
the roll-up transaction, we will obtain an appraisal of all of our properties
from an independent expert. If the appraisal will be included in a prospectus
used to offer the securities of the entity surviving completion of the roll-up
transaction, the appraisal shall be filed as an exhibit with the SEC and, if
applicable, the states in which registration of such securities are sought, as
an exhibit to the registration statement for the offering. In order to qualify
as an independent expert for this purpose, the person or entity must have no
material current or prior business or personal relationship with our advisor or
directors and must be engaged to a substantial extent in the business of
rendering opinions regarding the value of assets of the type held by our
company. Our properties will be appraised on a consistent basis, and the
appraisal will be based on the evaluation of all relevant information and will
indicate the value of our properties as of a date immediately prior to the
announcement of the proposed roll-up transaction. The appraisal will assume an
orderly liquidation of properties over a 12-month period. The terms of the
engagement of such independent expert will clearly state that the engagement is
for the benefit of our company and our stockholders. We will include a summary
of the independent appraisal, indicating all material assumptions underlying the
appraisal, in a report to the stockholders in connection with a proposed roll-up
transaction.
In connection
with a proposed roll-up transaction, the person sponsoring the roll-up
transaction must offer to common stockholders who vote against the proposal a
choice of:
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accepting the securities of the entity
that would be created or would survive after the successful completion of
the roll-up transaction offered in the proposed roll-up transaction; or
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one of the following:
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remaining stockholders of our company and
preserving their interests in our company on the same terms and conditions
as existed previously; or
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receiving cash in an amount equal to the
stockholder’s pro rata share of the appraised value of our net
assets.
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Our company
is prohibited from participating in any proposed roll-up
transaction:
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which would result in the common
stockholders having voting rights in the entity that would be created or
would survive after the successful completion of the roll-up transaction
that are less than those provided in our charter, including rights with
respect to the election and removal of directors, annual reports, annual
and special meetings, amendment of the charter, and dissolution of our
company;
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which includes provisions that would
operate as a material impediment to, or frustration of, the accumulation
of shares by any purchaser of the securities of the entity that would be
created or would survive after the successful completion of the roll-up
transaction, except to the minimum extent necessary to preserve the tax
status of such entity, or which would limit the ability of an investor to
exercise the voting rights of its securities of the entity that would be
created or would survive after the successful completion of the roll-up
transaction on the basis of the number of shares held by that investor;
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in which a common stockholder’s rights to
access of records of the entity that would be created or would survive
after the successful completion of the roll-up transaction will be less
than those provided in our charter and described in “Inspection of Books
and Records,” above; or
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in which our company would bear any of the
costs of the roll-up transaction if our stockholders reject the roll-up
transaction.
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Anti-Takeover Provisions of the MGCL
The following
paragraphs summarize some provisions of Maryland law and our charter and bylaws
which may delay, defer or prevent a transaction or a change of control of our
company that might involve a premium price for our stockholders.
Business
Combinations
Under the
MGCL, certain “business combinations” (including a merger, consolidation, share
exchange or, in certain circumstances, an asset transfer or issuance or
reclassification of equity securities) between a Maryland corporation and an
interested stockholder (defined as any person who beneficially owns 10% or more
of the voting power of the corporation’s then outstanding voting stock or an
affiliate or associate of the corporation who, at any time within the two-year
period prior to the date in question, was the beneficial owner of 10% or more of
the voting power of the then-outstanding stock of the corporation) or an
affiliate of such an interested stockholder are prohibited for five years after
the most recent date on which the interested stockholder becomes an interested
stockholder. A person is not an interested stockholder under the statute if the
board of directors approved in advance the transaction by which the person
otherwise would have become an interested stockholder. However, in approving a
transaction the board of directors may provide that its approval is subject to
compliance, at or after the time of approval, with any terms and conditions
determined by the board. After the five-year prohibition, any such business
combination must be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least (1) 80% of the votes entitled
to be cast by holders of outstanding shares of voting stock of the corporation
and (2) two-thirds of the votes entitled to be cast by holders of voting stock
of the corporation other than voting stock held by the interested stockholder
with whom (or with whose affiliate) the business combination is to be effected
or held by an affiliate or associate of the interested stockholder, unless,
among other conditions, the corporation’s common stockholders receive a minimum
price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the interested
stockholder for its shares. These provisions of the MGCL do not apply, however,
to business combinations that are approved or exempted by a board of directors
prior to the time that the interested stockholder becomes an interested
stockholder.
Pursuant to
the statute, our board of directors has opted out of these provisions of the
MGCL provided that the business combination is first approved by our board, and,
consequently, the five-year prohibition and the super-majority vote requirements
will not apply to business combinations between us and any person unless the
board fails to approve the business combination. As a result, any person may be
able to enter into business combinations with us that may not be in the best
interest of our stockholders without compliance by our company with the
super-majority vote requirements and the other provisions of the
statute.
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Control Share
Acquisitions
The MGCL
provides that “control shares” of a Maryland corporation acquired in a “control
share acquisition” have no voting rights except to the extent approved at a
special meeting by the affirmative vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of stock in a corporation in respect of
which any of the following persons is entitled to exercise or direct the
exercise of the voting power of shares of stock of the corporation in the
election of directors:
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a person who makes or proposes to make a
control share acquisition;
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an officer of the corporation; or
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an employee of the corporation who is also
a director of the corporation.
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“Control
shares”
are voting shares of stock which, if aggregated with all other
such shares of stock previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power:
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one-tenth or more but less than one-third;
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one-third or more but less than a
majority; or
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a majority or more of all voting
power.
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Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A “control share
acquisition” means the acquisition of control shares, subject to certain
exceptions.
A person who
has made or proposes to make a control share acquisition, upon satisfaction of
certain conditions (including an undertaking to pay expenses), may compel our
board of directors to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the shares. If no request for
a meeting is made, the corporation may itself present the question at any
stockholders meeting.
If voting
rights are not approved at the meeting or if the acquiring person does not
deliver an acquiring person statement as required by the statute, then, subject
to certain conditions and limitations, the corporation may redeem any or all of
the control shares (except those for which voting rights have previously been
approved) for fair value determined without regard to the absence of voting
rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders meeting and the acquiror
becomes entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share
acquisition.
The control
share acquisition statute does not apply to (1) shares acquired in a merger,
consolidation or share exchange if the corporation is a party to the transaction
or (2) acquisitions approved or exempted by the charter or bylaws of the
corporation.
Our bylaws
contain a provision exempting from the control share acquisition statute any and
all acquisitions by any person of our stock. We cannot assure you that such
provision will not be amended or eliminated at any time in the
future.
Subtitle 8
Subtitle 8 of
Title 3 of the MGCL permits a Maryland corporation with a class of equity
securities registered under the Exchange Act and at least three independent
directors to elect to be subject, by provision in its charter or bylaws or a
resolution of its board of directors and notwithstanding any contrary provision
in the charter or bylaws, to any or all of five provisions:
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a classified board;
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a two-thirds vote requirement for removing
a director;
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a requirement that the number of directors
be fixed only by vote of the directors;
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a requirement that a vacancy on the board
be filled only by the remaining directors and for the remainder of the
full term of the directorship in which the vacancy occurred; and
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a majority requirement for the calling of
a special meeting of stockholders.
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We have
elected, at such time as we are eligible to make the election provided for under
Subtitle 8, to provide that vacancies on our board of directors may be filled
only by the remaining directors and for the remainder of the full term of the
directorship in which the vacancy occurred. Through provisions in our charter
and bylaws unrelated to Subtitle 8, we already vest in our board of directors
the exclusive power to fix the number of directorships.
Dissolution or Termination of Our Company
We are an
infinite-life corporation which may be dissolved under the MGCL at any time by
the affirmative vote of a majority of our entire board and of stockholders
entitled to cast at least a majority of all the votes entitled to be cast on the
matter. Our operating partnership has a perpetual existence. Depending upon then
prevailing market conditions, it is our intention to consider beginning the
process of listing our shares of common stock, or liquidating our assets and
distributing the net proceeds to our stockholders within four to six years after
the termination of our offering stage. See “Investment Strategy, Objectives and
Policies — Listing or Liquidation Policy.”
Advance Notice of Director Nominations and New Business
Our bylaws
provide that with respect to an annual meeting of stockholders, nominations of
individuals for election to the board of directors and the proposal of business
to be considered by stockholders may be made only (1) pursuant to our notice of
the meeting, (2) by the board of directors or (3) by a stockholder who is
entitled to vote at the meeting and who has complied with the advance notice
procedures of the bylaws. With respect to special meetings of stockholders, only
the business specified in our notice of the meeting may be brought before the
meeting. Nominations of individuals for election to the board of directors at a
special meeting may be made only (1) pursuant to our notice of the meeting, (2)
by the board of directors or (3) provided that the board of directors has
determined that directors will be elected at the meeting, by a stockholder who
is entitled to vote at the meeting and who has complied with the advance notice
provisions of the bylaws.
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THE OPERATING PARTNERSHIP
AGREEMENT
General
Bluerock
Enhanced Multifamily Holdings, L.P., which we refer to as our operating
partnership, is a newly formed Delaware limited partnership. We expect to own
substantially all of our assets and conduct our operations through the operating
partnership. We are the sole general partner of the operating partnership and,
as of the date of this prospectus, our wholly owned subsidiary, Bluerock REIT
Holdings, LLC, is the sole limited partner of the operating partnership. As the
sole general partner, we have the exclusive power to manage and conduct the
business of the operating partnership.
As we accept
subscriptions for shares in this offering, we will transfer substantially all of
the net proceeds of the offering to our operating partnership as a capital
contribution in exchange for units of limited partnership interest that will be
held by our wholly owned subsidiary, Bluerock REIT Holdings, LLC; however, we
will be deemed to have made capital contributions in the amount of the gross
offering proceeds received from investors. The operating partnership will be
deemed to have simultaneously paid the selling commissions and other costs
associated with the offering.
As a result
of this structure, we are considered an UPREIT, or an umbrella partnership real
estate investment trust. An UPREIT is a structure that REITs often use to
acquire real property from sellers on a tax-deferred basis because the sellers
can generally accept partnership units and defer taxable gain otherwise required
to be recognized by them upon the disposition of their properties. Such sellers
may also desire to achieve diversity in their investment and other benefits
afforded to stockholders in a REIT. For purposes of satisfying the asset and
income tests for qualification as a REIT, the REIT’s proportionate share of the
assets and income of the operating partnership will be deemed to be assets and
income of the REIT.
If we ever
decide to acquire properties in exchange for units of limited partnership
interest in the operating partnership, we expect to amend and restate the
partnership agreement to provide substantially as set forth below.
Capital Contributions
We would
expect the partnership agreement to require us to contribute the proceeds of any
offering of our shares of stock to the operating partnership as an additional
capital contribution. If we did contribute additional capital to the operating
partnership, we would receive additional partnership interests and our
percentage interest in the operating partnership would be increased on a
proportionate basis based upon the amount of such additional capital
contributions and the value of the operating partnership at the time of such
contributions. We also expect that the partnership agreement would allow us to
cause the operating partnership to issue partnership interests for less than
their fair market value if we conclude in good faith that such issuance is in
the best interest of the operating partnership and us. The operating partnership
would also be able to issue preferred partnership interests in connection with
acquisitions of property or otherwise. These preferred partnership interests
could have priority over common partnership interests with respect to
distributions from the operating partnership, including priority over the
partnership interests that we would own as a limited partner. If the operating
partnership would require additional funds at any time in excess of capital
contributions made by us or from borrowing, we could borrow funds from a
financial institution or other lender and lend such funds to the operating
partnership on the same terms and conditions as are applicable to our borrowing
of such funds.
Operations
We would
expect the partnership agreement to provide that, so long as we remain qualified
as a REIT, the operating partnership would be operated in a manner that would
enable us to satisfy the requirements for being classified as a REIT for tax
purposes. We would also have the power to take actions to ensure that the
operating partnership would not be classified as a “publicly traded partnership”
for purposes of Section 7704 of the Code. Classification as a publicly traded
partnership could result in the operating partnership being taxed as a
corporation, rather than as a partnership.
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Distributions and Allocations of Profits and Losses
The
partnership agreement would provide that the operating partnership would
distribute cash flow from operations to its partners in accordance with their
respective percentage interests on at least a monthly basis in amounts that we
determine. The effect of these distributions would be that a holder of one unit
of limited partnership interest in our operating partnership would receive the
same amount of annual cash flow distributions as the amount of annual
distributions paid to the holder of one of our shares of common
stock.
Similarly,
the partnership agreement would provide that the operating partnership would
allocate taxable income to its partners in accordance with their respective
percentage interests. Subject to compliance with the provisions of Sections
704(b) and 704(c) of the Code and the corresponding Treasury regulations, the
effect of these allocations would be that a holder of one unit of limited
partnership interest in the operating partnership would be allocated taxable
income for each taxable year in an amount equal to the amount of taxable income
to be recognized by a holder of one of our shares of common stock. Losses, if
any, would generally be allocated among the partners in accordance with their
respective percentage interests in the operating partnership. Losses could not
be passed through to our stockholders.
Upon
liquidation of the operating partnership, after payment of, or adequate
provision for, debts and obligations of the operating partnership, including
partner loans, any remaining assets of the operating partnership would be
distributed to its partners in accordance with their respective positive capital
account balances.
Rights, Obligations and Powers of the General Partner
We would
expect to be the sole general partner of the operating partnership. As sole
general partner, we generally would have complete and exclusive discretion to
manage and control the operating partnership’s business and to make all
decisions affecting its assets. Under an amended and restated partnership
agreement, we would also expect to have the authority to:
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acquire, purchase, own, operate, lease and
dispose of any real property and any other assets;
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construct buildings and make other
improvements on owned or leased properties;
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authorize, issue, sell, redeem or
otherwise purchase any debt or other securities;
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borrow or loan money;
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originate loans;
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make or revoke any tax election;
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maintain insurance coverage in amounts and
types as we determine is necessary;
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retain employees or other service
providers;
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form or acquire interests in joint
ventures; and
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merge, consolidate or combine the
operating partnership with another entity.
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As it will
upon commencement of this offering, under an amended and restated partnership
agreement, we expect that the operating partnership would pay all of the
administrative and operating costs and expenses it incurs in acquiring and
operating real properties. The operating partnership would also pay all of our
administrative costs and expenses and such expenses would be treated as expenses
of the operating partnership. Such expenses would include:
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all expenses relating to our formation and
continuity of existence;
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all expenses relating to the public
offering and registration of our securities;
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all expenses associated with the
preparation and filing of our periodic reports under federal, state or
local laws or regulations;
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all expenses associated with our
compliance with applicable laws, rules and regulations; and
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all of our other operating or
administrative costs incurred in the ordinary course of
business.
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The only
costs and expenses we could incur that the operating partnership would not
reimburse would be costs and expenses relating to properties we may own outside
of the operating partnership. We would pay the expenses relating to such
properties directly.
Exchange Rights
We expect
that an amended and restated partnership agreement would also provide for
exchange rights. We expect the limited partners of the operating partnership
would have the right to cause the operating partnership to redeem their units of
limited partnership interest for cash equal to the value of an equivalent number
of our shares, or, at our option, we could purchase their units of limited
partnership interest for cash or by issuing one share of our common stock for
each unit redeemed. Limited partners, however, would not be able to exercise
this exchange right if and to the extent that the delivery of our shares upon
such exercise would:
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result in any person owning shares in
excess of the ownership limit in our charter (unless exempted by our board
of directors);
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result in our shares being owned by fewer
than 100 persons;
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result in our shares being “closely held”
within the meaning of Section 856(h) of the Code; or
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cause us to own 10% or more of the
ownership interests in a tenant within the meaning of Section 856(d)(2)(B)
of the Code.
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Furthermore,
limited partners could exercise their exchange rights only after their units of
limited partnership interest had been outstanding for one year. A limited
partner could not deliver more than two exchange notices each calendar year and
would not be able to exercise an exchange right for less than 1,000 units of
limited partnership interest, unless such limited partner held less than 1,000
units. In that case, he would be required to exercise his exchange right for all
of his units.
Change in General Partner
We expect
that we generally would not be able to withdraw as the general partner of the
operating partnership or transfer our general partnership interest in the
operating partnership (unless we transferred our interest to a wholly owned
subsidiary). The principal exception to this would be if we merged with another
entity and (1) the holders of a majority of partnership units (including those
we held) approved the transaction; (2) the limited partners received or had the
right to receive an amount of cash, securities or other property equal in value
to the amount they would have received if they had exercised their exchange
rights immediately before such transaction; (3) we were the surviving entity and
our stockholders did not receive cash, securities or other property in the
transaction; or (4) the successor entity contributed substantially all of its
assets to the operating partnership in return for an interest in the operating
partnership and agreed to assume all obligations of the general partner of the
operating partnership. If we voluntarily sought protection under bankruptcy or
state insolvency laws, or if we were involuntarily placed under such protection
for more than 90 days, we would be deemed to be automatically removed as the
general partner. Otherwise, the limited partners would not have the right to
remove us as general partner.
Transferability of Interests
With certain
exceptions, the limited partners would not be able to transfer their interests
in the operating partnership, in whole or in part, without our written consent
as the general partner.
Amendment of Limited Partnership Agreement
We expect
amendments to the amended and restated partnership agreement would require the
consent of the holders of a majority of the partnership units including the
partnership units we and our affiliates held. Additionally, we, as general
partner, would be required to approve any amendment. We expect that certain
amendments would have to be approved by a majority of the units held by
third-party limited partners.
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FEDERAL INCOME TAX
CONSIDERATIONS
The following
is a summary of the federal income tax considerations associated with an
investment in our common stock that may be relevant to you. The statements made
in this section of the prospectus are based upon current provisions of the Code
and Treasury Regulations promulgated thereunder, as currently applicable,
currently published administrative positions of the Internal Revenue Service and
judicial decisions, all of which are subject to change, either prospectively or
retroactively. We cannot assure you that any changes will not modify the
conclusions expressed in counsel’s opinions described herein. This summary does
not address all possible tax considerations that may be material to an investor
and does not constitute legal or tax advice. Moreover, this summary does not
deal with all tax aspects that might be relevant to you, as a prospective
stockholder, in light of your personal circumstances, nor does it deal with
particular types of stockholders that are subject to special treatment under the
federal income tax laws, such as insurance companies, holders whose shares are
acquired through the exercise of share options or otherwise as compensation,
holders whose shares are acquired through the distribution reinvestment plan or
who intend to sell their shares under the share redemption program, tax-exempt
organizations (except as provided below), financial institutions or
broker-dealers, or foreign corporations or persons who are not citizens or
residents of the United States (except as provided below). The Code provisions
governing the federal income tax treatment of REITs and their stockholders are
highly technical and complex, and this summary is qualified in its entirety by
the express language of applicable Code provisions, Treasury Regulations
promulgated thereunder and administrative and judicial interpretations
thereof.
The
statements in this section are based on the current federal income tax laws
governing qualification as a REIT. We cannot assure you that new laws,
interpretations thereof, or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be
inaccurate.
We urge you
to consult your own tax advisor regarding the specific tax consequences to you
of investing in our common stock and of our election to be taxed as a REIT.
Specifically, you should consult your own tax advisor regarding the federal,
state, local, foreign, and other tax consequences of such investment and
election, and regarding potential changes in applicable tax laws.
Taxation of Our Company
We intend to
elect to be taxed as a REIT commencing with our taxable year in which we satisfy
the minimum offering requirement. We believe that, commencing with such taxable
year, we will be organized and will operate in a manner so as to qualify as a
REIT under the federal income tax laws. We cannot assure you, however, that we
will qualify or remain qualified as a REIT. This section discusses the laws
governing the federal income tax treatment of a REIT and its stockholders, which
laws are highly technical and complex.
Alston &
Bird LLP has acted as tax counsel to us in connection with this offering. Alston
& Bird LLP is of the opinion 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. Alston &
Bird LLP’s opinion is based solely on our representations with respect to
factual matters concerning our business operations and our properties. Alston
& Bird LLP has not independently verified these facts. In addition, our
qualification as a REIT depends, among other things, upon our meeting the
requirements of Sections 856 through 860 of the Code throughout each year.
Accordingly, because our satisfaction of such requirements will depend upon
future events, including the final determination of financial and operational
results, no assurance can be given that we will satisfy the REIT requirements
commencing with our taxable year in which we satisfy the minimum offering
requirement or in any future year.
Our REIT
qualification depends on our ability to meet on a continuing basis several
qualification tests set forth in the federal tax laws. Those qualification tests
involve the percentage of income that we earn from specified sources, the
percentage of our assets that fall within specified categories, the diversity of
our share ownership, and the percentage of our earnings that we distribute. We
describe the REIT qualification tests, and the consequences of our failure to
meet those tests, in more detail below. Alston & Bird LLP will not review
our compliance with those tests on a continuing basis. Accordingly, neither we
nor Alston & Bird LLP can assure you that we will satisfy those
tests.
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If we qualify
as a REIT, we generally will not be subject to federal income tax on the taxable
income that we distribute to our stockholders. The benefit of that tax treatment
is that it avoids the “double taxation,” which means taxation at both the
corporate and stockholder levels, that generally results from owning stock in a
corporation.
However, we
will be subject to federal tax in the following circumstances:
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we will pay federal income tax on taxable
income, including net capital gain, that we do not distribute to our
stockholders during, or within a specified time period after, the calendar
year in which the income is earned;
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we may be subject to the “alternative
minimum tax” on any items of tax preference that we do not distribute or
allocate to our stockholders;
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we will pay income tax at the highest
corporate rate on (1) net income from the sale or other disposition of
property acquired through foreclosure that we hold primarily for sale to
customers in the ordinary course of business and (2) other non-qualifying
income from foreclosure property;
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we will pay a 100% tax on our net income
from sales or other dispositions of property, other than foreclosure
property, that we hold primarily for sale to customers in the ordinary
course of business;
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if we fail to satisfy either the 75%
Income Test or the 95% Income Test, as described below under “— Income
Tests,” and nonetheless continue to qualify as a REIT because we meet
other requirements, we will pay a 100% tax on (1) the gross income
attributable to the greater of the amounts by which we fail the 75% and
95% Income Tests, multiplied by (2) a fraction intended to reflect our
profitability;
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if we fail to distribute during a calendar
year at least the sum of (1) 85% of our REIT ordinary net income for such
year, (2) 95% of our REIT capital gain net income for such year (unless an
election is made as provided below) and (3) any undistributed taxable
income from prior periods, we will pay a 4% excise tax on the excess of
such required distribution over the amount we actually
distributed;
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we may elect to retain and pay income tax
on our net long-term capital gain. In that case, a United States
stockholder would be taxed on its proportionate share of our undistributed
long-term capital gain and would receive a credit or refund for its
proportionate share of the tax we paid;
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if we fail certain of the REIT asset tests
and do not qualify for “de minimis” relief, we may be required to pay a
corporate level tax on the income generated by the assets that caused us
to violate the asset test;
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income earned by any of our taxable REIT
subsidiaries will be subject to tax at regular corporate rates;
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pursuant to provisions in recently enacted
legislation, if we should fail to satisfy the asset or other requirements
applicable to REITs, as described below, yet nonetheless maintain our
qualification as a REIT because there is reasonable cause for the failure
and other applicable requirements are met, we may be subject to an excise
tax. In that case, the amount of the tax will be at least $50,000 per
failure, and, in the case of certain asset test failures, will be
determined as the amount of net income generated by the assets in question
multiplied by the highest corporate tax rate (currently 35%) if that
amount exceeds $50,000 per failure; and
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if we acquire any asset from a C
corporation, or a corporation generally subject to full corporate-level
tax, in a merger or other transaction in which we acquire a tax basis
determined by reference to the C corporation’s basis in the asset, we will
pay tax at the highest regular corporate rate if we recognize gain on the
sale or disposition of such asset during the 10-year period after we
acquire such asset. The amount of gain on which we will pay tax is the
lesser of (1) the amount of gain that we recognize at the time of the sale
or disposition and (2) the amount of gain that we would have recognized if
we had sold the asset at the time we acquired the asset.
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Requirements for Qualification
Bluerock
Enhanced Multifamily Trust, Inc. is a corporation that, it is anticipated, will
meet the following requirements:
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(1)
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it is managed by one or more trustees or
directors;
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(2)
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its beneficial ownership is evidenced by
transferable shares, or by transferable certificates of beneficial
interest;
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(3)
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it would be taxable as a domestic
corporation, but for the REIT provisions of the federal income tax
laws;
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(4)
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it is neither a financial institution nor
an insurance company subject to specified provisions of the federal income
tax laws;
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(5)
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at least 100 persons are beneficial owners
of its shares or ownership certificates;
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(6)
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not more than 50% in value of its
outstanding shares or ownership certificates is owned, directly or
indirectly, by five or fewer individuals, including specified entities,
during the last half of any taxable year;
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(7)
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it elects to be a REIT, or has made such
election for a previous taxable year, and satisfies all relevant filing
and other administrative requirements established by the Internal Revenue
Service that must be met to elect and maintain REIT status;
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(8)
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it uses a calendar year for federal income
tax purposes and complies with the record keeping requirements of the
federal income tax laws; and
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(9)
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it meets other qualification tests,
described below, regarding the nature of its income and
assets.
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We must meet
requirements 1 through 4 during our entire taxable year and must meet
requirement 5 during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months. Requirements 5
and 6 will not apply to us until our second taxable year.
If we comply
with all the requirements for ascertaining the ownership of our outstanding
shares in a taxable year and have no reason to know that requirement 6 above was
violated, we will be deemed to have satisfied that requirement for such taxable
year. For purposes of determining share ownership under requirement 6, a
supplemental unemployment compensation benefits plan, a private foundation, and
a portion of a trust permanently set aside or used exclusively for charitable
purposes are each considered one individual owner. However, a trust that is a
qualified employee pension or profit sharing trust under the federal income tax
laws is not considered one owner but rather all of the beneficiaries of such a
trust will be treated as holding our shares in proportion to their actuarial
interests in the trust for purposes of requirement 6.
We plan to
issue sufficient common stock with sufficient diversity of ownership to satisfy
requirements 5 and 6 set forth above. In addition, our charter restricts the
ownership and transfer of our stock so that we should continue to satisfy
requirements 5 and 6. The provisions of our charter restricting the ownership
and transfer of our stock are described in “Description of Capital Stock —
Restrictions on Ownership and Transfer.”
A corporation
that is a “qualified REIT subsidiary” is not treated as a corporation separate
from its parent REIT. All assets, liabilities and items of income, deduction and
credit of a “qualified REIT subsidiary” are considered to be assets, liabilities
and items of income, deduction and credit of the REIT. A “qualified REIT
subsidiary” is a corporation, all of the capital stock of which is owned by the
REIT. Thus, in applying the requirements described herein, any of our “qualified
REIT subsidiaries” will be ignored, and all assets, liabilities and items of
income, deduction and credit of such subsidiaries will be considered to be
assets, liabilities and items of income, deduction and credit of our company. We
currently do not have any corporate subsidiaries, but we may have corporate
subsidiaries in the future.
Our operating
partnership is a wholly owned subsidiary of us, which means that is disregarded
as a separate entity from us for U.S. federal income tax purposes. Thus, the
assets, liabilities and items of income of our operating partnership will be
treated as assets, liabilities, and items of income of us for purposes of
applying the requirements described in this prospectus. In the event that a
disregarded subsidiary of ours, such as the operating partnership, ceases to be
wholly owned — for example, if any equity interest in the subsidiary is acquired
by a person other than us or another disregarded subsidiary of ours — the
subsidiary’s separate existence would no longer be disregarded for federal
income tax purposes. Instead, the subsidiary would have multiple owners and
would be treated as either a partnership or a taxable corporation. Such an event
could, depending on the circumstances, adversely affect our ability to satisfy
the various asset and gross income requirements applicable to REITs, including
the requirement that REITs generally may not own, directly or indirectly, more
than 10% of the securities of another corporation. See “—Asset Tests” and “—
Income Tests.”
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In the case
of a REIT that is a partner in a partnership, the REIT is treated as owning its
proportionate share of the assets of the partnership and as earning its
allocable share of the gross income of the partnership for purposes of the
applicable REIT qualification tests. In addition, the character of the assets
and gross income of the partnership will retain the same character in the hands
of the REIT for purposes of the REIT requirements, including the asset and
income tests described below.
The Code
provides relief from violations of the REIT gross income requirements, as
described below under “—Income Tests,” in cases where a violation is due to
reasonable cause and not willful neglect, and other requirements are met,
including the payment of a penalty tax that is based upon the magnitude of the
violation. In addition, the Code includes provisions that extend similar relief
in the case of certain violations of the REIT asset requirements and other REIT
requirements, again provided that the violation is due to reasonable cause and
not willful neglect, and other conditions are met, including the payment of a
penalty tax. If we fail to satisfy any of the various REIT requirements, there
can be no assurance that these relief provisions would be available to enable us
to maintain our qualification as a REIT, and, if available, the amount of any
resultant penalty tax could be substantial.
Income Tests
We must
satisfy two gross income tests annually to qualify and maintain our
qualification as a REIT. First, at least 75% of our gross income, excluding
gross income from prohibited transactions, for each taxable year must consist of
defined types of income that we derive, directly or indirectly, from investments
relating to real property or mortgages on real property or temporary investment
income. This test is referred to as the “75% Income Test.” Qualifying income for
purposes of the 75% Income Test includes:
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“rents from real property;”
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interest on debt or obligations secured by
mortgages on real property or on interests in real property; and
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dividends or other distributions on and
gain from the sale of shares in other REITs.
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Second, at
least 95% of our gross income, excluding gross income from prohibited
transactions, for each taxable year must consist of income that is qualifying
income for purposes of the 75% Income Test described above, dividends, other
types of interest, gain from the sale or disposition of stock or securities, or
any combination of the foregoing. This test is referred to as the “95% Income
Test.” The following paragraphs discuss the specific application of those tests
to our company.
Rents
and Interest
Rent that we
receive from our tenants will qualify as “rents from real property” in
satisfying the gross income requirements for a REIT described above only if the
following conditions are met:
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The amount of rent must not be based, in
whole or in part, on the income or profits of any person, but may be based
on a fixed percentage or percentages of receipts or sales.
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Neither we nor a direct or indirect owner
of 10% or more of our stock may own, actually or constructively, 10% or
more of a tenant from whom we receive rent, known as a “related party
tenant.”
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If the rent attributable to the personal
property leased in connection with a lease of our real property exceeds
15% of the total rent received under the lease, the rent that is
attributable to personal property will not qualify as “rents from real
property.”
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We generally
must not operate or manage our real property or furnish or render services to
our tenants, other than through a taxable subsidiary or an “independent
contractor” who is adequately compensated and from whom we do not derive
revenue. However, we need not provide services through an independent
contractor, but instead may provide services directly, if the services are
“usually or customarily rendered” in connection with the rental of space for
occupancy only and are not otherwise considered “rendered to the occupant.” In
addition, we may render a de minimis amount of “non-customary” services to the
tenants of a property, other than through a taxable subsidiary or an independent
contractor, as long as our income from the services does not exceed 1% of our
gross income from the property.
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As a result,
we may establish taxable REIT subsidiaries to hold assets generating
non-qualifying income. Rent paid by a taxable REIT subsidiary will constitute
rents from real property for purposes of the 75% and 95% Income Tests only if
the lease is respected as a true lease for federal income tax purposes and is
not treated as a service contract, joint venture or some other type of
arrangement. The determination of whether a lease is a true lease depends on an
analysis of all the surrounding facts and circumstances. Potential investors in
shares of our common stock should be aware, however, that there are no
controlling regulations, published administrative rulings or judicial decisions
involving leases with terms substantially similar to the contemplated leases
between our operating partnership and the a taxable REIT subsidiary that discuss
whether the leases constitute true leases for federal income tax purposes. We
intend to structure any leases with a taxable REIT subsidiary as true leases for
federal income tax purposes; however, there can be no assurance that the IRS or
a court will not assert a contrary position. If any of these leases are
re-characterized as service contracts or partnership agreements, rather than as
true leases, part or all of the payment that we receive from such taxable REIT
subsidiary would not be considered rent or would otherwise fail the various
requirements for qualification as rents from real property.
Additionally,
we may, from time to time, enter into hedging transactions with respect to
interest rate exposure on one or more of our assets or liabilities. Any such
hedging transactions could take a variety of forms, including the use of
derivative transactions such as interest rate swap contracts, interest rate cap
or floor contracts futures or forward contracts and options. Any income or gain
derived by us from instruments that hedge certain risks, such as the risk of
changes in interest rates or currency fluctuations, will not be treated as gross
income for purposes of either the 75% or the 95% Income Test, provided that
specified 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” (as described below
under “— Asset Tests”) 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). We intend to structure any hedging
transactions in a manner that does not jeopardize our status as a
REIT.
We may invest
the net offering proceeds in liquid assets such as government securities or
certificates of deposit. For purposes of the 75% Income Test, income
attributable to a stock or debt instrument purchased with the proceeds received
by a REIT in exchange for stock in the REIT (other than amounts received
pursuant to a distribution reinvestment plan) constitutes qualified temporary
investment income if such income is received or accrued during the one-year
period beginning on the date the REIT receives such new capital. To the extent
that we hold any proceeds of the offering for longer than one year, we may
invest those amounts in less liquid investments such as mortgage-backed
securities, maturing mortgage loans purchased from mortgage lenders or shares of
common stock in other REITs to satisfy the 75% and 95% Income Tests and the
Asset Tests described below. We expect the bulk of the remainder of our income
to qualify under the 75% and 95% Income Tests as gains from the sale of real
property interests, interest on mortgages on real property and rents from real
property in accordance with the requirements described above.
We do not
expect to charge rent for any of our properties that is based, in whole or in
part, on the income or profits of any person, except by reason of being based on
a fixed percentage of gross revenues, as described above. Furthermore, we have
represented that, to the extent that the receipt of such rent would jeopardize
our REIT status, we will not charge rent for any of our properties that is
based, in whole or in part, on the income or profits of any person. In addition,
we do not anticipate receiving rent from a related party tenant, and we have
represented that, to the extent that the receipt of such rent would jeopardize
our REIT status, we will not lease any of our properties to a related party
tenant. We also do not anticipate that we will receive rent attributable to the
personal property leased in connection with a lease of our real property that
exceeds 15% of the total rent received under the lease. Furthermore, we have
represented that, to the extent that the receipt of such rent would jeopardize
our REIT status, we will not allow the rent attributable to personal property
leased in connection with a lease of our real property to exceed 15% of the
total rent received under the lease. Finally, we do not expect to furnish or
render, other than under the 1% de minimis rule described above, “non-customary”
services to our tenants other than through an independent contractor, and we
have represented that, to the extent that the provision of such services would
jeopardize our REIT status, we will not provide such services to our tenants
other than through an independent contractor.
If our rent
attributable to the personal property leased in connection with a lease of our
real property exceeds 15% of the total rent we receive under the lease for a
taxable year, the portion of the rent that is attributable to
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personal property will not be qualifying income
for purposes of either the 75% or 95% Income Test. Thus, if such rent
attributable to personal property, plus any other income that we receive during
the taxable year that is not qualifying income for purposes of the 95% Income
Test, exceeds 5% of our gross income during the year, we would lose our REIT
status. Furthermore, if either (1) the rent we receive under a lease of our
property is considered based, in whole or in part, on the income or profits of
any person or (2) the tenant under such lease is a related party tenant, none of
the rent we receive under such lease would qualify as “rents from real
property.” In that case, if the rent we receive under such lease, plus any other
income that we receive during the taxable year that is not qualifying income for
purposes of the 95% Income Test, exceeds 5% of our gross income during the year,
we would lose our REIT status. Finally, if the rent we receive under a lease of
our property does not qualify as “rents from real property” because we furnish
non-customary services to the tenant under such lease, other than through a
qualifying independent contractor or under the 1% de minimis exception described
above, none of the rent we receive from the related party would qualify as
“rents from real property.” In that case, if the rent we receive from such
property, plus any other income that we receive during the taxable year that is
not qualifying income for purposes of the 95% Income Test, exceeds 5% of our
gross income during the year, we would lose our REIT status.
To the extent
that we receive from our tenants reimbursements of amounts that the tenants are
obligated to pay to third parties or penalties for the nonpayment or late
payment of such amounts, those amounts should qualify as “rents from real
property.” However, to the extent that we receive interest accrued on the late
payment of the rent or other charges, that interest will not qualify as “rents
from real property,” but instead will be qualifying income for purposes of the
95% Income Test. We may receive income not described above that is not
qualifying income for purposes of the gross income tests. We will monitor the
amount of non-qualifying income that our assets produce and we will manage our
portfolio to comply at all times with the gross income tests.
For purposes
of the 75% and 95% Income Tests, the term “interest” generally excludes any
amount that is based in whole or in part on the income or profits of any person.
However, the term “interest” generally does not exclude an amount solely because
it is based on a fixed percentage or percentages of receipts or sales.
Furthermore, if a loan contains a provision that entitles a REIT to a percentage
of the borrower’s gain upon the sale of the secured property or a percentage of
the appreciation in the property’s value as of a specific date, income
attributable to such provision will be treated as gain from the sale of the
secured property, which generally is qualifying income for purposes of the 75%
and 95% Income Tests. In addition, interest received on debt obligations that
are not secured by a mortgage on real property may not be qualified income, and
would be excluded from income for purposes of the 75% and 95% Income
Tests.
Failure to Satisfy Income Tests
If we fail to
satisfy one or both of the 75% and 95% Income Tests for any taxable year, we
nevertheless may qualify as a REIT for such year if we qualify for relief under
the relief provisions of the federal income tax laws. Those relief provisions
generally will be available if:
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our failure to meet such tests is due to
reasonable cause and not due to willful neglect;
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we attach a schedule of the sources of our
income to our tax return; and
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any incorrect information on the schedule
was not due to fraud with intent to evade tax.
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We cannot
predict, however, whether in all circumstances we would qualify for the relief
provisions. In addition, as discussed above in “— Taxation of Our Company,” even
if the relief provisions apply, we would incur a 100% tax on the gross income
attributable to the greater of the amounts by which we fail the 75% and 95%
Income Tests, multiplied by a fraction intended to reflect our
profitability.
Prohibited Transaction Rules
A REIT will
incur a 100% tax on the net income derived from any sale or other disposition of
property, other than foreclosure property, that the REIT holds primarily for
sale to customers in the ordinary course of a trade or business. We anticipate
that none of our assets will be held for sale to customers and that a sale of
any such asset would not be in the ordinary course of our business. Whether a
REIT holds an asset “primarily for sale to customers in the ordinary course of a
trade or business” depends, however, on the facts and circumstances in effect
from time
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to time, including those related to a particular
asset. Nevertheless, we will attempt to comply with the terms of safe-harbor
provisions in the federal income tax laws prescribing when an asset sale will
not be characterized as a prohibited transaction, and will otherwise attempt to
avoid any sale of assets that will be treated as being held “primarily for sale
to customers in the ordinary course of a trade or business.” We cannot provide
assurance, however, that we can comply with such safe-harbor provisions or that
we will avoid owning property that may be characterized as property that we hold
“primarily for sale to customers in the ordinary course of a trade or
business.”
Foreclosure Property
Foreclosure
property is real property and any personal property incident to such real
property (1) that we acquire as the result of having bid on the property at
foreclosure, or having otherwise reduced the property to ownership or possession
by agreement or process of law, after a default (or upon imminent default) on a
lease of the property or a mortgage loan held by us and secured by the property,
(2) for which we acquired the related loan or lease at a time when default was
not imminent or anticipated and (3) with respect to which we made a proper
election to treat the property as foreclosure property. We generally will be
subject to tax at the maximum corporate rate (currently 35%) on any net income
from foreclosure property, including any gain from the disposition of the
foreclosure property, other than income that would otherwise be qualifying
income for purposes of the 75% gross income test. Any gain from the sale of
property for which a foreclosure property election has been made will not be
subject to the 100% tax on gains from prohibited transactions described above,
even if the property would otherwise constitute inventory or dealer property. To
the extent that we receive any income from foreclosure property that does not
qualify for purposes of the 75% gross income test, we intend to make an election
to treat the related property as foreclosure property.
Taxable Mortgage Pools and Excess Inclusion Income
An entity, or
a portion of an entity, may be classified as a taxable mortgage pool, or “TMP,”
under the Code if:
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substantially all of its assets consist of
debt obligations or interests in debt obligations;
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more than 50% of those debt obligations
are real estate mortgages or interests in real estate mortgages as of
specified testing dates;
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the entity has issued debt obligations
(liabilities) that have two or more maturities; and
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the payments required to be made by the
entity on its debt obligations (liabilities) “bear a relationship” to the
payments to be received by the entity on the debt obligations that it
holds as assets.
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Under
regulations issued by the U.S. Treasury Department, if less than 80% of the
assets of an entity (or a portion of an entity) consist of debt obligations,
these debt obligations are considered not to comprise “substantially all” of its
assets, and therefore the entity would not be treated as a TMP. Our financing
and securitization arrangements may give rise to TMPs with the consequences as
described below.
Where an
entity, or a portion of an entity, is classified as a TMP, it is generally
treated as a taxable corporation for federal income tax purposes. In the case of
a REIT, or a portion of a REIT, or a disregarded subsidiary of a REIT, that is a
TMP, however, special rules apply. The TMP is not treated as a corporation that
is subject to corporate income tax, and the TMP classification does not directly
affect the tax qualification of the REIT. Rather, the consequences of the TMP
classification would, in general, except as described below, be limited to the
stockholders of the REIT.
A portion of
the REIT’s income from the TMP arrangement, which might be noncash accrued
income, could be treated as excess inclusion income. Under recently issued IRS
guidance, the REIT’s excess inclusion income, including any excess inclusion
income from a residual interest in a REMIC, must be allocated among its
stockholders in proportion to distributions paid. The REIT is required to notify
stockholders of the amount of “excess inclusion income” allocated to them. A
stockholder’s share of excess inclusion income:
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cannot be offset by any net operating
losses otherwise available to the stockholder;
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is subject to tax as unrelated business
taxable income in the hands of most types of stockholders that are
otherwise generally exempt from federal income tax; and
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results in the application of U.S. federal
income tax withholding at the maximum rate (30%), without reduction for
any otherwise applicable income tax treaty or other exemption, to the
extent allocable to most types of foreign stockholders.
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See “—
Taxation of Taxable U.S. Stockholders.” Under recently issued IRS guidance, to
the extent that excess inclusion income is allocated from a TMP to a tax-exempt
stockholder of a REIT that is not subject to unrelated business income tax (such
as a government entity), the REIT will be subject to tax on this income at the
highest applicable corporate tax rate (currently 35%). In this case, we are
authorized to reduce and intend to reduce distributions to such stockholders by
the amount of such tax paid by the REIT that is attributable to such
stockholder’s ownership. Treasury regulations provide that such a reduction in
distributions does not give rise to a preferential dividend that could adversely
affect the REIT’s compliance with its distribution requirements. See “—
Distribution Requirements.” The manner in which excess inclusion income is
calculated, or would be allocated to stockholders, including allocations among
shares of different classes of stock, remains unclear under current law. As
required by IRS guidance, we intend to make such determinations using a
reasonable method. Tax-exempt investors, foreign investors and taxpayers with
net operating losses should carefully consider the tax consequences described
above, and are urged to consult their tax advisors.
If a
subsidiary partnership of ours that we do not wholly own, directly or through
one or more disregarded entities, were a TMP, the foregoing rules would not
apply. Rather, the partnership that is a TMP would be treated as a corporation
for federal income tax purposes and potentially could be subject to corporate
income tax or withholding tax. In addition, this characterization would alter
our income and asset test calculations and could adversely affect our compliance
with those requirements. We intend to monitor the structure of any TMPs
(including whether a taxable REIT subsidiary election might be made in respect
of any such TMP) in which we have an interest to ensure that they will not
adversely affect our qualification as a REIT.
Asset
Tests
To qualify as
a REIT, we also must satisfy two asset tests at the close of each quarter of
each taxable year. First, at least 75% of the value of our total assets must
consist of:
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cash or cash items, including receivables
specified in the federal tax laws;
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government securities;
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interests in mortgages on real property;
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stock of other REITs;
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investments in stock or debt instruments
but only during the one-year period following our receipt of new capital
that we raise through equity offerings or offerings of debt with a term of
at least five years; and/or
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interests in real property, including
leaseholds and options to acquire real property and
leaseholds.
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The second
asset test has two components. First, of our investments not included in the 75%
asset class, the value of our interest in any one issuer’s securities may not
exceed 5% of the value of our total assets. Second, we may not own more than 10%
of any one issuer’s outstanding securities as measured by vote or value. For
purposes of both components of the second asset test, “securities” does not
include our stock in other REITs or any qualified REIT subsidiary or our
interest in any partnership, including our operating partnership.
We anticipate
that, at all relevant times, (1) at least 75% of the value of our total assets
will be represented by real estate assets, cash and cash items, including
receivables, and government securities and (2) we will not own any securities in
violation of the 5% or 10% asset tests. In addition, we will monitor the status
of our assets for purposes of the various asset tests and we will manage our
portfolio to comply at all times with such tests.
Our company
is allowed to own up to 100% of the stock of taxable REIT subsidiaries which can
perform activities unrelated to our tenants, such as third-party management,
development, and other independent business activities, as well as provide
services to our tenants. We and our subsidiary must elect for the subsidiary to
be treated as a taxable REIT subsidiary. We may not own more than 10% of the
voting power or value of the stock of a taxable subsidiary that is not treated
as a taxable REIT subsidiary. This test is referred to as the “10% Asset Test.”
Overall, no more than 25% of our assets can consist of securities of taxable
REIT subsidiaries, determined on a quarterly basis.
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Any interest
that we hold in a real estate mortgage investment conduit, or REMIC, will
generally qualify as real estate assets and income derived from REMIC interests
will generally be treated as qualifying income for purposes of the REIT Income
Tests described above. If less than 95% of the assets of a REMIC are real estate
assets, however, then only a proportionate part of our interest in the REMIC and
income derived from the interest will qualify for purposes of the REIT asset and
income tests. If we hold a “residual interest” in a REMIC from which we derive
“excess inclusion income,” we will be required either to distribute the excess
inclusion income or to pay tax on it (or a combination of the two), even though
we may not receive the income in cash. To the extent that distributed excess
inclusion income is allocable to a particular stockholder, the income (1) would
not be allowed to be offset by any net operating losses otherwise available to
the stockholder, (2) would be subject to tax as unrelated business taxable
income in the hands of most types of stockholders that are otherwise generally
exempt from federal income tax and (3) would result in the application of U.S.
federal income tax withholding at the maximum rate (30%), without reduction
pursuant to any otherwise applicable income tax treaty, to the extent allocable
to most types of foreign stockholders. Moreover, any excess inclusion income
that we receive that is allocable to specified categories of tax-exempt
investors which are not subject to unrelated business income tax, such as
government entities, may be subject to corporate-level income tax in our hands,
regardless of whether it is distributed.
To the extent
that we hold mortgage participations or CMBS that do not represent REMIC
interests, such assets may not qualify as real estate assets, and the income
generated from them may not qualify for purposes of either or both of the 75%
and 95% Income Tests, depending upon the circumstances and the specific
structure of the investment.
We may also
hold certain participation interests, including B-Notes, in mortgage loans and
subordinated loans originated by other lenders. B-Notes are interests in
underlying loans created by virtue of participations or similar agreements to
which the originator of the loans is a party, along with one or more
participants. The borrower on the underlying loans is typically not a party to
the participation agreement. The performance of this investment depends upon the
performance of the underlying loans and, if the underlying borrower defaults,
the participant typically has no recourse against the originator of the loans.
The originator often retains a senior position in the underlying loans and
grants junior participations which absorb losses first in the event of a default
by the borrower. We generally expect to treat our participation interests as
qualifying real estate assets for purposes of the REIT asset tests and interest
that we derive from such investments as qualifying mortgage interest for
purposes of the 75% Income Test. The appropriate treatment of participation
interests for federal income tax purposes is not entirely certain, however, and
no assurance can be given that the IRS will not challenge our treatment of our
participation interests. In the event of a determination that such participation
interests do not qualify as real estate assets, or that the income that we
derive from such participation interests does not qualify as mortgage interest
for purposes of the REIT asset and income tests, we could be subject to a
penalty tax, or could fail to qualify as a REIT.
If we choose
to invest in subordinated loans, certain of them may qualify for the safe harbor
in Revenue Procedure 2003-65 pursuant to which certain loans secured by a first
priority security interest in ownership interests in a partnership or limited
liability company will be treated as qualifying assets for purposes of the 75%
real estate asset test and the 10% Asset Test. We may make some subordinated
loans that do not qualify for that safe harbor and that do not qualify as
“straight debt” securities or for one of the other exclusions from the
definition of “securities” for purposes of the 10% Asset Test. We intend to make
such investments in such a manner as not to fail the asset test described
above.
The Asset
Tests must generally be met for any quarter in which we acquire securities or
other property. Upon full investment of the net offering proceeds we expect that
most of our assets will consist of “real estate assets,” and we therefore expect
to satisfy the Asset Tests.
If we should
fail to satisfy the asset tests at the end of a calendar quarter, we would not
lose our REIT status if (1) we satisfied the asset tests at the close of the
preceding calendar quarter and (2) the discrepancy between the value of our
assets and the asset test requirements arose from changes in the market values
of our assets and was not wholly or partly caused by an acquisition of one or
more non-qualifying assets. If we did not satisfy the condition described in
clause (2) of the preceding sentence, we still could avoid disqualification as a
REIT by eliminating any discrepancy within 30 days after the close of the
calendar quarter in which the discrepancy arose.
To the extent
that we fail one or more of the asset tests and we do not fall within the de
minimis safe harbors with respect to the 5% and 10% asset tests, we may
nevertheless be deemed to have satisfied such requirements if
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(1) we take certain corrective measures, (2) we
meet certain technical requirements and (3) we pay a specified excise tax (the
greater of (A) $50,000 or (B) an amount determined by multiplying the highest
rate of corporate tax by the net income generated by the assets causing the
failure for the period beginning on the first date of the failure and ending on
the date that we dispose of the assets (or otherwise satisfy the asset test
requirements)).
The Code
contains a number of provisions applicable to REITs, including relief provisions
that make it easier for REITs to satisfy the asset requirements or to maintain
REIT qualification notwithstanding certain violations of the asset and other
requirements.
One such
provision allows a REIT which fails one or more of the asset requirements to
nevertheless maintain its REIT qualification if (1) it provides the IRS with a
description of each asset causing the failure, (2) the failure is due to
reasonable cause and not willful neglect, (3) the REIT pays a tax equal to the
greater of (A) $50,000 per failure and (B) the product of the net income
generated by the assets that caused the failure multiplied by the highest
applicable corporate tax rate (currently 35%) and (4) the REIT either disposes
of the assets causing the failure within six months after the last day of the
quarter in which it identifies the failure or otherwise satisfies the relevant
asset tests within that time frame.
A second
relief provision applies to de minimis violations of the 10% and 5% asset tests.
A REIT may maintain its qualification despite a violation of such requirements
if (1) the value of the assets causing the violation do not exceed the lesser of
1% of the REIT’s total assets and $10 million, or (2) the REIT either disposes
of the assets causing the failure within six months after the last day of the
quarter in which it identifies the failure, or the relevant tests are otherwise
satisfied within that time frame.
The Code also
provides that certain securities will not cause a violation of the 10% Asset
Test described above. Such securities include instruments that constitute
“straight debt,” which includes securities having certain contingency features.
A security cannot qualify as “straight debt” where a REIT (or a controlled
taxable REIT subsidiary of the REIT) owns other securities of the issuer of that
security which do not qualify as straight debt, unless the value of those other
securities constitute, in the aggregate, 1% or less of the total value of that
issuer’s outstanding securities. In addition to straight debt, the Code provides
that certain other securities will not violate the 10% Asset Test. Such
securities include (1) any loan made to an individual or an estate, (2) certain
rental agreements in which one or more payments are to be made in subsequent
years (other than agreements between a REIT and certain persons related to the
REIT), (3) any obligation to pay rents from real property, (4) securities issued
by governmental entities that are not dependent in whole or in part on the
profits of (or payments made by) a non-governmental entity, (5) any security
issued by another REIT and (6) any debt instrument issued by a partnership if
the partnership’s income is of a nature that it would satisfy the 75% gross
income test described above under “— Income Tests.” In addition, when applying
the 10% Asset Test, a debt security issued by a partnership is not taken into
account to the extent, if any, of the REIT’s proportionate equity interest in
that partnership.
No
independent appraisals will be obtained to support our conclusions as to the
value of our total assets or the value of any particular security or securities.
Moreover, values of some assets, including instruments issued in securitization
transactions, may not be susceptible to a precise determination, and values are
subject to change in the future. Furthermore, the proper classification of an
instrument as debt or equity for federal income tax purposes may be uncertain in
some circumstances, which could affect the application of the REIT asset
requirements. Accordingly, there can be no assurance that the IRS will not
contend that our interests in our subsidiaries or in the securities of other
issuers will not cause a violation of the REIT asset tests.
Distribution Requirements
To qualify as
a REIT, each taxable year we must make distributions, other than capital gain
dividends, deemed distributions of retained capital gain and income from
operations or sales through a TRS, to our stockholders in an aggregate amount at
least equal to:
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the sum of (1) 90% of our “REIT taxable
income,” computed without regard to the dividends paid deduction and
excluding our net capital gain or loss, and (2) 90% of our after-tax net
income, if any, from foreclosure property; minus
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the sum of specified items of non-cash
income.
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We must pay
such distributions in the taxable year to which they relate, or in the following
taxable year if we declare the distribution before we timely file our federal
income tax return for such year and pay the distribution on or before the first
regular dividend payment date after such declaration and no later than the close
of the subsequent tax year.
We will pay
federal income tax on any taxable income, including net capital gain, that we do
not distribute to our stockholders. Furthermore, if we fail to distribute during
a calendar year or, in the case of distributions with declaration and record
dates falling in the last three months of the calendar year, by the end of
January following such calendar year, at least the sum of:
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85% of our REIT ordinary income for such
year;
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95% of our REIT capital gain income for
such year; and
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any undistributed taxable income from
prior periods,
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we will incur a 4% nondeductible excise tax on
the excess of such required distribution over the amounts we actually
distributed. We may elect to retain and pay income tax on the net long-term
capital gain we receive in a taxable year. If we so elect, we will be treated as
having distributed any such retained amount for purposes of the 4% excise tax
described above. We intend to make timely distributions sufficient to satisfy
the annual distribution requirements.
From time to
time, we may experience timing differences between (1) our actual receipt of
income and actual payment of deductible expenses and (2) the inclusion of that
income and deduction of such expenses in arriving at our REIT taxable income. In
that case, we still would be required to recognize such excess as income in the
taxable year in which the difference arose even though we do have the
corresponding cash on hand. Further, it is possible that, from time to time, we
may be allocated a share of net capital gain attributable to the sale of
depreciated property which exceeds our allocable share of cash attributable to
that sale. Therefore, we may have less cash available for distribution than is
necessary to meet the applicable distribution requirement or to avoid corporate
income tax or the excise tax imposed on undistributed income. In such a
situation, we might be required to borrow money or raise funds by issuing
additional stock.
We may be
able to correct a failure to meet the distribution requirements for a year by
paying “deficiency dividends” to our stockholders in a later year. We may
include such deficiency dividends in our deduction for dividends paid for the
earlier year. Although we may be able to avoid income tax on amounts we
distribute as deficiency dividends, we will be required to pay interest and a
penalty to the Internal Revenue Service based on the amount of any deduction we
take for deficiency dividends.
As noted
above, we may also elect to retain, rather than distribute, our net long-term
capital gains. The effect of such an election would be as follows:
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we would be required to pay the federal
income tax on these gains;
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taxable U.S. stockholders, while required
to include their proportionate share of the undistributed long-term
capital gains in income, would receive a credit or refund for their share
of the tax paid by the REIT; and
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the basis of the stockholder’s shares of
common stock would be increased by the difference between the designated
amount included in the stockholder’s long-term capital gains and the tax
deemed paid with respect to such shares of common stock.
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In computing
our REIT taxable income, we will use the accrual method of accounting and intend
to depreciate depreciable property under the alternative depreciation system. We
are required to file an annual federal income tax return, which, like other
corporate returns, is subject to examination by the Internal Revenue Service.
Because the tax law requires us to make many judgments regarding the proper
treatment of a transaction or an item of income or deduction, it is possible
that the Internal Revenue Service will challenge positions we take in computing
our REIT taxable income and our distributions.
Issues could
arise, for example, with respect to the allocation of the purchase price of real
properties between depreciable or amortizable assets and non-depreciable or
non-amortizable assets such as land and the current deductibility of fees paid
to our advisor or its affiliates. Were the Internal Revenue Service to
successfully challenge our characterization of a transaction or determination of
our REIT taxable income, we could be found to have failed to
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satisfy a requirement for qualification as a
REIT. If, as a result of a challenge, we are determined to have failed to
satisfy the distribution requirements for a taxable year, we would be
disqualified as a REIT, unless we were permitted to pay a deficiency
distribution to our stockholders and pay interest thereon to the Internal
Revenue Service, as provided by the Code. A deficiency distribution cannot be
used to satisfy the distribution requirement, however, if the failure to meet
the requirement is not due to a later adjustment to our income by the Internal
Revenue Service.
Record Keeping Requirements
We must
maintain specified records in order to qualify as a REIT. In addition, to avoid
a monetary penalty, we must request on an annual basis information from our
stockholders designed to disclose the actual ownership of our outstanding stock.
We intend to comply with such requirements.
Failure to Qualify
If we fail to
qualify as a REIT in any taxable year, and no relief provision applies, we will
be subject to federal income tax and any applicable alternative minimum tax on
our taxable income at regular corporate rates. In such a year, we would not be
able to deduct amounts paid out to stockholders in calculating our taxable
income. In fact, we would not be required to distribute any amounts to our
stockholders in such year. In such event, to the extent of our current and
accumulated earnings and profits, all distributions to our stockholders would be
taxable as ordinary income. Subject to limitations in the federal income tax
laws, corporate stockholders might be eligible for the dividends received
deduction. Unless we qualified for relief under specific statutory provisions,
we also would be disqualified from taxation as a REIT for the four taxable years
following the year during which we ceased to qualify as a REIT. We cannot
predict whether in all circumstances we would qualify for such statutory
relief.
Sale-Leaseback Transactions
Some of our
investments may be in the form of sale-leaseback transactions. We normally
intend to treat these transactions as true leases for federal income tax
purposes. However, depending on the terms of any specific transaction, the
Internal Revenue Service might take the position that the transaction is not a
true lease but is more properly treated in some other manner. If such
recharacterization were successful, we would not be entitled to claim the
depreciation deductions available to an owner of the property. In addition, the
recharacterization of one or more of these transactions might cause us to fail
to satisfy the Asset Tests or the Income Tests described above based upon the
asset we would be treated as holding or the income we would be treated as having
earned, and such failure could result in our failing to qualify as a REIT.
Alternatively, the amount or timing of income inclusion or the loss of
depreciation deductions resulting from the recharacterization might cause us to
fail to meet the distribution requirement described above for one or more
taxable years absent the availability of the deficiency distribution procedure
or might result in a larger portion of our distributions being treated as
ordinary distribution income to our stockholders.
Investments in Taxable REIT Subsidiaries
We and
certain of our corporate subsidiaries may make a joint election for the
corporate subsidiary to be treated as a taxable REIT subsidiary of our REIT. A
domestic Taxable REIT subsidiary (or a foreign taxable REIT subsidiary with
income from a U.S. business) pays federal state and local income taxes at the
full applicable corporate rates on its taxable income prior to payment of any
dividends. To the extent we invest in any property outside of the U.S., a
taxable REIT subsidiary owning or leasing such property may pay foreign taxes.
The taxes owed by our taxable REIT subsidiaries could be substantial. To the
extent that our taxable REIT subsidiaries are required to pay federal, state,
local or foreign taxes, the cash available for distribution by us will be
reduced accordingly.
A taxable
REIT subsidiary is permitted to engage in certain kinds of activities that
cannot be performed directly by us without jeopardizing our REIT status.
However, several provisions regarding the arrangements between a REIT and its
taxable REIT subsidiary ensure that a taxable REIT subsidiary will be subject to
an appropriate level of federal income taxation. For example, the Code limits
the ability of our taxable REIT subsidiary to deduct interest payments in excess
of a certain amount made to us. In addition, we must pay a 100% tax on some
payments that we receive from, or on certain expenses deducted by, the taxable
REIT subsidiary if the economic arrangements between us, our tenants and the
taxable REIT subsidiary are not comparable to similar
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arrangements among unrelated parties. In
particular, this 100% tax would apply to our share of any rent paid by a taxable
REIT subsidiary that was determined to be in excess of a market rate rent. We
intend that all transactions between us and our taxable REIT subsidiaries will
be conducted on an arm’s length basis and, therefore, that the rent paid by our
taxable REIT subsidiaries to us will not be subject to the excise
tax.
Taxation of Taxable U.S. Stockholders
As long as we
qualify as a REIT, a taxable “U.S. stockholder” must take into account, as
ordinary income, distributions out of our current or accumulated earnings and
profits and that we do not designate as capital gain dividends or that we retain
as long-term capital gain. In 2003 Congress reduced the tax rate for qualified
dividend income to 15%. However, dividends from REITs generally are not subject
to this lower rate. REIT dividends paid to a U.S. stockholder that is a
corporation will not qualify for the dividends received deduction generally
available to corporations. As used herein, the term “U.S. stockholder” means a
holder of our common stock that for U.S. federal income tax purposes
is:
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a citizen or resident of the United
States;
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a corporation, partnership, or other
entity created or organized in or under the laws of the United States or
of an political subdivision thereof;
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an estate whose income from sources
without the United States is includable in gross income for U.S. federal
income tax purposes regardless of its connection with the conduct of a
trade or business within the United States; or
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any trust with respect to which (A) a U.S.
court is able to exercise primary supervision over the administration of
such trust and (B) one or more U.S. persons have the authority to control
all substantial decisions of the trust.
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A U.S.
stockholder generally will recognize distributions that we designate as capital
gain dividends as long-term capital gain without regard to the period for which
the U.S. stockholder has held its common stock. We generally will designate our
capital gain dividends as either 15% or 25% rate distributions. A corporate U.S.
stockholder, however, may be required to treat up to 20% of capital gain
dividends as ordinary income.
We may elect
to retain and pay income tax on the net long-term capital gain that is received
in a taxable year. In that case, a U.S. stockholder would be taxed on its
proportionate share of our undistributed long-term capital gain. The U.S.
stockholder would receive a credit or refund for its proportionate share of the
tax we paid. The U.S. stockholder would increase the basis in its stock by the
amount of its proportionate share of our undistributed long-term capital gain,
minus its share of the tax we paid.
If a
distribution exceeds our current and accumulated earnings and profits but does
not exceed the adjusted basis of a U.S. stockholder’s common stock, the U.S.
stockholder will not incur tax on the distribution. Instead, such distribution
will reduce the stockholder’s adjusted basis of the common stock. A U.S.
stockholder will recognize a distribution that exceeds both our current and
accumulated earnings and profits and the U.S. stockholder’s adjusted basis in
its common stock as long-term capital gain, or short-term capital gain if the
common stock has been held for one year or less, assuming the common stock is a
capital asset in the hands of the U.S. stockholder. In addition, if we declare a
distribution in October, November or December of any year that is payable to a
U.S. stockholder of record on a specified date in any such month, to the extent
of the REIT’s earnings and profits not already distributed, such distribution
shall be treated as both paid by us and received by the U.S. stockholder on
December 31 of such year, provided that we actually pay the distribution during
January of the following calendar year. We will notify U.S. stockholders after
the close of our taxable year as to the portions of the distributions
attributable to that year that constitute ordinary income or capital gain
dividends.
We will be
treated as having sufficient earnings and profits to treat as a distribution any
distribution by us up to the amount required to be distributed to avoid
imposition of the 4% excise tax discussed above. Moreover, any “deficiency
distribution” will be treated as an ordinary or capital gain distribution, as
the case may be, regardless of our earnings and profits. As a result,
stockholders may be required to treat as taxable some distributions that would
otherwise result in a tax-free return of capital.
If excess
inclusion income from a taxable mortgage pool or REMIC residual interest is
allocated to any stockholder, that income will be taxable in the hands of the
stockholder and would not be offset by any net operating
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losses of the stockholder that would otherwise
be available. See “— Taxable Mortgage Pools and Excess Inclusion Income.” As
required by IRS guidance, we intend to notify our stockholders if a portion of a
distribution paid by us is attributable to excess inclusion income.
Taxation of U.S. Stockholders on the Disposition of the Common
Stock
In general, a
U.S. stockholder who is not a dealer in securities must treat any gain or loss
realized upon a taxable disposition of the common stock as long-term capital
gain or loss if the U.S. stockholder has held the common stock for more than one
year and otherwise as short-term capital gain or loss. However, a U.S.
stockholder generally must treat any loss upon a sale or exchange of common
stock held by such stockholder for six months or less as a long-term capital
loss to the extent of capital gain dividends and other distributions from us
that such U.S. stockholder treats as long-term capital gain. All or a portion of
any loss a U.S. stockholder realizes upon a taxable disposition of the common
stock may be disallowed if the U.S. stockholder purchases other shares of such
common stock within 30 days before or after the disposition.
Capital Gains and Losses
A taxpayer
generally must hold a capital asset for more than one year for gain or loss
derived from its sale or exchange to be treated as long-term capital gain or
loss. The highest marginal individual income tax rate for the year 2008 is 35%.
The maximum tax rate on long-term capital gain applicable to non-corporate
taxpayers is 15% for sales and exchanges of assets held for more than one year.
For taxable years ending after December 31, 2010, the maximum tax rate on
long-term capital gains will increase to 20%. The maximum tax rate on long-term
capital gain from the sale or exchange of depreciable real property is 25% to
the extent that such gain would have been treated as ordinary income if the
property were a type of depreciable property other than real property. With
respect to distributions that we designate as capital gain dividends and any
retained capital gain that we are deemed to distribute, we generally may
designate whether such a distribution is taxable to our non-corporate
stockholders at a 15% or 25% rate. Thus, the tax rate differential between
capital gain and ordinary income for non-corporate taxpayers may be significant.
In addition, the characterization of income as capital gain or ordinary income
may affect the deductibility of capital losses. A non-corporate taxpayer may
deduct capital losses not offset by capital gains against its ordinary income
only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry
forward unused capital losses indefinitely. A corporate taxpayer must pay tax on
its net capital gain at ordinary corporate rates. A corporate taxpayer can
deduct capital losses only to the extent of capital gains, with unused losses
being carried back three years and forward five years.
Investments in Real Estate Outside the United States
We may invest
in real estate assets, directly or indirectly, in jurisdictions other than the
United States. Such assets may be subject to taxes in these non-U.S.
jurisdictions that ordinarily would give rise to foreign tax credits for U.S.
resident taxpayers. However, our anticipated investment structure will prevent
any of our U.S. stockholders from utilizing any foreign tax credits generated.
The foreign assets we acquire will either be held by us, an entity that intends
to qualify as a REIT, or through a taxable REIT subsidiary. Because we intend to
operate as a REIT and we are entitled to a dividends paid deduction, the foreign
tax credit limitation will prevent us from utilizing any foreign tax credits
with respect to property that we acquire directly to offset our income. As such,
we expect to only hold foreign real estate assets in low non-U.S. tax
jurisdictions directly. With respect to real estate assets located in high
non-U.S. tax jurisdictions, we expect to hold such assets through a taxable REIT
subsidiary so that such subsidiary may be able to utilize the foreign tax credit
to offset its U.S. taxable income. In either case, foreign taxes are not passed
through to our U.S. stockholders for purposes of calculating our U.S.
stockholders’ foreign tax credit.
Information Reporting Requirements and Backup Withholding
We will
report to our stockholders and to the Internal Revenue Service the amount of
distributions we pay during each calendar year, and the amount of tax we
withhold, if any. Under the backup withholding rules, a stockholder may be
subject to backup withholding at the rate of 28% with respect to distributions
unless such holder either:
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is a corporation or comes within another
exempt category and, when required, demonstrates this fact;
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provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and
otherwise complies with the applicable requirements of the backup
withholding rules.
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A stockholder
who does not provide us with its correct taxpayer identification number also may
be subject to penalties imposed by the Internal Revenue Service. Any amount paid
as backup withholding will be creditable against the stockholder’s income tax
liability. In addition, we may be required to withhold a portion of capital gain
distributions to any stockholders who fail to certify their non-foreign status
to us. The Treasury Department has issued regulations regarding the backup
withholding rules as applied to non-U.S. stockholders.
Taxation of Tax-Exempt Stockholders
Tax-exempt
entities, including qualified employee pension and profit sharing trusts and
individual retirement accounts and annuities, generally are exempt from federal
income taxation. However, they are subject to taxation on their unrelated
business taxable income. While many investments in real estate generate
unrelated business taxable income, the Internal Revenue Service has issued a
published ruling that dividend distributions from a REIT to an exempt employee
pension trust do not constitute unrelated business taxable income, provided that
the exempt employee pension trust does not otherwise use the shares of the REIT
in an unrelated trade or business of the pension trust. Based on that ruling,
amounts that we distribute to tax-exempt stockholders generally should not
constitute unrelated business taxable income. However, if a tax-exempt
stockholder were to finance its acquisition of the common stock with debt, a
portion of the income that it receives from us would constitute unrelated
business taxable income under the “debt-financed property” rules. To the extent
that we are (or a part of us or a disregarded subsidiary of ours is) a TMP, or
if we hold residual interests in a REMIC, a portion of the distributions paid to
a tax-exempt stockholder that is allocable to excess inclusion income may also
be treated as UBTI. We anticipate that our investments may generate excess
inclusion income. If, however, excess inclusion income is allocable to some
categories of tax-exempt stockholders that are not subject to UBTI, we will be
subject to corporate level tax on such income, and, in that case, we are
authorized to reduce and intend to reduce the amount of distributions to those
stockholders whose ownership gave rise to the tax. See “— Taxable Mortgage Pools
and Excess Inclusion Income.” As required by IRS guidance, we intend to notify
our stockholders if a portion of a distribution paid by us is attributable to
excess inclusion income. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts, and qualified group
legal services plans that are exempt from taxation under special provisions of
the federal income tax laws are subject to different unrelated business taxable
income rules, which generally will require them to characterize distributions
that they receive from us as unrelated business taxable income. Finally, in some
circumstances, a qualified employee pension or profit sharing trust that owns
more than 10% of our stock is required to treat a percentage of the dividends
that it receives from us as unrelated business taxable income. The percentage of
the dividends that the tax-exempt trust must treat as unrelated business taxable
income is equal to the gross income we derive from an unrelated trade or
business, determined as if our company were a pension trust, divided by our
total gross income for the year in which we pay the dividends. The unrelated
business taxable income rule applies to a pension trust holding more than 10% of
our stock only if:
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the percentage of the dividends that the
tax-exempt trust must otherwise treat as unrelated business taxable income
is at least 5%;
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we qualify as a REIT by reason of the
modification of the rule requiring that no more than 50% of our shares be
owned by five or fewer individuals that allows the beneficiaries of the
pension trust to be treated as holding our stock in proportion to their
actuarial interests in the pension trust; and
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either (A) one pension trust owns more
than 25% of the value of our stock or (B) a group of pension trusts
individually holding more than 10% of the value of our stock collectively
owns more than 50% of the value of our stock.
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Taxation of Non-U.S. Stockholders
The rules
governing U.S. federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships, and other foreign stockholders are complex.
This section is only a summary of such rules.
We urge those non-U.S. stockholders
to consult their own tax advisors to determine the impact of federal, state, and
local income tax laws on ownership of the common stock, including any reporting
requirements.
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A non-U.S.
stockholder that receives a distribution that is not attributable to gain from
our sale or exchange of U.S. real property interests, as defined below, and that
we do not designate as a capital gain dividend or retained capital gain will
recognize ordinary income to the extent that we pay such distribution out of our
current or accumulated earnings and profits. A withholding tax equal to 30% of
the gross amount of the distribution ordinarily will apply to such distribution
unless an applicable tax treaty reduces or eliminates the tax. However, if a
distribution is treated as effectively connected with the non-U.S. stockholder’s
conduct of a U.S. trade or business, the non-U.S. stockholder generally will be
subject to federal income tax on the distribution at graduated rates, in the
same manner as U.S. stockholders are taxed with respect to such distributions. A
non-U.S. stockholder may also be subject to the 30% branch profits tax. We plan
to withhold U.S. income tax at the rate of 30% on the gross amount of any such
distribution paid to a non-U.S. stockholder unless either:
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a lower treaty rate applies and the
non-U.S. stockholder files the required form evidencing eligibility for
that reduced rate with us; or
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the non-U.S. stockholder files an IRS Form
W-8ECI with us claiming that the distribution is effectively connected
income.
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Reduced
treaty rates and other exemptions are not available to the extent that income is
attributable to excess inclusion income allocable to the foreign stockholder.
Accordingly, we will withhold at a rate of 30% on any portion of a distribution
that is paid to a non-U.S. holder and attributable to that holder’s share of our
excess inclusion income. See “— Taxable Mortgage Pools and Excess Inclusion
Income.” As required by IRS guidance, we intend to notify our stockholders if a
portion of a distribution paid by us is attributable to excess inclusion
income.
The U.S.
Treasury Department has issued regulations with respect to the withholding
requirements for distributions made after December 31, 2000, and we will comply
with these regulations.
A non-U.S.
stockholder will not incur tax on the amount of a distribution that exceeds our
current and accumulated earnings and profits but does not exceed the adjusted
basis of its common stock. Instead, such a distribution will reduce the adjusted
basis of such stock. A non-U.S. stockholder will be subject to tax on a
distribution that exceeds both our current and accumulated earnings and profits
and the adjusted basis of its common stock, if the non-U.S. stockholder
otherwise would be subject to tax on gain from the sale or disposition of its
common stock, as described below. Because we generally cannot determine at the
time we make a distribution whether or not the distribution will exceed our
current and accumulated earnings and profits, we normally will withhold tax on
the entire amount of any distribution at the same rate as we would withhold on a
dividend. However, a non-U.S. stockholder may obtain a refund of amounts that we
withhold if it later determines that a distribution in fact exceeded our current
and accumulated earnings and profits.
For any year
in which we qualify as a REIT, a non-U.S. stockholder will incur tax on
distributions that are attributable to gain from our sale or exchange of “U.S.
real property interests” under special provisions of the federal income tax
laws. The term “U.S. real property interests” includes interests in U.S. real
property and stock in corporations at least 50% of whose assets consists of
interests in U.S. real property. Under those rules, a non-U.S. stockholder is
taxed on distributions attributable to gain from sales of U.S. real property
interests as if such gain were effectively connected with a U.S. business of the
non-U.S. stockholder. A non-U.S. stockholder thus would be taxed on such a
distribution at the normal capital gain rates applicable to U.S. stockholders
and might also be subject to the alternative minimum tax. A nonresident alien
individual also might be subject to a special alternative minimum tax. A
non-U.S. corporate stockholder not entitled to treaty relief or exemption also
may be subject to the 30% branch profits tax on such distributions. We must
withhold 35% of any distribution that we could designate as a capital gain
dividend. A non-U.S. stockholder will receive a credit against its tax liability
for the amount we withhold.
A non-U.S.
stockholder generally will not incur tax under the provisions applicable to
distributions that are attributable to gain from the sale of U.S. real property
interests on gain from the sale of its common stock as long as at all times
non-U.S. persons hold, directly or indirectly, less than 50% in value of our
stock. We cannot assure you that this test will be met. If the gain on the sale
of the common stock were taxed under those provisions, a non-U.S. stockholder
would be taxed in the same manner as U.S. stockholders with respect to such
gain, subject to applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals, and the possible
application of the 30% branch profits tax in the case of non-U.S. corporations.
Furthermore, a
124
non-U.S. stockholder will incur tax on gain not
subject to the provisions applicable to distributions that are attributable to
gain from the rule of U.S. real property interests if either:
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•
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the gain is effectively connected with the
non-U.S. stockholder’s U.S. trade or business, in which case the non-U.S.
stockholder will be subject to the same treatment as U.S. stockholders
with respect to such gain; or
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•
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the non-U.S. stockholder is a nonresident
alien individual who was present in the U.S. for 183 days or more during
the taxable year, in which case the non-U.S. stockholder will incur a 30%
tax on his capital gains.
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A capital
gain distribution will generally not be treated as income that is effectively
connected with a U.S. trade or business and will instead be treated the same as
an ordinary distribution from us, provided that (1) the capital gain
distribution is received with respect to a class of stock that is regularly
traded on an established securities market located in the United States and (2)
the recipient non-U.S. holder does not own more than 5% of that class of stock
at any time during the taxable year in which the capital gain distribution is
received. If such requirements are not satisfied, such distributions will be
treated as income that is effectively connected with a U.S. trade or business of
the non-U.S. holder without regard to whether the distribution is designated as
a capital gain distribution and, in addition, shall be subject to a 35%
withholding tax. We do not anticipate our common stock satisfying the “regularly
traded” requirement. Distributions subject to FIRPTA may also be subject to a
30% branch profits tax in the hands of a non-U.S. holder that is a corporation.
A distribution is not a USRPI capital gain if we held the underlying asset
solely as a creditor. Capital gain distributions received by a non-U.S. holder
from a REIT that are not USRPI capital gains are generally not subject to U.S.
income tax but may be subject to withholding tax.
Information Reporting Requirements and Backup Withholding for Non-U.S.
Stockholders
Non-U.S.
stockholders should consult their tax advisors with regard to U.S. information
reporting and backup withholding requirements under the Code.
Statement of Share Ownership
We are
required to demand annual written statements from the record holders of
designated percentages of our common stock disclosing the actual owners of the
shares of common stock. Any record stockholder who, upon our request, does not
provide us with required information concerning actual ownership of the shares
of common stock is required to include specified information relating to his
shares of common stock in his federal income tax return. We also must maintain,
within the Internal Revenue District in which we are required to file our
federal income tax return, permanent records showing the information we have
received about the actual ownership of our common stock and a list of those
persons failing or refusing to comply with our demand.
Other
Tax Considerations
We and/or you
may be subject to state and local tax in various states and localities,
including those states and localities in which we or you transact business, own
property, or reside. The state and local tax treatment in such jurisdictions may
differ from the federal income tax treatment described above. Consequently, you
should consult your own tax advisor regarding the effect of state and local tax
laws upon an investment in our common stock.
125
The following
is a summary of material considerations arising under ERISA and the prohibited
transaction provisions of the Code that may be relevant to a prospective
purchaser, including plans and arrangements subject to the fiduciary rules of
ERISA (“ERISA Plans”); plans and accounts that are not subject to ERISA but are
subject to the prohibited transaction rules of Section 4975 of the Code,
including IRAs, Keogh plans, and medical savings accounts (together with ERISA
Plans, “Benefit Plans” or “Benefit Plan Investors”); and governmental plans,
church plans, and foreign plans that are exempt from ERISA and the prohibited
transaction provisions of the Code but that may be subject to state law or other
requirements, which we refer to as Other Plans. This discussion does not address
all the aspects of ERISA, the Code or other laws that may be applicable to a
Benefit Plan or Other Plan, in light of their particular
circumstances.
In
considering whether to invest a portion of the assets of a Benefit Plan or Other
Plan, fiduciaries should consider, among other things, whether the
investment:
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•
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will be in accordance with the documents
and instruments covering the investments by such plan;
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•
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in the case of an ERISA plan, will satisfy
the prudence and diversification requirements of ERISA;
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•
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will result in unrelated business taxable
income to the plan;
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•
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will provide sufficient liquidity;
and
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•
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whether the plan fiduciary will be able to
value the asset in accordance with ERISA or other applicable law.
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ERISA and the
corresponding provisions of the Code prohibit a wide range of transactions
involving the assets of the Benefit Plan and persons who have specified
relationships to the Benefit Plan, who are “parties in interest” within the
meaning of ERISA and, “disqualified persons” within the meaning of the Code.
Thus, a designated plan fiduciary of a Benefit Plan considering an investment in
our shares should also consider whether the acquisition or the continued holding
of our shares might constitute or give rise to a prohibited transaction.
Fiduciaries of Other Plans should satisfy themselves that the investment is in
accord with applicable law.
The
Department of Labor has issued regulations that provide guidance on the
definition of plan assets under ERISA. These regulations also apply under the
Code for purposes of the prohibited transaction rules. Under the regulations, if
a plan acquires an equity interest in an entity which is neither a
“publicly-offered security” nor a security issued by an investment company
registered under the Investment Company Act, the plan’s assets would include
both the equity interest and an undivided interest in each of the entity’s
underlying assets unless an exception from the plan asset regulations
applies.
The
regulations define a publicly-offered security as a security that
is:
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“widely-held;”
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•
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“freely-transferable;” and
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•
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either part of a class of securities
registered under Section 12(b) or 12(g) of the Securities Exchange Act of
1934, or sold in connection with an effective registration statement under
the Securities Act of 1933, provided the securities are registered under
the Securities Exchange Act of 1934 within 120 days after the end of the
fiscal year of the issuer during which the offering occurred.
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Our shares of
common stock are being sold in connection with an effective registration
statement under the Securities Act of 1933.
The
regulations provide that a security is “widely held” only if it is part of a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A security will not fail to be widely held because
the number of independent investors falls below 100 subsequent to the initial
public offering as a result of events beyond the issuer’s control. Although we
anticipate that upon completion of the sale of the maximum offering, our common
stock will be “widely held,” our common stock will not be widely held until we
sell shares to 100 or more independent investors.
126
The
regulations list restrictions on transfer that ordinarily will not prevent
securities from being freely transferable. Such restrictions on transfer
include:
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•
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any restriction on or prohibition against
any transfer or assignment that would result in the termination or
reclassification of an entity for federal or state tax purposes, or that
otherwise would violate any federal or state law or court order;
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•
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any requirement that advance notice of a
transfer or assignment be given to the issuer;
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•
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any administrative procedure that
establishes an effective date, or an event, such as completion of an
offering, prior to which a transfer or assignment will not be effective;
and
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•
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any limitation or restriction on transfer
or assignment that is not imposed by the issuer or a person acting on
behalf of the issuer.
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We believe
that the restrictions imposed under our charter on the ownership and transfer of
our common stock will not result in the failure of our common stock to be
“freely transferable.” However, no assurance can be given that the Department of
Labor or the Treasury Department will not reach a contrary
conclusion.
Another
exception in the regulations provides that “plan assets” will not include any of
the underlying assets of an “operating company,” including a “real estate
operating company” or a “venture capital operating company.” To constitute a
“venture capital operating company” under the plan asset regulations, an entity
such as us must, on its initial valuation date and during each annual valuation
period, have at least 50% of its assets (valued at cost, excluding short-term
investments pending long-term commitment or distribution) invested in operating
companies with respect to which the entity obtains direct contractual rights to
participate significantly in management decisions, and must regularly exercise
its rights in the ordinary course of its business. To constitute a “real estate
operating company” under the plan asset regulation, an entity such as us must,
on its initial valuation date and during each annual valuation period, have at
least 50% of its assets (valued at cost, excluding short-term investments
pending long-term commitment or distribution) invested in real estate which is
managed or developed and with respect to which such entity has the right to
substantially participate directly in the management or development activities,
and must engage directly, in the ordinary course of its business, in real estate
management or development activities.
The
regulations further provide that “plan assets” will not include any of the
underlying assets of an entity if at all times less than 25% of the value of
each class of equity interests in the entity is held by Benefit Plans. We refer
to this as the “insignificant participation exception.” The interest of any
person (and their affiliates) who has discretionary authority over the control
of the assets of the entity or who provides investment advice for a fee with
respect to such assets is disregarded for purposes of applying the 25%
threshold. Because our common stock will not be “widely held” until we sell
shares to 100 or more independent investors, prior to the date that either our
common stock qualifies as a class of “publicly-offered securities” or we qualify
for another exception to the regulations, other than the insignificant
participation exception, Benefit Plan investors are prohibited from owning,
directly or indirectly, in the aggregate, 25% or more of our common stock.
Accordingly, our assets should not be deemed to be “plan assets” of any Benefit
Plan.
If the
underlying assets of our company were treated by the Department of Labor as
“plan assets,” the management of our company would be treated as fiduciaries
with respect to Benefit Plan stockholders and the prohibited transaction
restrictions of ERISA and the Code would apply unless an exception were
available. If the underlying assets of our company were treated as “plan
assets,” an investment in our company also might constitute an improper
delegation of fiduciary responsibility to our company under ERISA and expose the
ERISA Plan fiduciary to co-fiduciary liability under ERISA and might result in
an impermissible commingling of plan assets with other property.
If a
prohibited transaction were to occur, an excise tax equal to 15% of the amount
involved would be imposed under the Code, with an additional 100% excise tax if
the prohibited transaction is not “corrected.” Such taxes will be imposed on any
disqualified person who participates in the prohibited transaction. In addition,
our advisor and possibly other fiduciaries of plan stockholders subject to ERISA
who permitted such prohibited transaction to occur or who otherwise breached
their fiduciary responsibilities could be required to restore to the plan any
profits realized by these fiduciaries as a result of the transaction or beach.
With respect to an IRA or similar account that invests in our company, the
occurrence of a prohibited transaction involving the individual who established
the IRA,
127
or his or her beneficiary, would cause the IRA
to lose its tax-exempt status. In that event, the IRA or other account owner
generally would be taxed on the fair market value of all the assets in the
account as of the first day of the owner’s taxable year in which the prohibited
transaction occurred.
Annual Valuation Requirement
A fiduciary
of a Benefit Plan subject to ERISA’s reporting requirements is required to
determine annually the fair market value of each asset of the plan as of the end
of the plans’ fiscal year and to file a report reflecting that value with the
Department of Labor. When the fair market value of any particular asset is not
available, the fiduciary is required to make a good faith determination of that
asset’s fair market value, assuming an orderly liquidation at the time the
determination is made. In addition, a trustee or custodian of an IRA or similar
account must provide the account holder with a statement of the value of the IRA
or account each year. In discharging its obligation to value assets of a plan a
fiduciary subject to ERISA must act consistently with the relevant provisions of
the plan and the general fiduciary standards of ERISA.
Unless and
until our shares are listed for trading on a national securities exchange, it is
not expected that a public market for our shares will develop. To assist
fiduciaries of Benefit Plans subject to the annual reporting requirements of
ERISA and IRA trustees or custodians 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
(including IRA trustees and custodians) 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; provided, however, that if we have sold properties or other
assets and have made one or more special distributions to stockholders of all or
a portion of the net proceeds from such sales, the estimated value of a share of
our common stock will be equal to the offering price of shares in our most
recent offering less the amount of net sale proceeds per share that constitute a
return of capital distributed to investors as a result of such sales. 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.”
With respect
to the valuation of our shares, a plan fiduciary or IRA or similar account
trustee or custodian should be aware of that of the following:
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•
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a value included in the annual statement
may not be realized by us or by our stockholders upon liquidation (in part
because the estimated values do not necessarily indicate the price at
which assets could be sold and because the estimated may not take into
account the expenses of selling our assets);
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•
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you may not realize these values if you
were to attempt to sell your stock; and
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•
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an annual statement of value (or the
method used to establish value) may not comply with the requirements of
ERISA or the Code.
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128
General
We are
offering up to $1,000,000,000 in shares of our common stock to the public
through Select Capital Corporation, our dealer manager, which is a broker-dealer
registered with the SEC and a member of the Financial Industry Regulatory
Authority, Inc., or FINRA. The shares are being offered in the primary offering
at $10.00 per share. Any shares purchased pursuant to the distribution
reinvestment plan will be sold at $9.50 per share. The shares are being offered
on a “best efforts” basis, which means generally that our dealer manager and the
participating broker-dealers described below will be required to use only their
best efforts to sell the shares and have no firm commitment or obligation to
purchase any of the shares of our common stock. Our agreement with our dealer
manager may be terminated by either party upon 60 days’ written notice. The
offering will commence as of the effective date of the registration statement of
which this prospectus forms a part.
Our board of
directors and our dealer manager have determined the offering price of the
shares. While our board primarily considered the per share offering prices in
similar offerings conducted by companies formed for purposes similar to ours
when determining the offering price, neither prospective investors nor
stockholders should assume that the per share prices reflect the intrinsic or
realizable value of our shares or otherwise reflect our historical book value or
earnings or other objective measures of worth.
Minimum Offering
Except as
noted below, subscription proceeds will be placed in an interest-bearing account
with UMB Bank, N.A., as escrow agent, until subscriptions for at least the
minimum offering of $2,500,000 have been received and accepted by us. When
calculating the minimum offering, we will not include shares granted or
purchased under the Incentive Plan or shares purchased by our advisor or its
affiliates. Subscription proceeds held in the escrow account will be invested in
obligations of, or obligations guaranteed by, the United States government or
bank money-market accounts or certificates of deposit of national or state banks
that have deposits insured by the Federal Deposit Insurance Corporation,
including certificates of deposit of any bank acting as depository or custodian
for any such funds, as directed by our advisor. Subscribers may not withdraw
funds from the escrow account.
If
subscriptions for at least $2,500,000 in shares have not been received and
accepted within one year after the date of this prospectus, the escrow agent
will promptly so notify us and this offering will be terminated. In such event,
the escrow agent is obligated to use its best efforts to obtain an executed IRS
Form W-9 from each subscriber whose subscription is rejected. No later than
three business days after rejection of a subscription, the escrow agent will
refund and return all monies to rejected subscribers and any interest earned
thereon without deducting escrow expenses. In the event that a subscriber fails
to remit an executed IRS Form W-9 to the escrow agent prior to the date the
escrow agent returns the subscriber’s funds, the escrow agent will be required
to withhold from such funds 28% of the earnings attributable to such subscriber
in accordance with Internal Revenue Service regulations. During any period in
which subscription proceeds are held in escrow, interest earned thereon will be
allocated among subscribers on the basis of the respective amounts of their
subscriptions and the number of days that such amounts were on
deposit.
Initial
subscribers may be admitted as stockholders of our company and the payments
transferred from escrow to us at any time after we have received and accepted
the minimum offering.
After the
close of the minimum offering, subscriptions will be accepted or rejected within
30 days of receipt by us, and if rejected, all funds will be returned to
subscribers within three business days of rejection. Investors whose
subscriptions are accepted will be admitted as stockholders of our company
periodically, but not less often than quarterly. Escrowed proceeds will be
released to us on the date that the applicable stockholder is admitted to our
company.
We expect to
sell the $1,000,000,000 in shares offered in our primary offering over a
two-year period, or by October 15, 2011. If we have not sold all of the shares
within two years, we may continue the primary offering for an additional year
until October 15, 2012. Under rules promulgated by the SEC, should we determine
to register a follow-on offering, we may extend this offering up to an
additional 180 days beyond October 15, 2012. If we decide to continue our
primary offering beyond two years from the date of this prospectus, we will
provide that information in a prospectus supplement. We may continue to offer
shares under our distribution reinvestment plan beyond these dates. In
many
129
states, we will need to renew the registration
statement or file a new registration statement to continue the offering beyond
one year from the date of this prospectus. We may terminate this offering at any
time.
Dealer Manager and Participating Broker-Dealer Compensation and
Terms
Except as
provided below, our dealer manager will receive a selling commission of 7% of
the gross proceeds from the sale of shares of our common stock in the primary
offering. Our dealer manager will also receive 2.6% of the gross proceeds from
the sale of shares in the primary offering in the form of a dealer manager fee
as compensation for acting as our dealer manager. Our dealer manager will not
receive any selling commission or dealer manager fee for shares sold pursuant to
our distribution reinvestment plan. We will also reimburse our dealer manager
for
bona fide
due
diligence expenses incurred and supported by detailed and itemized invoices.
We will
reimburse our advisor or its affiliates for actual issuer organization and
offering expenses incurred on our behalf such as legal, accounting, printing,
mailing, technology, filing fees, charges of our escrow holder and transfer
agent, charges of our advisor for administrative services related to the
issuance of shares in the offering, 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 and
bona fide
training and
education meetings hosted by our advisor or its affiliates. Any such
reimbursements will not exceed actual expenses incurred by our advisor or its
affiliates and will only be made to the extent that such reimbursements would
not cause the cumulative amount of underwriting compensation and issuer
organization and offering expenses borne by us to exceed 15% of gross offering
proceeds from the sale of shares in the primary offering as of the date of
reimbursement. Our advisor and its affiliates will be responsible for the
payment underwriting compensation (other than selling commissions and the dealer
manager fee) and issuer organization and offering expenses to the extent that
cumulative selling commissions, the dealer manager fee, additional underwriting
expenses and issuer organization and offering expenses borne by us exceed 15% of
the gross proceeds of our primary offering as of the date of the reimbursement,
without recourse against or reimbursement by us. We will not pay referral or
similar fees to any accountants, attorneys or other persons in connection with
the distribution of the shares of our common stock.
Our dealer
manager may authorize certain additional broker-dealers who are members of
FINRA, which we refer to as participating broker-dealers, to participate in
selling shares of our common stock to investors. Our dealer manager may re-allow
all or a portion of its selling commissions from the sale of shares in the
primary offering to such participating broker-dealers with respect to shares of
our common stock sold by them. Our dealer manager, in its sole discretion, may
also re-allow to participating broker-dealers a portion of its dealer manager
fee for reimbursement of marketing expenses. The maximum amount of
reimbursements would be based on such factors as the number of shares sold by
participating broker-dealers and the assistance of such participating
broker-dealers in marketing the offering. We will also reimburse participating
broker-dealers for
bona fide
due diligence expenses incurred and supported by detailed and itemized
invoices.
An affiliate
of our dealer manager and a registered broker-dealer, Private Asset Group, Inc.,
or PAG, is expected to act a participating broker-dealer in this offering. If
PAG enters into a participating broker-dealer agreement with our dealer manager
with respect to this offering, PAG will be compensated on the same terms and
conditions as applicable to all other participating broker-dealers, and will not
receive any additional or special compensation as a result of its affiliation
with our dealer manager.
In addition
to the selling commissions and dealer manager fee described above, our advisor
or its affiliates may advance, and we will reimburse, underwriting expenses in
connection with this offering as described in the table below. This table sets
forth the nature and estimated amount of all items viewed as “underwriting
compensation” by FINRA, assuming we sell all of the shares offered hereby. As
required by the rules of FINRA, total underwriting compensation that will be
paid in connection with this offering will not exceed an amount equal to 10% of
our gross proceeds from the sale of shares of our common stock in the primary
offering. To show the maximum amount of dealer manager and participating
broker-dealer compensation that we may pay in this offering, or approximately
$100,000,000, which represents approximately 10% of the maximum gross proceeds
from shares sold in our primary offering, this table assumes that all shares are
sold through distribution channels associated with the highest possible selling
commissions and dealer manager fees. Many states limit our total organization
and offering expenses, which includes all items of underwriting compensation to
15% of gross offering proceeds. We will reimburse our advisor for actual
organization and offering expenses incurred by our advisor, which amount,
including all items of underwriting compensation, shall not exceed the 15%
limitation.
130
Dealer-Manager and Participating
Broker-Dealer Compensation
(Maximum Offering)
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Selling commissions
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$
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70,000,000
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7.0
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%
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Dealer
manager fee
(1)
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$
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26,000,000
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2.6
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%
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Expense reimbursements for training and education meetings and
sales seminars related to retailing activities
(2)
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$
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3,446,000
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(4)
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0.3
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%
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Expense reimbursements for training and education meetings and
sales seminars related to wholesaling activities
(3)
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$
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478,320
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(4)
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*
|
Legal
fees allocated to dealer manager.
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50,000
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(4)
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*
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Promotional items paid for by the issuer
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$
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25,680
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(4)
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*
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Total
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$
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100,000,000
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10.0
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%
|
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*
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Less than 0.1%
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(1)
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The dealer manager fee will be used by our
dealer manager to pay: (a) commissions, salaries and expense reimbursement
allowances to its FINRA-registered personnel engaged in marketing and
distributing this offering, which are estimated to be approximately $13.4
million, (b) reallowances to participating broker-dealers to assist
participating broker-dealers in marketing this offering which are
estimated to be approximately $10.0 million, (c) the costs associated with
certain promotional items that will be provided by the dealer manager to
registered representatives of participating broker-dealers, which are
estimated to be approximately $143,000 and (d) the costs associated with
the production of certain newsletters to be provided to registered
representatives of participating broker-dealers, which are estimated to be
approximately $60,000. The remainder of the dealer manager fee is expected
to be retained by the dealer manager.
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(2)
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Includes amounts used to reimburse
broker-dealers participating in this offering for actual costs incurred by
their FINRA-registered personnel for travel, meals, lodging and attendance
fees to attend training and education meetings sponsored by us or the
dealer manager and amounts used to pay registration fees and other
sponsorship costs, such as group meal expenses, for retail seminars
sponsored by third-party broker dealers.
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(3)
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Includes amounts used to reimburse our
dealer manager for actual costs incurred by its FINRA-registered personnel
for travel, meals, lodging and attendance fees to attend training and
education meetings sponsored by us or the dealer manager and retail
seminars sponsored by participating broker-dealers.
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(4)
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Amounts shown are estimates.
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Volume Discounts
A
“purchaser,” as defined below, who purchases more than 50,000 shares at any one
time through a single participating broker-dealer may receive a discount on the
purchase price of the shares above 50,000. The selling commissions payable to
the participating broker dealer will be commensurately reduced. The amount of
selling commissions otherwise payable to a participating dealer may be reduced
in accordance with the following schedule.
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Commission
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Price per
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|
Shares Purchased in the Transaction
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Rate
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Share
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1 to 50,000
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7%
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$
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10.00
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50,001 to 100,000
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6%
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|
$
|
9.90
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100,001 to 200,000
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5%
|
|
$
|
9.80
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|
200,001 to 300,000
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|
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4%
|
|
$
|
9.70
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|
300,001 to 400,000
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3%
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$
|
9.60
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400,001 to 500,000
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2%
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$
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9.50
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500,001 and up
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1%
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$
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9.40
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We will apply
the reduced selling price and selling commission to the entire purchase. All
commission rates and dealer manager fees are calculated assuming a price per
share of $10.00. For example, a purchase of 250,000 shares in a single
transaction would result in a purchase price of $2,425,000 ($9.70 per share),
and selling commissions of $100,000.
In addition,
in order to encourage purchases of 250,000 or more shares, an investor who
agrees to purchase at least 250,000 shares may negotiate with our dealer manager
to reduce the dealer manager fee with respect to the sale of the shares. In
addition or in the alternative, for sales of at least 500,000 shares our advisor
may agree to forego a portion of the amount we would otherwise be obligated to
reimburse our advisor for our organization and offering expenses. Other
accommodations may be agreed to by our sponsor in connection with a purchase of
500,000 or more shares.
Because all
investors will be deemed to have contributed the same amount per share to our
company for purposes of distributions of cash available for distribution, an
investor qualifying for a volume discount will receive a higher return on his
investment in our company than investors who do not qualify for such
discount.
131
Subscriptions
may be combined for the purpose of determining the volume discounts in the case
of subscriptions made by any “purchaser,” as that term is defined below,
provided all such shares are purchased through the same broker-dealer. The
volume discount may be prorated among the separate subscribers considered to be
a single “purchaser.” Any request to combine more than one subscription must be
made in writing, and must set forth the basis for such request. Any such request
will be subject to verification by our advisor that all of such subscriptions
were made by a single “purchaser.” You must mark the “Additional Investment”
space on the first page of the subscription agreement in order for purchases to
be combined. We are not responsible for failing to combine purchases if you fail
to mark the “Additional Investment” space.
For the
purposes of such volume discounts, the term “purchaser” includes:
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•
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an individual, his or her spouse and their
children under the age of 21 who purchase the shares for his, her or their
own accounts;
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•
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a corporation, partnership, association,
joint-stock company, trust fund or any organized group of persons, whether
incorporated or not;
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•
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an employees’ trust, pension, profit
sharing or other employee benefit plan qualified under the federal income
tax laws; and
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•
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all commingled trust funds maintained by a
given bank.
|
Notwithstanding
the above, in connection with volume sales made to investors in our company, our
dealer manager may, in its sole discretion, waive the “purchaser” requirements
and aggregate subscriptions as part of a combined order for purposes of
determining the number of shares purchased, provided that any aggregate group of
subscriptions must be received from the same broker-dealer, including our dealer
manager. Any such reduction in selling commission may be prorated among the
separate subscribers except that, in the case of purchases through our dealer
manager, our dealer manager may allocate such reduction among separate
subscribers considered to be a single “purchaser” as it deems appropriate. An
investor may reduce the amount of his purchase price to the net amount shown in
the foregoing table, if applicable. If such investor does not reduce the
purchase price, the excess amount submitted over the discounted purchase price
will be returned to the actual separate subscribers for shares.
Once you
qualify for a volume discount, you will be eligible to receive the benefit of
such discount for subsequent purchase of shares in our primary offering through
the same participating broker-dealer. If a subsequent purchase entitles an
investor to an increased reduction in the sales commissions and/or the dealer
manager fee, the volume discount will apply only to the current and future
investments. Except as provided in this paragraph and the three immediately
preceding paragraphs, separate subscriptions will not be cumulated, combined or
aggregated.
California
residents should be aware that volume discounts will not be available in
connection with the sale of shares made to California residents to the extent
such discounts do not comply with the provisions of the California corporate
securities laws. Under these laws, volume discounts can be made available to
California residents only in accordance with the following
conditions:
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•
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there can be no variance in the net
proceeds to our company from the sale of the shares to different
purchasers of the same offering;
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•
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all purchasers of the shares must be
informed of the availability of quantity discounts;
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•
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the same volume discounts must be allowed
to all purchasers of shares which are part of the offering;
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•
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the minimum amount of shares as to which
volume discounts are allowed cannot be less than $10,000;
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•
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the variance in the price of the shares
must result solely from a different range of commissions, and all
discounts allowed must be based on a uniform scale of commissions; and
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•
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no discounts are allowed to any group of
purchasers.
|
Accordingly,
volume discounts for California residents will be available in accordance with
the foregoing table of uniform discount levels based on dollar volume of shares
purchased, but no discounts are allowed to any group of
132
purchasers, and no subscriptions may be
aggregated as part of a combined order for purposes of determining the number of
shares purchased.
Other
Discounts
No selling
commissions will be paid and the price per share will be reduced to $9.30 in
connection with sales to investors who have engaged the services of a registered
investment advisor with whom the investor has agreed to pay a fee for investment
advisory services in lieu of normal commissions. The net proceeds to us will not
be affected by eliminating commissions payable in connection with sales to
investors purchasing through such investment advisors. All such sales must be
made through the registered broker-dealer with whom the registered investment
advisor is associated. We will not sell any shares through registered investment
advisors who are not associated with a registered broker-dealer.
Our advisor
and its affiliates may, at their option, purchase shares offered hereby at the
public offering price, net of the selling commissions and the dealer manager
fee, in which case they have advised us that they would expect to hold such
shares as stockholders for investment and not for distribution.
Our dealer
manager has agreed to sell up to 5% of the shares offered hereby in our primary
offering to persons to be identified by us at a discount from the public
offering price. We intend to use this “friends and family” program to sell
shares to certain investors identified by us, including investors who have a
prior business relationship with our sponsor, such as real estate brokers, joint
venture partners and their employees, title insurance company executives,
surveyors, attorneys and others to the extent consistent with applicable laws
and regulations. We will require all such purchasers to represent that they are
purchasing shares for investment only and to enter into one-year lock-up
agreements with respect to the purchased shares. The purchase price for such
shares will be $9.04 per share, reflecting that selling commissions in the
amount of $0.70 per share and the dealer manager fee in the amount of $0.26 per
share will not be payable in connection with such sales. The net proceeds to us
from such sales made net of commissions and the dealer manager fee will be
substantially the same as the net proceeds we receive from other sales of
shares.
In addition,
our dealer manager may sell shares to retirement plans of broker-dealers
participating in this offering, to broker-dealers in their individual
capacities, to IRAs and qualified plans of their registered representatives or
to any one of their registered representatives in their individual capacities
net of the selling commissions of $0.70, for a purchase price of $9.30, in
consideration of the services rendered by such broker-dealers and registered
representatives in the distribution. The net proceeds of these sales to our
company also will be substantially the same as our net proceeds from other sales
of shares.
Subscription Procedures
To purchase
shares in the offering, you must complete and sign a subscription agreement (in
the form attached to this prospectus as Exhibit B) for a specific number of
shares and pay for the shares at the time of your subscription. Payment for
shares should be made by check payable to “UMB Bank, N.A. as escrow agent for
Bluerock Enhanced Multifamily Trust, Inc.” or, after we have reached our minimum
offering amount, checks may be made payable directly to “Bluerock Enhanced
Multifamily Trust, Inc.” or “BEMTI.” Subscriptions will be effective only upon
acceptance by us, and we reserve the right to reject any subscription in whole
or in part. In no event may a subscription for shares be accepted until at least
five business days after the date the subscriber receives a final prospectus.
Each subscriber will receive a confirmation of his purchase. Except for purchase
under the distribution reinvestment plan, all accepted subscriptions will be for
whole shares and for not less than 250 shares, or $2,500. There will be no sales
to discretionary accounts without the prior specific written approval of the
customer.
You have the
option of placing a transfer on death, or TOD, designation on your shares
purchased in this offering. A TOD designation transfers ownership of the shares
to your designated beneficiary upon your death. This designation may only be
made by individuals, not entities, who are the sole or joint owners with right
of survivorship of the shares. This option, however, is not available to
residents of the states of Louisiana and Texas. If you would like to place a TOD
designation on your shares, you must complete and return the TOD form included
as part of the subscription agreement attached as Exhibit B to this prospectus
in order to effect the designation.
133
Investments through IRA Accounts
Both Sterling
Trust Company and Pershing LLC have agreed to act as IRA custodians for
purchasers of our common stock who would like to purchase shares though an IRA
account and desire to establish a new IRA account for that purpose. We will pay
the fees related to the establishment of investor accounts with either of these
custodians. For investments over $5,000, we will pay the first year annual IRA
maintenance fee. Thereafter, investors will be responsible for the annual IRA
maintenance fees unless the investment exceeds $25,000, in which case Bluerock
will continue to pay the annual fee for a basic IRA for either of these
custodians, subject to certain limitations. For investors who wish to receive
cash dividends rather than reinvest them, there will be an annual money market
account fee that will be charged. Further information about custodial services
is available through your financial advisor or through our dealer
manager.
Automatic Investment Plan
Investors who
desire to purchase shares in this offering at regular intervals may be able to
do so by electing to participate in the automatic investment plan by completing
an enrollment form that we will provide upon request. Only investors who have
already met the minimum purchase requirement may participate in the automatic
investment plan. The minimum periodic investment is $100 per month. We will pay
dealer manager fees and selling commissions in connection with sales under the
automatic investment plan to the same extent that we pay those fees and
commissions on shares sold in this offering outside of the automatic investment
plan. Residents of the States of Alabama and Ohio are not eligible to
participate in this automatic reinvestment plan. If you elect to participate in
both the automatic investment plan and our distribution reinvestment plan,
distributions earned from shares purchased pursuant to the automatic investment
plan will automatically be reinvested pursuant to the distribution reinvestment
plan. For a discussion of the distribution reinvestment plan, see “Summary of
Distribution Reinvestment Plan.”
You will
receive a confirmation of your purchases under the automatic investment plan no
less than quarterly. The confirmation will disclose the following
information:
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•
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the amount invested for your account
during the period;
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•
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the date of the investment;
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•
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the number and price of the shares
purchased by you; and
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•
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the total number of shares in your
account.
|
To qualify
for a volume discount as a result of purchases under the automatic investment
plan, you must notify us in writing when you initially become eligible to
receive a volume discount and at each time your purchase of shares through the
program would qualify you for an additional reduction in the price of shares
under the volume discount provisions described in this prospectus.
You may
terminate your participation in the automatic investment plan at any time by
providing us with written notice. If you elect to participate in the automatic
investment plan, you must agree that if at any time you fail to meet the
applicable investor suitability standards or cannot make the other investor
representations or warranties set forth in the then current prospectus or in the
subscription agreement, you will promptly notify us in writing of that fact and
your participation in the plan will terminate. See the “Investor Suitability
Standards” section of this prospectus and the form of subscription agreement
attached hereto as Exhibit B.
134
In addition
to this prospectus, we may use certain supplemental sales material in connection
with the offering of the shares. However, such sales material will only be used
when accompanied by or preceded by the delivery of this prospectus. This
material, prepared by our advisor, may include the following: a brochure
describing the advisor and its affiliates and our investment objectives; a fact
sheet that provides information regarding properties purchased to date and other
summary information related to our offering; property brochures; a power point
presentation that provides information regarding our company and our offering;
and the past performance of programs managed by our sponsor. No person has been
authorized to prepare for, or furnish to, a prospective investor any sales
material other than that described herein and “tombstone” newspaper
advertisements or solicitations of interest that are limited to identifying the
offering and the location of sources of additional information.
The offering
of our shares is made only by means of this prospectus. Although the information
contained in such sales material will not conflict with any of the information
contained in this prospectus, such material does not purport to be complete and
should not be considered a part of this prospectus or the registration
statement, of which this prospectus is a part.
The
consolidated balance sheet of Bluerock Enhanced Multifamily Trust, Inc. as of
December 31, 2008 included in this prospectus, has been audited by Freedman
& Goldberg, an independent registered public accounting firm, as stated in
their report appearing herein, and is included in reliance upon the report of
such firm given upon their authority as experts in accounting and
auditing.
Certain legal
matters will be passed upon for us by Alston & Bird LLP, Atlanta, Georgia.
The statements under the caption “Federal Income Tax Considerations” as they
relate to federal income tax matters have been reviewed by Alston & Bird and
Alston & Bird has opined as to certain federal income tax matters relating
to an investment in shares of Bluerock Enhanced Multifamily Trust, Inc. Alston
& Bird will advise us with respect to real estate law and other matters as
well. Alston & Bird has also represented Bluerock Real Estate, L.L.C., an
affiliate of our advisor, as well as various other affiliates of our advisor, in
other matters and may continue to do so in the future. Venable LLP, Baltimore,
Maryland has issued an opinion to us regarding certain matters of Maryland law,
including the validity of the shares offered hereby. Holland & Hart LLP will
advise the dealer manager.
We have filed
with the SEC a registration statement on Form S-11, as amended, of which this
prospectus is a part under the Securities Act of 1933 with respect to the shares
offered by this prospectus. This prospectus does not contain all of the
information set forth in the registration statement, portions of which have been
omitted as permitted by the rules and regulations of the SEC. Statements
contained in this prospectus as to the content of any contract or other document
filed as an exhibit to the registration statement are necessarily summaries of
such contract or other document, with each such statement being qualified in all
respects by such reference and the schedules and exhibits to this prospectus.
For further information regarding our company and the shares offered by this
prospectus, reference is made by this prospectus to the registration statement
and such schedules and exhibits.
The
registration statement and the schedules and exhibits forming a part of the
registration statement filed by us with the SEC can be inspected and copies
obtained from the Securities and Exchange Commission at Room 1580, 100 F Street,
N.E., Washington, D.C. 20549. Copies of such material can be obtained from the
Public Reference Section of the Securities and Exchange Commission, Room 1580,
100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. In addition,
the SEC maintains a website that contains reports, proxies and information
statements and other information regarding our company and other registrants
that have been filed electronically with the SEC. The address of such site is
http://www.sec.gov.
135
INDEX TO FINANCIAL
STATEMENTS
136
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholder
Bluerock Enhanced Multifamily Trust, Inc.
We have
audited the accompanying consolidated balance sheet of Bluerock Enhanced
Multifamily Trust, Inc., a Maryland corporation (the “Company”), as of December
31, 2008. The balance sheet is the responsibility of the Company’s management.
Our responsibility is to express an opinion on this consolidated balance sheet
based on our audit.
We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the balance sheet, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statement referred to above presents fairly,
in all material respects, the financial position of the Company as of December
31, 2008, in conformity with accounting principles generally accepted in the
United States of America.
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/s/ Freedman & Goldberg
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Certified Public Accountants
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Farmington Hills, MI
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February 19, 2009
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F–1
BLUEROCK ENHANCED MULTIFAMILY TRUST,
INC.
CONSOLIDATED BALANCE SHEETS
AS
OF JUNE 30, 2009 (Unaudited) AND DECEMBER 31, 2008
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June
30,
2009
(unaudited)
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December
31,
2008
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ASSETS
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Cash
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$
|
201,001
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$
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201,001
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|
|
|
|
|
|
|
|
|
Total
assets
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$
|
201,001
|
|
$
|
201,001
|
|
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|
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LIABILITIES AND
STOCKHOLDER’S EQUITY
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Preferred stock, $0.01 par value, 250,000,000 shares authorized;
none issued and outstanding
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$
|
—
|
|
$
|
—
|
|
Common
stock, $0.01 par value, 749,999,000 shares authorized; 22,200 shares
issued and outstanding
|
|
$
|
222
|
|
|
222
|
|
Nonvoting convertible stock, $0.01 par value per share; 1,000
shares authorized, none issued and outstanding
|
|
|
—
|
|
|
—
|
|
Additional paid in capital
|
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|
200,779
|
|
|
200,779
|
|
|
|
|
|
|
|
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|
Total stockholder’s equity
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|
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201,001
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201,001
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|
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Total liabilities and stockholder’s equity
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$
|
201,001
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|
$
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201,001
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|
|
|
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|
|
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|
|
The accompanying notes are an integral part of
this consolidated financial statement.
F–2
BLUEROCK ENHANCED MULTIFAMILY TRUST,
INC.
NOTES TO CONSOLIDATED BALANCE
SHEETS
AS OF JUNE 30, 2009 (Unaudited) AND DECEMBER 31,
2008
1.
ORGANIZATION AND NATURE OF BUSINESS
Bluerock Enhanced Multifamily Trust, Inc. (the
“Company”) was incorporated on July 25, 2008 under the laws of the state of
Maryland. If the Company meets the qualification requirements, it intends to
elect to be treated as a real estate investment trust, or REIT for Federal
income tax purposes for its first full tax year. The Company was incorporated to
raise capital and acquire a diverse portfolio of residential real estate assets.
As of June 30, 2009, it does not own any properties.
The Company is planning to commence a best
efforts initial public offering, or the offering, in which it intends to offer a
minimum of $2,500,000 in shares of its common stock and a maximum of $1 billion
in shares of its $.01 par value common stock for $10.00 per share. The Company
is also offering $285,000,000 in shares pursuant to its distribution
reinvestment plan at $9.50 per share.
The Company’s day-to-day operations are to be
managed by Bluerock Enhanced Multifamily Advisor, LLC, or the advisor, under an
advisory agreement. The advisor is affiliated with the Company in that the
Company and the advisor have common management.
2.
BASIS OF PRESENTATION IN FUTURE FINANCIAL STATEMENTS
The Company intends to operate in an umbrella
partnership REIT structure in which its wholly owned subsidiary, Bluerock
Enhanced Multifamily Holdings, L.P., a Delaware limited partnership, or wholly
owned subsidiaries of its operating partnership, will own substantially all of
the properties acquired on the Company’s behalf.
Because the Company is the sole general partner
of its operating partnership and has unilateral control over its management and
major operating decisions (even if additional limited partners are admitted to
its operating partnership), the accounts of its operating partnership are
consolidated in the Company’s financial statements. All significant intercompany
accounts and transactions will be eliminated in consolidation.
3.
RELATED PARTY TRANSACTIONS
As of June 30, 2009, approximately $2,115,000 of
organizational and offering costs have been incurred on the Company’s behalf.
These costs are not recorded in its financial statements because such costs are
not its liability until the subscriptions for the minimum number of shares are
received and accepted by the Company. When recorded by the Company,
organizational and offering costs will be expensed as incurred, and third party
offering costs will be deferred and charged to shareholders’ equity as such
amounts are reimbursed to the advisor or its affiliates from the gross proceeds
of the offering.
The advisor performs its duties and
responsibilities as the Company’s 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 the Company’s board of directors for an
unlimited number of successive one-year periods. The advisor will conduct the
Company’s operations and manage its portfolio of real estate and real
estate-related investments under the terms of the advisory
agreement.
Certain of the Company’s affiliates will receive
fees and compensation in connection with the Company’s public offering, and the
acquisition, management and sale of its real estate investments.
F–3
BLUEROCK ENHANCED MULTIFAMILY TRUST,
INC.
NOTES TO CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30,
2009 (Unaudited) AND DECEMBER 31, 2008
3.
RELATED PARTY TRANSACTIONS — (Continued)
The Company will pay its advisor a monthly asset
management fee for the services it provides pursuant to the advisory agreement.
The asset management fee will be equal to one-twelfth of 1.0% of the higher of
the cost or the value of each asset, where (A) cost equals the amount actually
paid, excluding acquisition fees and expenses, to purchase each asset it
acquires, including any debt attributable to the asset (including any debt
encumbering the asset after acquisition), provided that, with respect to any
properties the Company develops, constructs or improves, cost will include the
amount expended by the Company for the development, construction or improvement,
and (B) the value of an asset is the value established by the most recent
independent valuation report, if available, without reduction for depreciation,
bad debts or other non-cash reserves; provided, however, that 50% of the
advisor’s asset management fee will not be payable until stockholders have
received distributions in an amount equal to at least a 6.0% per annum
cumulative, non-compounded return on invested capital, at which time all such
amounts will become immediately due and payable. For these purposes, “invested
capital” means the original issue price paid for the shares of the Company’s
common stock reduced by prior distributions identified as special distributions
from the sale of its asset. The asset management fee will be based only on the
portion of the cost or value attributable to the Company’s investment in an
asset if the Company does not own all of an asset. The Company will also pay the
advisor a financing fee equal to 1% of the amount available under any loan or
line of credit made available to the Company. The advisor may reallow some or
all of this fee to reimburse third parties with whom it may subcontract to
procure such financing.
The advisor will also receive 1.75% of the
purchase price of a property or investment for its services in connection with
the investigation, selection, sourcing, due diligence and acquisition of that
property or investment. The purchase price of a property or investment will
equal the amount paid or allocated to the purchase, development, construction or
improvement of a property, inclusive of expenses related thereto, and the amount
of debt associated with such real property or investment. The purchase price
allocable for joint venture investments will equal the product of (1) the
purchase price of the underlying property and (2) the Company’s ownership
percentage in the joint venture. The Company will pay the advisor an origination
fee in lieu of an acquisition fee for services in connection with the
investigation, selection, sourcing, due diligence, and acquisition of mortgage,
subordinated, bridge or other loans of 1.75% of the principal amount of the
borrower’s loan obligation or of the purchase price of any loan the Company
purchases including third party expenses.
In addition, to the extent the advisor provides
a substantial amount of services in connection with the disposition of one or
more of the Company’s properties or investments (except for securities that are
traded on a national securities exchange), the 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 broker in connection with such a disposition. In no event may
disposition fees paid to the advisor or its affiliates and unaffiliated third
parties exceed in the aggregate 6% of the contract sales price.
In addition to the fees payable to the advisor,
the Company will reimburse the advisor for all reasonable and incurred expenses
in connection with services provided to the Company, subject to the limitation
that the Company will not reimburse any amount that would cause its total
operating expenses at the end of four preceding fiscal quarters to exceed the
greater of 2% of the Company’s average invested assets or 25% of the Company’s
net income determined (1) without reductions for any additions to reserves for
depreciation, bad debts or other similar non-cash reserves and (2) excluding any
gain from the sale of the Company’s assets for that period unless a majority of
its independent directors has determined such expenses were justified based on
unusual and non-recurring factors. The Company will not reimburse the advisor
for personnel costs in connection with services for which the advisor receives
acquisition, origination or disposition fees.
F–4
BLUEROCK ENHANCED MULTIFAMILY TRUST,
INC.
NOTES TO CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30,
2009 (Unaudited) AND DECEMBER 31, 2008
3.
RELATED PARTY TRANSACTIONS — (Continued)
The Company has issued 1,000 shares of
convertible stock, par value $0.01 per share to its advisor. The convertible
stock will convert to shares of common stock if and when: (A) the Company has
made total distributions on the then outstanding shares of its 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 specified conditions, the Company lists its common stock for trading
on a national securities exchange. A “listing” will be deemed to have occurred
on the effective date of any merger of the Company in which the consideration
received by the holders of the Company’s common stock is the cash and/or
securities of another issuer that are listed on a national securities exchange.
Upon conversion, each share of 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) the Company’s “enterprise value” (as defined in its charter) plus the
aggregate value of distributions paid to date on the outstanding shares of its
common stock over the (2) aggregate purchase price paid by the stockholders for
those shares plus an 8% cumulative, non-compounded, annual return on the
original issue price of those shares, divided by (B) the Company’s 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 an event triggering
the conversion occurs after the advisory agreement with the advisor is not
renewed or terminates (other than because of a material breach by the advisor),
the number of shares of common stock the advisor will receive upon conversion
will be prorated to account for the period of time the advisory agreement was in
force.
The Company will pay Bluerock REIT Property
Management, LLC, a wholly owned subsidiary of the advisor, a property management
fee equal to 4% of the monthly gross revenues from any properties it manages.
Alternatively, the Company may contract property management services for certain
properties directly to non-affiliated third parties, in which event the Company
will pay the advisor an oversight fee equal to 1% of monthly gross revenues of
such properties.
4.
STOCKHOLDERS’ EQUITY
Common
Stock
The Company is offering and selling to the
public up to $1 billion in shares of its $.01 par value common stock for $10.00
per share. The Company is also offering up to $285,000,000 in shares of its $.01
par value common stock to be issued pursuant to its distribution reinvestment
plan at $9.50 per share.
Convertible
Stock
The Company has issued to its advisor 1,000
shares of its convertible stock for an aggregate purchase price of $1,000. Upon
certain conditions, the convertible stock will convert to shares of common stock
with a value equal to 15% of the excess of (i) the Company’s enterprise value
(as defined in its charter) plus the aggregate value of distributions paid to
stockholders over (ii) the aggregate purchase price paid by stockholders for the
Company’s shares plus a 8% cumulative, non-compounded, annual return on the
original issue price paid for those outstanding shares. The interests of
stockholders purchasing in this offering will be diluted upon such
conversion.
Share
Repurchase Plan
The Company’s board of directors has approved a
share repurchase plan. The share repurchase plan allows for share repurchases by
the Company when certain criteria are met. Share repurchases will be made at the
sole discretion of the board of directors.
F–5
BLUEROCK ENHANCED MULTIFAMILY TRUST,
INC.
NOTES TO CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF JUNE 30,
2009 (Unaudited) AND DECEMBER 31, 2008
4.
STOCKHOLDERS’ EQUITY (Continued)
Grants
of Restricted Stock of Independent Directors
The Company’s independent directors will receive
an automatic grant of 5,000 shares of restricted stock on the effective date of
the public offering and an automatic grant of 2,500 shares of restricted stock
at each annual meeting of the Company’s stockholders thereafter. Each person who
thereafter is elected or appointed as an independent director will receive an
automatic grant of 5,000 shares of restricted stock on the date such person is
first elected as an independent director and an automatic grant of 2,500 shares
of restricted stock at each annual meeting of the Company’s stockholders
thereafter. To the extent allowed by applicable law, the independent directors
will not be required to pay any purchase price for these grants of restricted
stock. The restricted stock will vest 20% at the time of the grant and 20% on
each anniversary thereafter over four years from the date of the grant. All
restricted stock may receive distributions, whether vested or unvested. The
value of the restricted stock to be granted is not determinable until the date
of grant.
F–6
PRIOR
PERFORMANCE TABLES OF BLUEROCK REAL ESTATE, L.L.C.
The following
Prior Performance Tables, or Tables, provide information relating to real estate
investment programs sponsored by Bluerock Real Estate, L.L.C., or Bluerock, or
Prior Real Estate Programs, through December 31, 2008. All of the Prior Real
Estate Programs presented in the Tables or otherwise discussed in the section
entitled “Prior Performance Summary” in the prospectus are private programs that
have no public reporting requirements. Bluerock has not previously sponsored a
public program.
As of
December 31, 2008, Bluerock served as sponsor of ten Prior Real Estate Programs,
seven of which had been closed to outside investors as of such date and of which
only one had been completed. Because the three remaining programs commenced in
2008, and have not closed nor sold any of their properties within the three most
recent years, their information is not reflected in the Tables. Certain relevant
information regarding these programs is presented in Table VI, which is included
in Part II of the registration statement which our company has filed with the
SEC. An affiliate of Bluerock serves as either property manager or asset manager
for each of these programs.
In addition
to these programs with similar investment objectives, a notes program sponsored
by Bluerock offered notes to be issued by a limited liability company affiliated
with Bluerock. The issuer borrowed funds from investors, who invested in the
issuer’s notes. The issuer in turn contributed the offering proceeds to a
subsidiary for investment in real estate or real estate-related debt and
investments. Investors in the notes program made loans to the issuer by
investing in its notes, and did not acquire equity interests
therein.
As of
December 31, 2008, Bluerock through this notes program had raised approximately
$11.8 million from 179 investors. Including interest accrued through December
31, 2008, a total of approximately $10.9 million of those proceeds had been
invested principally with other Bluerock affiliates.
Other than
the notes program sponsored by Bluerock, certain of the investment objectives of
the Bluerock-sponsored programs are similar to ours, including the acquisition
and operation of commercial or multifamily properties; the provision of stable
cash flow available for distribution to investors; preservation and protection
of investor capital; and the realization of capital appreciation upon the
ultimate sale or refinancing of the program properties. See “Investment
Strategies, Objectives and Policies” in the prospectus. Bluerock considers the
investment objectives of the notes program to be different than the other Prior
Real Estate Programs. An investor in the notes program is making an investment
in notes, which is a loan to the issuer, not an equity investment. The
investment objective of the notes program is to provide fixed payments of
interest to investors and return principal to investors, regardless of the
underlying performance of the real estate assets. Because the notes program does
not have similar investment objectives to Bluerock’s other Prior Real Estate
Programs, the Tables do not include information on the notes
program.
Our advisor
is responsible for the acquisition, origination, financing, operation,
maintenance and disposition of our investments. Key members of the management of
Bluerock indirectly own and control our advisor and will play a significant role
in the promotion of this offering and the operation of our advisor. The
financial results of the Prior Real Estate Programs thus may provide some
indication of our advisor’s ability to perform its obligations. However, general
economic conditions affecting the real estate industry and other factors
contribute significantly to financial results.
As a
prospective investor, you should read these Tables carefully together with the
summary information concerning the Prior Real Estate Programs as set forth in
the “Prior Performance Summary” section of this prospectus.
A–1
As an
investor in our company, you will not own any interest in the Prior Real Estate
Programs and should not assume that you will experience returns, if any,
comparable to those experienced by investors in the Prior Real Estate
Programs.
The following
Tables are included herein:
|
|
|
Table I — Experience in Raising and
Investing Funds (Unaudited)
|
|
Table II — Compensation to Sponsor
(Unaudited)
|
|
Table III — Annual Operating Results of
Prior Real Estate Programs (Unaudited)
|
|
Table IV — Results of Completed Programs
(Unaudited)
|
|
Table V – Results of Sales or Disposals of
Property (Unaudited)
|
Additional
information relating to the acquisition of properties by the Prior Real Estate
Programs is contained in Table VI, which is included in Part II of the
registration statement which our company has filed with the SEC. We will provide
to you Table VI and, where feasible, additional information concerning the Prior
Real Estate Programs at no charge upon request.
Except in
Table III with respect to certain information required to be presented on a cash
basis, all information in the Tables is presented in conformity with
GAAP.
A–2
TABLE I
(UNAUDITED)
EXPERIENCE
IN RAISING AND INVESTING FUNDS
This Table I
sets forth a summary of experience of Bluerock Real Estate, L.L.C. in raising
and investing funds in in Prior Real Estate Programs the offerings of which have
closed in the three years ended December 31, 2008. All of the Prior Real Estate
Programs presented in this Table I have similar or identical investment
objectives to Bluerock Enhanced Multifamily Trust, Inc. Information is provided
with regard to the manner in which the proceeds of the offerings have been
applied. Also set forth is information pertaining to the timing and length of
these offerings and the time period over which the proceeds have been invested
in the properties. All figures are as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BR-North
ParkTowers,
DST
|
|
Summit
at
Southpoint
|
|
Landmark/Laumeier
Office
Portfolio
|
|
|
|
|
|
|
|
|
|
Dollar
amount offered
|
|
$
|
24,975,000
|
|
|
|
|
$
|
13,545,000
|
|
|
|
|
$
|
7,525,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
amount raised
|
|
|
11,432,968
|
|
|
100.0
|
%
|
|
13,387,849
|
|
|
100.0
|
%
|
|
7,315,869
|
|
|
100.0
|
%
|
Less
offering expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling commissions and discounts retained by
affiliates
|
|
|
1,086,132
|
|
|
9.5
|
%
|
|
1,338,785
|
|
|
10.0
|
%
|
|
695,008
|
|
|
9.5
|
%
|
Organizational expenses
|
|
|
91,464
|
|
|
0.8
|
%
|
|
393,692
|
|
|
2.9
|
%
|
|
280,118
|
|
|
3.8
|
%
|
Reserves
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
Other
|
|
|
—
|
|
|
0.0
|
%
|
|
—
|
|
|
0.0
|
%
|
|
—
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
available for investment
|
|
$
|
10,255,372
|
|
|
89.7
|
%
|
$
|
11,655,372
|
|
|
87.1
|
%
|
$
|
6,340,743
|
|
|
86.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash invested
|
|
|
8,565,186
|
|
|
33.9
|
%
|
|
11,158,680
|
|
|
31.6
|
%
|
|
6,043,726
|
|
|
24.3
|
%
|
Acquisition fees
|
|
|
944,501
|
|
|
3.7
|
%
|
|
206,409
|
|
|
0.6
|
%
|
|
195,538
|
|
|
0.8
|
%
|
Loan costs
|
|
|
745,685
|
|
|
3.0
|
%
|
|
290,283
|
|
|
0.8
|
%
|
|
101,479
|
|
|
0.4
|
%
|
Mortgage financing
|
|
|
15,000,000
|
|
|
59.4
|
%
|
|
23,700,000
|
|
|
67.0
|
%
|
|
18,500,000
|
|
|
74.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
acquisition cost
|
|
$
|
25,255,372
|
|
|
100
|
%
|
$
|
35,355,372
|
|
|
100
|
%
|
$
|
24,840,743
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent leverage
|
|
|
59.4
|
%
|
|
|
|
|
67.0
|
%
|
|
|
|
|
74.5
|
%
|
|
|
|
Date
offering began
|
|
|
12/9/05
|
|
|
|
|
|
1/18/07
|
|
|
|
|
|
6/25/07
|
|
|
|
|
Length
of offering (in months)
|
|
|
29
|
|
|
|
|
|
8
|
|
|
|
|
|
2
|
|
|
|
|
Months
to invest 90% of amount available for investment (measured from the
beginning of the offering)
|
|
|
11
|
(1)
|
|
|
|
|
5
|
(1)
|
|
|
|
|
2
|
(1)
|
|
|
|
A–3
TABLE I
(UNAUDITED)
EXPERIENCE
IN RAISING AND INVESTING FUNDS — (Continued)
This Table I
sets forth a summary of experience of Bluerock Real Estate, L.L.C. in raising
and investing funds in in Prior Real Estate Programs the offerings of which have
closed in the three years ended December 31, 2008. All of the Prior Real Estate
Programs presented in this Table I have similar or identical investment
objectives to Bluerock Enhanced Multifamily Trust, Inc. Information is provided
with regard to the manner in which the proceeds of the offerings have been
applied. Also set forth is information pertaining to the timing and length of
these offerings and the time period over which the proceeds have been invested
in the properties. All figures are as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cummings Research Park
|
|
1355 First
|
|
|
|
Portfolio I
|
|
Portfolio II
|
|
Portfolio III
|
|
Avenue
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
amount offered
|
|
$
|
24,209,284
|
|
|
|
|
$
|
21,276,699
|
|
|
|
|
$
|
21,206,547
|
|
|
|
|
$
|
31,237,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
amount raised
|
|
|
24,209,284
|
|
|
100.0
|
%
|
|
21,276,699
|
|
|
100.0
|
%
|
|
21,206,547
|
|
|
100.0
|
%
|
|
31,237,500
|
|
|
100.0
|
%
|
Less
offering expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling commissions and discounts retained by
affiliates
|
|
|
2,178,836
|
|
|
9.0
|
%
|
|
2,021,286
|
|
|
9.5
|
%
|
|
2,014,622
|
|
|
9.5
|
%
|
|
2,967,563
|
|
|
9.5
|
%
|
Organizational expenses
|
|
|
560,844
|
|
|
2.3
|
%
|
|
566,321
|
|
|
2.7
|
%
|
|
546,635
|
|
|
2.6
|
%
|
|
624,750
|
|
|
2.0
|
%
|
Reserves
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
Other
|
|
|
—
|
|
|
0.0
|
%
|
|
—
|
|
|
0.0
|
%
|
|
—
|
|
|
0.0
|
%
|
|
—
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
available for investment
|
|
$
|
21,469,604
|
|
|
88.7
|
%
|
$
|
18,689,092
|
|
|
87.8
|
%
|
$
|
18,645,290
|
|
|
87.9
|
%
|
$
|
27,645,188
|
|
|
88.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash invested
|
|
|
19,862,084
|
|
|
37.0
|
%
|
|
16,916,675
|
|
|
28.4
|
%
|
|
17,016,048
|
|
|
32.1
|
%
|
|
24,704,160
|
|
|
48.3
|
%
|
Acquisition fees
|
|
|
1,433,000
|
|
|
2.7
|
%
|
|
1,599,526
|
|
|
2.7
|
%
|
|
1,456,400
|
|
|
2.7
|
%
|
|
1,329,471
|
|
|
2.6
|
%
|
Loan costs
|
|
|
174,520
|
|
|
0.3
|
%
|
|
172,890
|
|
|
0.3
|
%
|
|
172,842
|
|
|
0.3
|
%
|
|
1,611,557
|
|
|
3.2
|
%
|
Mortgage financing
|
|
|
32,250,000
|
|
|
60.0
|
%
|
|
40,900,000
|
|
|
68.6
|
%
|
|
34,390,000
|
|
|
64.8
|
%
|
|
23,468,330
|
|
|
45.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
acquisition cost
|
|
$
|
53,719,604
|
|
|
100
|
%
|
$
|
59,589,092
|
|
|
100
|
%
|
$
|
53,035,290
|
|
|
100
|
%
|
$
|
51,113,518
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent leverage
|
|
|
60.0
|
%
|
|
|
|
|
68.6
|
%
|
|
|
|
|
64.8
|
%
|
|
|
|
|
45.9
|
%
|
|
|
|
Date
offering began
|
|
|
5/13/08
|
|
|
|
|
|
11/26/07
|
|
|
|
|
|
3/10/08
|
|
|
|
|
|
8/14/07
|
|
|
|
|
Length
of offering (in months)
|
|
|
4.5
|
|
|
|
|
|
5
|
|
|
|
|
|
3
|
|
|
|
|
|
8.5
|
|
|
|
|
Months
to invest 90% of amount available for investment (measured from the
beginning of the offering)
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
|
|
(1)
|
Property was acquired by sponsor prior to
offering date. Sponsor has retained ownership for the portion of the
offering which was not sold and does not intend to further syndicate this
program. The dollar amount raised is lower than the dollar amount offered
but is shown as a 100% so that all offering percentages are calculated off
of the lesser amount (i.e., the dollar amount raised).
|
A–4
TABLE II
(UNAUDITED)
COMPENSATION TO SPONSOR
This Table II
sets forth the types of compensation received by Bluerock Real Estate, L.L.C.,
and its affiliates, including compensation paid out of offering proceeds and
compensation paid in connection with ongoing operations, in connection with
seven programs the offerings of which have closed in the three years ended
December 31, 2008. All of the Prior Real Estate Programs presented in this Table
II have similar or identical investment objectives to Bluerock Enhanced
Multifamily Trust, Inc. All figures are as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BR North Park
|
|
Summit at
|
|
Landmark/
Laumeier
Office
|
|
Cummings Research Park
|
|
1355 First
|
|
Woodlands I
|
|
|
|
Towers, DST
|
|
Southpoint
|
|
Portfolio
|
|
Portfolio I
|
|
Portfolio II
|
|
Portfolio III
|
|
Avenue
|
|
LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
offering commenced
|
|
|
12/9/05
|
|
|
1/18/07
|
|
|
6/25/07
|
|
|
5/13/08
|
|
|
11/26/07
|
|
|
3/10/08
|
|
|
8/14/07
|
|
|
6/15/03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
amount raised
|
|
$
|
11,432,968
|
|
$
|
13,387,849
|
|
$
|
7,315,869
|
|
$
|
24,209,284
|
|
$
|
21,276,699
|
|
$
|
21,206,547
|
|
$
|
31,237,500
|
|
$
|
4,311,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
paid to sponsor from proceeds of offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting fees
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
25,000
|
|
Acquisition fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— real estate commissions
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
— advisory fees
|
|
|
309,600
|
|
|
975,000
|
|
|
712,477
|
|
|
1,433,000
|
|
|
1,599,526
|
|
|
1,456,400
|
|
|
1,329,471
|
|
|
—
|
|
— Reimbursed offering expenses
|
|
|
91,464
|
|
|
393,692
|
|
|
280,118
|
|
|
560,844
|
|
|
566,321
|
|
|
546,635
|
|
|
624,750
|
|
|
32,333
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35,000
|
|
|
35,000
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
amount paid to sponsor
|
|
$
|
401,064
|
|
$
|
1,368,692
|
|
$
|
992,595
|
|
$
|
1,993,844
|
|
$
|
2,200,847
|
|
$
|
2,038,035
|
|
$
|
1,954,221
|
|
$
|
57,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
amount of cash generated from operations before deducting payments to
sponsor
|
|
$
|
1,028,271
|
|
$
|
2,676,419
|
|
$
|
2,478,926
|
|
$
|
2,036,756
|
|
$
|
3,917,840
|
|
$
|
3,452,804
|
|
$
|
2,717,314
|
|
$
|
1,307,264
|
|
Amount
paid to sponsor from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property management fees
|
|
|
—
|
|
|
335,928
|
|
|
250,822
|
|
|
181,135
|
|
|
242,157
|
|
|
234,191
|
|
|
—
|
|
|
328,574
|
|
Partnership management fees
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction management fees
|
|
|
—
|
|
|
—
|
|
|
10,398
|
|
|
36,412
|
|
|
36,412
|
|
|
36,412
|
|
|
1,200,000
|
|
|
|
|
Reimbursements
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Leasing commissions
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Dollar
amount of property sales and refinancing before deducting payments to
sponsor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— cash
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
— notes
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amount
paid to sponsor from property sales and refinancing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate commissions
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Incentive fees
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
A–5
TABLE II
(UNAUDITED)
COMPENSATION TO SPONSOR — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plaza
Gardens,
DST
|
|
Valley
Townhomes,
DST
|
|
BR Town
&
County,
DST
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Date
offering commenced
|
|
|
9/19/08
|
|
|
8/22/08
|
|
|
11/15/08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
amount raised
|
|
$
|
1,662,528
|
|
$
|
12,387,470
|
|
$
|
100,000
|
|
$
|
130,066,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
paid to sponsor from proceeds of offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting fees
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
Acquisition fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— real estate commissions
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
— advisory fees
|
|
|
|
|
|
707,400
|
|
|
|
|
|
7,815,474
|
|
— Reimbursed offering expenses
|
|
|
15,813
|
|
|
159,165
|
|
|
|
|
|
3,063,825
|
|
Other
|
|
|
|
|
|
35,000
|
|
|
|
|
|
70,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
amount paid to sponsor
|
|
$
|
15,813
|
|
$
|
901,565
|
|
$
|
—
|
|
$
|
10,949,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
amount of cash generated from operations before deducting payments to
sponsor
|
|
|
|
|
|
|
|
|
|
|
$
|
18,308,330
|
|
Amount
paid to sponsor from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property management fees
|
|
|
|
|
|
|
|
|
106,442
|
|
|
1,244,233
|
|
Partnership management fees
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Construction management fees
|
|
|
|
|
|
|
|
|
|
|
|
1,319,634
|
|
Reimbursements
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Leasing commissions
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
amount of property sales and refinancing before deducting payments to
sponsor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— cash
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
— notes
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Amount
paid to sponsor from property sales and refinancing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate commissions
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Incentive fees
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
A–6
TABLE III
(UNAUDITED)
ANNUAL
OPERATING RESULTS OF PRIOR REAL ESTATE PROGRAMS
This Table
III sets forth the annual operating results of Prior Real Estate Programs
sponsored by Bluerock Real Estate, L.L.C. and its affiliates that have closed
offerings during the five years ended December 31, 2008. All of the Prior Real
Estate Programs presented in this Table III have similar or identical investment
objectives to Bluerock Enhanced Multifamily Trust, Inc. All figures are for the
period commencing January 1 of the year acquired, except as otherwise
noted.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Woodlands I, LLC (Sponsored by Bluerock Real Estate,
L.L.C.)
|
|
|
|
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006(1)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
revenue
|
$
|
1,729,356
|
|
$
|
2,238,883
|
|
$
|
2,129,734
|
|
$
|
998,884
|
|
Gain
on sale of properties
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,829,029
|
|
Interest income
|
|
|
1,897
|
|
|
6,915
|
|
|
12,366
|
|
|
27,167
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
442,056
|
|
|
669,266
|
|
|
881,966
|
|
|
313,445
|
|
Interest expense
|
|
|
600,214
|
|
|
838,878
|
|
|
829,788
|
|
|
306,455
|
|
Property and asset management fees
|
|
|
66,254
|
|
|
136,292
|
|
|
126,028
|
|
|
—
|
|
General and administrative
|
|
|
127,739
|
|
|
309,841
|
|
|
149,426
|
|
|
91,785
|
|
Commissions
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
|
297,685
|
|
|
432,758
|
|
|
464,587
|
|
|
472,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - GAAP basis
|
|
$
|
197,305
|
|
$
|
(141,237
|
)
|
$
|
(309,695
|
)
|
$
|
2,670,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
197,305
|
|
$
|
(141,237
|
)
|
$
|
(309,695
|
)
|
$
|
(158,064
|
)
|
— from gain on sale
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,829,029
|
|
Cash
generated from operations
|
|
|
440,948
|
|
|
228,066
|
|
|
(80,103
|
)
|
|
(119,504
|
)
|
Cash
generated from sales
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,214,685
|
|
Cash
generated from financing/refinancing
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash generated from operations, sales and refinancing
|
|
|
440,948
|
|
|
228,066
|
|
|
(80,103
|
)
|
|
5,095,181
|
|
Less:
Cash distributed to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from operating cash flow
|
|
|
153,903
|
|
|
525,009
|
|
|
525,009
|
|
|
60,483
|
|
— from sales and refinancing
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,214,685
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions
|
|
|
293,961
|
|
|
(324,597
|
)
|
|
(512,820
|
)
|
|
640,554
|
|
Special items (not including sales and refinancing)
Improvements
to building
|
|
|
135,924
|
|
|
222,874
|
|
|
204,812
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions and special
items
|
|
$
|
158,037
|
|
$
|
(547,471
|
)
|
$
|
(717,632
|
)
|
$
|
640,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax and Distribution
Data Per $1,000 Invested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from
operations
|
|
$
|
71
|
|
$
|
(30
|
)
|
$
|
(61
|
)
|
$
|
(31
|
)
|
— from
recapture
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital gain (loss)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
131
|
|
Cash
distribution to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from investment income
|
|
|
53
|
|
|
118
|
|
|
85
|
|
|
224
|
|
— from return of capital
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
distributions on GAAP basis
|
|
$
|
53
|
|
$
|
118
|
|
$
|
85
|
|
$
|
1,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source (on cash basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
53
|
|
$
|
118
|
|
$
|
85
|
|
$
|
14
|
|
— from refinancing
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
— from sales
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
distributions on cash basis
|
|
$
|
53
|
|
$
|
118
|
|
$
|
85
|
|
$
|
1,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
(in percentage terms) remaining invested in program properties at the end
of last year reported in table
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
0
|
%
|
|
|
(1)
|
The property owned by Woodlands I, LLC was
purchased on April 14, 2003 and sold on May 15, 2006.
|
A–7
TABLE III
(UNAUDITED)
ANNUAL
OPERATING RESULTS OF PRIOR REAL ESTATE PROGRAMS —
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BR North Park Towers, DST
(Sponsored by
Bluerock Real Estate, L.L.C.)
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Gross
revenue
|
$
|
50,044
|
|
$
|
867,355
|
|
$
|
2,165,177
|
|
$
|
2,145,856
|
|
Interest income
|
|
|
—
|
|
|
320
|
|
|
—
|
|
|
—
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest expense
|
|
|
22,091
|
|
|
334,676
|
|
|
806,665
|
|
|
817,705
|
|
Property and asset management fees
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
General and administrative
|
|
|
1,401
|
|
|
32,044
|
|
|
116,998
|
|
|
120,162
|
|
Commissions
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
|
21,173
|
|
|
512,927
|
|
|
1,259,215
|
|
|
1,286,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income - GAAP basis
|
|
$
|
5,379
|
|
$
|
(11,972
|
)
|
$
|
(17,701
|
)
|
$
|
(78,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
5,379
|
|
$
|
(11,972
|
)
|
$
|
(17,701
|
)
|
$
|
(78,341
|
)
|
— from gain on sale
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash
generated from operations
|
|
|
(217,284
|
)
|
|
193,293
|
|
|
838,586
|
|
|
247,915
|
|
Cash
generated from sales
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash
generated from financing/refinancing
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
cash generated from operations, sales and refinancing
|
|
|
(217,284
|
)
|
|
193,293
|
|
|
838,586
|
|
|
247,915
|
|
Less:
Cash distributed to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from operating cash flow
|
|
|
—
|
|
|
88,823
|
|
|
—
|
|
|
215,589
|
|
— from sales and refinancing
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions
|
|
|
(217,284
|
)
|
|
104,470
|
|
|
838,586
|
|
|
32,326
|
|
Special items (not including sales and refinancing)
Improvements
to building
|
|
|
—
|
|
|
72,080
|
|
|
219,681
|
|
|
205,489
|
|
Other
|
|
|
—
|
|
|
34,837
|
|
|
34,224
|
|
|
65,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions and special
items
|
|
$
|
(217,284
|
)
|
$
|
(2,447
|
)
|
$
|
584,681
|
|
$
|
(238,823
|
)
|
Tax and Distribution
Data Per $1,000 Invested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
1
|
|
$
|
(1
|
)
|
$
|
(2
|
)
|
$
|
(7
|
)
|
— from recapture
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Capital gain (loss)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Cash
distribution to investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from investment income
|
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
$
|
19
|
|
— from return of capital
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
distributions on GAAP basis
|
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source (on cash basis)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
$
|
19
|
|
— from refinancing
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
— from sales
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
distributions on cash basis
|
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
$
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
(in percentage terms) remaining invested in program properties at the end
of last year reported in table
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
(1)
|
The property owned by BR North Park
Towers, DST was purchased on December 9, 2005.
|
A–8
TABLE III
(UNAUDITED)
ANNUAL
OPERATING RESULTS OF PRIOR REAL ESTATE PROGRAMS —
(Continued)
|
|
|
|
|
|
|
|
|
|
Summit at Southpoint (Sponsored by Bluerock Real Estate,
L.L.C.)
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Gross
revenue
|
|
$
|
4,594,040
|
|
$
|
4,844,940
|
|
Interest income
|
|
|
63,770
|
|
|
19,749
|
|
Less:
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,893,957
|
|
|
1,876,996
|
|
Interest expense
|
|
|
1,620,832
|
|
|
1,356,549
|
|
Property and asset management fees
|
|
|
181,349
|
|
|
355,891
|
|
General and administrative
|
|
|
82,099
|
|
|
112,526
|
|
Commissions
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
|
587,252
|
|
|
614,799
|
|
|
|
|
|
|
|
|
|
Net
Income - GAAP basis
|
|
$
|
292,321
|
|
$
|
547,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
292,321
|
|
$
|
547,928
|
|
— from gain on sale
|
|
|
—
|
|
|
—
|
|
Cash
generated from operations
|
|
|
1,151,744
|
|
|
1,188,747
|
|
Cash
generated from sales
|
|
|
—
|
|
|
—
|
|
Cash
generated from financing/refinancing
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
cash generated from operations, sales and refinancing
|
|
|
1,151,744
|
|
|
1,188,747
|
|
Less:
Cash distributed to investors
|
|
|
|
|
|
|
|
— from operating cash flow
|
|
|
537,825
|
|
|
1,114,975
|
|
— from sales and refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions
|
|
|
613,919
|
|
|
73,772
|
|
|
Special items (not including sales and refinancing)
Improvements
to building
|
|
|
336,367
|
|
|
147,866
|
|
Other
|
|
|
21,020
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions and special
items
|
|
$
|
256,532
|
|
$
|
(74,094
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax and Distribution
Data Per $1,000 Invested
|
|
|
|
|
|
|
|
Federal income tax results:
|
|
|
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
22
|
|
$
|
41
|
|
— from recapture
|
|
|
—
|
|
|
—
|
|
Capital gain (loss)
|
|
$
|
—
|
|
$
|
—
|
|
Cash
distribution to investors
|
|
|
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
|
|
|
— from investment income
|
|
$
|
40
|
|
$
|
83
|
|
— from return of capital
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on GAAP basis
|
|
$
|
40
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source (on cash basis)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
40
|
|
$
|
83
|
|
— from refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
— from sales
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on cash basis
|
|
$
|
40
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
(in percentage terms) remaining invested in program properties at the end
of last year reported in table
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
(1)
|
The property owned by Summit at Southpoint
was purchased on February 22, 2006.
|
A–9
TABLE III
(UNAUDITED)
ANNUAL
OPERATING RESULTS OF PRIOR REAL ESTATE PROGRAMS —
(Continued)
|
|
|
|
|
|
|
|
|
|
Landmark/
Laumeier
Office
Portfolio
(sponsored by
Bluerock Real
Estate,
L.L.C.)
|
|
|
|
|
|
|
|
2007 (1)
|
|
2008
|
|
|
|
|
|
|
|
Gross
revenue
|
|
$
|
3,202,979
|
|
$
|
3,608,620
|
|
Interest income
|
|
|
2,978
|
|
|
24,729
|
|
Less:
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
998,593
|
|
|
1,491,113
|
|
Interest expense
|
|
|
880,119
|
|
|
1,049,505
|
|
Property and asset management fees
|
|
|
142,422
|
|
|
217,125
|
|
General and administrative
|
|
|
19,136
|
|
|
55,346
|
|
Depreciation and amortization
|
|
|
479,502
|
|
|
578,004
|
|
|
|
|
|
|
|
|
|
Net
Income - GAAP basis
|
|
$
|
686,185
|
|
$
|
242,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
686,185
|
|
$
|
242,256
|
|
— from gain on sale
|
|
|
—
|
|
|
—
|
|
Cash
generated from operations
|
|
|
306,846
|
|
|
938,097
|
|
Cash
generated from sales
|
|
|
—
|
|
|
—
|
|
Cash
generated from financing/refinancing
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total cash generated from operations,
sales and refinancing
|
|
|
306,846
|
|
|
938,097
|
|
Less:
Cash distributed to investors
|
|
|
|
|
|
|
|
— from operating cash flow
|
|
|
197,822
|
|
|
530,401
|
|
— from sales and refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions
|
|
|
109,024
|
|
|
407,696
|
|
Special items (not including sales and refinancing)
Improvements
to building
|
|
|
87,649
|
|
|
66,696
|
|
Other
|
|
|
—
|
|
|
147,937
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions and special
items
|
|
$
|
21,375
|
|
$
|
193,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax and Distribution
Data Per $1,000 Invested
|
|
|
|
|
|
|
|
Federal income tax results:
|
|
|
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
92
|
|
$
|
33
|
|
— from recapture
|
|
|
—
|
|
|
—
|
|
Capital gain (loss)
|
|
$
|
—
|
|
$
|
—
|
|
Cash
distribution to investors
|
|
|
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
|
|
|
— from investment income
|
|
$
|
27
|
|
$
|
71
|
|
— from return of capital
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on GAAP basis
|
|
$
|
27
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source (on cash basis)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
27
|
|
$
|
71
|
|
— from refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
— from sales
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on cash basis
|
|
$
|
27
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
(in percentage terms) remaining invested in program properties at the end
of last year reported in table
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
(1)
|
The property owned by Landmark/Laumeier
Porfolio was purchased on May 14, 2007.
|
A–10
TABLE III
(UNAUDITED)
ANNUAL
OPERATING RESULTS OF PRIOR REAL ESTATE PROGRAMS —
(Continued)
|
|
|
|
|
|
|
|
|
|
1355 First Avenue (sponsored by Bluerock Real Estate,
L.L.C.)
|
|
|
|
|
|
|
|
2007 (1)
|
|
2008
|
|
|
|
|
|
|
|
Gross
revenue
|
|
$
|
—
|
|
$
|
2,787,650
|
|
Interest income
|
|
|
59,607
|
|
|
96,724
|
|
Less:
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
60,000
|
|
|
—
|
|
Interest expense
|
|
|
1,020,964
|
|
|
—
|
|
Property and asset management fees
|
|
|
—
|
|
|
—
|
|
General and administrative
|
|
|
95,225
|
|
|
19,609
|
|
Commissions
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Net
Income - GAAP basis
|
|
$
|
(1,116,582
|
)
|
$
|
2,864,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
$
|
2,864,765
|
|
— from gain on sale
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated from operations
|
|
|
(1,347,451
|
)
|
|
2,864,765
|
|
Cash
generated from sales
|
|
|
—
|
|
|
—
|
|
Cash
generated from financing/refinancing
|
|
|
—
|
|
|
—
|
|
Total
cash generated from operations, sales and refinancing
|
|
|
(1,347,451
|
)
|
|
2,864,765
|
|
|
|
|
|
|
|
|
|
Less:
Cash distributed to investors
|
|
|
|
|
|
|
|
— from operating cash flow
|
|
|
—
|
|
|
1,641,714
|
|
— from sales and refinancing
|
|
|
101,719
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions
|
|
|
(1,449,170
|
)
|
|
1,223,051
|
|
Special items (not including sales and refinancing)
Improvements
to building
|
|
|
1,348,767
|
|
|
13,254,395
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions and special
items
|
|
$
|
(2,797,937
|
)
|
$
|
(12,031,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax and Distribution
Data Per $1,000 Invested
|
|
|
|
|
|
|
|
Federal income tax results:
|
|
|
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
(55
|
)
|
$
|
(55
|
)
|
— from recapture
|
|
|
—
|
|
|
—
|
|
Capital gain (loss)
|
|
$
|
—
|
|
$
|
—
|
|
Cash
distribution to investors
|
|
|
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
|
|
|
— from investment income
|
|
$
|
—
|
|
$
|
53
|
|
— from return of capital
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on GAAP basis
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source (on cash basis)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
$
|
53
|
|
— from refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
— from sales
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on cash basis
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Amount
(in percentage terms) remaining invested in program properties at the end
of last year reported in table
|
|
|
100
|
%
|
|
100
|
%
|
|
|
(1)
|
The property owned by 1355 First Avenue
was purchased on June 29, 2007.
|
A–11
TABLE III
(UNAUDITED)
ANNUAL
OPERATING RESULTS OF PRIOR REAL ESTATE PROGRAMS —
(Continued)
|
|
|
|
|
|
|
|
|
|
Huntsville - Cummings Research Park - Portfolio I -
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Gross
revenue
|
|
$
|
1,487,708
|
|
$
|
7,289,265
|
|
Interest income
|
|
|
31,243
|
|
|
26,097
|
|
Less:
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
268,377
|
|
|
3,544,865
|
|
Interest expense
|
|
|
—
|
|
|
2,121,351
|
|
Property and asset management fees
|
|
|
33,867
|
|
|
367,068
|
|
General and administrative
|
|
|
4,949
|
|
|
106,368
|
|
Commissions
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
|
517,388
|
|
|
3,151,434
|
|
|
|
|
|
|
|
|
|
Net
Income - GAAP basis
|
|
$
|
694,370
|
|
$
|
(1,975,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
694,370
|
|
$
|
(1,975,724
|
)
|
— from gain on sale
|
|
|
—
|
|
|
—
|
|
Cash
generated from operations
|
|
|
11,107,095
|
|
|
1,185,345
|
|
Cash
generated from sales
|
|
|
—
|
|
|
—
|
|
Cash
generated from financing/refinancing
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
cash generated from operations, sales and refinancing
|
|
|
11,107,095
|
|
|
1,185,345
|
|
Less:
Cash distributed to investors
|
|
|
|
|
|
|
|
— from operating cash flow
|
|
|
—
|
|
|
1,350,057
|
|
— from sales and refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions
|
|
|
11,107,095
|
|
|
(164,712
|
)
|
Special items (not including sales and refinancing)
Improvements
to building
|
|
|
—
|
|
|
2,388,717
|
|
Other
|
|
|
—
|
|
|
96,876
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions and special
items
|
|
$
|
11,107,095
|
|
$
|
(2,650,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax and Distribution
Data Per $1,000 Invested
|
|
|
|
|
|
|
|
Federal income tax results:
|
|
|
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
$
|
(82
|
)
|
— from recapture
|
|
|
—
|
|
|
—
|
|
Capital gain (loss)
|
|
$
|
—
|
|
$
|
—
|
|
Cash
distribution to investors
|
|
|
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
|
|
|
— from investment income
|
|
$
|
—
|
|
$
|
56
|
|
— from return of capital
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on GAAP basis
|
|
$
|
—
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source (on cash basis)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
$
|
56
|
|
— from refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
— from sales
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on cash basis
|
|
$
|
—
|
|
$
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
(in percentage terms) remaining invested in program properties at the end
of last year reported in table
|
|
|
100
|
%
|
|
100
|
%
|
A–12
TABLE III
(UNAUDITED)
ANNUAL
OPERATING RESULTS OF PRIOR REAL ESTATE PROGRAMS —
(Continued)
|
|
|
|
|
|
|
|
|
|
Huntsville -
Cummings
Research Park - Portfolio II
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Gross
revenue
|
|
$
|
1,314,505
|
|
$
|
8,511,115
|
|
Interest income
|
|
|
136,487
|
|
|
29,370
|
|
Less:
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
260,708
|
|
|
3,466,514
|
|
Interest expense
|
|
|
—
|
|
|
2,690,334
|
|
Property and asset management fees
|
|
|
41,392
|
|
|
534,851
|
|
General and administrative
|
|
|
9,020
|
|
|
136,070
|
|
Commissions
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
|
359,308
|
|
|
2,174,579
|
|
|
|
|
|
|
|
|
|
Net
Income - GAAP basis
|
|
$
|
780,564
|
|
$
|
(461,863
|
)
|
|
|
|
|
|
|
|
|
Taxable income
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
780,564
|
|
$
|
(461,863
|
)
|
— from gain on sale
|
|
|
—
|
|
|
—
|
|
Cash
generated from operations
|
|
|
11,020,459
|
|
|
2,945,123
|
|
Cash
generated from sales
|
|
|
—
|
|
|
—
|
|
Cash
generated from financing/refinancing
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
cash generated from operations, sales and refinancing
|
|
|
11,020,459
|
|
|
2,945,123
|
|
Less:
Cash distributed to investors
|
|
|
|
|
|
|
|
— from operating cash flow
|
|
|
—
|
|
|
1,227,028
|
|
— from sales and refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions
|
|
|
11,020,459
|
|
|
1,718,095
|
|
Special items (not including sales and refinancing)
Improvements
to building
|
|
|
—
—
|
|
|
—
1,461,149
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions and special
items
|
|
$
|
11,020,459
|
|
$
|
256,946
|
|
|
|
|
|
|
|
|
|
Tax and Distribution
Data Per $1,000 Invested
|
|
|
|
|
|
|
|
Federal income tax results:
|
|
|
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
$
|
(22
|
)
|
— from recapture
|
|
|
—
|
|
|
—
|
|
Capital gain (loss)
|
|
$
|
—
|
|
$
|
—
|
|
Cash
distribution to investors
|
|
|
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
|
|
|
— from investment income
|
|
$
|
—
|
|
$
|
58
|
|
— from return of capital
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on GAAP basis
|
|
$
|
—
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
Source (on cash basis)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
$
|
58
|
|
— from refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
— from sales
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on cash basis
|
|
$
|
—
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
Amount
(in percentage terms) remaining invested in program properties at the end
of last year reported in table
|
|
|
100
|
%
|
|
100
|
%
|
A–13
TABLE III
(UNAUDITED)
ANNUAL
OPERATING RESULTS OF PRIOR REAL ESTATE PROGRAMS —
(Continued)
|
|
|
|
|
|
|
|
|
|
Huntsville -
Cummings
Research Park - Portfolio III
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Gross
revenue
|
|
$
|
1,218,835
|
|
$
|
8,164,819
|
|
Interest income
|
|
|
31,534
|
|
|
19,721
|
|
Less:
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
305,746
|
|
|
3,631,519
|
|
Interest expense
|
|
|
—
|
|
|
2,262,117
|
|
Property and asset management fees
|
|
|
33,426
|
|
|
324,969
|
|
General and administrative
|
|
|
9,952
|
|
|
327,175
|
|
Commissions
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
|
319,636
|
|
|
2,205,383
|
|
|
|
|
|
|
|
|
|
Net
Income - GAAP basis
|
|
$
|
581,609
|
|
$
|
(566,623
|
)
|
|
|
|
|
|
|
|
|
Taxable income
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
581,609
|
|
$
|
(566,623
|
)
|
— from gain on sale
|
|
|
—
|
|
|
—
|
|
Cash
generated from operations
|
|
|
8,981,298
|
|
|
2,661,423
|
|
Cash
generated from sales
|
|
|
—
|
|
|
—
|
|
Cash
generated from financing/refinancing
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
cash generated from operations, sales and refinancing
|
|
|
8,981,298
|
|
|
2,661,423
|
|
Less:
Cash distributed to investors
|
|
|
|
|
|
|
|
— from operating cash flow
|
|
|
—
|
|
|
1,244,261
|
|
— from sales and refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions
|
|
|
8,981,298
|
|
|
1,417,162
|
|
Special items (not including sales and refinancing)
|
|
|
—
|
|
|
—
|
|
Improvements to building
|
|
|
—
|
|
|
941,557
|
|
Other
|
|
|
4,508,843
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Cash
generated (deficiency) after cash distributions and special
items
|
|
$
|
4,472,455
|
|
$
|
475,605
|
|
|
|
|
|
|
|
|
|
Tax and Distribution
Data Per $1,000 Invested
|
|
|
|
|
|
|
|
Federal income tax results:
|
|
|
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
$
|
(27
|
)
|
— from recapture
|
|
|
|
|
|
|
|
Capital gain (loss)
|
|
$
|
—
|
|
$
|
—
|
|
Cash
distribution to investors
|
|
|
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
|
|
|
— from investment income
|
|
$
|
—
|
|
|
59
|
|
— from return of capital
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on GAAP basis
|
|
$
|
—
|
|
|
59
|
|
|
|
|
|
|
|
|
|
Source (on cash basis)
|
|
|
|
|
|
|
|
— from operations
|
|
$
|
—
|
|
|
59
|
|
— from refinancing
|
|
|
—
|
|
|
—
|
|
— from other
|
|
|
—
|
|
|
—
|
|
— from sales
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
distributions on cash basis
|
|
$
|
—
|
|
|
59
|
|
|
|
|
|
|
|
|
|
Amount
(in percentage terms) remaining invested in program properties at the end
of last year reported in table
|
|
|
100
|
%
|
|
100
|
%
|
A–14
TABLE IV
(UNAUDITED)
RESULTS
OF COMPLETED PROGRAMS
This Table IV
sets forth the results of completed Prior Real Estate Programs sponsored by
Bluerock Real Estate, L.L.C. that have sold properties and completed operations
during the five years ended December 31, 2008. All of the Prior Real Estate
Programs presented in this Table IV have similar or identical investment
objectives to Bluerock Enhanced Multifamily Trust, Inc.
|
|
|
|
|
|
|
Bluerock Real Estate, LLC sponsored program
|
|
|
|
|
|
|
|
Woodlands I LLC
|
|
|
|
|
|
Dollar
amount raised
|
|
$
|
4,311,100
|
|
Number
of properties purchased
|
|
|
3
|
|
Date
of closing of offering
|
|
|
3/9/05
|
|
Date
of first sale of property
|
|
|
5/15/06
|
|
Date
of final sale of property
|
|
|
5/15/06
|
|
Tax and Distribution
Data Per $1,000 Investment
|
|
|
|
|
Federal Income Tax Results:
|
|
|
|
|
Ordinary income (loss)
|
|
|
|
|
— from operations
|
|
$
|
(95
|
)
|
— from recapture
|
|
|
—
|
|
Capital Gain (loss)
|
|
|
656
|
|
Deferred Gain
|
|
|
|
|
— Capital
|
|
|
—
|
|
— Ordinary
|
|
|
—
|
|
Cash
Distributions to Investors
|
|
|
|
|
Source (on GAAP basis)
|
|
|
|
|
— Investment income
|
|
|
480
|
|
— Return of capital
|
|
|
1,000
|
|
Source (on cash basis)
|
|
|
|
|
— Sales
|
|
|
1,210
|
|
— Refinancing
|
|
|
—
|
|
— Operations
|
|
|
270
|
|
— Other
|
|
|
—
|
|
Receivable on Net Purchase Money Financing
|
|
|
—
|
|
A–15
TABLE V
(UNAUDITED)
RESULTS OF
SALES OR DISPOSALS OF PROPERTY
This Table V
sets forth summary information on the results of the sale or disposals of
properties during the three years ended December 31, 2008 by Prior Real Estate
Programs sponsored by Bluerock Real Estate, L.L.C. All of the Prior Real Estate
Programs have similar or identical investment objectives to Bluerock Enhanced
Multifamily Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling Price, Net of Closing Costs and GAAP
Adjustments
|
|
Cost of Properties
Including
Closing and Soft Costs
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
Date Acquired
|
|
Date of Sale
|
|
Cash Received Net of Closing Costs
|
|
Mortgage Balance at Time of Sale
|
|
Purchase Money Mortgage Taken Back by Program
|
|
Adjustments Resulting from Application of GAAP
|
|
Total(1)
|
|
Original Mortgage Financing
|
|
Total Acquisition Cost, Capital Improvement Closing and Soft
Costs(2)
|
|
Total
|
|
Excess (Deficiency) of Property Operating Cash Receipts Over Cash
Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Woodlands Office Park.
|
|
|
4/14/03
|
|
|
5/15/06
|
|
$
|
4,843,489
|
|
$
|
14,435,424
|
|
$
|
—
|
|
$
|
—
|
|
$
|
19,278,913
|
|
$
|
12,961,344
|
|
$
|
1,863,265
|
|
$
|
14,824,609
|
|
$
|
4,084,797
|
|
|
|
(1)
|
None of these sales are being reported on
the installment basis.
|
(2)
|
The amounts shown do not include a pro
rata share of the original offering costs. There were no carried interest
received in lieu of commissions in connection with the acquisition of the
property.
|
(3)
|
Resulting taxable gain is classified as
ordinary gain.
|
A–16
|
|
|
|
BluerockRE.com 877.826.BLUE
(2583)
|
|
|
Subscription
Agreement
The undersigned hereby tenders this subscription and applies
for the purchase of the dollar amount of shares of common stock (the “Shares”)
of Bluerock Enhanced Multifamily Trust, Inc., a Maryland corporation (sometimes
referred to herein as the “Company”) set forth below.
|
|
|
1.
Investment
(Select only one.)
|
Amount of Subscription
$_________________________
|
|
o
|
Initial Investment (minimum initial investment of $2500)
(Purchases made by residents of TN must meet their state’s minimum amount
of $5000.)
|
o
|
Additional Investment in this Offering (minimum of
$100)
|
o
|
Shares are being purchased net of commissions (Purchase
pursuant to a wrap fee arrangement or by a registered rep. on his/her own
behalf).
|
2. Type of Ownership
(Select
only one.)
|
|
|
Non-Custodial Ownership
|
|
|
o
|
Individual
— One
signature required.
|
o
|
Joint
Tenants with Rights of Survivorship
—
|
|
All parties must sign.
|
o
|
Community Property
— All
parties must sign.
|
o
|
Tenants
in Common
— All parties must sign.
|
o
|
Uniform
Gift to Minors Act
— State of _______________
|
|
Custodian signature required.
|
o
|
Uniform
Transfer to Minors Act
— State of ___________
|
|
Custodian signature required.
|
o
|
Qualified Pension or Profit
Sharing Plan
—
|
|
Include plan documents.
|
o
|
Trust
— Include title,
signature and “Powers of the
|
|
Trustees” pages.
|
o
|
Corporation
— Include
corporate resolution, articles of
|
|
incorporation and bylaws. Authorized signature
required.
|
o
|
Partnership
— Include
partnership agreement.
|
|
Authorized signature(s) required.
|
o
|
Other
(Specify) —
__________________
|
|
Include title and signature pages.
|
|
|
|
Custodial Ownership
|
|
|
o
|
Traditional IRA
— Owner
and custodian
|
|
signatures required.
|
o
|
Roth
IRA
— Owner and custodian signatures required.
|
o
|
Simplified Employee
Pension/Trust (SEP)
— Owner and
|
|
custodian signatures required.
|
o
|
KEOGH
— Owner and
custodian signatures required.
|
o
|
Other
—
________________________________________
|
|
Owner and custodian signatures required.
|
|
|
Custodian Information
(To be completed by
custodian.)
|
|
Name of Custodian:
|
|
|
|
Mailing Address:
|
|
|
|
City:
|
|
|
|
State:
|
Zip Code:
|
|
|
Custodian Tax ID #:
|
|
|
|
Custodian Account #:
|
Custodian Phone #:
|
|
|
3. Investor Information
(You
must include a permanent street address even if your mailing address is a P.O.
Box.)
|
|
|
|
|
|
|
|
Individual/Beneficial Owner
(Please print
name(s) to whom shares are to be registered.)
|
|
|
|
|
First, Middle, Last Name:
|
Social Security #:
|
Date of Birth:
|
|
|
|
|
|
Street Address:
|
City:
|
State:
|
Zip Code:
|
|
|
|
|
Daytime Phone #:
|
If Not a US Citizen, Specific Country of
Citizenship:
|
|
|
E-mail Address:
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint Owner/Minor
(If applicable.)
|
|
First, Middle, Last Name:
|
Social Security #:
|
Date of Birth:
|
|
|
|
|
|
Street Address:
|
City:
|
State:
|
Zip Code:
|
|
|
|
|
Daytime Phone #:
|
If Not a US Citizen, Specific Country of
Citizenship:
|
|
|
|
|
|
|
|
Bluerock Enhanced
Multifamily Trust
|
|
|
|
|
Securities offered through Select Capital Corporation, Member
FINRA/SIPC | 3070 Bristol Street, Suite 500 | Costa Mesa, CA 92626 |
866.699.5338
|
|
Bluerock © 2009. All rights reserved. BEMT-SA-08.09
|
|
B-1
|
|
|
Subscription
Agreement
|
|
|
BluerockRE.com 877.826.BLUE
(2583)
|
3. Investor Information
(continued)
|
|
|
|
|
|
|
|
Trust
|
|
|
|
|
|
|
|
Name of Trust:
|
Tax ID #:
|
Date of Trust:
|
|
|
|
|
|
Name(s) of Trustee(s):
|
Name of Beneficial Owner(s):
|
|
|
Beneficial Owner(s) Street Address:
|
City:
|
State:
|
Zip Code:
|
|
|
|
|
Social Security #:
|
Date of Birth:
|
Occupation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporation/Partnership/Other
|
|
Entity Name:
|
Tax ID #:
|
Date of Entity Foundation:
|
|
|
|
Name of Officer(s), General Partner or other Authorized
Person(s):
|
|
|
|
|
|
|
|
Street Address:
|
City:
|
State:
|
Zip Code:
|
|
|
|
|
4. Distributions
(Select only
one.)
I hereby
subscribe for shares of Bluerock Enhanced Multifamily Trust, Inc. and elect the
distribution option indicated below
(IRA accounts may not direct
distributions without the custodian’s approval):
|
|
o
|
I choose to
participate in the Company’s Distribution Reinvestment Plan.
|
|
Each investor that elects to have his or her
distributions invested in the Company’s Distribution Reinvestment Plan
agrees to notify the Company and the broker dealer named in this
Subscription Agreement in writing if any time he or she is unable to make
any representations and warranties set forth in the Prospectus, as
supplemented, and this Subscription Agreement, including but not limited
to the representations and warranties contained in Section 6
below.
|
o
|
I choose to
have distributions mailed to me at the address listed in Section
3.
|
o
|
I
choose to have distributions mailed to me at the following address:
____________________________________________
|
o
|
I choose to
have distributions deposited in a checking, savings or brokerage account.
|
|
I authorize the Company or its agent to deposit my
distribution to the account indicated below. This authority will remain in
force until I notify the Company to cancel it. In the event that the
Company deposits funds erroneously into my account, the Company is
authorized to debit my account for the amount of the erroneous
deposit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Financial Institution:
|
|
Your Bank’s ABA Routing #:
|
|
|
|
|
|
|
|
|
|
|
|
Your Account #:
|
|
Name on Account or FBO:
|
|
Account Type:
|
|
o
Checking
|
|
o
Savings
|
|
o
Brokerage
|
|
|
|
|
|
|
|
|
|
|
|
Mailing Address:
|
|
|
|
City:
|
|
State:
|
|
Zip Code:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
o
Attach a
pre-printed, voided check.
The deposit services above cannot be
established without a pre-printed, voided check.
For Electronic Funds
Transfers, the signatures of the bank account owner(s) must appear exactly as
they appear on the bank registration. If the registration at the bank differs
from that on this Subscription Agreement, all parties must sign
below.
|
|
|
|
|
|
|
|
|
|
Signature of Individual/Trustee/Beneficial
Owner
|
|
Signature of Joint Owner/Co-Trustee
|
|
Date
|
5. Electronic
Delivery of Documents
(Optional)
|
|
o
|
In lieu of receiving documents by mail, I authorize the
company to make available on its web site at www.BluerockRE.com its
quarterly reports, annual reports, proxy statements, Prospectus
supplements, or other reports required to be delivered to me, as well as
any investment or marketing updates, and to notify me via e-mail when such
reports or updates are available.
(Any investor who elects this
option must provide an e-mail address below.)
|
|
E-mail Address:
|
|
|
|
|
|
|
|
Bluerock Enhanced
Multifamily Trust
|
|
|
|
|
Securities offered through Select Capital Corporation, Member
FINRA/SIPC | 3070 Bristol Street, Suite 500 | Costa Mesa, CA 92626 |
866.699.5338
|
|
Bluerock © 2009. All rights reserved. BEMT-SA-08.09
|
|
B-2
|
|
|
Subscription
Agreement
|
|
|
BluerockRE.com 877.826.BLUE
(2583)
|
6. Subscriber Signatures
Please carefully read and
separately initial each of the representations below. In the case of joint
investors, each investor must initial. Except in the case of fiduciary accounts,
you may not grant any person power of attorney to make such representations on
your behalf. In order to induce the fund to accept this subscription, I (we)
hereby represent and warrant that:
|
|
|
|
|
|
Owner
|
Joint Owner
|
|
|
|
|
a.
|
I (we) have received a Prospectus for the Company
relating to the Shares, wherein the terms and conditions of the offering
are described and agree to the following terms and
conditions.
|
|
|
|
|
|
|
b.
|
I (we) certify that I (we) have (1) a net worth
(exclusive of home, home furnishings and automobiles) of $250,000 or more;
or (2) a net worth (exclusive of home, home furnishings and automobiles)
of at least $70,000 and had during the last tax year or estimate that I
(we) will have during the current tax year a minimum of $70,000 annual
gross income, or that I (we) meet the higher suitability requirements
imposed by my state of primary residence as set forth in the Prospectus
under “Suitability Standards.”
Please check the appropriate
box(es) below regarding state suitability
requirements.
|
|
|
|
|
|
|
c.
|
I am (we are) purchasing Shares for my (our) own
account.
|
|
|
|
|
|
|
d.
|
I (we) acknowledge that the Shares are not liquid, there
is no public market for the Shares, and I (we) may not be able to sell the
Shares.
|
|
|
|
|
|
|
In addition
to “b.” above, please check and initial the applicable
section.
|
|
|
|
|
|
|
|
|
|
|
o
|
1.
|
I am (we are) a resident of
California
, I (we)
certify that I (we) have (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. I (we) also certify that this investment does not exceed 10% of
my (our) net worth.
|
|
|
|
|
|
|
|
o
|
2.
|
I am (we are) a resident of
Iowa
, I (we) certify
that I (we) have (1) a net worth of at least $350,000 or (2) a gross
annual income of at least $70,000 and a net worth of at least $100,000. I
(we) also certify that this investment, combined with any investment in
any of the Company’s affiliates, does not exceed 10% of my (our) net
worth.
|
|
|
|
|
|
|
|
o
|
3.
|
I am (we are) a resident of
Missouri
, I (we)
certify that I (we) have (1) a net worth (exclusive of home, home
furnishings and automobiles) of $250,000 or more; or (2) a net worth
(exclusive of home, home furnishings and automobiles) of at least $70,000
and had during the last tax year or estimate that I (we) will have during
the current tax year a minimum of $70,000 annual gross income. I (we) also
certify that this investment does not exceed 10% of my (our) liquid net
worth.
|
|
|
|
|
|
|
|
o
|
4.
|
I am (we are) a resident of
Kentucky
, I (we) certify
that this investment does not exceed 10% of my (our) net
worth.
|
|
|
|
|
|
|
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o
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5.
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I am (we are) a resident of
Michigan
, I (we) certify
that this investment, combined with any investment in any affiliate of the
Company, does not exceed 10% of my (our) net worth.
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6.
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I am (we are) a resident of
Ohio
, I (we) certify
that this investment, combined with any investment in any affiliate of the
Company, does not exceed10% of my (our) liquid net worth.
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7.
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I am (we are) a resident of
Oregon
, I (we) certify
that this investment, combined with any investment in any affiliate of the
Company, does not exceed 10% of my (our) liquid net worth. 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.
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8.
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I am (we are) a resident of
Alabama
, I (we) certify
that this investment, combined with investments in similar programs, does
not exceed 10% of my(our) liquid net worth.
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9.
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I am (we are) a resident of
Kansas
, I understand
that the Office of the Kansas Securities Commissioner recommends that
Kansas investors not invest, in the aggregate, more than 10% of their
liquid net worth in this and similar direct participation programs. Liquid
net worth is defined as that portion of net worth that consists of cash,
cash equivalents and readily marketable securities.
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10.
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I am (we are) a resident of
New Jersey or Tennessee
,
I (we) certify that I (we) have 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. I (we) also certify that this investment does not exceed 10% of
my (our) liquid net worth.
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Substitute IRS Form W-9
Certification
I (we) declare that the information supplied in this
Subscription Agreement is true and correct and may be relied upon by the Company
in connection with my investment in the company. Under penalties of perjury,
each investor signing below certifies that (1) the number shown in the Investor
Social Security Number/Taxpayer Identification Number field in Section 3 of this
form is my correct taxpayer identification number (or I am waiting for a number
to be issued to me), and (2) I am not subject to backup withholding because (a)
I am exempt from backup withholding, or (b) I have not been notified by the
Internal Revenue Service (IRS) that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup withholding, and(3) I am a
U.S. person (including a non-resident alien).
NOTE: You must cross out item(2)
above if you have been notified by the IRS that you are currently subject to
backup withholding because you have failed to report all interest and dividends
on your tax return.
The Internal Revenue Service does not require your consent to
any provision of this document other than the certifications required to avoid
backup withholding.
By signing below, you hereby acknowledge receipt of the
Prospectus of the Company dated October 15, 2009 not less than five (5) business
days prior to the signing of this Subscription Agreement. You agree that if this
subscription is accepted, it will be held, together with the accompanying
payment, on the terms described in the Prospectus. You agree that subscriptions
may be rejected in whole or in part by the Company in its sole and absolute
discretion. You understand that you will receive a confirmation of your
purchase, subject to acceptance by the Company, within 30 days from the date
your subscription is received, and that the sale of Shares pursuant to this
subscription agreement will not be effective until at least five business days
after the date you have received a final Prospectus. Residents of the States of
Maine, Massachusetts, Minnesota, Missouri, Nebraska and Ohio who first received
the Prospectus only at the time of subscription may receive a refund of the
subscription amount upon request to the Company within five business days of the
date of subscription.
By signing below, you also acknowledge that you have been
advised that the assignability and transferability of the Shares is restricted
and governed by the terms of the Prospectus; there are risks associated with an
investment in the Shares and you should rely only on the information contained
in the Prospectus and not on any other information or representations from other
sources; and you should not invest in the Shares unless you have an adequate
means of providing for your current needs and personal contingencies and have no
need for liquidity in this investment.
The Company is required by law to obtain, verify and record
certain personal information from you or persons on your behalf in order to
establish the account. Required information includes name, date of birth,
permanent residential address and social security/taxpayer identification
number. We may also ask to see other identifying documents. If you do not
provide the information, the Company may not be able to open your account. By
signing the Subscription Agreement, you agree to provide this information and
confirm that this information is true and correct. You further agree that the
Company may discuss your personal information and your investment in the Shares
at any time with your then current financial advisor. If we are unable to verify
your identity, or that of another person(s) authorized to act on your behalf, or
if we believe we have identified potentially criminal activity, we reserve the
right to take action as we deem appropriate which may include closing your
account.
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Printed Name – Owner or Authorized Person
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Signature – Owner or Authorized Person
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Date
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Printed Name – Joint Owner or Authorized Person (if
applicable)
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Signature – Joint Owner or Authorized
Person
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Date
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Bluerock Enhanced
Multifamily Trust
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Securities offered through Select Capital Corporation, Member
FINRA/SIPC | 3070 Bristol Street, Suite 500 | Costa Mesa, CA 92626 |
866.699.5338
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Bluerock © 2009. All rights reserved. BEMT-SA-08.09
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B-3
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Subscription
Agreement
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BluerockRE.com 877.826.BLUE
(2583)
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7. Financial
Advisor
(Please read and complete the following.)
The undersigned confirm on behalf of the Broker Dealer that
they (i) are registered in the state in which the sale of the Shares to the
investor executing this Subscription Agreement has been made and that the
offering of the Shares is registered for sale in such state; (ii) have
reasonable grounds to believe that the information and representations
concerning the investor identified herein are true, correct and complete in all
respects; (iii) have discussed such investor’s prospective purchase of Shares
with such investor; (iv) have advised such investor of all pertinent facts with
regard to the fundamental risks of the investment, including the lack of
liquidity and marketability of the Shares; (v) have delivered a current
Prospectus and related supplements, if any, to such investor; (iv) have
reasonable grounds to believe that the investor is purchasing these Shares for
his or her own account; and (vii) have reasonable grounds to believe that the
purchase of Shares is a suitable investment for such investor, that the
undersigned will obtain and retain records relating to such investor’s
suitability for a period of six years, that such investor meets the suitability
standards applicable to such investor set forth in the Prospectus and related
supplements, if any, that such investor is in a financial position to enable
such investor to realize the benefits of such an investment and to suffer any
loss that may occur with respect thereto and that such investor has an
understanding of the fundamental risks of the investment, the background and
qualifications of the persons managing the Company and the tax consequences of
purchasing and owning Shares. The undersigned Financial Advisor further
represents and certifies that, in connection with this subscription for Shares,
he has compiled with and has followed all applicable policies and procedures
under his firm’s existing Anti-Money Laundering Program and Customer
Identification Program.
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Broker Dealer
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Name of Financial Advisor:
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Advisor #:
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Branch #:
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Advisor Street Address/PO Box:
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City:
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State:
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Zip Code:
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E-mail Address:
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Telephone #:
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Fax #:
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Financial Advisor Signature:
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Date:
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Principal Signature (if required by Broker
Dealer):
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Date:
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8. Investment
Instructions
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By
Mail
— Checks 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
” or after the Company meets the minimum offering
requirements, checks should be made payable to “
Bluerock Enhanced Multifamily
Trust, Inc.
” or “
BEMTI
”.
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By Wire
Transfer
— Forward this Subscription Agreement to the address
listed below. Escrow agent wiring instructions:
UMB Bank,
N.A.
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ABA Routing Number: 101000695
Account Number: 9871737780
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Account Name: UMB Bank, N.A., as Escrow
Agent for Bluerock Enhanced Multifamily Trust, Inc.
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By Asset
Transfer
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Custodial Accounts
—
Forward this Subscription Agreement directly to the
custodian.
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Form
Mailing Address
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Regular
Mail
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Overnight
Mail
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Bluerock
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Bluerock
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c/o DST Systems, Inc.
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c/o DST Systems, Inc.
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PO Box 219003
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430 West 7th Street
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Kansas City, MO 64121-9003
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Kansas City, MO 64105
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Bluerock Enhanced
Multifamily Trust
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Securities offered through Select Capital Corporation, Member
FINRA/SIPC | 3070 Bristol Street, Suite 500 | Costa Mesa, CA 92626 |
866.699.5338
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Bluerock © 2009. All rights reserved. BEMT-SA-08.09
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B-4
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EXHIBIT C
BLUEROCK ENHANCED
MULTIFAMILY TRUST, INC.
DISTRIBUTION REINVESTMENT PLAN
The
Distribution Reinvestment Plan (the “DRIP”) for Bluerock Enhanced Multifamily
Trust, Inc., a Maryland corporation (the “Company”), offers to holders of the
Company’s common stock, $0.01 par value per share (the “Common Stock”), the
opportunity to purchase, through reinvestment of distributions, additional
shares of Common Stock, on the terms, subject to the conditions and at the
prices herein stated.
The DRIP will
be implemented in connection with the Company’s Registration Statement under the
Securities Act of 1933 on Form S-11, including the prospectus contained therein
(the “Prospectus”) and the registered initial public offering of 130,000,000
shares of the Company’s Common Stock (the “Initial Offering”), of which amount
$285,000,000 in shares will be registered and authorized and reserved for
distribution pursuant to the DRIP.
Distributions
reinvested pursuant to the DRIP will be applied to the purchase of shares of
Common Stock at a price per share (the “DRIP Price”) equal to $9.50 until all
$285,000,00 in shares reserved initially for the DRIP (the “Initial DRIP
Shares”) have been purchased or until the termination of the Initial Offering,
whichever occurs first. Thereafter, the Company may, in its sole discretion,
effect additional registrations of common stock for use in the DRIP. In any
case, the per share purchase price under the DRIP for such additionally acquired
shares will equal the DRIP Price.
The
DRIP
The DRIP
provides you with a simple and convenient way to invest your cash distributions
in additional shares of Common Stock. As a participant in the DRIP, you may
purchase shares at the DRIP Price until all $285,000,000 in Initial DRIP Shares
have been purchased or until the Company elects to terminate the DRIP. The
Company may, in its sole discretion, effect registration of additional shares of
Common Stock for issuance under the DRIP.
Shares for
the DRIP will be purchased directly from the Company. Such shares will be
authorized and may be either previously issued or unissued shares. Proceeds from
the sale of the DRIP Shares provide the Company with funds for general corporate
purposes.
Eligibility
Holders of
record of Common Stock must participate with respect to 100% of their shares of
Common Stock. If your shares are held of record by a broker or nominee and you
want to participate in the DRIP, you must make appropriate arrangements with
your broker or nominee.
The Company
may refuse participation in the DRIP to stockholders residing in states where
shares offered pursuant to the DRIP are neither registered under applicable
securities laws nor exempt from registration.
Administration
As of the
date of this Prospectus, the DRIP will be administered by the Company or an
affiliate of the Company (the “DRIP Administrator”), but a different entity may
act as DRIP Administrator in the future. The DRIP Administrator will keep all
records of your DRIP purchases and send statements of your purchases to you.
Shares of Common Stock purchased under the DRIP will be registered in the name
of each participating stockholder.
Enrollment
You must own
shares of Common Stock in order to participate in the DRIP. You may become a
participant in the DRIP by indicating your election to participate on your
signed enrollment form available from the DRIP Administrator enclosed with this
Prospectus and returning it to us at the time you subscribe for shares. If you
receive a copy of the Prospectus or a separate prospectus relating solely to the
DRIP and have not previously elected to participate in the DRIP, then you may so
elect at any time by completing an enrollment form available from
the
C–1
DRIP Administrator or participating
broker-dealers or by other appropriate written notice to the Company of your
desire to participate in the DRIP.
Your
participation in the DRIP will begin with the first distribution payment after
your enrollment form is received, provided such form is received on or before
ten days prior to the payment date established for that distribution. If your
enrollment form is received after the tenth day prior to the record date for any
distribution and before payment of that distribution, reinvestment of your
distributions will begin with the next distribution payment date. Distributions
are expected to be paid monthly as authorized by the Company’s Board of
Directors and declared by the Company.
Costs
Purchases
under the DRIP will not be subject to selling commissions or the dealer manager
fee for purchases made under the DRIP. All costs of administration of the DRIP
will be paid by the Company.
Purchases and Price of Shares
Common Stock
distributions will be invested within 30 days after the date on which Common
Stock distributions are paid (the “Investment Date”). Payment dates for Common
Stock distributions will be ordinarily on or about the last calendar day of each
month but may be changed to quarterly in the sole discretion of the Company. Any
distributions not so invested will be returned to participants in the
DRIP.
You become an
owner of shares purchased under the DRIP as of the Investment Date.
Distributions paid on shares held in the DRIP (less any required withholding
tax) will be credited to your DRIP account. Distributions will be paid on both
full and fractional shares held in your account and are automatically
reinvested.
Reinvested
Distributions
. The Company will use the aggregate amount of distributions
to all participants for each distribution period to purchase shares for the
participants. If the aggregate amount of distributions to participants exceeds
the amount required to purchase all shares then available for purchase, the
Company will purchase all available shares and will return all remaining
distributions to the participants within 30 days after the date such
distributions are made. The Company will allocate the purchased shares among the
participants based on the portion of the aggregate distributions received on
behalf of each participant, as reflected on the Company’s books.
Optional Cash
Purchases
. Until determined otherwise by the Company, DRIP participants
may not make additional cash payments for the purchase of Common Stock under the
DRIP.
Reports
Within 90
days after the end of each fiscal year, you will receive a report of all your
investment, including information with respect to the distributions reinvested
during the year, the number of shares purchased during the year, the per share
purchase price for such shares, the total administrative charge retained by the
Company or DRIP Administrator and tax information with respect to income earned
on shares purchased under the DRIP for the year. These statements are your
continuing record of the cost of your purchases and should be retained for
income tax purposes. The Company shall provide such information reasonably
requested by the dealer manager or a participating broker-dealer, in order for
the dealer manager or participating broker-dealer to meet its obligations to
deliver written notification to participants of the information required by Rule
10b-10(b) promulgated under the Securities Exchange Act of 1934.
Certificates for Shares
The ownership
of shares purchased under the DRIP will be uncertificated and noted in
book-entry form until the Company’s Board of Directors determines otherwise. The
number of shares purchased will be shown on your statement of account. This
feature permits ownership of fractional shares, protects against loss, theft or
destruction of stock certificates and reduces the costs of the
DRIP.
C–2
Termination of Participation
You may
discontinue reinvestment of distributions under the DRIP with respect to all,
but not less than all, of your shares (including shares held for your account in
the DRIP) at any time without penalty by notifying the DRIP Administrator in
writing no less than ten days prior to the next distribution payment date. A
notice of termination received by the DRIP Administrator after such cutoff date
will not be effective until the next following distribution payment date.
Participants who terminate their participation in the DRIP may thereafter rejoin
the DRIP by notifying the Company and completing all necessary forms and
otherwise as required by the Company.
A participant
who changes his or her address must promptly notify the DRIP Administrator. If a
participant moves his or her residence to a state where shares offered pursuant
to the DRIP are neither registered nor exempt from registration under applicable
securities laws, the Company may deem the participant to have terminated
participation in the DRIP.
The Company
reserves the right to prohibit certain employee benefit plans from participating
in the DRIP if such participation could cause the underlying assets of the
Company to constitute “plan assets” of such plans.
Amendment and Termination of the DRIP
The Board of
Directors may, in its sole discretion, terminate the DRIP or amend any aspect of
the DRIP (except for the ability of each participant to withdraw from
participation in the DRIP) without the consent of participants or other
stockholders, provided that written notice of termination or any material
amendment is sent to participants at least 10 days prior to the effective date
thereof. You will be notified if the DRIP is terminated or materially amended.
The Board of Directors also may terminate any participant’s participation in the
DRIP at any time by notice to such participant if continued participation will,
in the opinion of the Board of Directors, jeopardize the status of the Company
as a real estate investment trust under the Code.
Voting of Shares Held Under the DRIP
You will be
able to vote all whole shares of Common Stock purchased under the DRIP at the
same time that you vote the other shares registered in your name on the records
of the Company. Fractional shares will not be voted.
Responsibility of
the DRIP Administrator and the Company Under the DRIP
The DRIP
Administrator will not be liable for any claim based on an act done in good
faith or a good faith omission to act. This includes, without limitation, any
claim of liability arising out of failure to terminate a participant’s account
upon a participant’s death, the prices at which shares are purchased, the times
when purchases are made, or fluctuations in the market price of Common
Stock.
All notices
from the DRIP Administrator to a participant will be mailed to the participant
at his or her last address of record with the DRIP Administrator, which will
satisfy the DRIP Administrator’s duty to give notice. Participants must promptly
notify the DRIP Administrator of any change in address.
You should
recognize that neither the Company nor the DRIP Administrator can provide any
assurance of a profit or protection against loss on any shares purchased under
the DRIP.
Interpretation and Regulation of the DRIP
The Company
reserves the right, without notice to participants, to interpret and regulate
the DRIP as it deems necessary or desirable in connection with its operation.
Any such interpretation and regulation shall be conclusive.
Federal Income Tax Consequences of Participation in the DRIP
The following
discussion summarizes the principal federal income tax consequences, under
current law, of participation in the DRIP. It does not address all potentially
relevant federal income tax matters, including consequences peculiar to persons
subject to special provisions of federal income tax law (such as tax-exempt
organizations, insurance companies, financial institutions, broker dealers and
foreign persons). The discussion is based on various rulings of the Internal
Revenue Service regarding several types of distribution reinvestment
plans.
C–3
No ruling, however, has been issued or requested
regarding the DRIP. The following discussion is for your general information
only, and you must consult your own tax advisor to determine the particular tax
consequences (including the effects of any changes in law) that may result from
your participation in the DRIP and the disposition of any shares purchased
pursuant to the DRIP.
Stockholders
subject to federal income taxation who elect to participate in the DRIP will
incur a tax liability for distributions allocated to them even though they have
elected not to receive their distributions in cash but rather to have their
distributions reinvested pursuant to the DRIP. Specifically, participants will
be treated as if they received the distribution from the Company and then
applied such distribution to purchase the shares in the DRIP. To the extent that
a stockholder purchases shares through the DRIP at a discount to fair market
value, the stockholders will be treated for tax purposes as receiving an
additional distribution equal to the amount of such discount. A stockholder
designating a distribution for reinvestment will be taxed on the amount of such
distribution as ordinary income to the extent such distribution is from current
or accumulated earnings and profits, unless the Company has designated all or a
portion of the distribution as a capital gain dividend. In such case, such
designated portion of the distribution will be taxed as a capital gain. The
amount treated as a distribution to you will constitute a dividend for federal
income tax purposes to the same extent as a cash distribution.
C–4
[This page intentionally left blank]
We have not
authorized any dealer, salesperson or other individual to give any information
or to make any representations that are not contained in this prospectus. If any
such information or statements are given or made, you should not rely upon such
information or representation. This prospectus does not constitute an offer to
sell any securities other than those to which this prospectus relates, or an
offer to sell, or a solicitation of an offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be unlawful. This
prospectus speaks as of the date set forth below. You should not assume that the
delivery of this prospectus or that any sale made pursuant to this prospectus
implies that the information contained in this prospectus will remain fully
accurate and correct as of any time subsequent to the date of this prospectus.
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TABLE OF
CONTENTS
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PROSPECTUS SUMMARY
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1
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RISK
FACTORS
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15
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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37
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ESTIMATED USE OF PROCEEDS
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38
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MULTIFAMILY MARKET OVERVIEW
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39
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INVESTMENT STRATEGY, OBJECTIVES AND POLICIES
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42
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MANAGEMENT
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59
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MANAGEMENT COMPENSATION
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71
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PRIOR
PERFORMANCE SUMMARY
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76
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CONFLICTS OF INTEREST
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78
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SUMMARY OF DISTRIBUTION REINVESTMENT PLAN
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83
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SHARE
REPURCHASE PLAN
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86
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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89
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PRINCIPAL STOCKHOLDERS
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91
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DESCRIPTION OF CAPITAL STOCK
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92
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IMPORTANT PROVISIONS OF MARYLAND CORPORATE LAW AND OUR CHARTER AND
BY LAWS
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99
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THE
OPERATING PARTNERSHIP AGREEMENT
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106
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FEDERAL INCOME TAX CONSIDERATIONS
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109
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ERISA
CONSIDERATIONS
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126
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PLAN
OF DISTRIBUTION
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129
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SALES
LITERATURE
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135
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EXPERTS
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135
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LEGAL
MATTERS
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135
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ADDITIONAL INFORMATION
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135
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INDEX
TO FINANCIAL STATEMENTS
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136
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EXHIBIT A PRIOR PERFORMANCE TABLES
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A-1
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EXHIBIT B SUBSCRIPTION AGREEMENT
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B-1
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EXHIBIT C DISTRIBUTION REINVESTMENT PLAN
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C-1
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See “Risk
Factors” beginning on page 15 to read about risks you should consider before
buying shares of our common stock.
BLUEROCK ENHANCED MULTIFAMILY TRUST,
INC.
Maximum Offering of
$1,285,000,000
P R O S P E C T U
S
October 15, 2009
SUPPLEMENT
NO. 2
DATED
MARCH 3, 2010
TO
THE PROSPECTUS DATED OCTOBER 15, 2009
OF
BLUEROCK ENHANCED MULTIFAMILY TRUST, INC.
This
Supplement No. 2 supplements, and should be read in conjunction with, the
prospectus of Bluerock Enhanced Multifamily Trust, Inc. dated October 15,
2009. Supplement No. 2 supersedes and replaces Supplement No. 1 to
the prospectus. Unless otherwise defined in this Supplement No. 2,
capitalized terms used have the same meanings as set forth in the
prospectus. The purpose of this supplement is to disclose among other
things, the following:
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operating
information, including the status of our initial public offering,
investment portfolio data, compensation to our advisor and its affiliates,
and distribution information;
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•
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the
recent acquisition and related financing of a 37.5% equity interest in a
432-unit garden-style multifamily community known as Springhouse at
Newport News located in Newport News,
Virginia;
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updates
to our Investment Strategy, Objectives and
Policies;
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•
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information
regarding the selection of our initial board of
directors;
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•
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updated
biographical information about our President and Chief Investment Officer,
as well as updated related information regarding our
sponsor;
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•
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updates
regarding adverse developments in other real estate programs sponsored by
our sponsor and disclosed in the prior performance section of the
prospectus;
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•
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an
amendment to our share repurchase
plan;
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•
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“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
similar to that filed in our quarterly report on Form 10-Q for the period
ended September 30, 2009;
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•
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updates
to information regarding our principal
stockholders;
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•
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updates
to how our volume discounts will be calculated in our plan of
distribution;
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•
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updated
experts language; and
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•
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our
unaudited financial statements and the notes thereto as of the nine months
ended September 30, 2009.
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Status
of our Initial Public Offering
|
We
initiated our initial public offering on October 15, 2009, pursuant to which we
are offering up to $1,000,000,000 in shares of our common stock in a primary
offering at $10.00 per share. We are also offering up to $285,000,000
in shares of our common stock under a distribution reinvestment plan at an
initial price of $9.50 per share. Until receipt and acceptance of
subscriptions aggregating at least $2,500,000, all subscription proceeds will be
placed in an interest-bearing escrow account with UMB Bank, N.A., as escrow
agent. As of March 1, 2010, we have not yet satisfied the conditions
of this escrow.
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Real
Estate Investment
Portfolio
|
Property
Portfolio
As of
March 1, 2010, we, through a wholly owned subsidiary of our operating
partnership, have acquired one investment through a consolidated joint venture
as further described under “Acquisition and Related Financing of an interest in
Springhouse at Newport News” below. The following is a summary of our
investment portfolio as of March 1, 2010:
Multifamily
Community Name
|
|
Approximate
Rentable Square Footage
|
|
|
Property
Acquisition Cost
(1)
|
Joint
Venture Equity Investment Information
|
Approximate
Annualized
Base Rent
|
|
Amount
of BEMT Investment
|
BEMT
Ownership Interest in Property Owner
|
Springhouse
at Newport News
|
Newport
News, Virginia
|
314,512
|
432
|
12/03/2009
|
$30.1
million
|
$2.5
million
|
37.5%
|
$2,439,000
|
97%
|
_______________
(1)
Includes
contract purchase price, acquisition fees and closing costs.
Debt
Obligations
The follow is a summary of the
outstanding debt obligations as of March 1, 2010
:
Property
and
Related
Loan
|
|
Outstanding
Principal Balance
(in
millions)
|
|
|
|
|
|
|
|
|
Springhouse
at Newport News
Mortgage
Loan
(1)
|
|
$23.4
|
|
5.66%
|
|
Interest
only for the first two years, followed by monthly principal and interest
payments of $134,221 with principal calculated using an amortization term
of 30 years.
|
|
01/01/2020
|
|
(2)
|
Springhouse
at Newport News
Affiliate
Loan
(3)
|
|
$3.2
|
|
30-day
LIBOR + 5.00%
(4)
|
|
Interest
on a current basis
|
|
06/03/2010
|
|
(2)
|
_______________
(1)
Subject
to a prepayment penalty depending on whether the loan is securitized on or
before January 1, 2011. See description under “Acquisition and
Related Financing of an interest in Springhouse at Newport News – Property
Acquisition and Senior Financing” above.
(2)
The
Springhouse at Newport News mortgage loan will be consolidated in the Company’s
consolidated financial statements and will represent 88% of the consolidated
total indebtedness of the Company, but the Company will only be contingently
liable for 37.5% of such indebtedness. The affiliate loan of $3.2
million is entirely recourse to the Company.
(3)
The
loan is secured by our interest in the subsidiary through which we hold the
investment. See description under “Acquisition and Related Financing
of an interest in Springhouse at Newport News – Affiliate Loan for our
Investment in the Joint Venture” above.
(4)
Subject
to a floor of 7.00%.
Management
Compensation
The
following information supplements the relevant discussion in the
prospectus:
Our
advisor, Bluerock Enhanced Multifamily Advisor, LLC, and its affiliates, and our
dealer manager, Select Capital Corporation, which is not affiliated with us or
our advisor, receive compensation and fees for services relating to this
offering and managing our assets. In addition, our advisor and its
affiliates may receive reimbursements for certain organization and offering
costs. Summarized below are the fees earned and expenses reimbursable
to our advisor and its affiliates and to the dealer manager, and any related
amounts payable, for the years ended December 31, 2009 and December 31,
2008:
|
|
|
|
|
|
|
|
|
For
the Year Ended December 31, 2009
|
|
|
For
the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
Selling
Commissions
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Dealer
Manager Fee
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Reimbursement
of Other Organization and Offering Expenses
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Acquisition
Fees & Expense Reimbursements
|
|
$
|
235,823
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Asset
Management Fee
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,943
|
|
|
$
|
—
|
|
General
and Administrative Expenses
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
These expenses are not recorded in the consolidated financial statements
of the company as of December 31, 2009 or December 31, 2008 because such
expenses are not a liability of the Company until the minimum number of shares
of the Company’s common stock is issued, and such costs will only become a
liability of the Company to the extent selling commissions, the dealer manager
fee and other organization and offering costs do not exceed 15% of the gross
proceeds of the offering.
As of
March 1, 2010, all of our outstanding shares of common stock are owned by our
advisor and our independent directors. Although we acquired an
interest in a property in December 2009, we have not yet declared or paid any
distributions on our outstanding shares of common stock through March 1,
2010.
|
Recent
Acquisition and Financing
|
Springhouse
at Newport News
On
December 3, 2009, through a wholly owned subsidiary of our operating
partnership, we completed an investment in a joint venture along with Bluerock
Special Opportunity + Income Fund, LLC (“
BEMT Co-Investor
”), an
affiliate of our sponsor, and Hawthorne Springhouse, LLC (“
Hawthorne
”), an unaffiliated
entity, to acquire a 432-unit garden-style multifamily community known as
Springhouse at Newport News (the “
Springhouse property
”),
located in Newport News, Virginia, from Newport-Oxford Associates Limited
Partnership, an unaffiliated entity. The material features of our
investment in the joint venture, the property acquisition and related
financings, and the acquired property are described below.
|
Joint
Venture Parties and Structure
|
In
connection with the closing of the Springhouse property acquisition, we invested
$2.5 million to acquire a 50% equity interest in BR Springhouse Managing Member,
LLC (the “
Springhouse Managing
Member JV Entity
”) through a wholly owned subsidiary of our operating
partnership, BEMT Springhouse, LLC (“
BEMT
Springhouse
”). BEMT Co-Investor invested $2.5 million to
acquire the remaining 50% interest in the Springhouse Managing Member JV
Entity. BEMT Springhouse and BEMT Co-Investor are co-managers of the
Springhouse Managing Member JV Entity.
The
Springhouse Managing Member JV Entity contributed its capital to acquire a 75%
equity interest in BR Hawthorne Springhouse JV, LLC (the “
Springhouse JV Entity
”) and
acts as the manager of the Springhouse JV Entity. Hawthorne invested
$1.7 million to acquire the remaining 25% interest in the Springhouse JV
Entity. The Springhouse JV Entity is the sole owner of BR
Springhouse, LLC (“
BR
Springhouse
”), a special-purpose entity that holds title to the
Springhouse property.
Under the
terms of the operating agreement for the Springhouse Managing Member JV Entity,
certain major decisions regarding the investments of the Springhouse Managing
Member JV Entity require the unanimous approval of BEMT Co-Investor and us
(through BEMT Springhouse). To the extent that we and BEMT
Co-Investor are not able to agree on a major decision or at any time after
December 3, 2012, either party may initiate a buy-sell
proceeding. Additionally, any time after December 3, 2012, either
party may initiate a proceeding to force the sale of the Springhouse Managing
Member JV Entity’s interest in the Springhouse JV Entity to a third party, or,
in the instance of the non-initiating party’s rejection of a sale, cause the
non-initiating party to purchase the initiating party’s interest in the
Springhouse Managing Member JV Entity. The operating agreement
contains terms, conditions, representations, warranties and indemnities that are
customary and standard for joint ventures in the real estate
industry.
Under the
terms of the operating agreement of the Springhouse JV Entity, major decisions
with respect to the joint venture or the Springhouse property are made by the
majority vote of an appointed management committee, which is controlled by the
Springhouse Managing Member JV Entity. However, any decision with
respect to the sale or refinancing of the Springhouse property requires the
unanimous approval of the Springhouse Managing Member JV Entity and
Hawthorne. Further, to the extent that the Springhouse Managing
Member JV Entity and Hawthorne are not able to agree on a major decision or at
any time after December 3, 2012, either party may initiate a buy-sell
proceeding. Additionally, any time after December 3, 2012, either
party may initiate a proceeding to force the sale of the Springhouse property to
a third party, or, in the instance of the non-initiating party’s rejection of a
sale, cause the non-initiating party to purchase the initiating party’s interest
in the Springhouse JV Entity. The operating agreement contains terms,
conditions, representations, warranties and indemnities that are customary and
standard for joint ventures in the real estate industry.
As a
result of the structure described above, we and BEMT Co-Investor each hold a
37.5% indirect equity interest in the Springhouse property, and Hawthorne holds
the remaining 25% indirect equity interest. We, BEMT Co-Investor and
Hawthorne will each receive current distributions from the operating cash flow
generated by the Springhouse property in proportion to these respective
percentage equity interests.
Affiliate Loan for our Investment in
the Joint Venture
In
connection with our investment in the joint venture, on December 3, 2009, BEMT
Springhouse entered into a loan agreement with BEMT Co-Investor pursuant to
which BEMT Springhouse borrowed $3.2 million (the “
BEMT Co-Investor
Loan
”). The BEMT Co-Investor Loan has a six-month term,
maturing June 3, 2010, and may be prepaid without penalty. It bears
interest compounding monthly at a rate of 30-day LIBOR + 5.00%, subject to a
minimum rate of 7.00%, annualized. As of March 1, 2010, the interest
rate on the BEMT Co-Investor Loan was 7.00%. Interest on the loan
will be paid on a current basis from cash flow distributed to us from the
Springhouse Managing Member JV Entity. The BEMT Co-Investor Loan is
secured by a pledge of our indirect membership interest in BEMT Springhouse and
a pledge of BEMT Springhouse’s membership interest in the Springhouse Managing
Member JV Entity. In accordance with the requirements of our charter,
the BEMT Co-Investor Loan was reviewed and approved by a majority of our board
of directors (including a majority of our independent directors) as being fair,
competitive, and commercially reasonable and no less favorable to us than loans
between unaffiliated parties under the same
circumstances. Furthermore, due to the unique investment opportunity
presented by the Springhouse property, including the opportunity to distinguish
ourselves competitively from other early-stage non-traded REITs, our board of
directors expressly considered and approved leverage in excess of our general
charter-imposed limitations in connection with entering into the BEMT
Co-Investor loan.
Property Acquisition and Senior
Financing
Our
sponsor, Bluerock Real Estate, LLC, entered into a purchase and sale contract
dated September 24, 2009 to purchase the Springhouse property. The
purchase price for the Springhouse property was $29.25 million, plus closing
costs, which represents a nominal capitalization rate of 8.34% (the expected
first year yield on the
investment,
excluding recurring capital costs). Immediately prior to the closing on December
3, Bluerock Real Estate, LLC assigned the purchase and sale agreement to BR
Springhouse.
The
acquisition was funded with $6.7 million of gross equity from the Springhouse JV
Entity, and a $23.4 million senior mortgage loan made to BR Springhouse by
CWCapital LLC and subsequently sold to the Federal Home Loan Mortgage
Corporation (Freddie Mac) (the “
Senior Loan
”), which Senior
Loan is secured by the Springhouse property. The Senior Loan has a
10-year term, maturing on January 1, 2020. The effective interest rate on the
loan is fixed at 5.66% per annum, with interest-only payments for the first two
years and fixed monthly payments of approximately $134,221 based on a 30-year
amortization schedule thereafter.
Prepayment
terms of the Senior Loan depend on whether the loan is securitized on or before
January 1, 2011. If the loan is securitized, then a two-year lockout
period from the date of funding applies, with BR Springhouse having the right to
defease after the lockout period up to the third month prior to the maturity
date, after which the loan may be prepaid in full without penalty. If
the Senior Loan is not securitized on or before January 1, 2011, then yield
maintenance payments will be required to the extent prepaid before the sixth
month prior to the maturity date; during the period from the sixth month prior
to the maturity date to the third month prior to the maturity date, a prepayment
premium of 1% of the loan amount will be required, and thereafter the loan may
be prepaid without penalty.
R. Ramin
Kamfar and James G. Babb, III, who are our executive officers and members of our
board of directors, and Edward Harrington, Samantha Davenport and Shoffner
Allison, who are Hawthorne affiliates, have guaranteed all recourse liabilities
of BR Springhouse under the Senior Loan, including environmental
indemnities.
Description of the Springhouse
Property
The
Springhouse property is comprised of 432 units featuring one- and two-bedroom
layouts in 24 two-story garden-style apartment buildings surrounding a central
private lake on approximately 28 acres in Newport News, Virginia. The
property contains approximately 314,512 rentable square feet and the average
unit size is 728 square feet. As of November 2009, the property had
an average market rent of $826 per unit and was 96.8%
occupied. Additional property amenities include a clubhouse, fitness
center, swimming pool, tennis court, volleyball court, picnic area
and a private lake with gazebo.
The
Springhouse property is located within a ten-minute drive of two major Newport
News area employers, Northrop Grumman and the Fort Eustis Army
Base. In addition, Cannon Virginia, a subsidiary of Cannon USA, Inc.
recently opened a $640 million, 700,000-square foot manufacturing facility
within a few miles of the property. The Springhouse property is
situated between I-64 and Jefferson Avenue, the two main north-south
thoroughfares in Newport News, within close proximity to the Newport
News/Williamsburg International Airport. Several
neighborhood-oriented retail centers are located within a five-minute drive of
the property.
The
Springhouse property is located within the Hampton Roads MSA, which is home to
18 publicly traded corporations, the world’s largest naval base, a major East
Coast port, and numerous internationally known tourist
attractions. According to a recent CBRE appraisal, the Hampton Roads
MSA’s population has grown 5.6% on average from 2000 through 2008. As of October
2009, the MSA’s unemployment was 6.5%, which compared favorably with the
national average of 9.5%. Historically, unemployment in the region
has been below the national average. Traditionally, the Hampton Roads
MSA has been home to the military, shipbuilding and healthcare, but over the
past decade the region has attracted financial service firms, distribution
companies, telemarketing and customer service operations.
Hawthorne
Residential Partners, LLC, a Hawthorne affiliate, will be responsible for
providing day-to-day property management services to the
property. Hawthorne Residential Partners, LLC will receive an annual
management fee of 4% of gross receipts generated by the Springhouse
property. From this amount, 1% of gross property collections will be
re-allowed to the Springhouse Managing Member JV Entity as an oversight fee,
which fee will be shared equally between Bluerock Enhanced Multifamily Advisor,
LLC, our advisor, and Bluerock Property Management, LLC, an indirect wholly
owned subsidiary of our sponsor. Under the property management
agreement, Hawthorne Residential Partners, LLC will also be entitled to receive
a construction management fee of 5% of the cost of any approved capital project
exceeding $10,000 (excluding regular recurring interior capital
replacements).
The joint
venture has budgeted a total of approximately $200,000 for immediate capital
enhancements to the Springhouse property to improve its competitive
position. Such renovations will include amenity and curb appeal
enhancement, sidewalk repairs and new lighting. In the opinion of
management, the property is adequately covered by insurance. We
obtained a Phase I environmental survey and are generally satisfied with the
environmental status of the property. We also obtained engineering
and property condition reports and are generally satisfied with their
conclusions.
For
federal income tax purposes, the depreciable basis in the Springhouse property
will be approximately $27.4 million. We calculate depreciation for
income tax purposes using the straight-line method. Real estate taxes
on the property for the Fiscal Year 2009 are approximately $356,000, at a rate
of 1.10%.
The
investment in the Springhouse property is consistent with our geographic and
sector-based strategy to acquire stabilized assets in select markets that
satisfy our investment criteria for providing favorable risk-adjusted
returns.
PROSPECTUS
UPDATES
Prospectus
Summary
The
following information supersedes the relevant discussions in the “Prospectus
Summary” section of the prospectus.
Our
Sponsor – Bluerock
The third paragraph under “Our Sponsor
– Bluerock” in the prospectus summary is replaced with the
following:
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 one of the founding team members
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
multifamily sector investments) and that have invested an aggregate of
approximately $8 billion (including equity, debt 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:
The fourth bullet point under “Our
Sponsor – Bluerock” in the prospectus summary is replaced with the
following:
·
|
Through
the Starwood Funds, playing an integral role in raising over $2.6 billion
of equity from institutional and third-party
investors.
|
Share
Repurchase Plan
On
February 12, 2010, our board of directors amended our share repurchase
plan. In connection with such amendment, the following information
supersedes and replaces the information contained in the last sentence of the
third paragraph under “Share Repurchase Plan” and the bullet points following
such sentence in the “Prospectus Summary — Share Repurchase Plan” section of the
prospectus:
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 the price paid to acquire the shares from us for
stockholders who have held their shares for at least one
year;
|
·
|
The
lower of $9.50 or 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 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 the price paid to acquire the shares from us for
stockholders who have held their shares for at least four
years.
|
Investment
Strategy, Objectives and Policies
The following information supplements
the information contained in the “Investment Strategy, Objectives and Policies”
section of the prospectus and should be read immediately after the section
entitled “Joint Venture Investments” and before the section entitled “Our
Advisor’s Approach to Evaluating Potential Investments” in the
prospectus.
Network
of Operating Partners
We
believe successful investing in multifamily real estate requires more than just
capital; local market knowledge, relationships, and operational expertise are
essential to the success of any investment. One of the critical
elements of our investment process is the identification of uniquely qualified,
specialized top-tier real estate local operating partners who bring significant
value in terms of specialized expertise, market knowledge, relationships, and
execution to the transaction.
Our
advisor's principals have spent over 15 years developing and cultivating a broad
network of operating partners who are knowledgeable, disciplined, have
successful track records, possess significant local market knowledge and
relationships, and that have a high degree of integrity. This network
of partners brings the following advantages to augment the likelihood of success
of an investment:
·
|
extensive
knowledge base and familiarity with local market conditions to enable
better deal sourcing and
underwriting;
|
·
|
significant
local contacts and relationships which can promote deal flow and the
sourcing of proprietary private-market
transactions;
|
·
|
substantial
local management and execution
capabilities;
|
·
|
local
name recognition that can increases our credibility in sourcing
opportunities; and
|
·
|
the
ability to leverage the operator's management team and operating
infrastructure in order to limit the overhead burden for our
investors.
|
In
addition, we will generally require meaningful capital contributions from
operating partners in terms of an equity co-investment (generally 15% or more of
required equity), and will structure transactions in order to assure an
alignment of interests between our investors and our local
partners. Notwithstanding the investment, we expect to maintain
substantial control over strategic decision-making in our ventures with local
operating partners.
We
will generally seek local partners who have the ability to provide property
management services. In our advisor’s experience, local partners can
provide superior management execution as co-investors in the property than would
be available from disinterested third party management companies. Our asset
management team will then work with our local partners to oversee the
implementation of each asset's business plan, including budgeting, capital
expenditures, tenant improvements and financial
performance.
Management
The
following information supplements the information contained in the
“Management” section of the prospectus.
Selection of Our Board of
Directors
In
determining the composition of our initial board of directors, our sponsor’s
goal was to assemble a group of individuals of sound character, judgment and
business acumen, whose varied backgrounds, leadership
experience
and real estate experience would complement each other to bring a diverse set of
skills and perspectives to the board.
Mr. Kamfar, who controls our sponsor,
was chosen to serve as the Chairman of the board because, as our Chief Executive
Officer, Mr. Kamfar is well positioned to provide essential insight and guidance
to the board from the inside perspective of the day-to-day operations of the
company. Furthermore, Mr. Kamfar brings to the board approximately 20
years of experience in building operating companies, and in various aspects of
real estate, mergers and acquisitions, private equity investing, public and
private financings, and retail operations. His experience with
complex financial and operational issues in the real estate industry, as well as
his strong leadership ability and business acumen make him critical to proper
functioning of our board.
Our
sponsor selected Mr. Babb to serve as one of our initial directors because
of his extensive expertise in real estate acquisition, management, finance and
disposition. With more than 20 years of experience investing in and managing
real estate investments, Mr. Babb will offer key insights and perspective
with respect to our real estate portfolio. As one of our executive officers and
the Chief Investment Officers of our advisor, Mr. Babb will also be able to
inform and advise the board with respect the critical operational issues facing
our company.
Our
sponsor selected Mr. Bailey as one of our initial independent directors in order
to leverage his extensive experience in sourcing, evaluating, structuring and
managing private equity investments and his experience related to real estate
and real-estate related debt financing. In addition, Mr. Bailey’s
prior service on the audit committees of numerous privately-held companies
provides him with the requisite skills and knowledge to serve effectively on our
audit committee.
Our
sponsor selected Mr. Majumder as one of our initial independent directors due to
his depth of legal experience in advising a clients with respect to corporate
and securities transactions, including representations of underwriters,
placement agents and issuers in both public and private
offerings. Mr. Majumder also brings with him significant legal
experience relating to the acquisition of a number of types of real estate
assets.
Our
sponsor selected Mr. Tio as one of our initial independent directors as a result
of his demonstrated leadership skill and industry-specific experience developed
through a number of high-level management positions with investment and advisory
firms specialized in the commercial real estate sector.
Our
Executive Officers and Directors
Mr. Babb’s
biographical information contained in the list of our executive officers and
directors in the “Management” section of our prospectus is modified as
follows:
James G. Babb, III, President and
Chief Investment Officer
. Mr. Babb serves as our President and Chief
Investment Officer and is on our board of directors, and is the President and
Chief Investment Officer of our advisor. Mr. Babb is also the Managing Director
and Chief Investment Officer of Bluerock , which he joined in July 2007. He
oversees all real estate sourcing, diligence, structuring and acquisitions for
Bluerock. He 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.
From 1992
to August 2003, Mr. Babb helped lead the residential and office acquisitions
initiatives for Starwood Capital Group, or Starwood Capital, most recently as a
Senior Vice President. Starwood Capital was formed in 1992 and during his tenure
raised and invested funds on behalf of institutional investors through seven
private real estate funds, each of which had investment objectives similar to
ours (but not limited to multifamily investments), and which in the aggregate
ultimately invested approximately $8 billion in approximately 250 separate
transactions. During such period, Mr. Babb led or shared investment
responsibility for over 75 investment transactions totaling approximately $2.5
billion of asset value in more than 20 million square feet of residential,
office and industrial properties located in 25 states and seven foreign
countries, including a significant number of transactions that were contributed
to the initial public offering of Equity Residential Properties Trust (NYSE:
EQR), and to create iStar Financial Inc. (NYSE: SFI). Mr. Babb was
also active in Starwood Capital’s efforts to expand its platform to invest in
Europe. From August 2003 to July 2007, Mr. Babb founded his own
principal investment company, Bluepoint Capital, LLC. Bluepoint was a private
real estate investment company focused on the acquisition, development and/or
redevelopment of residential and commercial properties in the Northeast
United
States
and Western Europe. Mr. Babb received a B.A. degree in Economics in 1987 from
the University of North Carolina at Chapel Hill.
Our
Sponsor – Bluerock Real Estate, L.L.C.
The paragraph describing our sponsor
under the “Management – Our Sponsor – Bluerock Real Estate, L.L.C.” section of
the prospectus is replaced with the following:
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. Mr. Kamfar controls Bluerock. Mr. Babb is
Bluerock’s Chief Investment Officer and Managing Director. 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, including as one of the founding team members and as a Senior Vice
President of Starwood Capital, an investment management firm specializing in
real estate and real estate-related investments on behalf of institutional
investors. Mr. Babb is the President and Chief Investment Officer of our company
and of our advisor. See “— Our Advisor’s Chief Investment Officer.”
Our
Advisor’s Chief Investment Officer
The paragraph describing our advisor’s
Chief Investment Officer under the “Management – Our Advisor’s Chief Investment
Officer” section of the prospectus is replaced with the following:
Mr. Babb
is the President and Chief Investment Officer of our company and of our advisor.
Prior to his tenure with Bluerock, Mr. Babb was one of the founding team members
and Senior Vice President of Starwood Capital where he was involved in the
formation of the Starwood Funds with investment objectives similar to ours (but
not focused solely on multifamily sector investments) and that have invested an
aggregate of approximately $8 billion (including equity, debt 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:
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;
·
|
iStar 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 iStar Financial, the largest publicly owned
finance company at that time focused exclusively on commercial real
estate;
·
|
Through
the Starwood Funds, playing an integral role in raising over $2.6 billion
of equity from institutional and third-party
investors.
|
By noting
Mr. Babb’s prior role in the raising of capital from institutional investors, we
do not suggest that we are assured of raising funds in this offering from such
investors. If institutional investors do participate in this
offering, they would likely invest in amounts entitling them to volume discounts
such that their returns, if any, would likely be greater than those who purchase
shares in this offering at $10 per share.
In
addition, you should note that Bluerock has not sponsored the Funds and programs
formed or participated in by Mr. Babb, and you should not assume that you will
experience returns comparable to those experienced by investors in those
programs, or that the investment opportunities similar to those available to
those programs will be available to us. Investors who purchase shares of our
common stock will not thereby acquire any ownership interest in Starwood Capital
or the Starwood Funds, and the information presented here regarding Starwood
Capital and Starwood Funds is provided solely for you to evaluate Mr. Babb’s
experience and expertise.
Prior
Performance Summary
The
“Prior Performance Summary” section of the prospectus is supplemented by the
addition of the following:
Adverse
Business Developments
Recent
conditions in the general economy have adversely affected the financial and real
estate markets, as well as certain of our private programs. The
Summit at Southpoint program in 2009 secured a new, large tenant in connection
with a 10 year lease which was longer term than budgeted (10 years vs budget of
5 years) and which resulted in higher than budgeted TI/LC expenditures. As a
result property distributions were reduced in April 2009 from a 7.25% to a 1%
cash yield in order to rebuild reserves so that the property may be properly
positioned to continue to compete for tenants. The BR-North Park
Towers program’s property is located in the Southfield, Michigan market, which
has been under continued pressure due to the weak Michigan economy and the
deterioration of the domestic automobile manufacturing industry. In
September 2009, the distributions to investors were reduced from a 6% to a 3.5%
cash yield on their investment, and the property has recently become engaged in
loan restructuring discussions with the first mortgage lender. The
1355 First Avenue program was unable to secure construction financing in 2009 at
the originally anticipated loan-to-cost ratio as a result of the general lack of
credit in the current depressed economic environment, which delayed commencement
of construction and a suspension of investor distributions in August
2009. The market for such financing has improved recently and the
program is in negotiations with several Manhattan real estate development firms
through which, if successful, both construction financing and preferred equity
investments are anticipated, and which would enable commencement of
construction. These adverse market conditions leading to reduced distributions
for those programs may cause the total return to those investors to be lower
than previously anticipated.
Share
Repurchase Plan
On February 12, 2010, our board of
directors amended our share repurchase plan. In connection with such
amendment, the following information supersedes and replaces the information
contained in the last sentence of the first paragraph under “Share Repurchase
Plan” and the bullet points following such sentence in the “Share Repurchase
Plan” section of the prospectus:
Unless the shares are being repurchased
in connection with a stockholder’s death or “qualifying disability” (as defined
below), the prices at which we will repurchase shares prior to the time we
establish an estimated value of our shares are as follows:
·
|
The
lower of $9.25 or the price paid to acquire the shares from us for
stockholders who have held their shares for at least one
year;
|
·
|
The
lower of $9.50 or 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 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 the price paid to acquire the shares from us for
stockholders who have held their shares for at least four
years.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
as
of and for the Three and Nine Months Ended September 30, 2009
The
following discussion and analysis should be read in conjunction with the
accompanying consolidated financial statements of Bluerock Enhanced Multifamily
Trust, Inc., and the notes thereto. As used herein, the terms “we,”
“our” and “us” refer to Bluerock Enhanced Multifamily Trust, Inc., a Maryland
corporation, and, as required by context, Bluerock Enhanced Multifamily
Holdings, L.P., a Delaware limited partnership, which we refer to as our
operating partnership, and to their subsidiaries.
This
discussion contains forward-looking statements that can be identified with the
use of forward-looking terminology such as “may,” “will,” “seeks,”
“anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should”
or similar expressions. Actual results may differ from those
described in forward-looking statements. For a discussion of the
factors that could cause actual results to differ from those anticipated, see
“Risk Factors” in the prospectus.
Overview
We are a
recently formed Maryland corporation that intends to qualify as a REIT beginning
with the taxable year in which we satisfy the minimum offering
requirements.
As of
September 30, 2009, we have not yet commenced active operations. Subscription
proceeds may be released to us after the minimum offering is achieved and will
be applied to investment in properties and the payment or reimbursement of
selling commissions and other fees and expenses. We will experience a
relative increase in liquidity as we receive additional subscriptions for shares
and a relative decrease in liquidity as we spend net offering proceeds in
connection with the acquisition, development and operation of our
assets.
As of
September 30, 2009, we have not entered into any arrangements creating a
reasonable probability that we will acquire a specific property or other
asset. The number of properties and other assets that we will acquire
will depend upon the number of shares sold and the resulting amount of the net
proceeds available for investment in properties and other
assets. Until required for the acquisition, development or operation
of assets, we will keep the net proceeds of this offering in short-term, liquid
investments.
We intend
to make reserve allocations as necessary to aid our objective of preserving
capital for our investors by supporting the maintenance and viability of
properties we acquire in the future. If reserves and any other
available income become insufficient to cover our operating expenses and
liabilities, it may be necessary to obtain additional funds by borrowing,
refinancing properties or liquidating our investment in one or more
properties. There is no assurance that such funds will be available
or, if available, that the terms will be acceptable to us.
We intend
to make an election to be taxed as a REIT under Section 856(c) of the Internal
Revenue Code. In order to qualify as a REIT, we must distribute to
our stockholders each calendar year at least 90% of our taxable income
(excluding net capital gains). If we qualify as a REIT for federal
income tax purposes, we generally will not be subject to federal income tax on
income that we distribute to our stockholders. If we fail to qualify
as a REIT in any taxable year, we will be subject to federal income tax on our
taxable income at regular corporate rates and will not be permitted to qualify
as a REIT for four years following the year in which our qualification is
denied. Such an event could materially and adversely affect our net
income and results of operations.
Results
of Operations
Our
results of operations as of September 30, 2009 are not indicative of those
expected in future periods as we have not commenced business operations and were
in our organizational and development stage. During the period from
inception (July 25, 2008) to December 31, 2008, we had been formed but had not
yet commenced operations, as we had not yet begun our best efforts initial
public offering.
The SEC
declared the registration statement for our best efforts initial public offering
effective on October 15, 2009 and we retained Select Capital Corporation to
serve as our dealer manager for the offering. Our management is not
aware of any material trends or uncertainties, favorable or unfavorable, other
than national economic conditions affecting our targeted portfolio, the
apartment housing industry and real estate generally, which may be reasonably
anticipated to have a material impact on either capital resources or the
revenues or incomes to be derived from the operation of our assets.
Our
organization and offering costs (other than selling commissions and the dealer
manager fee) are initially being paid by our advisor, the dealer manager and
their affiliates on our behalf. These other organization and offering
costs include all expenses to be paid by us in connection with our ongoing
public offering, including but not limited to (i) legal, accounting, printing,
mailing and filing fees; (ii) charges of the escrow holder and transfer agent;
(iii) charges of the advisor for administrative services related to the issuance
of shares in the offering; (iv) reimbursement of the dealer manager for amounts
it may pay to reimburse the bona fide diligence expenses of broker-dealers; (v)
reimbursement to the advisor for costs in connection with preparing supplemental
sales materials; (vi) the cost of bona fide training and education meetings held
by us (primarily the travel, meal and lodging costs of registered
representatives of broker-dealers); (vii) reimbursement to the dealer manager
for attendance and sponsorship fees and cost reimbursements for employees of the
dealer manager to attend retail seminars conducted by broker-dealers; and (viii)
in special cases, reimbursement to participating broker-dealers for technology
costs associated with the offering, costs and expenses related to such
technology costs, and costs and expenses associated with the facilitation of the
marketing of the shares in the offering and the ownership of the shares by such
broker-dealers’ customers. Our advisor and its affiliates have
incurred on our behalf organization and offering costs of approximately
$2,225,000 through September 30, 2009. These costs are not recorded
in our consolidated financial statements because such costs are not a liability
to us until we sell the minimum number of shares, and such costs will only
become a liability to us to the extent selling commissions, the dealer manager
fee and other organization and offering costs do not exceed 15% of the gross
proceeds of the offering.
Our Investment Strategy
– 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 in the prospectus) 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.
Liquidity
and Capital Resources
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, with discounts available for certain 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.
Our
principal demands for cash will be for acquisition costs, including the purchase
price of any properties, loans or securities we acquire, and construction and
development costs and the payment of our operating and administrative expenses,
continuing debt service obligations and distributions to our
stockholders. Generally, we will fund our acquisitions from the net
proceeds of our public offering. We intend to acquire our assets with
cash and mortgage or other debt, but we may acquire assets free and clear of
permanent mortgage or other indebtedness by paying the entire purchase price for
the asset in cash or in units of limited partnership interest in our operating
partnership. Due to the delay between the sale of our shares and our
acquisitions, there may be a delay in the benefits to our stockholders, if any,
of returns generated from our investments.
We
anticipate that adequate cash will be generated from operations to fund our
operating and administrative expenses, continuing debt service obligations and
the payment of distributions. However, our ability to finance our
operations is subject to several uncertainties. Our ability to
generate working capital is dependent on our ability to attract and retain
tenants and the economic and business environments of the various markets in
which our properties are located. Our ability to sell real estate
investments is partially dependent upon the state of real estate markets and the
ability of purchasers to obtain financing at reasonable commercial
rates. In general, our policy will be to pay distributions from cash
flow from operations. However, some or all of our distributions may
be paid from other sources, such as from borrowings, advances from our advisor,
our advisor’s deferral of its fees and expense reimbursements or the proceeds of
our public offering.
Potential
future sources of capital include secured or unsecured financings from banks or
other lenders, establishing additional lines of credit, proceeds from the sale
of properties and undistributed cash flow. However, as of September
30, 2009 we had not identified any additional sources of financing, and there is
no assurance that such sources of financings will be available on favorable
terms or at all.
Distributions
We have
not paid any distributions as of September 30, 2009. We intend to make regular
cash distributions to our stockholders, typically on a monthly
basis. Our board of directors will determine the amount of
distributions to be distributed to our stockholders. The board’s
determination will be based on a number of factors, including funds available
from operations, our capital expenditure requirements and the annual
distribution requirements necessary to maintain our REIT status under the
Internal Revenue Code. As a result, our distribution rate and payment frequency
may vary from time to time. However, to qualify as a REIT for tax
purposes, we must make distributions equal to at least 90% of our “REIT taxable
income” each year. Especially during the early stages of our
operations, we may declare distributions in excess of funds from
operations.
Funds
From Operations
One of
our objectives is to provide cash distributions to our stockholders from cash
generated by our operations and funds from operations. Funds from
operations is not equivalent to our net operating income or loss as determined
under GAAP. Due to certain unique operating characteristics of real
estate companies, the National Association of Real Estate Investment Trusts, or
NAREIT, an industry trade group, has promulgated a measure known as Funds From
Operations, or FFO, which it believes more accurately reflects the operating
performance of a REIT such as our company.
We define
FFO, a non-GAAP measure, consistent with the NAREIT’s definition, as net income,
computed in accordance with GAAP, excluding gains (or losses) from sales of
property, plus depreciation and amortization of real estate assets, and after
adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joints
ventures will be calculated to reflect FFO on the same basis.
We
consider FFO to be an appropriate supplemental measure of a REIT’s operating
performance as it is based on a net income analysis of property portfolio
performance that excludes non-cash items such as depreciation. The
historical accounting convention used for real estate assets requires
straight-line depreciation of buildings and improvements, which implies that the
value of real estate assets diminishes predictably over time. Since
real estate values historically rise and fall with market conditions,
presentations of operating results for a REIT, using historical accounting for
depreciation, could be less informative. The use of FFO is
recommended by the REIT industry as a supplemental performance
measure.
Presentation
of this information is intended to assist the reader in comparing the operating
performance of different REITs, although it should be noted that not all REITs
calculate FFO the same way, so comparisons with other REITs may not be
meaningful. Furthermore, FFO is not necessarily indicative of cash
flow available to fund cash needs and should not be considered as an alternative
to net income as an indication of our performance.
Subsequent
Events
On
October 15, 2009, the Company’s three independent directors received an
automatic grant of 5,000 shares each of restricted stock.
On
December 3, 2009, the Company closed on the acquisition and related financing of
a 37.5% equity interest in the Springhouse property as described elsewhere
herein.
Critical
Accounting Policies
Below is
a discussion of the accounting policies that management believes will be
critical upon commencement of real estate operations. We consider
these policies critical because they involve significant management judgments
and assumptions, require estimates about matters that are inherently uncertain
and because they are important for understanding and evaluating our reported
financial results. These judgments affect the reported amounts of assets and
liabilities and our disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenue and expenses
during the reporting periods. With different estimates or assumptions,
materially different amounts could be reported in our consolidated financial
statements. Additionally, other companies may utilize different estimates that
may impact the comparability of our results of operations to those of companies
in similar businesses.
Real
Estate Assets
Depreciation
We have
to make subjective assessments as to the useful lives of our depreciable assets.
These assessments have a direct impact on our net income, because, if we were to
shorten the expected useful lives of our investments in real estate, we would
depreciate these investments over fewer years, resulting in more depreciation
expense and lower net income on an annual basis throughout the expected useful
lives of these investments. We consider the period of future benefit of an asset
to determine its appropriate useful life. We anticipate the estimated useful
lives of our assets by class to be as follows:
Buildings
25-40 years
Building
improvements
10-25 years
Land
improvements
20-25 years
Tenant
improvements
Shorter of lease term or expected useful life
Tenant
origination and absorption
costs
Remaining term of related lease
Real
Estate Purchase Price Allocation
In
accordance with the provisions of the Business Combinations Topic of the FASB
ASC, the Company will record above-market and below-market in-place lease values
for acquired properties based on the present value (using an interest rate that
reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) management’s estimate of fair market lease rates for the corresponding
in-place leases, measured over a period equal to the remaining non-cancelable
term of
the
lease. The Company will amortize any capitalized above-market or below-market
lease values as an increase or reduction to rental income over the remaining
non-cancelable terms of the respective leases.
The
Company will measure the aggregate value of other intangible assets acquired
based on the difference between (i) the property valued with existing in-place
leases adjusted to market rental rates and (ii) the property valued as if
vacant. Management’s estimates of value are expected to be made using
methods similar to those used by independent appraisers (e.g., discounted cash
flow analysis). Factors to be considered by management in its analysis include
an estimate of carrying costs during hypothetical expected lease-up periods,
considering current market conditions and costs to execute similar leases. The
Company will also consider information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired. In
estimating carrying costs, management will also include real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market
rates during the expected lease-up periods. Management will also estimate costs
to execute similar leases including leasing commissions and legal and other
related expenses to the extent that such costs are not already incurred in
connection with a new lease origination as part of the transaction.
In
accordance with the provisions of the Intangibles - Goodwill and Other Topic of
the FASB ASC the total amount of other intangible assets acquired will be
further allocated to in-place lease values and customer relationship intangible
values based on management’s evaluation of the specific characteristics of each
tenant’s lease and the Company’s overall relationship with that respective
tenant. Characteristics to be considered by management in allocating these
values include the nature and extent of the Company’s existing business
relationships with the tenant, growth prospects for developing new business with
the tenant, the tenant’s credit quality and expectations of lease renewals
(including those existing under the terms of the lease agreement), among other
factors.
The
Company will amortize the value of in-place leases to expense over the initial
term of the respective leases. The value of customer relationship intangibles
will be amortized to expense over the initial term and any renewal periods in
the respective leases, but in no event will the amortization period for the
intangible assets exceed the remaining depreciable life of the building. Should
a tenant terminate its lease, the unamortized portion of the in-place lease
value and customer relationship intangibles would be charged to expense in that
period.
Valuation
of Real Estate Assets
We will
continually monitor events and changes in circumstances that could indicate that
the carrying amounts of our real estate and related intangible assets may not be
recoverable. When indicators of potential impairment suggest that the carrying
value of real estate and related intangible assets may not be recoverable, we
will assess the recoverability of the assets by estimating whether we will
recover the carrying value of the asset through its undiscounted future cash
flows and its eventual disposition. If based on this analysis we do not believe
that we will be able to recover the carrying value of the asset, we will record
an impairment loss to the extent that the carrying value exceeds the estimated
fair value of the asset as required by the provisions of the Impairment or
Disposal of Long Lived Assets Topic of the FASB ASC.
Projections
of future cash flows require us to estimate the expected future operating income
and expenses related to an asset as well as market and other trends. The use of
inappropriate assumptions in our future cash flows analyses would result in an
incorrect assessment of our assets’ future cash flows and fair values and could
result in the overstatement of the carrying values of our real estate assets and
an overstatement of our net income.
Real
Estate Loans Receivable
The real
estate loans receivable will be recorded at cost and reviewed for potential
impairment at each balance sheet date. A loan receivable is considered impaired
when it becomes probable, based on current information, that we will be unable
to collect all amounts due according to the loan’s contractual terms. The amount
of impairment, if any, is measured by comparing the recorded amount of the loan
to the present value of the expected cash flows or the fair value of the
collateral. If a loan was deemed to be impaired, we would record a
reserve for loan losses through a charge to income for any shortfall. Failure to
recognize impairment would result in the overstatement of the carrying values of
our real estate loans receivable and an overstatement of our net
income.
Distribution
Policy
Generally,
our policy will be to pay distributions from cash flow from operations. However,
we expect that some or all of our distributions will be paid from sources other
than funds from operations, such as from the proceeds of our public offering,
cash advances to us by our advisor, cash resulting from a waiver of asset
management fees and borrowings (including borrowings secured by our assets) in
anticipation of future operating cash flow until such time as we have sufficient
cash flow from operations to fully fund the payment of distributions therefrom.
Further, because we may receive income from interest or rents at various times
during our fiscal year and because we may need cash flow from operations during
a particular period to fund capital expenditures and other expenses, we expect
that at least during the early stages of our development and from time to time
during our operational stage, we will declare distributions in anticipation of
cash flow that we expect to receive during a later period, and we will pay these
distributions in advance of our actual receipt of these funds. In
these instances, we expect to look to third-party borrowings to fund our
distributions. We may also fund such distributions from advances from
our advisor or sponsors or from our advisor’s deferral of its asset management
fee.
To the
extent that we redeem shares pursuant to our share repurchase plan or make
payments or reimburse certain expenses to our advisor pursuant to our advisory
agreement, our cash flow and therefore our ability to make distributions from
cash flow, as well as cash flow available for investment, will be negatively
impacted. In addition, certain amounts we are required to pay to our
advisor, including the monthly asset management fee, the property management
fee, the financing fee, the disposition fee and the payment made upon conversion
of our convertible stock, depend on the assets acquired, gross revenues of the
properties managed, indebtedness incurred, sales prices of investments sold or
the value of our company at the time of conversion, respectively, and therefore
cannot be quantified or reserved for until such fees have been earned. We are
required to pay these amounts to our advisor regardless of the amount of cash we
distribute to our stockholders, and therefore our ability to make distributions
from cash flow, as well as cash flow available for investment, to our
stockholders may be negatively impacted. In addition, to the extent
we invest in development or redevelopment projects or in properties that have
significant capital requirements, these properties will not immediately generate
operating cash flow. Thus, our ability to make distributions may be
negatively impacted, especially during our early periods of
operation.
Once our
board of directors has begun to authorize distributions, we expect to declare
distributions on a quarterly basis and to pay distributions to our stockholders
on a monthly basis. We intend to calculate these monthly
distributions based on daily record dates so our investors will become eligible
for distributions immediately upon the purchase of their
shares. Distributions will be paid to stockholders as of the record
dates selected by the directors.
We are
required to make distributions sufficient to satisfy the requirements for
qualification as a REIT for tax purposes. Generally, distributed income will not
be taxable to us under the Code if we distribute at least 90% of our REIT
taxable income.
Distributions
will be authorized at the discretion of our board of directors, in accordance
with our earnings, cash flow, anticipated cash flow and general financial
condition. The board’s discretion will be directed, in substantial part, by its
intention to cause us to comply with the REIT requirements. Because we may
receive income from interest or rents at various times during our fiscal year,
distributions may not reflect our income earned in that particular distribution
period but may be made in anticipation of cash flow that we expect to receive
during a later period and may be made in advance of actual receipt of funds in
an attempt to make distributions relatively uniform. We may utilize capital,
borrow money, issue new securities or sell assets in order to fund
distributions. In addition, from time to time, our advisor and its affiliates
may, but are not required to, agree to waive or defer all or a portion of the
acquisition, asset management or other fees or other incentives due to them,
enter into lease agreements for un-leased space, pay general administrative
expenses or otherwise supplement investor returns in order to increase the
amount of cash available to make distributions to our stockholders.
Many of
the factors that can affect the availability and timing of cash distributions to
stockholders are beyond our control, and a change in any one factor could
adversely affect our ability to pay future distributions. There can
be no assurance that future cash flow will support distributions at the rate
that such distributions are paid in any particular distribution
period.
We are
not prohibited from distributing our own securities in lieu of making cash
distributions to stockholders. We may issue securities as stock dividends in the
future.
Income
Taxes
We intend
to elect to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, and intend to operate as such commencing with
the taxable year in which we satisfy the minimum offering requirements. We
expect to have little or no taxable income prior to electing REIT status. To
qualify as a REIT, we must meet certain organizational and operational
requirements, including a requirement to distribute at least 90% of our annual
REIT taxable income to stockholders (which is computed without regard to the
dividends paid deduction or net capital gain and which does not necessarily
equal net income as calculated in accordance with GAAP). As a REIT, we generally
will not be subject to federal income tax to the extent we distribute qualifying
dividends to its stockholders. Even if we qualify for taxation as a REIT, we may
be subject to certain state and local taxes on our income and property, and
federal income and excise taxes on our undistributed income. If we fail to
qualify as a REIT in any taxable year, we will be subject to federal income tax
on our taxable income at regular corporate income tax rates and generally will
not be permitted to qualify for treatment as a REIT for federal income tax
purposes for the four taxable years following the year during which
qualification is lost, unless the Internal Revenue Service grants us relief
under certain statutory provisions. Such an event could materially adversely
affect our net income and net cash available for distribution to stockholders.
However, we intend to organize and operate in such a manner as to qualify for
treatment as a REIT.
Principal
Stockholders
The
following table shows, as of the date of this prospectus, the number and
percentage of shares of our common stock owned by any person who is known by us
to be the beneficial owner of more than 5% of the outstanding shares of our
common stock, each director and executive officer, and all directors and
executive officers as a group.
|
|
|
|
|
|
|
|
Name of Beneficial
Owner
(1)
|
|
Number
of Shares
Beneficially
Owned
|
|
Percent
of
all
Shares
|
|
R.
Ramin Kamfar
|
|
|
23,200
|
(2)
|
|
60.7
|
%
|
James
G. Babb, III
|
|
|
—
|
|
|
—
|
|
Jordan
B. Ruddy
|
|
|
—
|
|
|
—
|
|
Jerold
E. Novack
|
|
|
—
|
|
|
—
|
|
Michael
L. Konig
|
|
|
—
|
|
|
—
|
|
Brian
D. Bailey
|
|
|
5,000
|
(3)
|
|
13.1
|
|
I.
Bobby Majumder
|
|
|
5,000
|
(3)
|
|
13.1
|
|
Romano
Tio
|
|
|
5,000
|
(3)
|
|
13.1
|
|
All
Named Executive Officers and Directors as a Group
|
|
|
38,200
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
(1)
|
The
address of each beneficial owner listed is 680 Fifth Avenue, 16th Floor,
New York, New York 10019.
|
(2)
|
As
of the date of this prospectus, our advisor owns 22,200 shares of our
common stock, all of which is issued and outstanding stock, and 1,000
shares of convertible stock, all of which is issued and outstanding. Our
advisor is controlled by BER Holdings, LLC, which is controlled by Mr.
Kamfar. Thus, Mr. Kamfar has the power to direct how our advisor votes its
shares of common stock. None of the securities listed are
pledged as security
|
(3)
|
None
of the securities listed are pledged as
security.
|
Plan
of Distribution
The
“Volume Discounts” section of the prospectus is replaced in its entirety with
the following:
Volume
Discounts
A
“purchaser,” as defined below, who purchases more than $500,000 of shares at any
one time through a single participating broker-dealer may receive a discount on
the purchase price of those shares. The selling commissions payable to the
participating broker dealer will be commensurately reduced. The amount of
selling commissions otherwise payable to a participating dealer may be reduced
in accordance with the following schedule.
|
|
|
|
|
|
|
|
|
|
Commission
|
|
Price
per
|
|
Dollar
Amount Purchased in the Transaction
|
|
Rate
|
|
Share
|
|
Up
to $500,000
|
|
|
7%
|
|
$
|
10.00
|
|
$500,000
up to $1000,000
|
|
|
6%
|
|
$
|
9.90
|
|
$1,000,001
up to $2,000,000
|
|
|
5%
|
|
$
|
9.80
|
|
$2,000,001
up to $3,000,000
|
|
|
4%
|
|
$
|
9.70
|
|
$3,000,001
up to $4,000,000
|
|
|
3%
|
|
$
|
9.60
|
|
$4,000,001
up to $5,000,000
|
|
|
2%
|
|
$
|
9.50
|
|
$5,000,001
and over
|
|
|
1%
|
|
$
|
9.40
|
|
We will
apply the reduced selling price and selling commission to the entire purchase.
All commission rates and dealer manager fees are calculated assuming a price per
share of $10.00. For example, a purchase of 250,000 shares in a single
transaction would result in a purchase price of $2,425,000 ($9.70 per share),
and selling commissions of $100,000.
In
addition, in order to encourage purchases of $2,500,000 or more of shares, an
investor who agrees to purchase at least $2,500,000 of shares may negotiate with
our dealer manager to reduce the dealer manager fee with respect to the sale of
the shares. In addition or in the alternative, for sales of at least $5,000,000
of shares our advisor may agree to forego a portion of the amount we would
otherwise be obligated to reimburse our advisor for our organization and
offering expenses. Other accommodations may be agreed to by our sponsor in
connection with a purchase of $5,000,000 or more of shares.
Because
all investors will be deemed to have contributed the same amount per share to
our company for purposes of distributions of cash available for distribution, an
investor qualifying for a volume discount will receive a higher return on his
investment in our company than investors who do not qualify for such
discount.
Subscriptions
may be combined for the purpose of determining the volume discounts in the case
of subscriptions made by any “purchaser,” as that term is defined below,
provided all such shares are purchased through the same broker-dealer. The
volume discount may be prorated among the separate subscribers considered to be
a single “purchaser.” Any request to combine more than one subscription must be
made in writing, and must set forth the basis for such request. Any such request
will be subject to verification by our advisor that all of such subscriptions
were made by a single “purchaser.” You must mark the “Additional Investment”
space on the first page of the subscription agreement in order for purchases to
be combined. We are not responsible for failing to combine purchases if you fail
to mark the “Additional Investment” space.
For the
purposes of such volume discounts, the term “purchaser” includes:
|
|
|
|
•
|
an
individual, his or her spouse and their children under the age of 21 who
purchase the shares for his, her or their own accounts;
|
|
|
|
|
•
|
a
corporation, partnership, association, joint-stock company, trust fund or
any organized group of persons, whether incorporated or
not;
|
|
|
|
|
•
|
an
employees’ trust, pension, profit sharing or other employee benefit plan
qualified under the federal income tax laws; and
|
|
|
|
|
•
|
all
commingled trust funds maintained by a given
bank.
|
Notwithstanding
the above, in connection with volume sales made to investors in our company, our
dealer manager may, in its sole discretion, waive the “purchaser” requirements
and aggregate subscriptions as part of a combined order for purposes of
determining the number of shares purchased, provided that any aggregate group of
subscriptions must be received from the same broker-dealer, including our dealer
manager. Any such reduction in selling commission may be prorated among the
separate subscribers except that, in the case of purchases through our dealer
manager, our dealer manager may allocate such reduction among separate
subscribers considered to be a single “purchaser” as it deems appropriate. An
investor may reduce the amount of his purchase price to the net amount shown in
the foregoing table, if applicable. If such investor does not reduce the
purchase price, the excess amount submitted over the discounted purchase price
will be returned to the actual separate subscribers for shares.
Once you
qualify for a volume discount, you will be eligible to receive the benefit of
such discount for subsequent purchase of shares in our primary offering through
the same participating broker-dealer. If a subsequent purchase entitles an
investor to an increased reduction in the sales commissions and/or the dealer
manager fee, the volume discount will apply only to the current and future
investments. Except as provided in this paragraph and the three immediately
preceding paragraphs, separate subscriptions will not be cumulated, combined or
aggregated.
California
residents should be aware that volume discounts will not be available in
connection with the sale of shares made to California residents to the extent
such discounts do not comply with the provisions of the California corporate
securities laws. Under these laws, volume discounts can be made available to
California residents only in accordance with the following
conditions:
|
•
|
there
can be no variance in the net proceeds to our company from the sale of the
shares to different purchasers of the same offering;
|
|
|
|
|
•
|
all
purchasers of the shares must be informed of the availability of quantity
discounts;
|
|
|
|
|
•
|
the
same volume discounts must be allowed to all purchasers of shares which
are part of the offering;
|
|
|
|
|
•
|
the
minimum amount of shares as to which volume discounts are allowed cannot
be less than $10,000;
|
|
|
|
|
•
|
the
variance in the price of the shares must result solely from a different
range of commissions, and all discounts allowed must be based on a uniform
scale of commissions; and
|
|
|
|
|
•
|
no
discounts are allowed to any group of
purchasers.
|
Accordingly,
volume discounts for California residents will be available in accordance with
the foregoing table of uniform discount levels based on dollar volume of shares
purchased, but no discounts are allowed to any group of purchasers, and no
subscriptions may be aggregated as part of a combined order for purposes of
determining the number of shares purchased.
Experts
The
“Experts” section of the prospectus is supplemented by the addition of the
following:
The
statement of revenues and certain operating expenses of Springhouse at Newport
News for the year ended December 31, 2008, included in this prospectus, has
been audited by Freedman & Goldberg, an independent registered public
accounting firm, as stated in their report appearing herein (which report on the
statement of revenues and certain operating expenses expresses an unqualified
opinion and includes explanatory paragraphs referring to the purpose of the
statement), and is included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
INDEX
TO FINANCIAL STATEMENTS
Bluerock Enhanced Multifamily Trust,
Inc.
|
|
Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
F-2
|
Notes
to Consolidated Balance Sheets (unaudited)
|
F-3
|
|
|
Springhouse at Newport News
|
|
Independent
Auditors’ Report
|
F-12
|
Statements
of Revenues and Certain Operating Expenses for the nine months ended
September 30, 2009 (unaudited) and for the year ended December 31,
2008
|
F-14
|
|
|
Pro Forma Financial Information for Bluerock
Enhanced Multifamily Trust, Inc.
|
|
Summary
of Unaudited Pro Forma Consolidated Financial Information
|
F-15
|
Unaudited
Pro Forma Consolidated Balance Sheet as of September 30,
2009
|
F-16
|
Notes
to Unaudited Pro Forma Consolidated Balance Sheet as of September 30,
2009
|
F-17
|
Unaudited
Pro Forma Consolidated Statement of Operations for the nine months ended
September 30, 2009
|
F-18
|
Notes
to Unaudited Pro Forma Consolidated Statement of Operations for the nine
months ended September 30, 2009
|
F-19
|
Unaudited
Pro Forma Consolidated Statement of Operations for the year ended December
31, 2008
|
F-20
|
Notes
to Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 2008
|
F-21
|
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC. CONSOLIDATED BALANCE SHEETS
AS
OF SEPTEMBER 30, 2009 (Unaudited) AND DECEMBER 31, 2008
|
|
|
|
|
|
|
|
|
September 30,
2009
|
|
|
December 31,
2008
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Cash
|
|
$
|
201,001
|
|
|
$
|
201,001
|
|
Total
assets
|
|
$
|
201,001
|
|
|
$
|
201,001
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDER’S
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 50,000,000 shares authorized; none issued and
outstanding
|
|
$
|
-
|
|
|
$
|
-
|
|
Common
stock, $0.01 par value, 249,999,000 shares authorized; 22,200 shares
issued and outstanding
|
|
|
222
|
|
|
|
222
|
|
Nonvoting
convertible stock, $0.01 par value per share; 1,000 shares authorized,
none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Additional
paid in capital
|
|
|
200,779
|
|
|
|
200,779
|
|
Total
stockholder’s equity
|
|
|
201,001
|
|
|
|
201,001
|
|
Total
liabilities and stockholder’s equity
|
|
$
|
201,001
|
|
|
$
|
201,001
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of this consolidated financial
statement.
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
1.
ORGANIZATION AND NATURE OF BUSINESS
Bluerock
Enhanced Multifamily Trust, Inc. (the “Company”) was incorporated on July 25,
2008 under the laws of the state of Maryland. If we meet the qualification
requirements, we intend to elect to be treated as a real estate investment trust
or REIT for Federal income tax purposes. We were incorporated to raise capital
and acquire a diverse portfolio of residential real estate assets. Our
day-to-day operations are to be managed by Bluerock Enhanced Multifamily
Advisor, LLC, or our advisor, under an advisory agreement. Our advisor is
affiliated with us in that we and our advisor have common ownership and
management. The use of the words “we,” “us” or “our” refers to Bluerock Enhanced
Multifamily Trust, Inc. and its subsidiary Bluerock Enhanced Multifamily
Holdings, L.P., or our operating partnership, except where the context otherwise
requires.
On August
22, 2008, the Company filed a registration statement on Form S-11 with the
Securities and Exchange Commission (the “SEC”) to offer 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, with
discounts available for certain 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.
The
Company’s fiscal year end is December 31. As of September 30, 2009, neither the
Company nor the operating partnership had purchased or contracted to purchase
any properties or other investments or begun operations. Also as of September
30, 2009, the advisor had not identified any properties or other investments in
which there is a reasonable probability that the Company or the operating
partnership will invest.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Basis of Presentation
We intend
to operate in an umbrella partnership REIT structure in which our wholly owned
subsidiary, Bluerock Enhanced Multifamily Holdings, L.P., a Delaware limited
partnership, or wholly owned subsidiaries of our operating partnership, will own
substantially all of the properties acquired on our behalf.
In June
2009, the Financial Accounting Standards Board (“FASB”) issued its final
Statement of Financial Accounting Standards -
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles
. This Statement made the FASB Accounting Standards
Codification (the “ASC”) the single source of U.S. Generally Accepted Accounting
Principles (“GAAP”) used by nongovernmental entities in the preparation of
financial statements, except for rules and interpretive releases of the SEC
under authority of federal securities laws. The ASC supersedes all existing
non-SEC accounting and reporting standards and was effective for the interim and
annual periods ending after September 15, 2009. We have prepared our
consolidated financial statements in conformity with the ASC using the plain
English approach encouraged by the FASB in the
FASB Accounting
Standards Codification Notice to Constituents (v.3.0) release
.
Because
we are the sole general partner of our operating partnership and have unilateral
control over its management and major operating decisions (even if additional
limited partners are admitted to our operating partnership), the accounts of our
operating partnership are consolidated in our company’s consolidated financial
statements. All significant intercompany accounts and transactions will be
eliminated in consolidation. The Company will consider future majority owned and
controlled joint ventures for consolidation in accordance with the provisions
required by the Consolidation Topic of the FASB ASC.
Interim
Financial Information
The
financial information as of September 30, 2009 is unaudited, but includes all
adjustments, consisting of normal recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
the
Company’s financial position for such period. These condensed consolidated
financial statements do not include all disclosures required by GAAP for annual
consolidated financial statements. The Company’s audited consolidated statements
for the year ended December 31, 2008 are contained in the Company’s Registration
Statement on Form S-11 (File No. 333-153135).
Revenue
Recognition
The
Company will recognize minimum rent, including rental abatements and contractual
fixed increases attributable to operating leases, on a straight-line basis over
the term of the related lease, and amounts expected to be received in later
years will be recorded as deferred rents. The Company will record property
operating expense reimbursements due from tenants for common area maintenance,
real estate taxes, and other recoverable costs in the period the related
expenses are incurred.
The
Company will recognize gains on sales of real estate pursuant to the provisions
required by the Real Estate Sales Topic of the FASB ASC. The specific timing of
a sale is measured against various criteria related to the terms of the
transaction and any continuing involvement associated with the property. If the
criteria for profit recognition under the full-accrual method are not met, the
Company will defer gain recognition and account for the continued operations of
the property by applying the percentage-of-completion, reduced profit, deposit,
installment or cost recovery methods, as appropriate, until the appropriate
criteria are met.
Interest
income from any loans receivable the Company may purchase will be recognized
based on the contractual terms of the debt instrument. Fees related to the
buy-down of the interest rate will be deferred as prepaid interest income and
amortized over the term of the loan as an adjustment to interest income using
the effective interest method. Closing costs related to the purchase of the loan
receivable will be amortized over the term of the loan and accreted as an
adjustment against interest income using the effective interest method. Interest
and other income will be recognized as they are earned
Use
of Estimates
The
preparation of the financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates include such items as
purchase price allocation of real estate acquisitions, impairment of long-lived
assets, depreciation and amortization and allowance for doubtful accounts.
Actual results could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash equivalents may
include cash and short-term investments. Short-term investments are stated at
cost, which approximates fair value. There are no restrictions on the use of the
Company’s cash as of September 30, 2009.
Real
Estate Assets
Depreciation
Real
estate costs related to the acquisition, development, construction, and
improvement of properties will be capitalized. Repair and maintenance costs will
be charged to expense as incurred and significant replacements and betterments
will be capitalized. Repair and maintenance costs include all costs that do not
extend the useful life of the real estate asset. The Company considers the
period of future benefit of an asset to determine its appropriate useful life.
The Company anticipates the estimated useful lives of its assets by class to be
generally as follows:
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
|
|
Buildings
|
25-40
years
|
Building
improvements
|
10-25
years
|
Land
improvements
|
20-25
years
|
Tenant
improvements
|
Shorter
of lease term or expected useful life
|
Tenant
origination and absorption costs
|
Remaining
term of related lease
|
Real
Estate Purchase Price Allocation
In
accordance with the provisions of the Business Combinations Topic of the FASB
ASC, the Company will record above-market and below-market in-place lease values
for acquired properties based on the present value (using an interest rate that
reflects the risks associated with the leases acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) management’s estimate of fair market lease rates for the corresponding
in-place leases, measured over a period equal to the remaining non-cancelable
term of the lease. The Company will amortize any capitalized above-market or
below-market lease values as an increase or reduction to rental income over the
remaining non-cancelable terms of the respective leases.
The
Company will measure the aggregate value of other intangible assets acquired
based on the difference between (i) the property valued with existing in-place
leases adjusted to market rental rates and (ii) the property valued as if
vacant. Management’s estimates of value are expected to be made using methods
similar to those used by independent appraisers (e.g., discounted cash flow
analysis). Factors to be considered by management in its analysis include an
estimate of carrying costs during hypothetical expected lease-up periods,
considering current market conditions and costs to execute similar leases. The
Company will also consider information obtained about each property as a result
of its pre-acquisition due diligence, marketing and leasing activities in
estimating the fair value of the tangible and intangible assets acquired. In
estimating carrying costs, management will also include real estate taxes,
insurance and other operating expenses and estimates of lost rentals at market
rates during the expected lease-up periods. Management will also estimate costs
to execute similar leases including leasing commissions and legal and other
related expenses to the extent that such costs are not already incurred in
connection with a new lease origination as part of the transaction.
In
accordance with the provisions of the Intangibles - Goodwill and Other Topic of
the FASB ASC the total amount of other intangible assets acquired will be
further allocated to in-place lease values and customer relationship intangible
values based on management’s evaluation of the specific characteristics of each
tenant’s lease and the Company’s overall relationship with that respective
tenant. Characteristics to be considered by management in allocating these
values include the nature and extent of the Company’s existing business
relationships with the tenant, growth prospects for developing new business with
the tenant, the tenant’s credit quality and expectations of lease renewals
(including those existing under the terms of the lease agreement), among other
factors.
The
Company will amortize the value of in-place leases to expense over the initial
term of the respective leases. The value of customer relationship intangibles
will be amortized to expense over the initial term and any renewal periods in
the respective leases, but in no event will the amortization period for the
intangible assets exceed the remaining depreciable life of the building. Should
a tenant terminate its lease, the unamortized portion of the in-place lease
value and customer relationship intangibles would be charged to expense in that
period.
Impairment
of Real Estate Assets
The
Company will continually monitor events and changes in circumstances that could
indicate that the carrying amounts of its real estate and related intangible
assets may not be recoverable. When indicators of potential impairment suggest
that the carrying value of real estate and related intangible assets may not
be
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
recoverable,
the Company will assess the recoverability of the assets by estimating whether
the Company will recover the carrying value of the asset through its
undiscounted future cash flows and its eventual disposition. If based on this
analysis the Company does not believe that it will be able to recover the
carrying value of the asset, the Company will record an impairment loss to the
extent that the carrying value exceeds the estimated fair value of the asset as
required by the provisions of the Impairment or Disposal of Long Lived Assets
Topic of the FASB ASC.
Real
Estate Loans Receivable
The real
estate loans receivable will be recorded at cost and reviewed for potential
impairment at each balance sheet date. A loan receivable is considered impaired
when it becomes probable, based on current information, that the Company will be
unable to collect all amounts due according to the loan’s contractual terms. The
amount of impairment, if any, is measured by comparing the recorded amount of
the loan receivable to the present value of the expected cash flows or the fair
value of the collateral. If a loan was deemed to be impaired, the Company would
record a reserve for loan losses through a charge to income for any
shortfall
Rents
and Other Receivables
The
Company will periodically evaluate the collectability of amounts due from
tenants and maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of tenants to make required payments under lease
agreements. The Company will maintain an allowance for deferred rent receivable
that arises from the straight-lining of rents. The Company will exercise
judgment in establishing these allowances and consider payment history and
current credit status of its tenants in developing these estimates.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with the provisions
of the Equity Topic of the FASB ASC. This topic established a fair value based
method of accounting for stock-based compensation and requires the fair value of
stock-based compensation awards to amortize as an expense over the vesting
period and requires any dividend equivalents earned to be treated as dividends
for financial reporting purposes. Stock-based compensation awards are valued at
the fair value on the date of grant and amortized as an expense over the vesting
period.
Distribution
Policy
The
Company intends to elect to be taxed as a REIT and to operate as a REIT
beginning with its taxable year ending December 31, 2009. To maintain its
qualification as a REIT, the Company intends to make distributions each taxable
year equal to at least 90% of its REIT annual taxable income (excluding net
capital gains and income from operations or sales through a taxable REIT
subsidiary, or TRS). The Company expects to authorize and declare daily
distributions that will be paid on a monthly basis.
Distributions
to stockholders will be determined by the board of directors of the Company and
will be dependent upon a number of factors relating to the Company, including
funds available for the payment of distributions, financial condition, the
timing of property acquisitions, capital expenditure requirements, and annual
distribution requirements in order to maintain the Company’s status as a REIT
under the Internal Revenue Code of 1986, as amended (the “Code”) and other
considerations as our board of directors may deem relevant.
Organization
and Offering Costs
Organization
and offering costs (other than selling commissions and the dealer manager fee)
of the Company are initially being paid by the advisor, the dealer manager or
their affiliates on behalf of the Company. These other organization and offering
costs include all expenses to be paid by the Company in
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
connection
with the Company’s ongoing public offering, including but not limited to (i)
legal, accounting, printing, mailing and filing fees; (ii) charges of the escrow
holder and transfer agent; (iii) charges of the advisor for administrative
services related to the issuance of shares in the offering; (iv) reimbursement
of the dealer manager for amounts it may pay to reimburse the bona fide
diligence expenses of broker-dealers; (v) reimbursement to the advisor for costs
in connection with preparing supplemental sales materials; (vi) the cost of bona
fide training and education meetings held by the Company (primarily the travel,
meal and lodging costs of registered representatives of broker-dealers); (vii)
reimbursement to the dealer manager for attendance and sponsorship fees and cost
reimbursements for employees of the dealer manager to attend retail seminars
conducted by broker-dealers; and (viii) in special cases, reimbursement to
participating broker-dealers for technology costs associated with the offering,
costs and expenses related to such technology costs, and costs and expenses
associated with the facilitation of the marketing of the shares in the offering
and the ownership of the shares by such broker-dealers’ customers. Pursuant to
the Advisory Agreement and the Dealer Manager Agreement, the Company will be
obligated to reimburse the advisor, the dealer manager or their affiliates, as
applicable, for organization and offering costs paid by them on behalf of the
Company, provided that the advisor would be obligated to reimburse the Company
to the extent selling commissions, the dealer manager fee and other organization
and offering costs incurred by the Company in the offering exceed 15% of gross
offering proceeds
In the
event the minimum number of shares of the Company’s common stock is not sold to
the public, the Company will terminate the offering and will have no obligation
to reimburse the advisor, the dealer manager or their affiliates for any
organization and offering costs. As of September 30, 2009, the advisor has
incurred on behalf of the Company organization and offering costs of
approximately $2,225,000. These costs are not recorded in the consolidated
financial statements of the Company as of September 30, 2009 because such costs
are not a liability of the Company until the minimum number of shares of the
Company’s common stock is issued, and such costs will only become a liability of
the Company to the extent selling commissions, the dealer manager fee and other
organization and offering costs do not exceed 15% of the gross proceeds of the
offering. When recorded by the Company, organization costs will be expensed as
incurred, and offering costs, which include selling commissions and dealer
manager fees, will be deferred and charged to stockholders’ equity as such
amounts are reimbursed to the advisor, the dealer manager or their affiliates
from the gross proceeds of the offering.
Independent
Director Compensation
The
Company will pay each of its independent directors an annual retainer of
$25,000. In addition, the independent directors will be paid for attending
meetings as follows: (i) $2,500 for each board meeting attended, (ii) $2,000 for
each committee meeting attended, (iii) $1,000 for each teleconference board
meeting attended, and (iv) $1,000 for each teleconference committee meeting
attended. All directors also receive reimbursement of reasonable out-of-pocket
expenses incurred in connection with attendance at meetings of the board of
directors. In addition 5,000 shares of restricted stock will be granted upon
election to the board and 2,500 shares of restricted stock will be granted upon
re-election to the board. Director compensation is an operating expense of the
Company that is subject to the operating expense reimbursement obligation of the
advisor discussed in Note 4, “Related-Party Transactions.”
Income
Taxes
The
Company intends to elect to be taxed as a REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended, and intends to operate as such
commencing with the taxable year in which the Company satisfies the minimum
offering requirements. The Company expects to have little or no taxable income
prior to electing REIT status. To qualify as a REIT, the Company must meet
certain organizational and operational requirements, including a requirement to
distribute at least 90% of the Company’s annual REIT taxable income to
stockholders (which is computed without regard to the dividends paid deduction
or net capital gain and which does not necessarily equal net income as
calculated in accordance with GAAP). As a REIT, the Company generally will not
be subject to federal income tax to the extent it distributes qualifying
dividends to its stockholders. Even if we qualify for taxation as a REIT,
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
we may be
subject to certain state and local taxes on our income and property, and federal
income and excise taxes on our undistributed income. If the Company fails to
qualify as a REIT in any taxable year, it will be subject to federal income tax
on its taxable income at regular corporate income tax rates and generally will
not be permitted to qualify for treatment as a REIT for federal income tax
purposes for the four taxable years following the year during which
qualification is lost, unless the Internal Revenue Service grants the Company
relief under certain statutory provisions. Such an event could materially
adversely affect the Company’s net income and net cash available for
distribution to stockholders. However, the Company intends to organize and
operate in such a manner as to qualify for treatment as a REIT.
Per
Share Data
Loss per
basic share of common stock is calculated by dividing net loss by the
weighted-average number of shares of common stock outstanding during such
period. Diluted loss per share of common stock equals basic loss per share of
common stock as there were no potentially dilutive shares of common stock for
the nine months ended September 30, 2009.
3.
RECENT ACCOUNTING PRONOUNCEMENTS
In April
2009, the FASB issued new provisions required under the Financial Instruments
Topic of the FASB ASC, which require (i) disclosure of the fair value of all
financial instruments for which it is practicable to estimate that value in
interim period financial statements as well as in annual financial statements,
(ii) that the fair value information be presented together with the related
carrying amount of the asset or liability, and (iii) disclosure of the methods
and significant assumptions used to estimate the fair value and changes, if any,
to the methods and significant assumptions used during the period. The
provisions are effective for interim periods ending after June 15,
2009.
In May
2009, the FASB issued new provisions required under the Subsequent Events Topic
of the FASB ASC, to establish general standards of accounting for and disclosure
of subsequent events. The provisions rename the two types of subsequent events
as
recognized
subsequent
events or
non-recognized
subsequent
events and modify the definition of the evaluation period for subsequent events
as events or transactions that occur after the balance sheet date, but before
the financial statements are issued. This will require entities to disclose the
date through which they have evaluated subsequent events and the basis for that
date (the issued date for public companies). The provisions are effective for
interim or annual financial periods ending after June 15, 2009, and will be
applied prospectively. This disclosure is presented in Note 7.
4.
RELATED-PARTY TRANSACTIONS
As of
September 30, 2009, approximately $2,225,000 of organizational and offering
costs have been incurred on the Company’s behalf. These costs are not recorded
in its consolidated financial statements because such costs are not its
liability until the subscriptions for the minimum number of shares are received
and accepted by the Company. When recorded by the Company, organizational and
offering costs will be expensed as incurred, and third-party offering costs will
be deferred and charged to shareholders’ equity as such amounts are reimbursed
to the advisor or its affiliates from the gross proceeds of the
offering.
The
advisor performs its duties and responsibilities as the Company’s fiduciary
under an advisory agreement. The term of the current advisory agreement ends
October 14, 2010, subject to renewals by the Company’s board of directors for an
unlimited number of successive one-year periods. The advisor will conduct the
Company’s operations and manage its portfolio of real estate and real
estate-related investments under the terms of the advisory
agreement.
Certain
of the Company’s affiliates will receive fees and compensation in connection
with the Company’s public offering, and the acquisition, management and sale of
its real estate investments
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
The
Company will pay its advisor a monthly asset management fee for the services it
provides pursuant to the advisory agreement. The asset management fee will be
equal to one-twelfth of 1.0% of the higher of the cost or the value of each
asset, where (A) cost equals the amount actually paid, excluding acquisition
fees and expenses, to purchase each asset it acquires, including any debt
attributable to the asset (including any debt encumbering the asset after
acquisition), provided that, with respect to any properties the Company
develops, constructs or improves, cost will include the amount expended by the
Company for the development, construction or improvement, and (B) the value of
an asset is the value established by the most recent independent valuation
report, if available, without reduction for depreciation, bad debts or other
non-cash reserves; provided, however, that 50% of the advisor’s asset management
fee will not be payable until stockholders have received distributions in an
amount equal to at least a 6.0% per annum cumulative, non-compounded return on
invested capital, at which time all such amounts will become immediately due and
payable. For these purposes, “invested capital” means the original issue price
paid for the shares of the Company’s common stock reduced by prior distributions
identified as special distributions from the sale of its assets. The asset
management fee will be based only on the portion of the cost or value
attributable to the Company’s investment in an asset if the Company does not own
all of an asset. The Company will also pay the advisor a financing fee equal to
1% of the amount available under any loan or line of credit made available to
the Company. The advisor may re-allow some or all of this fee to reimburse third
parties with whom it may subcontract to procure such financing.
The
advisor will also receive 1.75% of the purchase price of a property or
investment for its services in connection with the investigation, selection,
sourcing, due diligence and acquisition of that property or investment. The
purchase price of a property or investment will equal the amount paid or
allocated to the purchase, development, construction or improvement of a
property, inclusive of expenses related thereto, and the amount of debt
associated with such real property or investment. The purchase price allocable
for joint venture investments will equal the product of (1) the purchase price
of the underlying property and (2) the Company’s ownership percentage in the
joint venture. The Company will pay the advisor an origination fee in lieu of an
acquisition fee for services in connection with the investigation, selection,
sourcing, due diligence, and acquisition of mortgage, subordinated, bridge or
other loans of 1.75% of the principal amount of the borrower’s loan obligation
or of the purchase price of any loan the Company purchases including third-party
expenses.
In
addition, to the extent the advisor provides a substantial amount of services in
connection with the disposition of one or more of the Company’s properties or
investments (except for securities that are traded on a national securities
exchange), the 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 broker in connection with
such a disposition. In no event may disposition fees paid to the advisor or its
affiliates and unaffiliated third parties exceed in the aggregate 6% of the
contract sales price
In
addition to the fees payable to the advisor, the Company will reimburse the
advisor for all reasonable and incurred expenses in connection with services
provided to the Company, subject to the limitation that the Company will not
reimburse any amount that would cause its total operating expenses at the end of
four preceding fiscal quarters to exceed the greater of 2% of the Company’s
average invested assets or 25% of the Company’s net income determined (1)
without reductions for any additions to reserves for depreciation, bad debts or
other similar non-cash reserves and (2) excluding any gain from the sale of the
Company’s assets for the period unless a majority of its independent directors
has determined such expenses were justified based on unusual and non-recurring
factors. The Company will not reimburse the advisor for personnel costs in
connection with services for which the advisor receives acquisition, origination
or disposition fees.
The
Company has issued 1,000 shares of convertible stock, par value $0.01 per share
to its advisor. The convertible stock will convert to shares of common stock if
and when: (A) the Company has made total distributions on the then outstanding
shares of its 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
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
(B)
subject to specified conditions, the Company lists its common stock for trading
on a national securities exchange. A “listing” will be deemed to have occurred
on the effective date of any merger of the Company in which the consideration
received by the holders of the Company’s common stock is the securities of
another issuer that are listed on a national securities exchange. Upon
conversion, each share of 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)
the Company’s “enterprise value” (as defined in its charter) plus the aggregate
value of distributions paid to date on the outstanding shares of its common
stock over the (2) aggregate purchase price paid by the stockholders for those
shares plus an 8% cumulative, non-compounded, annual return on the original
issue price of those shares, divided by (B) the Company’s 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 an event triggering
the conversion occurs after the advisory agreement with the advisor is not
renewed or terminates (other than because of a material breach by the advisor),
the number of shares of common stock the advisor will receive upon conversion
will be prorated to account for the period of time the advisory agreement was in
force.
The
Company will pay Bluerock REIT Property Management, LLC, a wholly owned
subsidiary of the advisor, a property management fee equal to 4% of the monthly
gross income from any properties it manages. Alternatively, the Company may
contract property management services for certain properties directly to
non-affiliated third parties, in which event the Company will pay the advisor an
oversight fee equal to 1% of monthly gross revenues of such
properties.
All of
the Company’s executive officers and some of its directors are also executive
officers, managers and/or holders of a direct or indirect controlling interest
in the advisor and other Bluerock-affiliated entities as well as executive
officers and directors of the Company. As a result, they owe fiduciary duties to
each of these entities, their members and limited partners and investors, which
fiduciary duties may from time to time conflict with the fiduciary duties that
they owe to the Company and its stockholders.
Some of
the material conflicts that the advisor or its affiliates will face are: 1) the
determination of whether an investment opportunity should be recommended to the
Company or another Bluerock-sponsored program or Bluerock-advised investor; 2)
the allocation of the time of key executive officers, directors, and other real
estate professionals among the Company, other Bluerock-sponsored programs and
Bluerock-advised investors, and the activities in which they are involved; 3)
the fees received by the advisor and its affiliates in connection with
transactions involving the purchase, origination, management and sale of
investments regardless of the quality of the asset acquired or the service
provided the Company; and 4) the fees received by the advisor and its affiliates
in connection with the Company’s public offering of equity
securities.
5.
STOCKHOLDERS’ EQUITY
Common
Stock
The
Company is offering and selling to the public up to $1,000,000,000 in shares of
its $.01 par value common stock for $10.00 per share, with discounts available
for certain categories of purchasers. The Company is also offering up to
$285,000,000 in shares of its $.01 par value common stock to be issued pursuant
to its distribution reinvestment plan at $9.50 per share.
Convertible
Stock
The
Company has issued to its advisor 1,000 shares of its convertible stock for an
aggregate purchase price of $1,000. Upon certain conditions, the convertible
stock will convert to shares of common stock with a value equal to 15% of the
excess of (i) the Company’s enterprise value (as defined in its charter) plus
the aggregate value of distributions paid to stockholders over (ii) the
aggregate purchase price paid by stockholders for the Company’s shares plus a 8%
cumulative, non-compounded, annual return on the original issue price paid for
those outstanding shares
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
NOTES
TO CONSOLIDATED BALANCE SHEETS (continued)
AS
OF SEPTEMBER 30, 2009 (unaudited) and DECEMBER 31, 2008
Share
Repurchase Plan
The
Company’s board of directors has approved a share repurchase plan. The share
repurchase plan allows for share repurchases by the Company when certain
criteria are met.
Stock-based
Compensation for Independent Directors
The
Company’s independent directors received an automatic grant of 5,000 shares of
restricted stock on the effective date of the public offering and will receive
an automatic grant of 2,500 shares of restricted stock at each annual meeting of
the Company’s stockholders thereafter. Each person who thereafter is elected or
appointed as an independent director will receive an automatic grant of 5,000
shares of restricted stock on the date such person is first elected as an
independent director and an automatic grant of 2,500 shares of restricted stock
at each annual meeting of the Company’s stockholders thereafter. To the extent
allowed by applicable law, the independent directors will not be required to pay
any purchase price for these grants of restricted stock. The restricted stock
will vest 20% at the time of the grant and 20% on each anniversary thereafter
over four years from the date of the grant. All restricted stock may receive
distributions, whether vested or unvested. The value of the restricted stock to
be granted is not determinable until the date of grant. No stock-based awards
were issued under the plan as of September 30, 2009.
6.
ECONOMIC DEPENDENCY
The
Company is dependent on the advisor for certain services that are essential to
the Company, including the identification, evaluation, negotiation, purchase and
disposition of properties and other investments; management of the daily
operations of the Company’s real estate portfolio; and other general and
administrative responsibilities. In the event that these companies are unable to
provide the respective services, the Company will be required to obtain such
services from other sources.
7.
SUBSEQUENT EVENTS
Pursuant
to the Subsequent Events Topic of FASB ASC, we have reviewed all subsequent
events and transactions that occurred after our September 30, 2009 unaudited
consolidated balance sheet date through the time of filing this quarterly report
on Form 10-Q on November 20, 2009.
On
October 15, 2009, the Company’s Registration Statement on Form S-11 (File No.
333-153135), registering a public offering of up to 100,000,000 shares of the
Company’s common stock, was declared effective under the Securities Act of 1933,
as amended, and the Company commenced its initial public offering.
Also on
October 15, 2009, the Company’s three independent directors received an
automatic grant of 5,000 shares each of restricted stock.
|
FREEDMAN
& GOLDBERG
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CERTIFIED
PUBLIC ACCOUNTANTS
|
|
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A
PROFESSIONAL CORPORATION
|
|
|
|
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ERIC
W. FREEDMAN
MICHAEL
GOLDBERG
|
|
GLORIA
K. MOORE
BETTY
J. POWELL
|
|
JULIE
A. CHEEK
|
|
JUDITH
A. COOPER
|
|
KAREN
E. LONG
MICHAEL
GOULD
|
31150
NORTHWESTERN HIGHWAY, SUITE 200
FARMINGTON
HILLS, MICHIGAN 48334
(248)
626-2400
FAX:
(248) 626-4298
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SALLY
LISCOMB
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REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Bluerock
Enhanced Multifamily Trust, Inc.
We have
audited the accompanying statement of revenues and certain operating
expenses of Springhouse at Newport News for the year ended December 31, 2008.
This statement is the responsibility of the Company’s management. Our
responsibility is to express an opinion on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the statement
of revenues and certain operating expenses is free of material misstatement.
Springhouse at Newport News is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of Springhouse
at Newport News’ internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of revenues and
certain operating expenses, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the statement of revenues and certain operating expenses. We
believe that our audit provides a reasonable basis for our opinion.
The
accompanying statement of revenues and certain operating expenses was prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission, as described in Note 2, and is not intended to be a
complete presentation of Springhouse at Newport News’ revenues and
expenses.
In our
opinion, the statement of revenues and certain operating expenses referred to
above presents fairly, in all material respects, the revenues and certain
operating expenses, as described in Note 2 of Springhouse at Newport News for
the year ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
/s/
Freedman & Goldberg
Certified
Public Accountants
Farmington
Hills, MI
February
18, 2010
Represented
worldwide as a member firm of the International Association of Local Public
Accountants
SPRINGHOUSE
AT NEWPORT NEWS
|
|
STATEMENTS
OF REVENUES AND CERTAIN OPERATING EXPENSES
|
|
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For
the Nine Months Ended September 30, 2009
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For
the Year Ended December 31, 2008
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(unaudited)
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Revenues
|
|
|
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Rental
revenue
|
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$
|
2,996,223
|
|
|
$
|
3,879,368
|
|
Tenant
reimbursements and other income
|
|
|
277,537
|
|
|
|
361,773
|
|
Total
revenues
|
|
|
3,273,760
|
|
|
|
4,241,141
|
|
|
|
|
|
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|
|
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Certain
Operating Expenses
|
|
|
|
|
|
|
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Property
Operating Expenses
|
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873,828
|
|
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1,149,646
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Property
taxes and insurance
|
|
|
440,065
|
|
|
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523,652
|
|
Management
Fees
|
|
|
153,202
|
|
|
|
191,642
|
|
General
and administrative
|
|
|
7,960
|
|
|
|
289,275
|
|
Total
Certain operating expenses
|
|
|
1,475,055
|
|
|
|
2,154,215
|
|
|
|
|
|
|
|
|
|
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Revenues
in excess of certain operating expenses
|
|
$
|
1,798,705
|
|
|
$
|
2,086,926
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
|
SPRINGHOUSE
AT NEWPORT NEWS
NOTES
TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
For
the Nine Months Ended September 30, 2009 (unaudited) and the Year Ended December
31, 2008
1. DESCRIPTION
OF REAL ESTATE PROPERTY
On
December 3, 2009, through a wholly owned subsidiary, Bluerock Enhanced
Multifamily Trust, Inc. (the “Company”) completed an investment in a joint
venture along with Bluerock Special Opportunity + Income Fund (“BEMT
Co-Investor”), an affiliate of the Company’s sponsor, and Hawthorne Springhouse,
LLC (“Hawthorne”), an unaffiliated entity, to acquire a 432-unit garden-style
multifamily community known as Springhouse at Newport News (the “Springhouse
property”), located in Newport News, Virginia, from Newport-Oxford Associates
Limited Partnership, an unaffiliated entity.
The
Springhouse property is comprised of 432 units, featuring one- and two-bedroom
layouts in 24, 2-story garden-style apartment buildings surrounding a
centralized lake. The property contains approximately 314,572 rentable square
feet and the average unit size is 728 square feet. Newport
News, VA is part of the Virginia Beach-Norfolk-Newport News, VA-NC
MSA. The community features include clubhouse, fitness center,
swimming pool, tennis court, volleyball court, picnic area and private lake with
gazebo.
The
aggregate purchase price for the Springhouse property was approximately $29.25
million, plus closing costs.
2.
BASIS OF
PRESENTATION
The
statements of revenues and certain operating expenses (the “Historical
Summaries”) have been prepared for the purpose of complying with the provisions
of Article 3-14 of Regulation S-X promulgated by the Securities and Exchange
Commission (the “SEC”), which requires certain information with respect to real
estate operations to be included with certain filings with the
SEC. The Historical Summaries include the historical revenue and
certain operating expenses of the Springhouse property, exclusive of interest
income, asset management fees, interest expenses and depreciation and
amortization, which may not be comparable to the proposed future operations of
the Springhouse property.
The
statement of revenues and certain operating expenses and notes thereto for the
nine months ended September 30, 2009, included in this report, are
unaudited. In the opinion of the Company’s management, all
adjustments necessary for a fair presentation of such statement of revenues and
certain operating expenses have been included. Such adjustments
consist of normal recurring items. Interim results are not
necessarily indicative of results for a full year.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Revenue
Recognition
The
Springhouse property operations consist of rental income earned from its tenants
under lease agreements with terms of one year or less. Rental income
is recognized when earned. This policy effectively results in income
recognition on the straight-line method over the related terms of the
leases.
Use
of Estimates
The
preparation of the financial statements in conformity with U.S. generally
accepted accounting principles (“GAAP”) requires management to make estimates
and assumptions that affect the reported amounts of revenue and certain expenses
during the reporting period. Actual results could differ from those
estimates.
4.
SUBSEQUENT EVENTS
The
Company has evaluated subsequent events for recognition or disclosure
through February 18, 2010, which is the date the financial statements were
issued.
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
Summary
of Unaudited Pro Forma Consolidated Financial Information
The
following pro forma information should be read in conjunction with the
consolidated balance sheet of Bluerock Enhanced Multifamily Trust, Inc. (“the
Company”) as of September 30, 2009, which has been filed with the SEC in the
Company’s quarterly report on Form 10-Q for the quarterly period ended September
30, 2009. In addition, this pro forma information should be read in
conjunction with the statements of revenues and certain operating expenses and
the notes thereto of Springhouse at Newport News (the “Springhouse
property”).
The
following unaudited pro forma consolidated balance sheet as of September 30,
2009 has been prepared as if we had acquired the 37.5% interest in the
Springhouse property on September 30, 2009 and the Company qualified as a REIT,
distributed 90% of its taxable income and, therefore, incurred no income tax
benefit or expense during the period.
The
following unaudited pro forma consolidated statements of operations for the
year ended December 31, 2008 and the nine months ended September 30, 2009 have
been prepared as if we had acquired the 37.5% interest in the Springhouse
property on January 1, 2008.
The pro
forma unaudited consolidated financial statements are not necessarily indicative
of what the actual financial position or results of operations would have been
had we completed the transaction as of the beginning of the periods presented,
nor is it necessarily indicative of future results. In addition, the
pro forma balance sheet includes pro forma allocation of the purchase price
based upon preliminary estimates of the fair value of the assets
acquired. These allocations may be adjusted in the future upon
finalization of these preliminary estimates.
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
|
|
PROFORMA
CONSOLIDATED BALANCE SHEET
|
|
As
of September 30, 2009
|
|
|
|
|
|
Pro
Forma Adjustments
|
|
|
|
|
|
Bluerock
Enhanced Multifamily Trust, Inc. Historical (a)
|
|
|
Springhouse
at Newport News
|
|
|
Pro
Forma Total
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Real
Estate:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
-
|
|
|
$
|
2,925,000
|
(b)
|
|
$
|
2,925,000
|
|
Buildings
and Improvements
|
|
|
|
|
|
|
26,325,000
|
(b)
|
|
|
26,325,000
|
|
Total
real estate, cost
|
|
|
-
|
|
|
|
29,250,000
|
|
|
|
29,250,000
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
real estate, net
|
|
|
-
|
|
|
|
29,250,000
|
|
|
|
29,250,000
|
|
Cash
and cash equivalents
|
|
|
201,001
|
|
|
|
|
|
|
|
201,001
|
|
Deferred
financing
|
|
|
|
|
|
|
175,530
|
(b)
|
|
|
175,530
|
|
Other
assets
|
|
|
|
|
|
|
1,221,029
|
(b)
|
|
|
1,221,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
201,001
|
|
|
$
|
30,646,559
|
|
|
$
|
30,847,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
payable
|
|
|
|
|
|
$
|
23,400,000
|
(b)
|
|
$
|
23,400,000
|
|
Notes
payable
|
|
|
-
|
|
|
|
2,754,520
|
(b)
|
|
|
2,754,520
|
|
Total
liabilities
|
|
|
-
|
|
|
|
26,154,520
|
|
|
|
26,154,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
|
|
|
|
4,492,039
|
(b)
|
|
|
4,492,039
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 50,000,000 shares
|
|
|
|
|
|
|
|
|
|
authorized;
none issued and outstanding
|
|
|
|
|
|
|
|
-
|
|
Common
stock, $0.01 par value, 249,999,000 shares
|
|
|
|
|
|
|
|
|
|
authorized;
22,200 shares issued and outstanding
|
|
|
222
|
|
|
|
|
|
|
|
222
|
|
Nonvoting
convertible stock, $0.01 par value per share;
|
|
|
|
|
|
|
|
|
|
1,000
shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
-
|
|
Additional
paid-in-capital
|
|
|
200,779
|
|
|
|
|
|
|
|
200,779
|
|
Total
shareholder's equity
|
|
|
201,001
|
|
|
|
4,492,039
|
|
|
|
4,693,040
|
|
Total
liabilities and shareholders' equity
|
|
$
|
201,001
|
|
|
$
|
30,646,559
|
|
|
$
|
30,847,560
|
|
See
accompanying notes
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
Notes
to Unaudited Pro Forma Consolidated Balance Sheet
As
of September 30, 2009
(a)
|
Reflects
the historical balance sheet of the Company as reported in the quarterly
report on Form 10-Q as of September 30,
2009.
|
(b)
|
Represents
the acquisition of the 37.5% interest in the Springhouse
property. The aggregate purchase price for the Springhouse
property was approximately $29.25 million, plus closing costs and, through
a consolidated joint venture, was funded by a combination of debt and a
loan from an affiliate of the Company’s advisor. The Company
accounted for the acquisition in accordance with the provisions of the
Consolidation Topic of the Financial Accounting Standards Board Accounting
Standards Codification (“FASB ASC”.) The Company consolidates
the joint venture because we have a controlling financial interest in the
joint venture. The purchase price allocation is preliminary and
subject to change.
|
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
|
|
UNAUDITED
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
|
For
the Nine Months Ended September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Bluerock
Enhanced Multifamily Trust, Inc. Historical (a)
|
|
Springhouse
at Newport News
|
|
|
Pro
Forma Total
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Rental
revenue
|
|
$
|
-
|
|
$
|
2,996,223
|
(b)
|
|
$
|
2,996,223
|
|
Tenant reimbursements and other income
|
|
|
|
|
|
277,537
|
(c)
|
|
|
277,537
|
|
Total
revenues
|
|
|
-
|
|
|
3,273,760
|
|
|
|
3,273,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Property
Operating Expenses
|
|
|
|
|
|
873,828
|
(d)
|
|
|
873,828
|
|
Property
taxes and insurance
|
|
|
|
|
|
440,065
|
(e)
|
|
|
440,065
|
|
Management
Fees
|
|
|
|
|
|
306,031
|
(f)
|
|
|
306,031
|
|
Depreciation
and amortization
|
|
|
|
|
|
506,250
|
(g)
|
|
|
506,250
|
|
Interest
expense
|
|
|
|
|
|
993,330
|
(h)
|
|
|
993,330
|
|
Total
expenses
|
|
|
-
|
|
|
3,119,504
|
|
|
|
3,119,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income allocated to minority interests
|
|
|
154,256
|
|
|
|
154,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
allocated to minority interests
|
|
|
|
|
|
(96,410
|
|
|
|
(96,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
-
|
|
$
|
57,846
|
|
|
$
|
57,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
|
|
|
|
|
|
|
|
|
|
|
|
|
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
Notes
to Unaudited Pro Forma Consolidated Statement of Operations
For
the Nine Months Ended September 30, 2009
(a)
|
As
of the Company’s Quarterly Report on Form 10-Q for the nine months ended
September 30, 2009 it had not yet commenced active
operations.
|
(b)
|
Represents
base rental income for the nine months ended September 30, 2009. Base
rent is recognized on a straight-line basis beginning on the pro forma
acquisition date of
January 1, 2008.
|
|
(c)
|
Represents
operating cost reimbursements from tenants for the nine months ended
September 30, 2009, based on historical operations of the previous
owner.
|
(d)
|
Represents
property operating expenses for the nine months ended September
30, 2009, based on historical operations of the previous
owner.
|
(e)
|
Represents
real estate taxes and insurance expense incurred by the property for the
nine months ended September 30, 2009, based on historical operations
of the previous owner.
|
(f)
|
Represents
asset management and property management fees for the nine months ended
September 30, 2009 that would be due to an affiliate had the
assets been acquired on January 1, 2008. With respect to
investments in real property, the asset management fee is a monthly fee
equal to one-twelfth of 1.0% of the cost of the asset where the cost
equals the amount actually paid, excluding acquisition fees and expenses,
including any debt attributable to the
asset.
|
(g)
|
Represents
depreciation expense for the nine months ended September 30, 2009.
Depreciation expense on the purchase price of the building is recognized
using the straight-line method and a 39-year life. Depreciation expense on
the purchase price of the tenant improvements is recognized using the
straight-line method over the life of the lease. Amortization expense on
lease intangible costs is recognized using the straight-line method over
the life of the lease.
|
(h)
|
Represents
interest expense for the nine months ended September 30, 2009 on the $23.4
million senior mortgage loan made to fund the acquisition. The
effective interest rate of the loan is
5.66%.
|
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
|
UNAUDITED
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
|
For
the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bluerock
Enhanced Multifamily Trust, Inc. Historical (a)
|
|
|
Springhouse
at Newport News
|
|
|
Pro
Forma Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Rental
revenue
|
|
$
|
-
|
|
|
$
|
3,879,368
|
(b)
|
|
$
|
3,879,368
|
|
|
Tenant
reimbursements and other income
|
|
|
|
|
|
|
361,773
|
(c)
|
|
|
361,773
|
|
|
Total
revenues
|
|
|
-
|
|
|
|
4,241,141
|
|
|
|
4,241,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
Operating Expenses
|
|
|
|
|
|
|
1,149,646
|
(d)
|
|
|
1,149,646
|
|
|
Property
taxes and insurance
|
|
|
|
|
|
|
523,652
|
(e)
|
|
|
523,652
|
|
|
Management
Fees
|
|
|
|
|
|
|
446,735
|
(f)
|
|
|
446,735
|
|
|
Depreciation
and amortization
|
|
|
|
|
|
|
675,000
|
(g)
|
|
|
675,000
|
|
|
Interest
expense
|
|
|
|
|
|
|
1,436,440
|
(h)(i)
|
|
|
1,436,440
|
|
|
Total
expenses
|
|
|
-
|
|
|
|
4,231,473
|
|
|
|
4,231,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income allocated to minority interests
|
|
|
|
9,668
|
|
|
|
9,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
allocated to minority interests
|
|
|
|
|
|
|
(6,043
|
|
|
|
(6,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
-
|
|
|
$
|
3,626
|
|
|
$
|
3,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
|
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
Notes
to Unaudited Pro Forma Consolidated Statement of Operations
For
the Year Ended December 31, 2008
(a)
|
As
of December 31, 2008 the Company had not yet commenced active
operations.
|
(b)
|
Represents
base rental income for the year ended December 31, 2008. Base rent is
recognized on a straight-line basis beginning on the pro forma acquisition
date of January 1, 2008.
|
(c)
|
Represents
operating cost reimbursements from tenants for the year
ended December 31, 2008, based on historical operations of the
previous owner.
|
(d)
|
Represents
property operating expenses for the year ended December 31, 2008,
based on historical operations of the previous
owner.
|
(e)
|
Represents
real estate taxes and insurance expense incurred by the property for the
year ended December 31, 2008, based on historical
operations of the previous owner.
|
(f)
|
Represents
asset management and property management fees for the year ended December
31, 2008 that would be due to an affiliate had the assets been acquired on
January 1, 2008. With respect to investments in real property,
the asset management fee is a monthly fee equal to one-twelfth of 1.0% of
the cost of the asset where the cost equals the amount actually paid,
excluding acquisition fees and expenses, including any debt attributable
to the asset.
|
(g)
|
Represents
depreciation expense for the year ended December 31,
2008. Depreciation expense on the purchase price of the
building is recognized using the straight-line method and a 39-year life.
Depreciation expense on the purchase price of the tenant improvements is
recognized using the straight-line method over the life of the lease.
Amortization expense on lease intangible costs is recognized using the
straight-line method over the life of the
lease.
|
(h)
|
Represents
interest expense for the year ended December 31, 2008 on the $23.4 million
senior mortgage loan made to fund the acquisition. The
effective interest rate of the loan is
5.66%.
|
(i)
|
Represents
interest expense for the year ended December 31, 2008 on the $3.2 million
loan made to the Company by an affiliate of the advisor used for the
acquisition of the Springhouse property. The loan has a
six-month term and bears interest at a rate of 30-day LIBOR + 5% subject
to a minimum rate of 7%, which is the rate assumed for this pro
forma.
|
EAST\42821958.4
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
31.
Other Expenses of Issuance
and Distribution
Set
forth below is an estimate of the approximate amount of the fees and expenses
payable by the Registrant in connection with the issuance and distribution of
the Shares.
|
|
|
|
|
Securities
and Exchange Commission registration fee
|
|
$
|
50,500
|
|
FINRA
filing fee
|
|
|
75,500
|
|
Legal
fees and expenses, including legal fees for dealer manager
|
|
|
1,050,000
|
|
Printing
and postage
|
|
|
4,272,750
|
|
Accounting
fees and expenses
|
|
|
1,000,000
|
|
Blue
Sky expenses
|
|
|
200,000
|
|
Advertising,
sales and literature
|
|
|
1,620,000
|
|
Bona fide
due diligence
expense reimbursement
|
|
|
5,000,000
|
|
Technology
expenses
|
|
|
1,000,000
|
|
Investor
Relations and Administrative Support Services
|
|
|
500,000
|
|
Educational
conferences and sales seminars
|
|
|
3,997,740
|
|
Promotional
items
|
|
|
25,680
|
|
|
|
|
|
|
Total
|
|
$
|
18,792,170
|
|
|
|
|
|
Item
32.
Sales to Special
Parties
The Company’s advisor and its
affiliates may, at their option, purchase shares offered hereby at the public
offering price, net of the selling commissions the dealer manager fee, in which
case they have advised us that they would expect to hold such shares as
stockholders for investment and not for distribution.
The dealer manager for the offering has
agreed to sell up to 5% of the shares offered hereby in the Company’s primary
offering to persons to be identified by the Company at a discount from the
public offering price. The Company intends to use this “friends and family”
program to sell shares to certain investors identified by the Company, including
investors who have a prior business relationship with our sponsor, such as real
estate brokers, joint venture partners and their employees, title insurance
company executives, surveyors, attorneys and others to the extent consistent
with applicable laws and regulations. The Company will require all such
purchasers to represent that they are purchasing shares for investment only and
to enter into one-year lock-up agreements with respect to the purchased shares.
The purchase price for such shares will be $9.04 per share, reflecting that
selling commissions in the amount of $0.70 per share and the dealer manager fee
in the amount of $0.26 per share will not be payable in connection with such
sales. The net proceeds to the Company from such sales made net of commissions
and the dealer manager fee will be substantially the same as the net proceeds we
receive from other sales of shares.
In addition, the dealer manager for the
offering may sell shares to retirement plans of broker-dealers participating in
this offering, to broker-dealers in their individual capacities, to IRAs and
qualified plans of their registered representatives or to any one of their
registered representatives in their individual capacities net of the selling
commissions of $0.70, for a purchase price of $9.30, in consideration of the
services rendered by such broker-dealers and registered representatives in the
distribution. The net proceeds of these sales to the company also will be
substantially the same as the net proceeds from other sales of
shares.
Item
33.
Recent Sales of
Unregistered Securities
On August 15, 2008, the Company was
capitalized with the issuance to Bluerock Enhanced Multifamily Advisor, LLC of
100 shares of our common stock for $1,000. These shares were purchased for
investment and for the purpose of organizing the Company. The Company issued
these units in reliance on an exemption from registration under Section 4(2) of
the Securities Act.
On August 15, 2008, the Company’s
operating partnership was capitalized with the issuance to Bluerock Enhanced
Multifamily Advisor, LLC of 22,727 units of limited partnership interest for
$200,000. The units were purchased for investment. The Company’s operating
partnership issued these units in reliance on an exemption from registration
under Section 4(2) of the Securities Act.
On October 20, 2008, the operating
partnership redeemed the 22,727 units of limited partnership interest held by
Bluerock Enhanced Multifamily Advisor, LLC in exchange for $200,000 in
cash.
On October 20, 2008, the Advisor
purchased 22,100 shares of the Company’s common stock in exchange for $200,000.
The Company issued these shares in reliance on an exemption from registration
under Section 4(2) of the Securities Act.
On October 20, 2008, the Company
capitalized Bluerock REIT Holdings, LLC, a wholly owned subsidiary of the
Company, with $200,000 in exchange for all of its membership
interests.
On October 20, 2008, Bluerock REIT
Holdings, LLC purchased 22,727 units of limited partnership interest from the
operating partnership for $200,000. The Company issued these units in reliance
on an exemption from registration under Section 4(2) of the Securities Act. As
of the date of this prospectus, Bluerock REIT Holdings, LLC is the sole limited
partner of the operating partnership, however, the Company will contribute
additional proceeds from this offering to the operating partnership in exchange
for units of limited partnership interest.
Item
34.
Indemnification of
Directors and Officers
Subject to any applicable limitations
set forth under Maryland law or below, (i) no director or officer of the Company
shall be liable to the Company or its stockholders for money damages and (ii)
the Company shall indemnify and pay or reimburse reasonable expenses in advance
of the final disposition of a proceeding to (A) any individual who is a present
or former director or officer of the Company; (B) any individual who, while a
director or officer of the Company and at the request of the Company, serves or
has served as a director, officer, partner or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his service in such capacity; or (C)
the Advisor or any of its affiliates.
Under the Maryland General Corporation
Law (the MGCL”), a Maryland corporation may limit the liability of directors and
officers to the corporation and its stockholders for money damages unless such
liability results from actual receipt of an improper benefit or profit in money,
property or services or active and deliberate dishonesty established by a final
judgment and which is material to the cause of action.
In addition, the MGCL allows directors
and officers to be indemnified against judgments, penalties, fines, settlements,
and expenses actually incurred in a proceeding unless the following can be
established:
|
|
|
|
•
|
the
act or omission of the director or officer was material to the cause of
action adjudicated in the proceeding, and was committed in bad faith or
was the result of active and deliberate dishonesty;
|
|
|
|
|
•
|
the
director or officer actually received an improper personal benefit in
money, property or services; or
|
|
|
|
|
•
|
with
respect to any criminal proceeding, the director or officer had reasonable
cause to believe his or her act or omission was
unlawful.
|
However, under the MGCL, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses.
Finally, the MGCL permits a Maryland
corporation to advance reasonable expenses to a director or officer upon receipt
of a written affirmation by the director or officer of his or her good faith
belief that he or she has met the standard of conduct necessary for
indemnification and a written undertaking by him or her or on his or her behalf
to repay the amount paid or reimbursed if it is ultimately determined that the
standard of conduct was not met.
Notwithstanding anything to the
contrary contained in the paragraphs above, the Company shall not provide for
indemnification of a director, the Advisor or any affiliate of an advisor (the
Indemnitee”) for any liability or loss suffered by any of them or hold such
person harmless for any loss or liability suffered by the Company, unless all of
the following conditions are met:
|
|
|
|
(i)
the Indemnitee has determined, in good faith, that the course of conduct
that caused the loss or liability was in the best interests of the
Company;
|
|
|
|
|
(ii)
the Indemnitee was acting on behalf of or performing services for the
Company;
|
|
|
|
|
(iii)
such liability or loss was not the result of (A) negligence or misconduct,
in the case that the Indemnitee is a director (other than an independent
director), the Advisor or an affiliate of the Advisor or (B) gross
negligence or willful misconduct, in the case that the Indemnitee is an
independent director;
|
|
|
|
|
(iv)
such indemnification or agreement to hold harmless is recoverable only out
of net assets and not from stockholders; and
|
|
|
|
|
(v)
with respect to losses, liability or expenses arising from or out of an
alleged violation of federal or state securities laws, one or more of the
following conditions are met: (A) there has been a successful adjudication
on the merits of each count involving alleged securities law violations as
to the Indemnitee; (B) such claims have been dismissed with prejudice on
the merits by a court of competent jurisdiction as to the Indemnitee; or
(C) a court of competent jurisdiction approves a settlement of the claims
against the Indemnitee and finds that indemnification of the settlement
and the related costs should be made, and the court considering the
request for indemnification has been advised of the position of the
Securities and Exchange Commission and of the published position of any
state securities regulatory authority in which securities of the Company
were offered or sold as to indemnification for violations of securities
laws.
|
Neither the amendment nor repeal of the
provision for indemnification in our charter, nor the adoption or amendment or
amendment of any other provision of our charter or bylaws inconsistent with the
provision for indemnification in our charter, shall apply to or affect in any
respect the applicability of the provision for indemnification in our charter
with respect to any act or failure to act that occurred prior to such amendment,
repeal or adoption.
The Company shall pay or reimburse
reasonable legal expenses and other costs incurred by an Indemnitee in advance
of the final disposition of a proceeding only if (in addition to the procedures
required by the MGCL) all of the following are satisfied: (a) the proceeding
relates to acts or omissions with respect to the performance of duties or
services on behalf of the Company, (b) the legal proceeding was initiated by a
third party who is not a stockholder or, if by a stockholder acting in his or
her capacity as such, a court of competent jurisdiction approves such
advancement and (c) the Indemnitee provides the Company with written affirmation
of his or her good faith belief that he or she has met the standard of conduct
necessary for indemnification and undertakes to repay the amount paid or
reimbursed by the Company, together with the applicable legal rate of interest
thereon, if it is ultimately determined that the particular Indemnitee is not
entitled to indemnification.
Item
35.
Treatment of Proceeds from
Stock Being Registered
None.
Item
36.
Financial Statements and
Exhibits
(a)
Index to Financial
Statements
The following financial statements of
the Registrant are filed as part of this Registration Statement and included in
the Prospectus:
Audited
Financial Statements
(1) Report of Independent Registered
Public Accounting Firm
(2) Consolidated Balance Sheet as of
December 31, 2008
(3) Notes to Consolidated Balance
Sheet
(4) Report of Independent Registered
Public Accounting Firm
(5) Statements of Revenues and Certain
Operating Expenses for Springhouse at Newport News for the nine months ended
September 30, 2009 (unaudited) and for the year ended December 31,
2008
(6) Summary of Unaudited Pro Forma
Consolidated Financial Information
(7) Unaudited Pro Forma Consolidated
Balance Sheet as of September 30, 2009
(8) Notes to Unaudited Pro Forma
Consolidated Balance Sheet as of September 30, 2009
(9) Unaudited Pro Forma Consolidated
Statement of Operations for the nine months ended September 30,
2009
(10) Notes to Unaudited Pro Forma
Consolidated Statement of Operations for the nine months ended September 30,
2009
(11) Unaudited Pro Forma Consolidated
Statement of Operations for the year ended December 31, 2008
(12) Notes to Unaudited Pro Forma
Consolidated Statement of Operations for the year ended December 31,
2008
(b)
Exhibits:
|
|
|
Exhibit
Number
|
Exhibit
|
|
|
|
1.1
*
|
Form
of Dealer Manager Agreement between Bluerock Enhanced Multifamily Trust,
Inc. and Select Capital Corporation
|
|
1.2*
|
Form
of Participating Broker-Dealer Agreement
|
|
3.1
*
|
Articles
of Amendment and Restatement of the Registrant
|
|
3.2
*
|
Amended
and Restated Bylaws of the Registrant
|
|
4.1
*
|
Distribution
Reinvestment Plan (included as Exhibit C to the
Prospectus)
|
|
5.1
*
|
Opinion
of Venable LLP
|
|
8.1
*
|
Opinion
of Alston & Bird LLP as to Tax Matters
|
|
10.3
*
|
Bluerock
Enhanced Multifamily Trust, Inc. Long Term Incentive
Plan
|
|
10.4
*
|
Advisory
Agreement between Bluerock Enhanced Multifamily Trust, Inc. and Bluerock
Enhanced Multifamily Advisor, LLC
|
|
10.5
*
|
Form
of Escrow Agreement between Bluerock Enhanced Multifamily Trust, Inc. and
UMB Bank, N.A.
|
|
10.6
*
|
Bluerock
Enhanced Multifamily Trust, Inc. Independent Directors Compensation
Plan
|
|
10.7
|
Limited
Liability Company/Joint Venture Agreement of BR Springhouse Managing
Member, LLC, dated as of December 3, 2009
|
|
10.8
|
Limited
Liability Company/Joint Venture Agreement of BR Hawthorne Springhouse JV,
LLC, dated as of December 3, 2009
|
|
10.9
|
Property
Management Agreement by and between BR Springhouse, LLC and Hawthorne
Residential Partners, LLC, dated as of December 3, 2009
|
|
10.10
|
Multifamily
Deed of Trust, Assignment of Rents and Security Agreement by BR
Springhouse, LLC for the benefit of CW Capital, LLC date December 3,
2009
|
|
10.11
|
Loan
Agreement by and between Bluerock Special Opportunity + Income Fund, LLC,
as lender, and BEMT Springhouse, LLC, dated as of December 3,
2009
|
|
10.12
|
Pledge
and Security Agreement by Bluerock Enhanced Multifamily Holdings L.P.
and BEMT Springhouse LLC for Bluerock Special Opportunity +
Income Fund, LLC dated December 3, 2009
|
|
10.13
|
Pledge
and Security Agreement by BEMT Springhouse LLC for Bluerock Special
Opportunity + Income Fund, LLC dated December 3, 2009
|
|
21.1
|
List
of Subsidiaries
|
|
23.1
*
|
Consent
of Venable LLP (included in Exhibit 5.1)
|
|
23.2
*
|
Consent
of Alston & Bird LLP (included in Exhibit 8.1)
|
|
23.3
|
Consent
of Freedman & Goldberg
|
|
24.1*
|
Power
of Attorney (included on Signature
Page)
|
Item
37.
Undertakings
Insofar as indemnification for
liabilities arising under the Securities Act of 1933, as amended (the Act”) may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referred to in Item 34 of this registration
statement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question as to
whether such indemnification by it is against public policy as expressed in the
Act, and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby
undertakes that:
|
|
|
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
|
|
|
|
(i)
To include any prospectus required by Section 10(a)(3) of the
Act;
|
|
|
|
(ii)
To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
|
|
|
|
(iii
) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration
statement.
|
|
|
|
(2)
That, for the purpose of determining liability under the Act, each such
post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
|
|
|
|
(3)
That, all post-effective amendments will comply with the applicable forms,
rules and regulations of the U.S. Securities and Exchange Commission (the
Commission”) in effect at the time such post-effective amendments are
filed.
|
|
|
|
(4)
To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
|
|
|
|
(5)
That, for the purpose of determining liability under the Act to any
purchaser in the initial distribution of the
securities:
|
The Registrant undertakes that in a
primary offering of securities of the Registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
|
|
|
(i)
Any preliminary prospectus or prospectus of the Registrant relating to the
offering required to be filed pursuant to Rule 424;
|
|
|
|
(ii)
Any free writing prospectus relating to the offering prepared by or on
behalf of the Registrant or used or referred to by the
Registrant;
|
|
|
|
(iii)
The portion of any other free writing prospectus relating to the offering
containing material information about the Registrant or its securities
provided by or on behalf of the Registrant; and
|
|
|
|
(iv)
Any other communication that is an offer in the offering made by the
Registrant to the purchaser.
|
That, for the purpose of determining
liability under the Securities Act of 1933 to any purchaser, if the Registrant
is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part
of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of an included in the registration
statement as of the date it is first used after effectiveness.
Provided,
however,
that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
The Registrant undertakes to send to
each stockholder at least on an annual basis a detailed statement of any
transactions with the advisor or its affiliates, and of fees, commissions,
compensation and other benefits paid, or accrued to the advisor or its
affiliates for the fiscal year completed, showing the amount paid or accrued to
each recipient and the services performed.
The Registrant undertakes to provide to
the stockholders the financial statements required by Form 10-K for the first
full year of operations of the Company.
The Registrant undertakes to file a
sticker supplement pursuant to Rule 424(c) under the Act during the distribution
period describing each property not identified in the prospectus at such time as
there arises a reasonable probability that such property will be acquired, and
such property represents 10% or more of the Registrant’s assets as reflected on
its most recent balance sheet, giving effect to all of the Registrant’s most
recent acquisitions, and to consolidate all such stickers into a post-effective
amendment filed at least once every three months, with the information contained
in such amendment provided simultaneously to the existing stockholders. Each
sticker supplement should disclose all compensation and fees received by
the
advisor and its affiliates in connection with any such acquisition. The
post-effective amendment shall include audited financial statements meeting the
requirements of Rule 3-14 of Regulation S-X only for properties acquired during
the distribution period.
The Registrant also undertakes to file,
after the end of the distribution period, a current report on Form 8-K
containing the financial statements and any additional information required by
Rule 3-14 of Regulation S-X, to reflect each commitment (
i.e.
, the signing of a
binding purchase agreement) made after the end of the distribution period
involving the use of 10% or more (on a cumulative basis) of the net proceeds of
the offering and to provide the information contained in such report to the
stockholders at least once each quarter after the distribution period of the
offering has ended.
TABLE
VI
(UNAUDITED)
ACQUISITIONS
OF PROPERTIES BY PROGRAM
This
Table VI sets forth summary information on properties acquired during the three
years ended December 31, 2008 by Prior Real Estate Programs sponsored by
Bluerock Real Estate, L.L.C. All of the Prior Real Estate Programs presented in
this Table VI have similiar or identical investment objectives to Bluerock
Enhanced Multifamily Trust, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Landmark/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laumeier
|
|
|
|
|
|
|
|
|
|
|
|
|
Summit
at
|
|
Office
|
|
Cummings
Research Park
|
|
|
|
Southpoint
|
|
Portfolio
|
|
Portfolio
I
|
|
Portfolio
II
|
|
Portfolio
III
|
|
Property
Name
|
|
|
Summit
at Southpoint
|
|
|
Landmark
Office Park
|
|
|
Cummings
Research Park
|
|
|
Cummings
Research Park
|
|
|
Cummings
Research Park
|
|
Location
|
|
|
Jacksonville,
FL
|
|
|
St.
Louis, MO
|
|
|
Huntsville,
AL
|
|
|
Huntsville,
AL
|
|
|
Huntsville,
AL
|
|
Type
|
|
|
Office
|
|
|
Office
|
|
|
Office
|
|
|
Office
|
|
|
Office
|
|
Number
of units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
sq. ft of units
|
|
|
259,587
|
|
|
182,955
|
|
|
516,583
|
|
|
672,328
|
|
|
513,014
|
|
Date(s)
of purchase
|
|
|
2/22/06
|
|
|
5/14/07
|
|
|
11/7/07
|
|
|
11/7/07
|
|
|
11/7/07
|
|
Mortgage
Financing at date(s) of purchase
|
|
$
|
23,700,000
|
|
$
|
18,500,000
|
|
$
|
32,250,000
|
|
$
|
40,900,000
|
|
$
|
34,390,000
|
|
Cash
invested
|
|
$
|
11,164,124
|
|
$
|
6,043,726
|
|
$
|
19,459,310
|
|
$
|
15,408,857
|
|
$
|
16,129,498
|
|
Acquisition
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
purchase price plus acquisition fee
|
|
$
|
30,606,409
|
|
$
|
21,395,538
|
|
$
|
50,067,280
|
|
$
|
54,505,880
|
|
$
|
49,480,000
|
|
Other
cash expenditures capitalized
|
|
|
4,257,715
|
|
|
3,148,188
|
|
|
1,642,030
|
|
|
1,802,977
|
|
|
1,039,498
|
|
Total
acquisition cost
|
|
$
|
34,864,124
|
|
$
|
24,543,726
|
|
$
|
51,709,310
|
|
$
|
56,308,857
|
|
$
|
50,519,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1355
First
Avenue
|
|
Plaza
Gardens,
DST
|
|
Valley
Townhomes,
DST
|
|
BR
Town &
County,
DST
|
|
Property
Name
|
|
|
1355
First Avenue
|
|
|
Plaza
Gardens
|
|
|
Valley
Townhomes
|
|
|
Town
& Country Corporate Center
|
|
Location
|
|
|
New
York, NY
|
|
|
Overland
Park, KS
|
|
|
Pallyup,
Washington
|
|
|
St.
Louis, MO
|
|
Type
|
|
|
Condos
|
|
|
Multi
Family
|
|
|
Multi
Family
|
|
|
Office
|
|
Number
of units
|
|
|
45
|
|
|
200
|
|
|
221
|
|
|
|
|
Total
sq. ft of units
|
|
|
334,088
|
|
|
350,000
|
|
|
257,248
|
|
|
|
|
Date(s)
of purchase
|
|
|
6/29/07
|
|
|
8/29/08
|
|
|
7/31/08
|
|
|
6/24/08
|
|
Mortgage
Financing at date(s) of purchase
|
|
$
|
19,000,000
|
|
$
|
16,880,000
|
|
$
|
23,011,000
|
|
$
|
29,500,000
|
|
Cash
invested
|
|
$
|
15,598,050
|
|
$
|
3,053,754
|
|
$
|
16,766,354
|
|
$
|
295,979
|
|
Acquisition
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
purchase price plus acquisition fee
|
|
$
|
33,606,397
|
|
$
|
21,733,000
|
|
$
|
35,976,600
|
|
$
|
44,032,500
|
|
Other
cash expenditures capitalized
|
|
|
991,653
|
|
|
890,395
|
|
|
1,601,611
|
|
|
1,890,820
|
|
Total
acquisition cost
|
|
$
|
34,598,050
|
|
$
|
22,623,395
|
|
$
|
37,578,211
|
|
$
|
45,923,320
|
|
SIGNATURE
PAGE
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this post-effective
amendment to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 3rd day of March, 2010.
|
|
|
BLUEROCK
ENHANCED MULTIFAMILY TRUST, INC.
|
|
|
|
|
/s/
R. Ramin Kamfar
|
|
By:
|
R.
Ramin Kamfar,
|
|
|
Chief
Executive Officer
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this amended
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
|
|
|
|
/s/
R. Ramin Kamfar
|
Chief
Executive Officer and Chairman of the Board
|
March
3,
2010
|
|
R.
Ramin Kamfar
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
*
|
Chief
Financial Officer
|
March
3,
2010
|
|
Jerold
E. Novack
|
(Principal
Financial Officer and
Principal
Accounting Officer)
|
|
|
|
|
|
|
*
|
President,
Chief Investment Officer and Director
|
March
3,
2010
|
|
James
G. Babb, III
|
|
|
|
|
|
|
|
*
|
Director
|
March
3,
2010
|
|
Brian
D. Bailey
|
|
|
|
|
|
|
|
*
|
Director
|
March
3,
2010
|
|
I.
Bobby Majumder
|
|
|
|
|
|
|
|
*
|
Director
|
March
3,
2010
|
|
Romano
Tio
|
|
|
|
|
|
|
|
|
|
|
*
By:
|
/s/
R. Ramin Kamfar
|
|
|
|
R.
Ramin Kamfar
|
|
|
|
Attorney-in-fact
|
|
|
|
|
|
|
EXHIBIT
LIST
|
|
|
|
Exhibit
Number
|
|
Exhibit
|
|
|
|
1.1
|
*
|
|
Form
of Dealer Manager Agreement between Bluerock Enhanced Multifamily Trust,
Inc. and Select Capital Corporation
|
1.2
|
*
|
|
Form
of Participating Broker-Dealer Agreement
|
3.1
|
*
|
|
Articles
of Amendment and Restatement of the Registrant
|
3.2
|
*
|
|
Amended
and Restated Bylaws of the Registrant
|
4.1
|
*
|
|
Distribution
Reinvestment Plan (included as Exhibit C to the
Prospectus)
|
5.1
|
*
|
|
Opinion
of Venable LLP
|
8.1
|
*
|
|
Opinion
of Alston & Bird LLP as to Tax Matters
|
10.3
|
*
|
|
Bluerock
Enhanced Multifamily Trust, Inc. Long Term Incentive
Plan
|
10.4
|
*
|
|
Advisory
Agreement between Bluerock Enhanced Multifamily Trust, Inc. and Bluerock
Enhanced Multifamily Advisor, LLC
|
10.5
|
*
|
|
Form
of Escrow Agreement between Bluerock Enhanced Multifamily Trust, Inc. and
UMB Bank, N.A.,
|
10.6
|
*
|
|
Bluerock
Enhanced Multifamily Trust, Inc. Independent Directors Compensation
Plan
|
10.7
|
|
|
Limited
Liability Company/Joint Venture Agreement of BR Springhouse Managing
Member, LLC, dated as of December 3, 2009
|
10.8
|
|
|
Limited
Liability Company/Joint Venture Agreement of BR Hawthorne Springhouse JV,
LLC, dated as of December 3, 2009
|
10.9
|
|
|
Property
Management Agreement by and between BR Springhouse, LLC and Hawthorne
Residential Partners, LLC, dated as of December 3, 2009
|
10.10
|
|
|
Multifamily
Deed of Trust, Assignment of Rents and Security Agreement by BR
Springhouse, LLC for the benefit of CW Capital, LLC date December 3,
2009
|
10.11
|
|
|
Loan
Agreement by and between Bluerock Special Opportunity + Income Fund, LLC,
as lender, and BEMT Springhouse, LLC, dated as of December 3,
2009
|
10.12
|
|
|
Pledge
and Security Agreement by Bluerock Enhanced Multifamily Holdings L.P.
and BEMT Springhouse LLC for Bluerock Special Opportunity +
Income Fund, LLC dated December 3, 2009
|
10.13
|
|
|
Pledge
and Security Agreement by BEMT Springhouse LLC for Bluerock Special
Opportunity + Income Fund, LLC dated December 3, 2009
|
21.1
|
|
|
List
of Subsidiaries
|
23.1
|
*
|
|
Consent
of Venable LLP (included in Exhibit 5.1)
|
23.2
|
*
|
|
Consent
of Alston & Bird LLP (included in Exhibit 8.1)
|
23.3
|
|
|
Consent
of Freedman & Goldberg
|
24.1
|
*
|
|
Power
of Attorney (included on Signature
Page)
|
Exhibit 10.7
LIMITED
LIABILITY COMPANY/JOINT VENTURE AGREEMENT
OF
BR
SPRINGHOUSE MANAGING MEMBER, LLC
A
DELAWARE LIMITED LIABILITY COMPANY
DATED AS
OF DECEMBER 3, 2009
TABLE OF
CONTENTS
|
|
|
|
|
Page
|
Section
1.
|
Definitions
|
1
|
Section
2.
|
Organization
of the Company
|
8
|
2.1
|
Name
|
8
|
2.2
|
Place
of Registered Office; Registered Agent
|
9
|
2.3
|
Principal
Office
|
9
|
2.4
|
Filings
|
9
|
2.5
|
Term
|
9
|
2.6
|
Expenses
of the Company
|
9
|
Section
3.
|
Purpose
|
9
|
Section
4
|
Conditions
|
9
|
4.1
|
SOIF
Conditions
|
9
|
4.2
|
BEMT
Conditions
|
10
|
Section
5.
|
Capital
Contributions, Loans, Percentage Interests and Capital
Accounts
|
10
|
5.1
|
Initial
Capital Contributions
|
10
|
5.2
|
Additional
Capital Contributions
|
10
|
5.3
|
Percentage
Ownership Interest
|
12
|
5.4
|
Return
of Capital Contribution
|
12
|
5.5
|
No
Interest on Capital
|
13
|
5.6
|
Capital
Accounts
|
13
|
5.7
|
New
Members
|
13
|
Section
6.
|
Distributions
|
13
|
6.1
|
Distribution
of Distributable Funds
|
14
|
Section
7.
|
Allocations
|
14
|
7.1
|
Allocation
of Net Income and Net Losses Other than in Liquidation
|
14
|
7.2
|
Allocation
of Net Income and Net Losses in Liquidation
|
14
|
7.3
|
U.S.
Tax Allocations
|
15
|
Section
8.
|
Books,
Records, Tax Matters and Bank Accounts
|
15
|
8.1
|
Books
and Records
|
15
|
8.2
|
Reports
and Financial Statements
|
15
|
8.3
|
Tax
Matters Member
|
16
|
8.4
|
Bank
Accounts
|
17
|
8.5
|
Tax
Returns
|
17
|
8.6
|
Expenses
|
17
|
Section
9.
|
Management
|
17
|
9.1
|
Management
|
17
|
9.2
|
Affiliate
Transactions
|
18
|
9.3
|
Other
Activities
|
18
|
9.4
|
Operation
in Accordance with REOC/REIT Requirements
|
18
|
9.10
|
FCPA
|
20
|
Section
10.
|
Confidentiality
|
21
|
Section
11.
|
Representations
and Warranties
|
22
|
11.1
|
In
General
|
22
|
11.2
|
Representations
and Warranties
|
22
|
Section
12.
|
Sale,
Assignment, Transfer or other Disposition
|
25
|
12.1
|
Prohibited
Transfers
|
25
|
12.2
|
Affiliate
Transfers
|
25
|
12.3
|
Admission
of Transferee; Partial Transfers
|
26
|
12.4
|
Withdrawals
|
27
|
Section
13.
|
Dissolution
|
28
|
13.1
|
Limitations
|
28
|
13.2
|
Exclusive
Events Requiring Dissolution
|
28
|
13.3
|
Liquidation
|
28
|
13.4
|
Continuation
of the Company
|
29
|
Section
14.
|
Indemnification
|
29
|
14.1
|
Exculpation
of Members
|
29
|
14.2
|
Indemnification
by Company
|
29
|
14.3
|
General
Indemnification by the Members
|
30
|
Section
15.
|
Sale
Rights
|
30
|
15.1
|
Push
/ Pull Rights
|
30
|
15.2
|
Forced
Sale Rights
|
32
|
Section
16.
|
Mediation
and Arbitration of Disputes
|
33
|
16.1
|
Events
Giving Rise to Mediation or Arbitration
|
33
|
16.2
|
Selection
of Arbitrators
|
33
|
16.3
|
Arbitration
Hearing
|
34
|
16.4
|
Decision
of the Arbitrators/Binding Effect
|
34
|
Section
17.
|
Miscellaneous
|
34
|
17.1
|
Notices
|
34
|
17.2
|
Governing
Law
|
35
|
17.3
|
Successors
|
36
|
17.4
|
Pronouns
|
36
|
17.5
|
Table
of Contents and Captions Not Part of Agreement
|
36
|
17.6
|
Severability
|
36
|
17.7
|
Counterparts
|
36
|
17.8
|
Entire
Agreement and Amendment
|
36
|
17.9
|
Further
Assurances
|
36
|
17.10
|
No
Third Party Rights
|
37
|
17.11
|
Incorporation
by Reference
|
37
|
17.12
|
Limitation
on Liability
|
37
|
17.13
|
Remedies
Cumulative
|
37
|
17.14
|
No
Waiver
|
37
|
17.15
|
Limitation
On Use of Names
|
37
|
17.16
|
Publicly
Traded Partnership Provision
|
37
|
17.17
|
Uniform
Commercial Code
|
38
|
17.18
|
Public
Announcements
|
38
|
17.19
|
No
Construction Against Drafter
|
38
|
BR
SPRINGHOUSE MANAGING MEMBER, LLC
LIMITED
LIABILITY COMPANY AGREEMENT
This
Limited Liability Company Agreement (this “
Agreement
”) is
adopted, executed, and agreed to effective on December 3, 2009, by and among
Bluerock Special Opportunity + Income Fund, LLC, a Delaware limited liability
company (“
SOIF
”), and BEMT
Springhouse, LLC, a Delaware limited liability company (“
BEMT
”), as Members
(together, the “
Members
”), and SOIF
and BEMT, as Managers (together, the “
Managers
”).
W
I
T
N
E
S
S
E
T
H
:
WHEREAS,
BR Springhouse Managing Member, LLC, a Delaware limited liability company (the
“
Company
”), was
formed on September 28, 2009, pursuant to the Act;
WHEREAS,
the Members desire to participate in the Company for the purposes described
herein;
NOW,
THEREFORE, in consideration of the agreements and covenants set forth herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
Section
1.
|
Definitions
.
As used in this Agreement:
|
“
Act
” shall mean the
Delaware Limited Liability Company Act (currently Chapter 18 of Title 6 of the
Delaware Code), as amended from time to time.
“
Adjusted Capital Account
Deficit
” shall mean, with respect to any Member, the deficit balance, if
any, in such Member’s Capital Account as of the end of the applicable Fiscal
Year after (i) crediting such Capital Account with any amounts which such Member
is deemed to be obligated to restore pursuant to Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5), and (ii) debiting such Capital Account by the
amount of the items described in Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing
definition of Adjusted Capital Account Deficit is intended to comply with the
provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted
consistently therewith.
“
Advisor
” shall mean
any accountant, attorney or other advisor retained by a Member.
“
Affiliate
” shall mean
as to any Person any other Person that directly or indirectly controls, is
controlled by, or is under common control with such first Person. For
the purposes of this Agreement, a Person shall be deemed to control another
Person if such Person possesses, directly or indirectly, the power to direct or
cause the direction of the management, policies and/or decision making of such
other Person, whether through the ownership of voting securities, by contract or
otherwise. In addition, “Affiliate” shall include as to any Person
any other Person related to such Person within the meaning of Code Sections
267(b) or 707(b)(1).
Notwithstanding
the foregoing, SOIF and BEMT shall not be considered to be “Affiliates” of each
other.
“
Agreed Upon Value
”
shall mean the fair market value (net of any debt) agreed upon pursuant to a
written agreement between the Members of property contributed by a Member to the
capital of the Company, which shall for all purposes hereunder be deemed to be
the amount of the Capital Contribution applicable to such property
contributed.
“
Agreement
” shall mean
this Limited Liability Company Agreement, as amended from time to
time.
“
Applicable Adjustment
Percentage
” shall have the meaning set forth in
Section
5.2(b)(3)
.
“
Bankruptcy Code
”
shall mean Title 11 of the United States Code, as amended or any other
applicable bankruptcy or insolvency statute or similar law.
“
Bankruptcy/Dissolution
Event
” shall mean, with respect to the affected party, (i) the entry of
an Order for Relief under the Bankruptcy Code, (ii) the admission by such party
of its inability to pay its debts as they mature, (iii) the making by it of an
assignment for the benefit of creditors generally, (iv) the filing by it of a
petition in bankruptcy or a petition for relief under the Bankruptcy Code or any
other applicable federal or state bankruptcy or insolvency statute or any
similar law, (v) the expiration of sixty (60) days after the filing of an
involuntary petition under the Bankruptcy Code without such petition being
vacated, set aside or stayed during such period, (vi) an application by such
party for the appointment of a receiver for the assets of such party, (vii) an
involuntary petition seeking liquidation, reorganization, arrangement or
readjustment of its debts under any other federal or state insolvency law,
provided that the same shall not have been vacated, set aside or stayed within
sixty (60) days after filing, (viii) the imposition of a judicial or statutory
lien on all or a substantial part of its assets unless such lien is discharged
or vacated or the enforcement thereof stayed within sixty (60) days after its
effective date, (ix) an inability to meet its financial obligations as they
accrue, or (x) a dissolution or liquidation.
“
Beneficial Owner
”
shall have the meaning provided in
Section
5.7
.
“
BEMT
” shall have the
meaning set forth in the recitals.
“
BEMT Transferee
”
shall have the meaning set forth in
Section
12.2(b)(i)
.
“
BR Hawthorne JV
”
shall mean BR Hawthorne Springhouse JV, LLC, a Delaware limited liability
company.
“
BR Hawthorne JV Operating
Agreement
” shall mean the Limited Liability Company/Joint Venture
Agreement of BR Hawthorne JV, as amended from time to time.
“
BR REIT
” shall have
the meaning provided in
Section
12.2(b)(ii)
.
“
BR SOIF II
” shall
mean Bluerock Special Opportunity + Income Fund II, LLC, a Delaware limited
liability company.
“
Capital Account
”
shall have the meaning provided in
Section
5.6
.
“
Capital Contribution
”
shall mean, with respect to any Member, the aggregate amount of (i) cash, and
(ii) the Agreed Upon Value of other property contributed by such Member to the
capital of the Company net of any liability secured by such property that the
Company assumes or takes subject to.
“
Cash Flow
” shall
mean, for any period for which Cash Flow is being calculated, gross cash
receipts of the Company (but excluding Capital Contributions, less the following
payments and expenditures (i) all payments of operating expenses of the Company,
(ii) all payments of principal of, interest on and any other amounts due with
respect to indebtedness, leases or other commitments or obligations of the
Company (and other loans by Members to the Company), (iii) all sums expended by
the Company for capital expenditures, (iv) all prepaid expenses of the Company,
and (v) all sums expended by the Company which are otherwise
capitalized.
“
Certificate of
Formation
” shall mean the Certificate of Formation of the Company, as
amended from time to time.
“
Code
” shall mean the
Internal Revenue Code of 1986, as amended from time to time, including the
corresponding provisions of any successor law.
“
Collateral Agreement
”
shall mean any agreement, instrument, document or covenant concurrently or
hereafter made or entered into under, pursuant to, or in connection with this
Agreement and any certifications made in connection therewith or amendment or
amendments made at any time or times heretofore or hereafter to any of the
same.
“
Company
” shall mean
BR Springhouse Managing Member, LLC a Delaware limited liability company
organized under the Act.
“
Company Interest
”
shall mean all of the Company’s interest in BR Hawthorne JV, including its
limited liability company interest and its managerial interest
therein.
“
Company Minimum Gain
”
shall have the meaning given to the term “partnership minimum gain” in
Regulations Sections 1.704-2(b)(2) and 1.704-2(d).
“
Confidential
Information
” shall have the meaning provided in
Section
10(a)
.
“
Default Amount
” shall
have the meaning provided in
Section
5.2(b)
.
“
Default Loan
” shall
have the meaning provided in
Section
5.2(b)(1)
.
“
Default Loan Rate
”
shall have the meaning provided in
Section
5.2(b)(1)
.
“
Defaulting Member
”
shall have the meaning provided in
Section
5.2(b)
.
“
Delaware UCC
” shall
mean the Uniform Commercial Code as in effect in the State of Delaware from time
to time.
“
Dissolution Event
”
shall have the meaning provided in
Section
13.2
.
“
Distributable Funds
”
with respect to any month or other period, as applicable, shall mean the sum of
(x) an amount equal to the Cash Flow of the Company for such month or other
period, as applicable, as reduced by reserves for anticipated capital
expenditures, future working capital needs and operating expenses, contingent
obligations and other purposes, the amounts of which shall be reasonably
determined from time to time by the Managers.
“
Distributions
” shall
mean the distributions payable (or deemed payable) to a Member (including,
without limitation, its allocable portion of Distributable Funds).
“
ERISA
” shall mean the
Employee Retirement Income Security Act of 1974, as amended from time to
time.
“
Fiscal Year
” shall
mean each calendar year ending December 31.
“
Flow Through Entity
”
shall have the meaning provided in
Section
5.7
.
“
Foreign Corrupt Practices
Act
” shall mean the Foreign Corrupt Practices Act of the United States,
15 U.S.C. Sections 78a, 78m, 78dd-1, 78dd-2, 78dd-3, and 78ff, as amended, if
applicable, or any similar law of the jurisdiction where the Property is located
or where the Company or any of its Subsidiaries transacts business or any other
jurisdiction, if applicable.
“
Imputed Closing
Costs
” means an amount (not to exceed one and one quarters percent
(1.25%) of the purchase price) that would normally be incurred by a Subsidiary
if the Property were sold for an amount specified in
Section 15.1
or
Section 15.2
(as
applicable), for title insurance premiums, survey costs, brokerage commissions,
legal fees, and other commercially reasonable closing costs.
“
Income
” shall mean
the gross income of the Company for any month, Fiscal Year or other period, as
applicable, including gains realized on the sale, exchange or other disposition
of the Company’s assets.
“
Indemnified Party
”
shall have the meaning provided in
Section
14.3(a)
.
“
Indemnifying Party
”
shall have the meaning provided in
Section
14.3(a)
.
“
Inducement
Agreements
” shall have the meaning provided in Section
14.3(a).
“
Initiating Member
”
shall have the meaning provided in
Section
15.2(a)
.
“
Interest
” of any
Member shall mean the entire limited liability company interest of such Member
in the Company, which includes, without limitation, any and all rights, powers
and benefits accorded a Member under this Agreement and the duties and
obligations of such Member hereunder.
“
Loss
” shall mean the
aggregate of losses, deductions and expenses of the Company for any month,
Fiscal Year or other period, as applicable, including losses realized on the
sale, exchange or other disposition of the Company’s assets.
“
Major Decision
” means
any decision for the Company to take, or refrain from taking, any action or
incurring any obligation with respect to the following matters (or the
effectuation of any such action or obligation), including in the Company’s
capacity as a member of the BR Hawthorne JV with respect to making or refraining
to make a decision on the following matters to the extent the vote or approval
of the Company is required:
|
(i)
|
any
merger, conversion or consolidation involving the Company or any
Subsidiary or the sale, lease, transfer, exchange or other disposition of
all or substantially all of the Company’s assets, including the Company
Interest, or all of the Interests of the Members in the Company, in one or
a series of related transactions;
|
|
(ii)
|
except
as expressly provided in
Section 12
with
respect to Transfers by SOIF or a SOIF Transferee to a SOIF Transferee and
with respect to Transfers by BEMT or a BEMT Transferee to a BEMT
Transferee as permitted thereunder, the admission or removal of any Member
or the Company’s issuance to any third party of any equity interest in the
Company (including interests convertible into, or exchangeable for, equity
interests in the Company);
|
|
(iii)
|
except
as provided in
Section 13
, any
liquidation, dissolution or termination of the
Company;
|
|
(iv)
|
employing
any individual or establishing or entering into any employment contracts,
agreements with respect to salaries or bonus compensation or other
employee benefit plans;
|
|
(v)
|
the
incurrence by the Company or any Subsidiary, in an amount in excess of US
$25,000, of any indebtedness for borrowed money or any capitalized lease
obligation or the entry into of any agreement, commitment, assumption or
guarantee with respect to any of the
foregoing;
|
|
(vi)
|
expenditures
or distributions of cash or property by the Company or any Subsidiary, in
an amount in excess of US $25,000, which are not otherwise provided for in
this Agreement or the establishment of any
reserves;
|
|
(vii)
|
entering
into any material agreement, including without limitation any management
agreement or development agreement, contract, license or lease that could
result in an obligation or liability of the Company or any Subsidiary in
excess of US $25,000;
|
|
(viii)
|
doing
any act which would make it impossible or unreasonably burdensome to carry
on the business of the
Company;
|
|
(ix)
|
any
material change in the strategic direction of the Company or any material
expansion of the business of the Company, whether into new or existing
lines of business or any change in the structure of the
Company;
|
|
(x)
|
giving,
granting or undertaking any options, rights of first refusal, deeds of
trust, mortgages, pledges, ground leases, security or other interests in
or encumbering the Property, any portion thereof or any other material
assets;
|
|
(xi)
|
selling,
conveying, refinancing or effecting any material asset of the Company,
including the Company Interest, or any portion thereof or the entering
into of any agreement, commitment or assumption with respect to any of the
foregoing;
|
|
(xii)
|
confessing
a judgment against the Company (or any Subsidiary), submitting a Company
(or Subsidiary) claim to arbitration or engaging, terminating and/or
replacing counsel to defend or prosecute on behalf of the Company (or any
Subsidiary) any action or
proceeding;
|
|
(xiii)
|
acquiring
by purchase, ground lease or otherwise, any real property or other
material asset or the entry into of any agreement, commitment or
assumption with respect to any of the foregoing, or the making or posting
of any deposit (refundable or
non-refundable);
|
|
(xiv)
|
taking
any action by the Company that is reasonably likely to result in any
Member or any of its Affiliates having individual liability under any so
called “bad boy” guaranties or similar agreements provided to third party
lenders in respect of financings relating to the Company, the Subsidiaries
or any of their assets which provide for recourse as a result of willful
misconduct, fraud or gross negligence or failure to comply with the
covenants or any other provisions of such “bad boy”
guaranties;
|
|
(xv)
|
appointment
and removal of the Company’s Representatives on the Management
Committee;
|
|
(xvi)
|
the
amount of, whether and when to make, contributions to the Company (other
than the contributions under
Section 5.1(a)
made contemporaneously with the execution of this Agreement) and
Distributions by the Company;
|
|
(xvii)
|
amendment
of the Company’s Certificate of Formation or this Agreement;
or
|
|
(xviii)
|
any
item requiring the approval of the Company as a Member of BR Hawthorne JV,
including but not limited to those matters set forth in
Exhibit E
to
the BR Hawthorne JV Operating
Agreement.
|
“
Management Agreement
”
shall mean that certain property management agreement attached hereto as
Exhibit C
to be
entered into between BR Hawthorne JV (or a Subsidiary of BR Hawthorne JV), as
owner, and Property Manager, as manager, pursuant to which Property Manager will
provide certain management services for the Properties.
“
Management Committee
”
shall mean the management committee of BR Hawthorne JV as provided in Section
9.2(a) of the BR Hawthorne JV Operating Agreement.
“
Member
” and “
Members
” shall mean
SOIF, BEMT and any other Person admitted to the Company pursuant to this
Agreement. For purposes of the Act, the Members shall constitute a
single class or group of members.
“
Member in Question
”
shall have the meaning provided in
Section
17.12
.
“
Member Minimum Gain
”
shall mean an amount, determined in accordance with Regulations
Section 1.704-2(i)(3) with respect to each Member Nonrecourse Debt, equal
to the
Company
Minimum Gain that would result if such Member Nonrecourse Debt were treated as a
Nonrecourse Liability.
“
Member Nonrecourse
Debt
” shall have the meaning given the term “partner nonrecourse debt” in
Regulations Section 1.704-2(b)(4).
“
Member Nonrecourse
Deductions
” shall have the meaning given the term “partner nonrecourse
deductions” in Regulations Section 1.704-2(i).
“
Net Income
” shall
mean the amount, if any, by which Income for any period exceeds Loss for such
period.
“
Net Loss
” shall mean
the amount, if any, by which Loss for any period exceeds Income for such
period.
“
New York UCC
” shall
have the meaning provided in
Section
17.17
.
“
Non-Initiating
Member
” shall have the meaning provided in
Section
15.2(a)
.
“
Nonrecourse
Deduction
” shall have the meaning given such term in Regulations Section
1.704-2(b)(1).
“
Nonrecourse
Liability
” shall have the meaning given such term in Regulations Section
1.704-2(b)(3).
“
Offer
” shall have the
meaning provided in
Section
15.2(a)
.
“
Offeree
” shall have
the meaning provided in
Section
15.1(b)
.
“
Offeror
” shall have
the meaning provided in
Section
15.1(b)
.
“
Ownership Entity
”
shall have the meaning provided in
Section
15.2(a)
.
“
Percentage Interest
”
shall have the meaning provided in
Section
5.3
.
“
Person
” shall mean
any individual, corporation, partnership, joint venture, association,
joint-stock company, limited liability company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other legal entity.
“
Property
” shall have
the meaning provided in the BR Hawthorne JV Operating Agreement.
“
Property Manager
”
shall mean Hawthorne Residential Partners, LLC, so long as the Management
Agreement is in full force and effect and thereafter, the entity performing
similar services with respect to the Property.
“
Property Manager
Reports
” shall have the meaning set forth in
Section
8.2(c)
.
“
Pursuer
” shall have
the meaning provided in
Section
10(c)
.
“
Regulations
” shall
mean the Treasury Regulations promulgated pursuant to the Code, as amended from
time to time, including the corresponding provisions of any successor
regulations.
“
REIT
” shall mean a
real estate investment trust as defined in Code Section 856.
“
REIT Member
” shall
mean any Member, if such Member is a REIT or a direct or indirect subsidiary of
a REIT.
“
REIT Requirements
”
shall mean the requirements for qualifying as a REIT under the Code and
Regulations.
“
Representatives
”
shall mean the representatives of the Management Committee.
“
Response Period
”
shall have the meaning provided in
Section
15.2(b)
.
“
Sale Notice
” shall
have the meaning provided in
Section
15.2(a)
.
“
Securities Act
” shall
mean the Securities Act of 1933, as amended.
“
SOIF
” shall have the
meaning provided in the first paragraph of this Agreement.
“
SOIF Transferee
”
shall have the meaning set forth in
Section
12.2(b)(ii)
.
“
Subsidiary
” shall
mean any corporation, partnership, limited liability company or other entity of
which fifty percent (50%) of which at least a majority of the capital stock or
other equity securities is owned by the Company or more is owned by the
Company.
“
Tax Matters Member
”
shall have the meaning provided in
Section
8.3
.
“
Total Investment
”
shall mean the sum of the aggregate Capital Contributions made by a
Member.
“
Transfer
” means, as a
noun, any transfer, sale, assignment, exchange, charge, pledge, gift,
hypothecation, conveyance, encumbrance or other disposition, voluntary or
involuntary, by operation of law or otherwise and, as a verb, voluntarily or
involuntarily, by operation of law or otherwise, to transfer, sell, assign,
exchange, charge, pledge, give, hypothecate, convey, encumber or otherwise
dispose of.
“
Unreturned Investment
Amount
” shall have the meaning provided in
Section
15.2(a)
.
“
Valuation
Amount
” shall have the meaning provided in
Section
15.1(b)
.
Section
2.
|
Organization
of the Company
.
|
2.1
Name
. The
name of the Company shall be “
BR Springhouse Managing Member,
LLC
”. The business and affairs of the Company shall be
conducted under such name
or such
other name as the Managers deem necessary or appropriate to comply with the
requirements of law in any jurisdiction in which the Company may elect to do
business.
2.2
Place of Registered Office;
Registered Agent
. The address of the registered office of the
Company in the State of Delaware is 2711 Centerville Road, Wilmington, Delaware
19808. The name and address of the registered agent for service of
process on the Company in the State of Delaware is Corporation Service Company,
2711 Centerville Road, Wilmington, Delaware 19808. The Managers may
at any time on five (5) days prior notice to all Members change the location of
the Company’s registered office or change the registered agent.
2.3
Principal
Office
. The principal address of the Company shall be c/o
Bluerock Real Estate, L.L.C., 680 Fifth Avenue, New York, New York 10019, or, in
each case, at such other place or places as may be determined by the Managers
from time to time.
2.4
Filings
. On or before
execution of this Agreement, an authorized person within the meaning of the Act
shall have duly filed or caused to be filed the Certificate of Formation of the
Company with the office of the Secretary of State of Delaware, as provided in
Section 18-201 of the Act, and the Members hereby ratify such
filing. The Managers shall use their best efforts to take such other
actions as may be reasonably necessary to perfect and maintain the status of the
Company as a limited liability company under the laws of
Delaware. Notwithstanding anything contained herein to the contrary,
the Company shall not do business in any jurisdiction that would jeopardize the
limitation on liability afforded to the Members under the Act or this
Agreement.
2.5
Term
. The
Company shall continue in existence from the date hereof until January 30, 2059,
unless extended by the Members, or until the Company is dissolved as provided in
Section 13
,
whichever shall occur earlier.
2.6
Expenses of the
Company
. Other than the reimbursements of costs and expenses
as provided herein, no fees, costs or expenses shall be payable by the Company
to any Member (or its Affiliates).
The
Company is organized for the purpose of engaging in any lawful business, purpose
or activity that may be undertaken by a limited liability company organized
under and governed by the Act. The Company shall possess and may
exercise all of the powers and privileges granted by the Act, by any other law
or by this Agreement, together with any powers incidental thereto, including
such powers and privileges as are necessary or convenient to the conduct,
promotion or attainment of the business, purposes or activities of the
Company.
4.1
SOIF
Conditions
. The obligation of SOIF to consummate the
transactions contemplated herein and to make the initial Capital Contributions
under
Section
5.1
is subject to fulfillment of all of the following conditions on or
prior to the date hereof:
(a) BEMT
shall deposit in the Company’s bank account or the designated escrow account of
First American Title Insurance Company of New York (“Title Company”) the amount
of its initial Capital Contribution set forth on
Exhibit A
hereto;
and
(b) All
of the representations and warranties of BEMT contained in this Agreement shall
be true and correct as of the date hereof.
4.2
BEMT
Conditions
. The obligation of BEMT to consummate the
transactions contemplated herein and to make the initial Capital Contributions
under
Section
5.1
is subject to fulfillment of all of the following conditions on or
prior to the date hereof:
(a) SOIF
shall deposit into the Company’s bank account or Title Company’s designated
escrow account the amount of its initial Capital Contribution set forth on
Exhibit A
hereto;
and
(b) All
of the representations and warranties of SOIF contained in this Agreement shall
be true and correct as of the date hereof.
Section
5.
|
Capital
Contributions, Loans, Percentage Interests and Capital
Accounts
.
|
5.1
Initial Capital
Contributions
. Subject to the conditions set forth in
Section 4
, upon
execution of this Agreement, SOIF and BEMT shall each make an initial Capital
Contribution to the Company of cash in the amounts set forth in
Exhibit A
attached
hereto. The initial Capital Contribution of the Members to the Company may
include amounts for working capital and reserves.
5.2
Additional Capital
Contributions
. Additional Capital Contributions may be called
for from the Members by the Managers from time to time as and to the extent
capital is necessary to effect an investment. Except as otherwise
agreed by the Members, such additional Capital Contributions shall be in an
amount for each Member equal to the product of the amount of the aggregate
Capital Contribution called for multiplied by fifty (50%) percent in the case of
SOIF and fifty (50%) percent in the case of BEMT. Such additional
Capital Contributions shall be payable by the Members to the Company upon the
earlier of (i) twenty (20) days after written request from the Company, or (ii)
the date when the Capital Contribution is required, as set forth in a written
request from the Company.
(b) If
a Member (a “
Defaulting Member
”)
fails to make a Capital Contribution that is required as provided in
Section 5.2(a)
within
the time frame required therein (the amount of the failed contribution and
related loan shall be the “
Default Amount
”), the
other Member, provided that it has made the Capital Contribution required to be
made by it, in addition to any other remedies it may have hereunder or at law,
shall have one or more of the following remedies:
(1) to
advance to the Company on behalf of, and as a loan to the Defaulting Member, an
amount equal to the Default Amount to be evidenced by a promissory note in form
reasonably satisfactory to the non-failing Member (each such loan, a “
Default
Loan
”). The Capital Account of the Defaulting Member shall be
credited with the
amount of such Default Amount attributable to a Capital Contribution and the
aggregate of such amounts shall constitute a debt owed by the Defaulting Member
to the non-failing Member. Any Default Loan shall bear interest at
the rate of twenty (20%) percent per annum, but in no event in excess of the
highest rate permitted by applicable laws (the “
Default Loan Rate
”),
and shall be payable by the Defaulting Member on demand from the non-failing
Member and from any Distributions due to the Defaulting Member
hereunder. Interest on a Default Loan to the extent unpaid, shall
accrue and compound on a quarterly basis. A Default Loan shall be
prepayable, in whole or in part, at any time or from time to time without
penalty. Any such Default Loans shall be with full recourse to the
Defaulting Member and shall be secured by the Defaulting Member’s interest in
the Company including, without limitation, such Defaulting Member’s right to
Distributions. In furtherance thereof, upon the making of such
Default Loan, the Defaulting Member hereby pledges, assigns and grants a
security interest in its Interest to the non-failing Member and agrees to
promptly execute such documents and statements reasonably requested by the
non-failing Member to further evidence and secure such security
interest. Any advance by the non-failing Member on behalf of a
Defaulting Member pursuant to this
Section 5.2(b)(1)
shall be deemed to be a Capital Contribution made by the Defaulting Member
except as otherwise expressly provided herein. All Distributions to
the Defaulting Member hereunder shall be applied first to payment of any
interest due under any Default Loan and then to principal until all amounts due
thereunder are paid in full. While any Default Loan is outstanding,
the Company shall be obligated to pay directly to the non-failing Member, for
application to and until all Default Loans have been paid in full, the amount of
(x) any Distributions payable to the Defaulting Member, and (y) any proceeds of
the sale of the Defaulting Member’s Interest in the Company;
(2) subject
to any applicable thin capitalization limitations on indebtedness of the
Company, to treat its portion of such Capital Contribution as a loan to the
Company (rather than a Capital Contribution) and to advance to the Company as a
loan to the Company an amount equal to the Default Amount, which loan shall be
evidenced by a promissory note in form reasonably satisfactory to the
non-failing Member and which loan shall bear interest at the Default Loan Rate
and be payable on a first priority basis by the Company from available Cash Flow
and prior to any Distributions made to the Defaulting Member. If each
Member has loans outstanding to the Company under this provision, such loans
shall be payable to each Member in proportion to the outstanding balances of
such loans to each Member at the time of payment. Any advance to the
Company pursuant to this
Section 5.2(b)(2)
shall not be treated as a Capital Contribution made by the Defaulting
Member;
(3) to
make an additional Capital Contribution to the Company equal to the Default
Amount whereupon the Percentage Interests of the Members shall be recalculated
to (i) increase the non-defaulting Member’s Percentage Interest by the
percentage (“
Applicable Adjustment
Percentage
”) determined by dividing one hundred fifty percent (150%) of
the Default Amount by the sum of the Members’ Total Investment (taking into
account the actual amount of such additional Capital Contribution) and by
increasing its Capital Account by one and one-half of the amount of the Default
Amount, and (ii) to reduce the Defaulting Member’s Percentage Interest by the
Applicable Adjustment
Percentage and by decreasing its Capital Account by one-half of the amount of
the Default Amount; or
(4) in
lieu of the remedies set forth in subparagraphs (1), (2) or (3), revoke its
portion of such additional Capital Contribution, whereupon the portion of the
Capital Contribution made by the non-failing Member shall be returned within ten
(10) days with interest computed at the Default Loan Rate by the
Company.
(c) Notwithstanding
the foregoing provisions of this
Section 5.2
, no
additional Capital Contributions shall be required from any Member if (i) the
Company or any other Person shall be in default (or with notice or the passage
of time or both, would be in default) in any material respect under any loan,
indenture, mortgage, lease, agreement or instrument to which the Company or any
of its Subsidiaries is a party or by which the Company (or any of its
Subsidiaries) or any of its properties or assets is or may be bound, (ii) any
other Member, the Company or any of its Subsidiaries shall be insolvent or
bankrupt or in the process of liquidation, termination or dissolution, (iii) any
other Member, the Company or any of its Subsidiaries shall be subjected to any
pending litigation (x) in which the amount in controversy exceeds $500,000, (y)
which litigation is not being defended by an insurance company who would be
responsible for the payment of any judgment in such litigation, and (z) which
litigation if adversely determined could have a material adverse effect on such
other Member and/or the Company or any of its Subsidiaries and/or could
interfere with their ability to perform their obligations hereunder or under any
Collateral Agreement, (iv) there has been a material adverse change in
(including, but not limited to, the financial condition of) any other Member
(and/or its Affiliates) which, in Member’s reasonable judgment, prevents such
other Member (and/or its Affiliates from performing, or substantially interferes
with their ability to perform, their obligations hereunder or under any
Collateral Agreement. If any of the foregoing events shall have
occurred and any Member elects not to make a Capital Contribution on account
thereof, then any other Member which has made its pro rata share of such Capital
Contribution shall be entitled to a return of such Capital Contribution from the
Company.
5.3
Percentage Ownership
Interest
. The Members shall have the initial percentage
ownership interests (as the same are adjusted as provided in this Agreement, a
“
Percentage
Interest
”) in the Company set forth on
Exhibit A
immediately following the Capital Contributions provided for in
Section
5.1
. The Percentage Interests of the Members in the Company
shall be adjusted monthly so that the respective Percentage Interests of the
Members at any time shall be in proportion to their respective cumulative Total
Investment made (or deemed to be made) pursuant to
Sections 5.1
and
5.2
, as the
same may be further adjusted pursuant to
Section
5.2(b)(3)
. Percentage Interests shall not be adjusted by
distributions made (or deemed made) to a Member.
5.4
Return of Capital
Contribution
. Except as approved by each of the Members, no
Member shall have any right to withdraw or make a demand for withdrawal of the
balance reflected in such Member’s Capital Account (as determined under
Section 5.6
) until
the full and complete winding up and liquidation of the business of the
Company.
5.5
No Interest on
Capital
. Interest earned on Company funds shall inure solely
to the benefit of the Company, and no interest shall be paid upon any Capital
Contributions nor upon any undistributed or reinvested income or profits of the
Company.
5.6
Capital
Accounts
. A separate capital account (the “
Capital Account
”)
shall be maintained for each Member in accordance with Section 1.704-1(b)(2)(iv)
of the Regulations. Without limiting the foregoing, the Capital Account of each
Member shall be increased by (i) the amount of any Capital Contributions
made by such Member, (ii) the amount of Income allocated to such Member and
(iii) the amount of income or profits, if any, allocated to such Member not
otherwise taken into account in this
Section
5.6
. The Capital Account of each Member shall be reduced by
(i) the amount of any cash and the fair market value of any property distributed
to the Member by the Company (net of liabilities secured by such distributed
property that the Member is considered to assume or take subject to), (ii) the
amount of Loss allocated to the Member and (iii) the amount of expenses or
losses, if any, allocated to such Member not otherwise taken into account in
this
Section
5.6
. The Capital Accounts of the Members shall not be
increased or decreased pursuant to Regulations Section 1.704-1(b)(2)(iv)(f) to
reflect a revaluation of the Company’s assets on the Company’s books in
connection with any contribution of money or other property to the Company
pursuant to
Section
5.2
by existing Members. If any property other than cash is
distributed to a Member, the Capital Accounts of the Members shall be adjusted
as if such property had instead been sold by the Company for a price equal to
its fair market value, the gain or loss allocated pursuant to
Section 7
, and the
proceeds distributed in the manner set forth in
Section 6.1
or
Section
13.3(e)(iii)
. No Member shall be obligated to restore any
negative balance in its Capital Account. No Member shall be
compensated for any positive balance in its Capital Account except as otherwise
expressly provided herein. The foregoing provisions and the other
provisions of this Agreement relating to the maintenance of Capital Accounts are
intended to comply with the provisions of Regulations Section 1.704-1(b)(2)
and shall be interpreted and applied in a manner consistent with such
Regulations.
5.7
New
Members
. The Company may issue additional Interests and
thereby admit a new Member or Members, as the case may be, to the Company, only
if such new Member (i) has delivered to the Company its Capital Contribution,
(ii) has agreed in writing to be bound by the terms of this Agreement by
becoming a party hereto, and (iii) has delivered such additional documentation
as the Company shall reasonably require to so admit such new Member to the
Company. Without the prior written consent of each then-current
Member, a new Member may not be admitted to the Company if the Company would, or
may, have in the aggregate more than one hundred (100) members. For
purposes of determining the number of members under this
Section 5.7
, a Person
(the “
beneficial
owner
”) indirectly owning an interest in the Company through a
partnership, grantor trust or S corporation (as such terms are used in the
Code) (the “
flow-through entity
”)
shall be considered a member, but only if (i) substantially all of the value of
the beneficial owner’s interest in the flow-through entity is attributable to
the flow-through entity’s interest (direct or indirect) in the Company and (ii)
in the sole discretion of the Managers, a principal purpose of the use of the
flow-through entity is to permit the Company to satisfy the 100-member
limitation.
Section
6.
|
Distributions
.
|
6.1
Distribution of
Distributable Funds
(a) The
Managers shall calculate and determine the amount of Distributable Funds for
each applicable period. Except as provided in
Sections 5.2(b),
6.1(b)
or
13.3
or otherwise
provided hereunder, Distributable Funds, if any, shall be distributed to the
Members, in proportion to their Percentage Interests, on the 15
th
day
of each month or from time to time as determined by the Managers.
(b) Any
distributions otherwise payable to a Member under this Agreement shall be
applied first to satisfy amounts due and payable on account of the indemnity
and/or contribution obligations of such Member under this Agreement and/or any
other agreement delivered by such Member to the Company or any other Member but
shall be deemed distributed to such Member for purposes of this
Agreement.
6.2
Distributions in
Kind
. In the discretion of the Managers, Distributable Funds
may be distributed to the Members in cash or in kind and Members may be
compelled to accept a distribution of any asset in kind even if the percentage
of that asset distributed to it exceeds a percentage of that asset that is equal
to the percentage in which such Member shares in distributions from the
Company. In the case of all assets to be distributed in kind, the
amount of the distribution shall equal the fair market value of the asset
distributed as determined by the Managers. In the case of a
distribution of publicly traded property, the fair market value of such property
shall be deemed to be the average closing price for such property for the thirty
(30) day period immediately prior to the distribution, or if such property has
not yet been publicly traded for thirty (30) days, the average closing price of
such property for the period prior to the distribution in which the property has
been publicly traded.
7.1
Allocation of Net Income and
Net Losses Other than in Liquidation
. Except as otherwise
provided in this Agreement, Net Income and Net Losses of the Company for each
Fiscal Year shall be allocated among the Members in a manner such that, as of
the end of such Fiscal Year and taking into account all prior allocations of Net
Income and Net Losses of the Company and all distributions made by the Company
through such date, the Capital Account of each Member is, as nearly as possible,
equal to the distributions that would be made to such Member pursuant to
Section 6.1
if the
Company were dissolved, its affairs wound up and assets sold for cash equal to
their tax basis (or book value in the case of assets that have been revalued in
accordance with Section 704(b) of the Code), all Company liabilities were
satisfied, and the net assets of the Company were distributed in accordance with
Section 6.1
immediately after such allocation.
7.2
Allocation of Net Income and
Net Losses in Liquidation
. Net Income and Net Losses realized
by the Company in connection with the liquidation of the Company pursuant to
Section 13
shall be allocated among the Members in a manner such that, taking into account
all prior allocations of Net Income and Net Losses of the Company and all
distributions made by the Company through such date, the Capital Account of each
Member is, as nearly as possible, equal to the amount which such Member is
entitled to receive pursuant to
Section
13.3(d)(iii)
.
7.3
U.S. Tax
Allocations
.
(a) Subject
to Section 704(c) of the Code, for U.S. federal and state income tax purposes,
all items of Company income, gain, loss, deduction and credit shall be allocated
among the Members in the same manner as the corresponding item of income, gain,
loss, deduction or credit was allocated pursuant to the preceding paragraphs of
this
Section
7
.
(b)
Code Section
704(c)
. In accordance with Code Section 704(c) and the
Treasury regulations promulgated thereunder, income and loss with respect to any
property contributed to the capital of the Company (including, if the property
so contributed constitutes a partnership interest, the applicable distributive
share of each item of income, gain, loss, expense and other items attributable
to such partnership interest whether expressly so allocated or reflected in
partnership allocations) shall, solely for U.S. federal income tax purposes, be
allocated among the Members so as to take account of any variation between the
adjusted basis of such property to the Company for U.S. federal income tax
purposes and its Agreed Upon Value at the time of contribution. Such
allocation shall be made in accordance with such method set forth in Regulations
Section 1.704-3(b) as the Manager in its reasonable discretion
approves.
Any
elections or other decisions relating to such allocations shall be made by SOIF
in any manner that reasonably reflects the purpose and intention of this
Agreement. Allocations pursuant to this
Section 7.3.
are
solely for purposes of U.S. federal, state and local income taxes and shall not
affect, or in any way be taken into account in computing, any Member’s share of
Net Income, Net Loss, other items or distributions pursuant to any provisions of
this Agreement.
Section
8.
|
Books,
Records, Tax Matters and Bank Account
s
.
|
8.1
Books and
Records
. The books and records of account of the Company shall
be maintained in accordance with industry standards and shall be based on the
Property Manager Reports. The books and records shall be maintained
at the Company’s principal office or at a location designated by the Managers,
and all such books and records (and the dealings and other affairs of the
Company and its Subsidiaries, including BR Hawthorne JV) shall be available to
any Member at such location for review, investigation, audit and copying, at
such Member’s sole cost and expense, during normal business hours on at least
twenty-four (24) hours prior notice.
8.2
Reports and Financial
Statements
.
(a) Within
thirty (30) days of the end of each Fiscal Year, the Managers shall cause each
Member to be furnished with two sets of the following additional annual reports
computed as of the last day of the Fiscal Year:
(i) An
unaudited balance sheet of the Company;
(ii) An
unaudited statement of the Company’s profit and loss; and
(iii) A
statement of the Members’ Capital Accounts and changes therein for such Fiscal
Year.
(b) Within
fifteen (15) days of the end of each quarter of each Fiscal Year, the
Managers
shall
cause to be furnished to
BEMT or any REIT
Member
such
information as requested by
BEMT or any REIT
Member
as is
necessary for BEMT or any REIT Member to determine its qualification as a REIT
and its compliance with REIT Requirements as shall be requested by
BEMT or any REIT
Member.
(c) The
Members acknowledge that the Property Manager is obligated to perform
Project-related accounting and furnish Project-related accounting statements
under the terms of the Management Agreement (the “Property Manager
Reports”). The Managers shall be entitled to rely on the Property
Manager Reports with respect to its obligations under this Section 8, and the
Members acknowledge that the reports to be furnished shall be based on the
Property Manager Reports, without any duty on the part of the Managers to
further investigate the completeness, accuracy or adequacy of the Property
Manager Reports.
(d) At
the expense and cost of BEMT, the Managers will use their commercially best
efforts to obtain such financial statements (audited or unaudited), information
and attestations as may be required by BEMT or any of its Affiliates in
connection with public reporting, attestation, certification and other
requirements under the Securities Exchange Act of 1934, as amended, and the
Sarbanes-Oxley Act of 2002, as amended, applicable to such entity, and work in
good faith with the designated accountants or auditors of BEMT or any of its
Affiliates in connection therewith, including for purposes of testing internal
controls and procedures of BEMT or any of its Affiliates.
8.3
Tax Matters
Member
.
SOIF
is hereby designated as
the “tax matters partner” of the Company and the Subsidiaries, as defined in
Section 6231(a)(7) of the Code (the “
Tax Matters Member
”)
and shall prepare or cause to be prepared all income and other tax returns of
the Company and the Subsidiaries pursuant to the terms and conditions of
Section 8.5
. Except
as otherwise provided in this Agreement, all elections required or
permitted to be made by the Company and the Subsidiaries under the Code or
state tax law shall be timely determined and made by
SOIF.
The Members intend that
the Company be treated as a partnership for U.S. federal, state and local tax
purposes, and the Members will not elect or authorize any person to elect to
change the status of the Company from that of a partnership for U.S. federal,
state and local income tax purposes. SOIF
agrees to consult
with
BEMT with
respect to any written notice of any material tax elections and any material
inquiries, claims, assessments, audits, controversies or similar events received
from any taxing authority. In addition, upon the request of any
Member, the Company and each Subsidiary shall make an election pursuant to Code
Section 754 to adjust the basis of the Company’s property in the manner provided
in Code Sections 734(b) and 743(b). The Company hereby indemnifies
and holds harmless
SOIF
from and against any
claim, loss, expense, liability, action or damage resulting from its acting or
its failure to take any action as the “tax matters partner” of the Company and
the Subsidiaries,
provided
that any
such action or failure to act does not constitute gross negligence or willful
misconduct.
8.4
Bank
Accounts
. All funds of the Company are to be deposited in the
Company’s name in such bank account or accounts as may be designated by the
Managers and shall be withdrawn on the signature of such Person or Persons as
the Managers may authorize.
8.5
Tax
Returns
. The Managers shall cause to be prepared all income
and other tax returns of the Company and the Subsidiaries required by applicable
law. No later than the due date or extended due date thereof, the
Managers shall deliver or cause to be delivered to each Member a copy of the tax
returns for the Company and such Subsidiaries with respect to such Fiscal Year,
together with such information with respect to the Company and such Subsidiaries
as shall be necessary for the preparation by such Member of its U.S. federal and
state income or other tax and information returns.
8.6
Expenses
. Notwithstanding
any contrary provision of this Agreement, the Members acknowledge and agree that
the reasonable expenses and charges incurred directly or indirectly by or on
behalf of the Managers in connection with its obligations under this
Section 8
will be
reimbursed by the Company to the Managers.
9.1
Management
.
(a) The
Company shall be managed by one or more managers. SOIF shall have the power and
authority to appoint one (1) Manager without any further action or approval by
any Member, and SOIF hereby appoints SOIF as its initial
Manager. BEMT shall have the power and authority to appoint one (1)
Manager without any further action or approval by any Member, and BEMT hereby
appoints BEMT as its initial Manager. A Member may only remove and
replace a Manager appointed by that Member. To the extent that SOIF or a SOIF
Transferee Transfers all or a portion of its Interest in accordance with
Section 12
to a SOIF
Transferee, such SOIF Transferee may be appointed as an additional Manager under
this
Section
9.1(a)
by SOIF or a SOIF Transferee then holding all or a portion of an
Interest without any further action or authorization by any
Member. To the extent that BEMT or a BEMT Transferee Transfers all or
a portion of its Interest in accordance with
Section 12
to a BEMT
Transferee, such BEMT Transferee may be appointed as an additional Manager under
this
Section
9.1(a)
by BEMT or a BEMT Transferee then holding all or a portion of an
Interest without any further action or authorization by any Member.
(b) Each
Manager, acting alone following consultation with the other Manager or acting
jointly, shall have the authority to exercise all of the powers and privileges
granted by the Act, any other law or this Agreement, together with any powers
incidental thereto, and to take any other action not prohibited under the Act or
other applicable law, so far as such powers or actions are necessary or
convenient or related to the conduct, promotion or attainment of the business,
purposes or activities of the Company, except that any Major Decision or other
matter submitted by the Managers to the Members shall require the express and
unanimous approval of the Members.
(c) The
Managers may appoint
individuals to act on behalf of the Company with such titles and authority as
determined from time to time by the Managers.
Each of such individuals
shall hold office until his or her death, resignation or replacement by any
Manager.
9.2
Affiliate
Transactions
. No agreement shall be entered into by the
Company or any Subsidiary with a Member or any Affiliate of a Member and no
decision shall be made in respect of any such agreement (including, without
limitation, the enforcement or termination thereof) unless such agreement or
related decision shall have been approved unanimously in writing by the
Managers.
9.3
Other
Activities
.
(a)
Right to Participation in
Other Member Ventures
. Neither the Company nor any Member (or
any Affiliate of any Member) shall have any right by virtue of this Agreement
either to participate in or to share in any other now existing or future
ventures, activities or opportunities of any of the other Members or their
Affiliates, or in the income or proceeds derived from such ventures, activities
or opportunities. Neither the Company nor any Member (or any
Affiliate of any Member) shall have any right by virtue of this Agreement either
to participate in or to share in any other now existing or future ventures,
activities or opportunities of any of the other Members or their Affiliates, or
in the income or proceeds derived from such ventures, activities or
opportunities.
(b)
Limitation on Actions of
Members; Binding Authority
. No Member shall take any action on behalf of,
or in the name of, the Company, or enter into any contract, agreement,
commitment or obligation binding upon the Company, or, in its capacity as a
Member or Manager of the Company, perform any act in any way relating to the
Company or the Company’s assets, except in a manner and to the extent consistent
with the provisions of this Agreement.
9.4
Operation in Accordance with
REOC/REIT Requirements
.
(a) The
Members acknowledge that SOIF or one or more of its Affiliates (an “BR
Affiliate”) intends to qualify as a “real estate operating company” or “venture
capital operating company” within the meaning of U.S. Department of Labor
Regulation 29 C.F.R. §2510.3-101 (a “REOC”), and agree that the Company and its
Subsidiaries shall be operated in a manner that will enable SOIF and such SOIF
Affiliate to so qualify. Notwithstanding anything herein to the
contrary, the Company and its Subsidiaries shall not take, or refrain from
taking, any action that would result in SOIF or a SOIF Affiliate from failing to
qualify as a REOC. BEMT (a) shall not fund any Capital Contribution
"with the 'plan assets' of any 'employee benefit plan' within the meaning of
Section 3(3)
of
the Employee Retirement Income Security Act of 1974, as amended or any 'plan' as
defined by Section 4975 of the Internal Revenue Code of 1986, as amended", and
(b) shall comply with any requirements specified by SOIF in order to ensure
compliance with this
Section
9.4
.
(b) Notwithstanding
anything in this Agreement to the contrary, unless specifically agreed to by the
Managers in writing, neither the Company nor its Subsidiaries shall hold any
investment, incur any indebtedness or otherwise take any action that would cause
any
Member of
the Company (or any Person holding an indirect interest in the Company through
an entity or series of entities treated as partnerships for U.S. federal income
tax purposes) to realize any “unrelated business taxable income” as such term is
defined in Code Sections 511 through 514.
(c) The
Company
(and any
direct or indirect Subsidiary of the Company) may not engage in any activities
or hold any assets that would constitute or result in the occurrence of a REIT
Prohibited Transaction as defined herein. Notwithstanding anything to
the contrary contained in this Agreement, during the time a REIT Member is a
Member of the Company, neither the Company, any direct or indirect Subsidiary of
the Company, nor any Member of the Company shall take or refrain from taking any
action which, or the effect of which, would constitute or result in the
occurrence of a REIT Prohibited Transaction by the Company or any direct or
indirect
Subsidiary
thereof, including without limiting the generality of the foregoing, but in
amplification thereof:
(i)
Entering
into any lease, license, concession or other agreement or permitting any
sublease, license, concession or other agreement that provides for rent or other
payment based in whole or in part on the income or profits of any person,
excluding for this purpose a lease that provides for rent based in whole or in
part on a fixed percentage or percentages of gross receipts or gross sales of
any person without reduction for any costs of the lessee (and in the case of a
sublease, without reduction for any sublessor costs);
(ii)
Leasing
personal property, excluding for this purpose a lease of personal property that
is entered into in connection with a lease of real property where the rent
attributable to the personal property is less than 15% of the total rent
provided for under the lease;
(iii)
Acquiring
or holding any debt investments, excluding for these purposes “debt” solely
between wholly-owned Subsidiaries of the Company, unless (I) the amount of
interest income received or accrued by the Company under such loan does not,
directly or indirectly, depend in whole or in part on the income or profits of
any person, and (II) the debt is fully secured by mortgages on real property or
on interests in real property. Notwithstanding anything to the
contrary herein, in the case of debt issued to the Company by a Subsidiary which
is treated as a “taxable REIT subsidiary” of the REIT Member, such debt shall be
secured by a mortgage or similar security interest, or by a pledge of the equity
ownership of a subsidiary of such taxable REIT subsidiary;
(iv)
Acquiring
or holding, directly or indirectly, more than 10% of the outstanding securities
of any one issuer (by vote or value) other than an entity which either (i) is
taxable as a partnership or a disregarded entity for United States federal
income tax purposes, (ii) has properly elected to be a taxable REIT subsidiary
of the REIT Member by jointly filing with REIT, IRS Form 8875, or (iii) has
properly elected to be a real estate investment trust for U.S. federal income
tax purposes;
(v)
Entering
into any agreement where the Company receives amounts, directly or indirectly,
for rendering services to the tenants of any property that is owned, directly or
indirectly, by the Company other than (i) amounts received for services that are
customarily furnished or rendered in connection with the rental of real property
of a similar class in the geographic areas in which the Property is located
where such services are either provided by (A) an Independent Contractor (as
defined in Section 856(d)(3) of the Code) who is adequately compensated for such
services and from which the Company or REIT Member do not, directly or
indirectly, derive revenue or (B) a taxable REIT subsidiary of REIT Member who
is adequately compensated for such services or (ii) amounts received for
services that
are
customarily furnished or rendered in connection with the rental of space for
occupancy only (as opposed to being rendered primarily for the convenience of
the Property’s tenants);
(vi)
Entering
into any agreement where a material amount of income received or accrued by the
Company under such agreement, directly or indirectly, does not qualify as either
(i) “rents from real property” or (ii) “interest on obligations secured by
mortgages on real property or on interests in real property,” in each case as
such terms are defined in Section 856(c) of the Code;
(vii)
Holding
cash of the Company available for operations or distribution in any manner other
than a traditional bank checking or savings account;
(viii)
Selling
or disposing of any property, subsidiary or other asset of the Company prior to
(i) the completion of a two
(
2
)
year holding
period with such period to begin on the date the Company acquires a direct or
indirect interest in such property and begins to hold such property, subsidiary
or asset for the production of rental income, and (ii) the satisfaction of any
other requirements under Section 857 of the Code necessary for the avoidance of
a prohibited transaction tax on the REIT;
or
(ix) Failing to make current
cash distributions to REIT Member each year in an amount which does not at least
equal the taxable income allocable to REIT Member for such year.
Notwithstanding
the foregoing provisions of this Section 9.4(c), the Company may enter into a
REIT Prohibited Transaction if it receives the prior written approval of the
REIT Member specifically acknowledging that the REIT Member is approving a REIT
Prohibited Transaction pursuant to this Section 9.4(c). For purposes
of this Section 9.4(c), “REIT Prohibited Transactions” shall mean any of the
actions specifically set forth in this Section 9.4(c)
9.5
FCPA
.
(a) In
compliance with the Foreign Corrupt Practices Act, each Member will not, and
will ensure that its officers, directors, employees, shareholders, members,
agents and Affiliates, acting on its behalf or on the behalf of the Company or
any of its Subsidiaries or Affiliates do not, for a corrupt purpose, offer,
directly or indirectly, promise to pay, pay, promise to give, give or authorize
the paying or giving of anything of value to any official representative or
employee of any government agency or instrumentality, any political party or
officer thereof or any candidate for office in any jurisdiction, except for any
facilitating or expediting payments to government officials, political parties
or political party officials the purpose of which is to expedite or secure the
performance of a routine governmental action by such government officials or
political parties or party officials. The term “routine governmental
action” for
purposes
of this provision shall mean an action which is ordinarily and commonly
performed by the applicable government official in (i) obtaining permits,
licenses, or other such official documents which such Person is otherwise
legally entitled to; (ii) processing governmental papers; (iii) providing police
protection, mail pick-up and delivery or scheduling inspections associated with
contract performance or inspections related to transit of goods across country;
(iv) providing phone service, power and water supply, loading and unloading of
cargo, or protecting perishable products or commodities from deterioration; or
(v) actions of a similar nature.
The term
routine governmental action does not include any decision by a government
official whether, or on what terms, to award new business to or to continue
business with a particular party, or any action taken by an official involved in
the decision making process to encourage a decision to award new business to or
continue business with a particular party.
(b) Each
Member agrees to notify immediately the other Member of any request that such
Member or any of its officers, directors, employees, shareholders, members,
agents or Affiliates, acting on its behalf, receives to take any action that may
constitute a violation of the Foreign Corrupt Practices Act.
Section
10.
|
Confidentiality
.
|
(a) Any
information relating to a Member’s business, operation or finances which are
proprietary to, or considered proprietary by, a Member are hereinafter referred
to as “Confidential Information”. All Confidential Information in
tangible form (plans, writings, drawings, computer software and programs, etc.)
or provided to or conveyed orally or visually to a receiving Member, shall be
presumed to be Confidential Information at the time of delivery to the receiving
Member. All such Confidential Information shall be protected by the
receiving Member from disclosure with the same degree of care with which the
receiving Member protects its own Confidential Information from
disclosure. Each Member agrees: (i) not to disclose such
Confidential Information to any Person except to those of its employees or
representatives who need to know such Confidential Information in connection
with the conduct of the business of the Company and who have agreed to maintain
the confidentiality of such Confidential Information and (ii) neither it nor any
of its employees or representatives will use the Confidential Information for
any purpose other than in connection with the conduct of the business of the
Company; provided that such restrictions shall not apply if such Confidential
Information:
(x) is
or hereafter becomes public, other than by breach of this
Agreement;
(y) was
already in the receiving Member’s possession prior to any disclosure of the
Confidential Information to the receiving Member by the divulging Member;
or
(z) has
been or is hereafter obtained by the receiving Member from a third party not
bound by any confidentiality obligation with respect to the Confidential
Information;
provided
,
further
, that nothing
herein shall prevent any Member from disclosing any portion of such Confidential
Information (1) to the Company and allowing the Company to use such
Confidential
Information in connection with the Company’s business, (2) pursuant to judicial
order or in response to a governmental inquiry, by subpoena or other legal
process, but only to the extent required by such order, inquiry, subpoena or
process, and only after reasonable notice to the original divulging Member, (3)
as necessary or appropriate in connection with or to prevent the audit by a
governmental agency of the accounts of BEMT or SOIF, (4) in order to initiate,
defend or otherwise pursue legal proceedings between the parties regarding this
Agreement, (5) necessary in connection with a Transfer of an Interest permitted
hereunder or (6) to a Member’s respective attorneys or accountants or other
representative.
(b) The
Members and their Affiliates shall each act to safeguard the secrecy and
confidentiality of, and any proprietary rights to, any non-public information
relating to the Company and its business, except to the extent such information
is required to be disclosed by law or reasonably necessary to be disclosed in
order to carry out the business of the Company. Each Member may, from
time to time, provide the other Members written notice of its non-public
information which is subject to this
Section
10(b)
.
(c) Without
limiting any of the other terms and provisions of this Agreement (including,
without limitation,
Section 9.6
), to the
extent a Member (the “
Pursuer
”) provides
the other Member with information relating to a possible investment opportunity
then being actively pursued by the Pursuer on behalf of the Company, the other
Member receiving such information shall not use such information to pursue such
investment opportunity for its own account to the exclusion of the Pursuer so
long as the Pursuer is actively pursuing such opportunity on behalf of the
Company and shall not disclose any Confidential Information to any Person
(except as expressly permitted hereunder) or take any other action in connection
therewith that is reasonably likely to cause damage to the Pursuer.
Section
11.
|
Representations
and Warranties
.
|
11.1
In
General
. As of the date hereof, each of the Members hereby
makes each of the representations and warranties applicable to such Member as
set forth in
Section
11.2
. Such representations and warranties shall survive the
execution of this Agreement.
11.2
Representations and
Warranties
. Each Member hereby represents and warrants
that:
(a)
Due Incorporation or
Formation; Authorization of Agreement
. Such Member is a
corporation duly organized or a partnership or limited liability company duly
formed, validly existing and in good standing under the laws of the jurisdiction
of its incorporation or formation and has the corporate, partnership or company
power and authority to own its property and carry on its business as owned and
carried on at the date hereof and as contemplated hereby. Such Member
is duly licensed or qualified to do business and in good standing in each of the
jurisdictions in which the failure to be so licensed or qualified would have a
material adverse effect on its financial condition or its ability to perform its
obligations hereunder. Such Member has the corporate, partnership or
company power and authority to execute and deliver this Agreement and to perform
its obligations hereunder, and the execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate,
partnership
or company action. This Agreement constitutes the legal, valid and
binding obligation of such Member.
(b)
No Conflict with
Restrictions; No Default
. Neither the execution, delivery or
performance of this Agreement nor the consummation by such Member (or any of its
Affiliates) of the transactions contemplated hereby (i) does or will conflict
with, violate or result in a breach of (or has conflicted with, violated or
resulted in a breach of) any of the terms, conditions or provisions of any law,
regulation, order, writ, injunction, decree, determination or award of any
court, any governmental department, board, agency or instrumentality, domestic
or foreign, or any arbitrator, applicable to such Member or any of its
Affiliates, (ii) does or will conflict with, violate, result in a breach of or
constitute a default under (or has conflicted with, violated, resulted in a
breach of or constituted a default under) any of the terms, conditions or
provisions of the articles of incorporation, bylaws, partnership agreement or
operating agreement of such Member or any of its Affiliates or of any material
agreement or instrument to which such Member or any of its Affiliates is a party
or by which such Member or any of its Affiliates is or may be bound or to which
any of its properties or assets is subject, (iii) does or will conflict with,
violate, result in (or has conflicted with, violated or resulted in) a breach
of, constitute (or has constituted) a default under (whether with notice or
lapse of time or both), accelerate or permit the acceleration of (or has
accelerated) the performance required by, give (or has given) to others any
material interests or rights or require any consent, authorization or approval
under any indenture, mortgage, lease, agreement or instrument to which such
Member or any of its Affiliates is a party or by which such Member or any of its
Affiliates or any of their properties or assets is or may be bound or (iv) does
or will result (or has resulted) in the creation or imposition of any lien upon
any of the properties or assets of such Member or any of its
Affiliates.
(c)
Governmental
Authorizations
. Any registration, declaration or filing with,
or consent, approval, license, permit or other authorization or order by, or
exemption or other action of, any governmental, administrative or regulatory
authority, domestic or foreign, that was or is required in connection with the
valid execution, delivery, acceptance and performance by such Member under this
Agreement or consummation by such Member (or any of its Affiliates) of any
transaction contemplated hereby has been completed, made or obtained on or
before the date hereof.
(d)
Litigation
. There
are no actions, suits, proceedings or investigations pending, or, to the
knowledge of such Member or any of its Affiliates, threatened against or
affecting such Member or any of its Affiliates or any of their properties,
assets or businesses in any court or before or by any governmental department,
board, agency or instrumentality, domestic or foreign, or any arbitrator which
could, if adversely determined (or, in the case of an investigation could lead
to any action, suit or proceeding which if adversely determined could)
reasonably be expected to materially impair such Member’s ability to perform its
obligations under this Agreement or to have a material adverse effect on the
consolidated financial condition of such Member; such Member or any of its
Affiliates has not received any currently effective notice of any default, and
such Member or any of its Affiliates is not in default, under any applicable
order, writ, injunction, decree, permit, determination or award of any court,
any governmental department, board, agency or instrumentality, domestic or
foreign, or any arbitrator which could reasonably be expected to materially
impair such Member’s (or any of its
Affiliate’s)
ability to perform its obligations under this Agreement or to have a material
adverse effect on the consolidated financial condition of such
Member.
(e)
Investigation
. Such
Member is acquiring its Interest based upon its own investigation, and the
exercise by such Member of its rights and the performance of its obligations
under this Agreement will be based upon its own investigation, analysis and
expertise. Such Member is a sophisticated investor possessing an
expertise in analyzing the benefits and risks associated with acquiring
investments that are similar to the acquisition of its Interest.
(f)
Broker
. No
broker, agent or other person acting as such on behalf of such Member was
instrumental in consummating this transaction and that no conversations or prior
negotiations were had by such party with any broker, agent or other such person
concerning the transaction that is the subject of this Agreement.
(g)
Investment Company
Act
. Neither such Member nor any of its Affiliates is, nor
will the Company as a result of such Member holding an interest therein be, an
“investment company” as defined in, or subject to regulation under, the
Investment Company Act of 1940, as amended.
(h)
Securities
Matters
.
|
(i)
|
None
of the Interests are registered under the Securities Act or any state
securities laws. Such Member understands that the offering,
issuance and sale of the Interests are intended to be exempt from
registration under the Securities Act, based, in part, upon the
representations, warranties and agreements contained in this
Agreement. Such Member is an “accredited investor” as such term
is defined in Rule 501 of Regulation D promulgated under the Securities
Act.
|
|
(ii)
|
Neither
the Securities and Exchange Commission nor any state securities commission
has approved the Interests or passed upon or endorsed the merits of the
offer or sale of the Interests. Such Member is acquiring the
Interests solely for such Member’s own account for investment and not with
a view to resale or distribution thereof in violation of the Securities
Act.
|
|
(iii)
|
Such
Member is unaware of, and in no way relying on, any form of general
solicitation or general advertising in connection with the offer and sale
of the Interests, and no Member has taken any action which could give rise
to any claim by any person for brokerage commissions, finders’ fees
(without regard to any finders’ fees payable by the Company directly) or
the like relating to the transactions contemplated
hereby.
|
|
(iv)
|
Such
Member is not relying on the Company or any of its officers, directors,
employees, advisors or representatives with regard to the tax and other
economic considerations of an investment in the Interests, and such Member
has relied on the advice of only such Member’s
advisors.
|
|
(v)
|
Such
Member understands that the Interests may not be sold, hypothecated or
otherwise disposed of unless subsequently registered under the Securities
Act and applicable state securities laws, or an exemption from
registration is available. Such Member agrees that it will not
attempt to sell, transfer, assign, pledge or otherwise dispose of all or
any portion of the Interests in violation of this
Agreement.
|
|
(vi)
|
Such
Member has adequate means for providing for its current financial needs
and anticipated future needs and possible contingencies and emergencies
and has no need for liquidity in the investment in the
Interests.
|
|
(vii)
|
Such
Member is knowledgeable about investment considerations and has a
sufficient net worth to sustain a loss of such Member’s entire investment
in the Company in the event such a loss should occur. Such
Member’s overall commitment to investments which are not readily
marketable is not excessive in view of such Member’s net worth and
financial circumstances and the purchase of the Interests will not cause
such commitment to become excessive. The investment in the
Interests is suitable for such
Member.
|
|
(viii)
|
Such
Member represents to the Company that the information contained in this
subparagraph (h) and in all other writings, if any, furnished to the
Company with regard to such Member (to the extent such writings relate to
its exemption from registration under the Securities Act) is complete and
accurate and may be relied upon by the Company in determining the
availability of an exemption from registration under federal and state
securities laws in connection with the sale of the
Interests.
|
Section
12.
|
Sale,
Assignment, Transfer or other
Disposition
.
|
12.1
Prohibited
Transfers
. Except as otherwise provided in this
Section 12
,
Sections 5.2(b)
or as
approved by the Managers, no Member shall Transfer all or any part of its
Interest, whether legal or beneficial, in the Company, and any attempt to so
Transfer such Interest (and such Transfer) shall be null and void and of no
effect. Notwithstanding the foregoing, either Member shall have the
right, with the consent of the other Member, at any time to pledge to a lender
or creditor, directly or indirectly, all or any part of its Interest in the
Company for such purposes as it deems necessary in the ordinary cause of its
business and operations.
12.2
Affiliate
Transfers
.
(a) Subject
to the provisions of Section 12.2(b) hereof, and subject in each case to the
prior written approval of each Member (such approval not to be unreasonably
withheld), any Member may Transfer all or any portion of its Interest in the
Company at any time to an Affiliate of such Member, provided that such Affiliate
shall remain an Affiliate of
such
Member at all times that such Affiliate holds such Interest. If such
Affiliate shall thereafter cease being an Affiliate of such Member while such
Affiliate holds such Interest, such cessation shall be a non-permitted Transfer
and shall be deemed
void ab
initio
, whereupon the Member having made the Transfer shall, at its own
and sole expense, cause such putative transferee to disgorge all economic
benefits and otherwise indemnify the Company and the other Member(s) against
loss or damage under any Collateral Agreement.
(b) Notwithstanding
anything to the contrary contained in this Agreement, the following Transfers
shall not require the approval set forth in Section 12.2(a):
(i) Any
Transfer by SOIF or a SOIF Transferee of up to one hundred percent (100%) of its
Interest to any Affiliate of SOIF, including but not limited to (A) Bluerock
Enhanced Multifamily Trust, Inc. (“
BR REIT
”) or any
Person that is directly or indirectly owned by BR REIT; and/or (B) Bluerock
Special Opportunity + Income Fund II, LLC (“
BR SOIF II
”) or any
Person that is directly or indirectly owned by BR SOIF II (collectively, a
“
SOIF
Transferee
”);
(ii)
Any
Transfer by BEMT or a BEMT Transferee of up to one hundred percent (100%) of its
Interest to any Affiliate of BEMT, including but not limited to (A) BR REIT or
any Person that is directly or indirectly owned by BR REIT; and/or (B) BR SOIF
II or any Person that is directly or indirectly owned by BR SOIF II
(collectively, a “
BEMT
Transferee
”);
provided
however, as to subparagraphs (b)(i) and (b)(ii), and as to subparagraph (a), no
Transfer shall be permitted and shall be
void ab initio
if it shall
violate any “Transfer” provision of any applicable Collateral Agreement with
third party lenders.
(c)
Upon the
execution by any such BEMT Transferee or SOIF Transferee of such documents
necessary to admit such party into the Company and to cause the BEMT Transferee
or SOIF Transferee (as applicable) to become bound by this Agreement, the BEMT
Transferee or SOIF Transferee (as applicable) shall become a Member, without any
further action or authorization by any Member.
12.3
Admission of
Transferee
;
Partial Transfers
. Notwithstanding anything in this
Section 12
to the
contrary and except as provided in
Sections 5.2(b)
, no
Transfer of Interests in the Company shall be permitted unless the potential
transferee is admitted as a Member under this
Section
12.3:
(a)
If a
Member Transfers all or any portion of its Interest in the Company, such
transferee may become a Member if (i) such transferee executes and agrees to be
bound by this Agreement, (ii) the transferor and/or transferee pays all
reasonable legal and other fees and expenses incurred by the Company in
connection with such assignment and substitution and (iii) the transferor and
transferee execute such documents and deliver such certificates to the Company
and the remaining Members as may be required by applicable law or otherwise
advisable; and
(b)
Notwithstanding
the foregoing, any Transfer or purported Transfer of any Interest, whether to
another Member or to a third party, shall be of no effect and
void ab initio
, and such
transferee shall not become a Member or an owner of the purportedly transferred
Interest, if the Management Committee determines in its sole discretion
that:
(i) the
Transfer would require registration of any Interest under, or result in a
violation of, any federal or state securities laws;
(ii) the
Transfer would result in a termination of the Company under Code
Section 708(b);
(iii) as
a result of such Transfer the Company would be required to register as an
investment company under the Investment Company Act of 1940, as amended, or any
rules or regulations promulgated thereunder;
(iv) if
as a result of such Transfer the aggregate value of Interests held by “benefit
plan investors” including at least one benefit plan investor that is subject to
ERISA, could be “significant” (as such terms are defined in U.S. Department of
Labor Regulation 29 C.F.R. 2510.3-101(f)(2)) with the result that the assets of
the Company could be deemed to be “plan assets” for purposes of
ERISA;
(v) as
a result of such Transfer, the Company would or may have in the aggregate more
than one hundred (100) members and material adverse federal income tax
consequences would result to a Member. For purposes of determining
the number of members under this
Section 12.3(b)(v)
, a
Person (the “
beneficial owner
”)
indirectly owning an interest in the Company through a partnership, grantor
trust or S corporation (as such terms are used in the Code) (the “
flow-through entity
”)
shall be considered a member, but only if (i) substantially all of the value of
the beneficial owner’s interest in the flow-through entity is attributable to
the flow-through entity’s interest (direct or indirect) in the Company and (ii)
in the sole discretion of the Managers, a principal purpose of the use of the
flow-through entity is to permit the Company to satisfy the 100-member
limitation; or
(vi) the
transferor failed to comply with the provisions of Sections 12.2(a) or
(b).
The
Managers may require the provision of a certificate as to the legal nature and
composition of a proposed transferee of an Interest of a Member and from any
Member as to its legal nature and composition and shall be entitled to rely on
any such certificate in making such determinations under this
Section
12.3
.
12.4
Withdrawals
. Each
of the Members does hereby covenant and agree that it will not withdraw, resign,
retire or disassociate from the Company, except as a result of a Transfer of its
entire Interest in the Company permitted under the terms of this Agreement and
that it will carry out its duties and responsibilities hereunder until the
Company is terminated, liquidated and dissolved under
Section
13
. No Member shall be entitled to receive any distribution or
otherwise receive the fair market value of its Interest in compensation for any
purported resignation or withdrawal not in accordance with the terms of this
Agreement.
Section
13.
|
Dissolution
.
|
13.1
Limitations
. The
Company may be dissolved, liquidated and terminated only pursuant to the
provisions of this
Section 13
, and, to
the fullest extent permitted by law but subject to the terms of this Agreement,
the parties hereto do hereby irrevocably waive any and all other rights they may
have to cause a dissolution of the Company or a sale or partition of any or all
of the Company’s assets.
13.2
Exclusive Events Requiring
Dissolution
. The Company shall be dissolved only upon the
earliest to occur of the following events (a “
Dissolution
Event
”):
(a) the
expiration of the specific term set forth in
Section
2.5
;
(b) at
any time at the election of the Managers in writing;
(c) at
any time there are no Members (unless otherwise continued in accordance with the
Act); or
(d) the
entry of a decree of judicial dissolution pursuant to Section 18-802 of the
Act.
13.3
Liquidation
. Upon
the occurrence of a Dissolution Event, the business of the Company shall be
continued to the extent necessary to allow an orderly winding up of its affairs,
including the liquidation of the assets of the Company pursuant to the
provisions of this
Section 13.3
, as
promptly as practicable thereafter, and each of the following shall be
accomplished:
(a) The
Managers shall cause to be prepared a statement setting forth the assets and
liabilities of the Company as of the date of dissolution, a copy of which
statement shall be furnished to all of the Members.
(b) The
property and assets of the Company shall be liquidated or distributed in kind
under the supervision of the Managers as promptly as possible, but in an
orderly, businesslike and commercially reasonable manner.
(c) Any
gain or loss realized by the Company upon the sale of its property shall be
deemed recognized and allocated to the Members in the manner set forth in
Section
7.2
. To the extent that an asset is to be distributed in kind,
such asset shall be deemed to have been sold at its fair market value on the
date of distribution, the gain or loss deemed realized upon such deemed sale
shall be allocated in accordance with
Section 7.2
and the
amount of the distribution shall be considered to be such fair market value of
the asset.
(d) The
proceeds of sale and all other assets of the Company shall be applied and
distributed as follows and in the following order of priority:
|
(i)
|
to
the satisfaction of the debts and liabilities of the Company (contingent
or otherwise) and the expenses of liquidation or distribution (whether by
payment or reasonable provision for payment), other than liabilities to
Members or former Members for
distributions;
|
|
(ii)
|
to
the satisfaction of loans made pursuant to
Section 5.2(b)
in proportion to the outstanding balances of such loans at the time of
payment;
|
|
(iii)
|
the
balance, if any, to the Members in accordance with
Sections
6.1
.
|
13.4
Continuation of the
Company
. Notwithstanding anything to the contrary contained
herein, the death, retirement, resignation, expulsion, bankruptcy, dissolution
or removal of a Member shall not in and of itself cause the dissolution of the
Company, and the Members are expressly authorized to continue the business of
the Company in such event, without any further action on the part of the
Members.
Section
14.
|
Indemnification
.
|
14.1
Exculpation of
Members
. No Member, Manager, representative or officer of the
Company shall be liable to the Company or to the other Members for damages or
otherwise with respect to any actions or failures to act taken or not taken
relating to the Company, except to the extent any related loss results from
fraud, gross negligence or willful or wanton misconduct on the part of such
Member, Manager, representative or officer or the willful breach of any
obligation under this Agreement.
14.2
Indemnification by
Company
. The Company hereby indemnifies, holds harmless and
defends the Members, the Managers, the officers and each of their respective
agents, officers, directors, members, partners, shareholders and employees from
and against any loss, expense, damage or injury suffered or sustained by them
(including but not limited to any judgment, award, settlement, reasonable
attorneys’ fees and other costs or expenses incurred in connection with the
defense of any actual or threatened action, proceeding or claim) by reason of or
arising out of (i) their activities on behalf of the Company or in furtherance
of the interests of the Company, including, without limitation, the provision of
guaranties to third party lenders in respect of financings relating to the
Company or any of its assets (but specifically excluding from such indemnity by
the Company any so called “bad boy” guaranties or similar agreements which
provide for recourse as a result of failure to comply with covenants, willful
misconduct or gross negligence, (ii) their status as Members, Managers,
representatives, employees or officers of the Company, or (iii) the Company’s
assets, property, business or affairs (including, without limitation, the
actions of any officer, director, member or employee of the Company or any of
its Subsidiaries), if the acts or omissions were not performed or omitted
fraudulently or as a result of gross negligence or willful or wanton misconduct
by the indemnified party or as a result of the willful breach of any obligation
under this Agreement by the indemnified party. For the purposes of
this
Section 14.2
,
officers, directors, employees and other representatives of Affiliates of a
Member who are functioning as representatives of such Member in connection with
this Agreement shall be considered representatives of such Member for the
purposes of this
Section
14
. Reasonable expenses incurred by the indemnified party in
connection with any such proceeding relating to the foregoing matters shall be
paid or reimbursed by the Company in advance of the final disposition of such
proceeding upon receipt by the Company of (x) written affirmation by the Person
requesting indemnification of its good faith belief that it has met the standard
of conduct necessary for indemnification by the Company and (y) a written
undertaking by or on behalf of such Person to repay such amount if it shall
ultimately be determined by a court of competent jurisdiction that such Person
has not met such standard of conduct, which undertaking shall be an unlimited
general obligation of the indemnified party but need not be
secured.
14.3
General Indemnification by
the Members
.
(a) Notwithstanding
any other provision contained herein, each Member (the “
Indemnifying Party
”)
hereby indemnifies and holds harmless the other Members, the Company and each of
their subsidiaries and their agents, officers, directors, members, partners,
shareholders and employees (each, an “
Indemnified Party
”)
from and against all losses, costs, expenses, damages, claims and liabilities
(including reasonable attorneys’ fees) as a result of or arising out of (i) any
breach of any obligation of the Indemnifying Party under this Agreement, or (ii)
any breach of any obligation by or any inaccuracy in or breach of any
representation or warranty made by the Indemnifying Party, whether in this
Agreement or in any other agreement with respect to the conveyance, assignment,
contribution or other transfer of the Properties (or interests therein), assets,
agreements, rights or other interests conveyed, assigned, contributed or
otherwise transferred to the Company (collectively, the “
Inducement
Agreements
”).
(b) Except
as otherwise provided herein or in any other agreement, recourse for the
indemnity obligation of the Members under this
Section 14.3
shall be
limited to such Indemnifying Party’s Interest in the Company.
(c) The
indemnities, contributions and other obligations under this Agreement shall be
in addition to any rights that any Indemnified Party may have at law, in equity
or otherwise. The terms of this
Section 14
shall
survive termination of this Agreement.
15.1
Push / Pull
Rights
.
(a)
Availability of
Rights
. At any time (i) after the third anniversary of this
Agreement or (ii) that the Members are unable to agree on a Major Decision and
such failure to agree has continued for fifteen (15) days after written notice
from one Member to the other Member indicating an intention to exercise rights
under this
Section
15.1
, either Member may exercise its right to initiate the provisions of
this
Section
15.1
.
(b)
Exercise
. The
Member wishing to exercise its rights pursuant to this
Section 15.1
(the
“
Offeror
”)
shall do so by giving notice to the other Member (the “
Offeree
”) setting
forth a statement of intent to invoke its rights under this
Section 15.1
, stating
therein the aggregate dollar amount (the “
Valuation Amount
”)
that the Offeror would be willing to pay for the assets of the Company as of the
Closing Date (as defined below) free and clear of
all
liabilities, and setting forth all oral or written offers and inquiries received
by the Offeror during the previous twelve-month period relating to the
financing, disposition or leasing of any Company property.
(c)
Offeree
Response
. After receipt of such notice, the Offeree shall
elect to either (i) sell its entire Interest to the Offeror for an amount equal
to the amount the Offeree would have been entitled to receive if the Company had
sold its assets for the Valuation Amount on the Closing Date and the Company had
immediately paid all Company liabilities and Imputed Closing Costs and
distributed the net proceeds of sale to the Members in satisfaction of their
Interests pursuant to
Section 13.3
, or (ii)
purchase the entire Interest of the Offeror for an amount equal to the amount
the Offeror would have been entitled to receive if the Company had sold all of
its assets for the Valuation Amount on the Closing Date and the Company had
immediately paid all Company liabilities and Imputed Closing Costs and
distributed the net proceeds of the sale to the Members in satisfaction of their
Interests pursuant to
Section
13.3
. The Offeree shall have thirty (30) days from the giving
of the Offeror’s notice in which to exercise either of its options by giving
written notice to the Offeror. If the Offeree does not elect to
acquire the Offeror’s Interest within such time period, the Offeree shall be
deemed to have elected to sell its Interest to the Offeror as provided in
subsection (i) above.
(d)
Earnest
Money
. Within five (5) business days after an election has
been made or deemed made under
Section 15.1(c)
, the
acquiring Member shall deposit with a mutually acceptable third-party escrow
agent a non-refundable earnest money deposit in the amount of five percent (5%)
of the amount the selling Member is entitled to receive for its Interest under
this
Section
15.1
, which amount shall be applied to the purchase price at
closing. If the acquiring Member should thereafter fail to consummate
the transaction for any reason other than a default by the selling Member or a
refusal by any lender of the Company or any Subsidiary who has a right under its
loan documents to consent to such transfer to so consent, (i) (A) the earnest
money deposit shall be distributed from escrow to the selling Member, free of
all claims of the acquiring Member, as liquidated damages and constituting the
sole and exclusive remedy available to the selling Member because of a default
by the acquiring Member or (B) the selling Member may, by delivering to the
acquiring Member written notice thereof, elect to buy the acquiring Member’s
entire Interest for an amount equal to the amount the acquiring Member would
have been entitled to receive if the Company had sold all of its assets for the
Valuation Amount and the Company had immediately paid all Company liabilities
and Imputed Closing Costs and distributed the net proceeds of the sale to the
Members in satisfaction of their Interests pursuant to
Section 13.3
, in
which case, the Closing Date therefor shall be the date specified in the selling
Member’s notice, and (ii) if the acquiring Member was the Offeror, the
non-refundable earnest money deposit for any future election by the acquiring
Member to buy the selling Member’s Interest shall be twenty percent (20%) of the
amount the selling Member is entitled to receive for its Interest in connection
with such future election.
(e)
Closing
. The
closing of an acquisition pursuant to this
Section 15.1
shall be
held at the principal place of business of the Company on a mutually acceptable
date (the “
Closing
Date
”) not later than sixty (60) days (or, if the Offeree is the
acquiring Member, ninety (90) days) after an election has been made or deemed
made under
Section
15.1(c)
. At such closing, the following shall
occur:
(i)
The
selling Member shall assign to the acquiring Member or its designee the selling
Member’s Interest in accordance with the instructions of the acquiring Member,
and shall execute and deliver to the acquiring Member all documents which may be
required to give effect to the disposition and acquisition of such interests, in
each case free and clear of all liens, claims, and encumbrances, with covenants
of general warranty; and
(ii)
The
acquiring Member shall pay to the selling Member the consideration therefor in
cash.
(f)
Enforcement
. It
is expressly agreed that the remedy at law for breach of the obligations of the
Members set forth in this
Section 15.1
is
inadequate in view of (i) the complexities and uncertainties in measuring the
actual damage to be sustained by reason of the failure of a Member to comply
fully with such obligations, and (ii) the uniqueness of the Company’s business
and the Members’ relationships. Accordingly, each of such obligations
shall be, and is hereby expressly made, enforceable by an order of specific
performance.
15.2
Forced Sale
Rights
.
(a)
Offers
. If, at any time
following the third anniversary of the date that the Property is acquired by a
Subsidiary, (i) either Member desires to offer the Company Interest for sale on
specified terms, or (ii) receives from an unaffiliated purchaser a
bona
fide
written cash offer
(i.e., not seller financed) for the purchase of such Company Interest on terms
that such Member desires for the Company to accept (such specified terms or
bona
fide
offer being herein
called the “
Offer
”), then the
Member desiring to make or accept the Offer (the “
Initiating Member
”)
shall provide written notice of the terms of such Offer (the “
Sale Notice
”) to the
other Member (the “
Non-Initiating
Member
”). Any offer must be in an amount at least equal to the
amount of the Company’s pro rata share of any indebtedness secured by such
Property plus the aggregate Unreturned Investment Amount.
(b)
Response
. The
Non-Initiating Member shall have thirty (30) days from the date of the Sale
Notice (the “
Response
Period
”) to provide written notice to the Initiating Member of whether
the Company should make or accept the Offer; the failure to timely deliver such
notice shall be deemed to constitute an election to accept the Offer and sell
such Company Interest on the terms of the Offer.
(c)
Offer
Unacceptable
. If the Non-Initiating Member does not wish for
the Company to make or accept the Offer, the Initiating Member may elect to sell
its Interest to the Non-Initiating Member, in which case the Non-Initiating
Member must purchase the Initiating Member’s Interest for an amount equal to the
amount that would be distributable to the Initiating Member if the Company had
accepted the Offer, closed the sale pursuant to such Offer and wound up its
affairs pursuant to
Section
13
.
For
purposes of the foregoing calculations, the purchase price for a sale shall be
reduced by Imputed Closing Costs therefor. The Initiating Member must
exercise this
option,
if at all, by delivering written notice thereof to the Non-Initiating Member
within twenty (20) days after the end of the Response Period. The
Non-Initiating Member shall pay the Initiating Member cash for its Interest, as
the case may be. Closing shall take place on or before the date
specified in the Sale Notice, but if the Non-Initiating Member is purchasing the
Initiating Member’s Interest, the Non-Initiating Member shall have until 120
days after the Sale Notice in which to close. If the Initiating
Member or the Non-Initiating Member defaults at closing, the non-defaulting
party shall have the right to bring suit for damages, for specific performance,
or exercise any other remedy available at law or in equity. Upon
payment at closing, the Initiating Member shall execute and deliver all
documents reasonably required to transfer the interest being
sold.
(d)
Offer
Acceptable
. If the Non-Initiating Member consents (or is
deemed to have consented) to the Company selling the Company Interest on the
terms of the Offer, then the Initiating Member shall be allowed to sell the
Company Interest for cash on the terms of the Offer for a period of up to one
hundred eighty (180) days following the expiration of the Response
Period. If the Initiating Member obtains a
bona
fide
third party contract to
sell the Company Interest on the terms of the offer within such one hundred
eighty (180) day period, the Initiating Member shall have an additional period
of ninety (90) days after the date of such contract (that is, not to exceed 270
days after the expiration of the Response Period) in which to consummate the
sale. If after having received the consent (or deemed consent) of the
Non-Initiating Member to the sale of such Company Interest on the terms of the
Offer, the Initiating Member is unable to obtain a
bona
fide
contract within such one
hundred eighty (180) day period, or if after having obtained such
bona
fide
contract, the Initiating
Member is unable to consummate such sale within 270 days after the expiration of
the Response Period, then the Initiating Member must again submit an Offer to
the Non-Initiating Member under the terms of this
Section 15.2
before
it may sell such Company Interest.
Section
16.
|
Mediation
and Arbitration of Disputes
.
|
16.1
Events Giving Rise To
Mediation or Arbitration
. In the event that there is a
dispute between the Managers or the Members as to any action or issue, or in the
event of a deadlock between the Members, then and in such event all of the
Members agree, upon the written request of any one Member, to submit to
mediation within ten (10) days of receipt of the request for mediation for the
purpose of resolving the dispute. If mediation is not successful in
resolving the dispute; one or more of the Members may elect to have the dispute
submitted to binding arbitration as provided in this Article 10 by giving
written notice to each of the Members of such Member’s election to require
arbitration of such dispute. Said written notice shall set forth (i)
the action or issue in dispute and (ii) a brief description of the position of
the electing Member with respect to such dispute.
16.2
Selection of
Arbitrators
.
Within
ten (10) days of the date upon which the notice is sent pursuant to Section
10.1, the Members shall meet for the purpose of selecting three (3) persons to
act as arbitrators for the Company for such dispute. In the event
that the Members are unable to agree upon the selection of the arbitrators at
such meeting, then within ten (10) days following such meeting, the Member(s)
requesting such arbitration shall select one (1)
person to
serve as an arbitrator and the remaining Member(s) shall select one (1) person
to serve as an arbitrator and, within five (5) days of the date of their
selection, the two persons so selected shall select a third person to serve as
the third and final arbitrator. In the event that the Member(s)
requesting such arbitration select one such person within such ten (10) day
period, but the remaining Member(s) fails to select one such person within such
ten (10) day period, or vice versa, then the person selected shall serve as the
sole arbitrator and shall make the determination required
hereunder. In the event the two selected arbitrators are unable to
agree upon the identity of the person to serve as the third and final
arbitrator, such determination shall be made by the American Arbitration
Association in accordance with its then-existing rules and
regulations. No person selected by the Members and/or by the
arbitrators may be employed by, doing substantial business with or otherwise
affiliated with any of the Members (including, but not limited to, acting as an
attorney or accountant for any one or more of the Members or for the
Company).
16.3
Arbitration
Hearing
.
Not
later than fifteen (15) days following the selection of the third arbitrator, a
hearing shall be convened by the arbitrators at a mutually agreeable
site. At such hearing, each Member shall be entitled to present
arguments in favor of and call witnesses in support of such Member’s position
with respect to the item in dispute; provided, however, that absent a written
agreement of the Members to the contrary, presentation and/or arguments
(including the direct testimony of any witnesses called by a Member) of each
side of the dispute shall be limited to three (3) hours.
16.4
The
arbitrators shall render their decision regarding the matter in dispute within
ten (10) days following the date of the hearing set forth in Section 10.3
hereinabove and said decision shall be final and binding upon the Members and
the Company. Each of the Members hereby covenant and agree that they
shall comply with the decision of the arbitrators.
Section
17.
|
Miscellaneous
.
|
17.1
Notices
.
(a) All
notices, requests, approvals, authorizations, consents and other communications
required or permitted under this Agreement shall be in writing and shall be (as
elected by the Person giving such notice) hand delivered by messenger or
overnight courier service, mailed (airmail, if international) by registered or
certified mail (postage prepaid), return receipt requested, or sent via
facsimile (provided such facsimile is immediately followed by the delivery of an
original copy of same via one of the other foregoing delivery methods) addressed
to:
If to
SOIF:
c/o
Bluerock Real Estate, L.L.C.
680 Fifth Avenue
New York, New York 10019
Attention: James G. Babb, III
with a
copy to:
c/o
Bluerock Real Estate, L.L.C.
680 5th
Avenue, 16th Floor
New York,
New York 10019
Attention: Michael
Konig, Esq.
If to
BEMT:
Bluerock
Enhanced Multifamily Advisor, LLC
c/o
Bluerock Real Estate, L.L.C.
680 Fifth
Avenue
New York,
New York 10019
Attention: James
G. Babb, III
with a
copy to:
DLA
Piper, LLP
4141
Parklake Avenue, Suite 300
Raleigh,
North Carolina 27612-2350
Attention: Robert
H. Bergdolt, Esq.
(b) Each
such notice shall be deemed delivered (a) on the date delivered if by hand
delivery or overnight courier service or facsimile, and (b) on the date upon
which the return receipt is signed or delivery is refused or the notice is
designated by the postal authorities as not deliverable, as the case may be, if
mailed (provided, however, if such actual delivery occurs after 5:00 p.m. (local
time where received), then such notice or demand shall be deemed delivered on
the immediately following business day after the actual day of
delivery).
(c) By
giving to the other parties at least fifteen (15) days written notice thereof,
the parties hereto and their respective successors and assigns shall have the
right from time to time and at any time during the term of this Agreement to
change their respective addresses.
17.2
Governing
Law
. This Agreement and the rights of the Members hereunder
shall be governed by, and interpreted in accordance with, the laws of the State
of Delaware. Each of the parties hereto irrevocably submits to the jurisdiction
of the New York State courts and the Federal courts sitting in the State of New
York and agree that all matters
involving
this Agreement shall be heard and determined in such courts. Each
of the parties hereto waives irrevocably the defense of inconvenient
forum to the maintenance of such action or proceeding. Each of the
parties hereto designates CT Corporation System, 1633 Broadway, New York, New
York 10019, as its agent for service of process in the State of New
York, which designation may only be changed on not less than ten (10) days’
prior notice to all of the other parties.
17.3
Successors
. This
Agreement shall be binding upon, and inure to the benefit of, the parties and
their successors and permitted assigns. Except as otherwise provided
herein, any Member who Transfers its Interest as permitted by the terms of this
Agreement shall have no further liability or obligation hereunder, except with
respect to claims arising prior to such Transfer.
17.4
Pronouns
. Whenever
from the context it appears appropriate, each term stated in either the singular
or the plural shall include the singular and the plural, and pronouns stated in
either the masculine, the feminine or the neuter gender shall include the
masculine, feminine and neuter.
17.5
Table of Contents and
Captions Not Part of Agreement
. The table of contents and
captions contained in this Agreement are inserted only as a matter of
convenience and in no way define, limit or extend the scope or intent of this
Agreement or any provisions hereof.
17.6
Severability
. If
any provision of this Agreement shall be held invalid, illegal or unenforceable
in any jurisdiction or in any respect, then the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired, and the Members shall use their best efforts to amend
or substitute such invalid, illegal or unenforceable provision with enforceable
and valid provisions which would produce as nearly as possible the rights and
obligations previously intended by the Members without renegotiation of any
material terms and conditions stipulated herein.
17.7
Counterparts
. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original but all of which shall constitute one and the same
instrument.
17.8
Entire Agreement and
Amendment
. This Agreement and the other written agreements
described herein between the parties hereto entered into as of the date hereof,
constitute the entire agreement between the Members relating to the subject
matter hereof. In the event of any conflict between this Agreement or
such other written agreements, the terms and provisions of this Agreement shall
govern and control.
17.9
Further
Assurances
. Each Member agrees to execute and deliver any and
all additional instruments and documents and do any and all acts and things as
may be necessary or expedient to effectuate more fully this Agreement or any
provisions hereof or to carry on the business contemplated
hereunder.
17.10
No Third Party
Rights
. The provisions of this Agreement are for the exclusive
benefit of the Members and the Company, and no other party (including, without
limitation, any creditor of the Company) shall have any right or claim against
any Member by reason of those provisions or be entitled to enforce any of those
provisions against any Member.
17.11
Incorporation by
Reference
. Every Exhibit and Annex attached to this Agreement is
incorporated in this Agreement by reference.
17.12
Limitation on
Liability
. Except as set forth in
Section 14
and with
respect to a Default Loan as set forth in
Section 5.2(b)
, the
Members shall not be bound by, or be personally liable for, by reason of being a
Member, a judgment, decree or order of a court or in any other manner, for the
expenses, liabilities or obligations of the Company, and the liability of each
Member shall be limited solely to the amount of its Capital Contributions as
provided under
Section
5
. Except with respect to a Default Loan as set forth in
Section 5.2(b)
, any
claim against any Member (the “
Member in Question
”)
which may arise under this Agreement shall be made only against, and shall be
limited to, such Member in Question’s Interest, the proceeds of the sale by the
Member in Question of such Interest or the undivided interest in the assets of
the Company distributed to the Member in Question pursuant to
Section 13.3(d)
hereof. Except with respect to a Default Loan as set forth in
Section 5.2(b)
, any
right to proceed against (i) any other assets of the Member in Question or (ii)
any agent, officer, director, member, partner, shareholder or employee of the
Member in Question or the assets of any such Person, as a result of such a claim
against the Member in Question arising under this Agreement or otherwise, is
hereby irrevocably and unconditionally waived.
17.13
Remedies
Cumulative
. The rights and remedies given in this Agreement
and by law to a Member shall be deemed cumulative, and the exercise of one of
such remedies shall not operate to bar the exercise of any other rights and
remedies reserved to a Member under the provisions of this Agreement or given to
a Member by law. In the event of any dispute between the parties
hereto, the prevailing party shall be entitled to recover from the other party
reasonable attorney’s fees and costs incurred in connection
therewith.
17.14
No
Waiver
. One or more waivers of the breach of any provision of
this Agreement by any Member shall not be construed as a waiver of a subsequent
breach of the same or any other provision, nor shall any delay or omission by a
Member to seek a remedy for any breach of this Agreement or to exercise the
rights accruing to a Member by reason of such breach be deemed a waiver by a
Member of its remedies and rights with respect to such breach.
17.15
Limitation On Use of
Names
. Notwithstanding anything contained in this Agreement or
otherwise to the contrary, each of SOIF and BEMT as to itself agree that neither
it nor any of its Affiliates, agents, or representatives is granted a license to
use or shall use the name of the other under any circumstances whatsoever,
except such name may be used in furtherance of the business of the Company but
only as and to the extent unanimously approved by the Managers.
17.16
Publicly Traded Partnership
Provision
. Each Member hereby severally covenants and agrees
with the other Members for the benefit of such Members, that (i) it is not
currently
making a market in Interests in the Company and will not in the future make such
a market and (ii) it will not Transfer its Interest on an established securities
market, a secondary market or an over-the-counter market or the substantial
equivalent thereof within the meaning of Code Section 7704 and the Regulations,
rulings and other pronouncements of the U.S. Internal Revenue Service or the
Department of the Treasury thereunder. Each Member further agrees
that it will not assign any Interest in the Company to any assignee unless such
assignee agrees to be bound by this
Section
and to assign
such Interest only to such Persons who agree to be similarly
bound.
17.17
Uniform Commercial
Code
. The interest of each Member in the Company shall be a
“certificated security” governed by Article 8 of the Delaware UCC and the UCC as
enacted in the State of New York (the “
New York UCC
”),
including, without limitation, (i) for purposes of the definition of a
“security” thereunder, the interest of each Member in the Company shall be a
security governed by Article 8 of the Delaware UCC and the New York UCC and (ii)
for purposes of the definition of a “certificated security”
thereunder.
17.18
Public
Announcements
. Neither BEMT nor any of its Affiliates shall,
without the prior approval of SOIF, issue any press releases or otherwise make
any public statements with respect to the Company or the transactions
contemplated by this Agreement, except as may be required by applicable law or
regulation or by obligations pursuant to any listing agreement with any national
securities exchange so long as BEMT or such Affiliate has used reasonable
efforts to obtain the approval of SOIF prior to issuing such press release or
making such public disclosure. Neither SOIF nor any of its Affiliates
shall, without the prior approval of BEMT, issue any press releases or otherwise
make any public statements with respect to the Company or the transactions
contemplated by this Agreement, except as may be required by applicable law or
regulation or by obligations pursuant to any listing agreement with any national
securities exchange so long as SOIF or such Affiliate has used reasonable
efforts to obtain the approval of BEMT prior to issuing such press release or
making such public disclosure.
17.19
No Construction Against
Drafter
. This Agreement has been negotiated and prepared by
SOIF and BEMT and their respective attorneys and, should any provision of this
Agreement require judicial interpretation, the court interpreting or construing
such provision shall not apply the rule of construction that a document is to be
construed more strictly against one party.
IN
WITNESS WHEREOF, the Members have executed this Limited Liability Company
Agreement as of the date set forth above.
|
|
|
|
MEMBERS:
|
|
|
|
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Bluerock
Special Opportunity + Income Fund, LLC,
|
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a
Delaware limited liability company
|
|
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By:
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Bluerock
Real Estate, L.L.C.,
|
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a
Delaware limited liability company,
|
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its
Managing Member
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By:______________________________
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Name:____________________________
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Title:_____________________________
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BEMT
Springhouse, LLC,
|
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a
Delaware limited liability company
|
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By:
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Bluerock
Enhanced Multifamily Holdings, L.P.,
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its
Sole Member
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By:
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Bluerock
Enhanced Multifamily Trust, Inc.,
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its
General Partner
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By:______________________________
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Name:____________________________
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Title:_____________________________
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Initial Capital
Contributions and Percentage Interests
Member Name
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Initial
Capital
Contribution
|
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Vl
|
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Percentage Interest
|
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Bluerock
Special Opportunity + Income Fund, LLC
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$
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[ ]
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50
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%
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BEMT
Springhouse, LLC
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$
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[
]
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50
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%
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Exhibit 10.8
LIMITED
LIABILITY COMPANY/JOINT VENTURE AGREEMENT
OF
BR
HAWTHORNE SPRINGHOUSE JV, LLC
A
DELAWARE LIMITED LIABILITY COMPANY
DATED AS
OF DECEMBER
[3]
,
2009
TABLE OF
CONTENTS
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Page
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Section
1.
|
Definitions
|
1
|
Section
2.
|
Organization
of the Company
|
8
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2.1
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Name
|
8
|
2.2
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Place
of Registered Office; Registered Agent
|
8
|
2.3
|
Principal
Office
|
9
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2.4
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Filings
|
9
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2.5
|
Term
|
9
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2.6
|
Expenses
of the Company
|
9
|
Section
3.
|
Purpose
|
9
|
Section
4
|
Conditions
|
9
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4.1
|
Bluerock
Conditions
|
9
|
4.2
|
Hawthorne
Conditions
|
10
|
Section
5.
|
Capital
Contributions, Loans, Percentage Interests and Capital
Accounts
|
10
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5.1
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Initial
Capital Contributions
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10
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5.2
|
Additional
Capital Contributions
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10
|
5.3
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Percentage
Ownership Interest
|
13
|
5.4
|
Return
of Capital Contribution
|
13
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5.5
|
No
Interest on Capital
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13
|
5.6
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Capital
Accounts
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13
|
5.7
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New
Members
|
14
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Section
6.
|
Distributions
|
14
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6.1
|
Distribution
of Distributable Funds
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14
|
Section
7.
|
Allocations
|
15
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7.1
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Allocation
of Net Income and Net Losses Other than in Liquidation
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15
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7.2
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Allocation
of Net Income and Net Losses in Liquidation
|
15
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7.3
|
U.S.
Tax Allocations
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15
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Section
8.
|
Books,
Records, Tax Matters and Bank Accounts
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16
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8.1
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Books
and Records
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16
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8.2
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Reports
and Financial Statements
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16
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8.3
|
Tax
Matters Member
|
16
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8.4
|
Bank
Accounts
|
17
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8.5
|
Tax
Returns
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17
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8.6
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Expenses
|
17
|
Section
9.
|
Management
and Operations
|
17
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9.1
|
Management
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17
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9.2
|
Management
Committee
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18
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9.3
|
Annual
Business Plan
|
20
|
9.4
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Implementation
of Plan by Property Manager
|
20
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9.5
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Affiliate
Transactions
|
21
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9.6
|
Other
Activities
|
21
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9.7
|
Management
Agreement
|
21
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9.8
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Operation
in Accordance with REOC/REIT Requirements
|
22
|
9.10
|
FCPA
|
24
|
Section
10.
|
Confidentiality
|
25
|
Section
11.
|
Representations
and Warranties
|
26
|
11.1
|
In
General
|
26
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11.2
|
Representations
and Warranties
|
26
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Section
12.
|
Sale,
Assignment, Transfer or other Disposition
|
29
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12.1
|
Prohibited
Transfers
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29
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12.2
|
Affiliate
Transfers
|
29
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12.3
|
Admission
of Transferee; Partial Transfers
|
30
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12.4
|
Withdrawals
|
31
|
Section
13.
|
Dissolution
|
31
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13.1
|
Limitations
|
31
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13.2
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Exclusive
Events Requiring Dissolution
|
32
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13.3
|
Liquidation
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32
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13.4
|
Continuation
of the Company
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33
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Section
14.
|
Indemnification
|
33
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14.1
|
Exculpation
of Members
|
33
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14.2
|
Indemnification
by Company
|
33
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14.3
|
Indemnification
by Members for Misconduct
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34
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14.4
|
General
Indemnification by the Members
|
34
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14.5
|
Pledge
of Hawthorne Interest
|
34
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Section
15.
|
Sale
Rights
|
35
|
15.1
|
Push
/ Pull Rights
|
35
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15.2
|
Forced
Sale Rights
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37
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Section
16.
|
Miscellaneous
|
38
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16.1
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Notices
|
38
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16.2
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Governing
Law
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39
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16.3
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Successors
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40
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16.4
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Pronouns
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40
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16.5
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Table
of Contents and Captions Not Part of Agreement
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40
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16.6
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Severability
|
40
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16.7
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Counterparts
|
40
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16.8
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Entire
Agreement and Amendment
|
40
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16.9
|
Further
Assurances
|
40
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16.10
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No
Third Party Rights
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41
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16.11
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Incorporation
by Reference
|
41
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16.12
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Limitation
on Liability
|
41
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16.13
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Remedies
Cumulative
|
41
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16.14
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No
Waiver
|
41
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16.15
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Limitation
On Use of Names
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41
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16.16
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Publicly
Traded Partnership Provision
|
42
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16.17
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Uniform
Commercial Code
|
42
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16.18
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Public
Announcements
|
42
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16.19
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No
Construction Against Drafter
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42
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Section
17.
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Insurance
|
42
|
LIMITED
LIABILITY COMPANY AGREEMENT
OF
BR
HAWTHORNE SPRINGHOUSE JV, LLC
THIS
LIMITED LIABILITY COMPANY AGREEMENT of
BR HAWTHORNE SPRINGHOUSE JV, LLC
(“
JV
” or
“
Company
”) is
made and entered into and is effective as of December
[3]
, 2009, by and between
BR Springhouse Managing Member,
LLC
(“
Bluerock
”) and
Hawthorne Springhouse, LLC
, a
North Carolina limited liability company (“
Hawthorne
”) (this
“
Agreement
”). Capitalized
terms used herein shall have the meanings ascribed to such terms in this
Agreement.
W
I
T
N
E
S
S
E
T
H
:
WHEREAS,
the Company was formed on September 28, 2009, pursuant to the Act;
WHEREAS,
the Members desire to participate in the Company for the purposes described
herein;
WHEREAS,
Hawthorne Residential Partners, LLC (“Property Manager”) has agreed to provide
management services to the Company on the terms set forth in the Management
Agreement; and
WHEREAS,
it is agreed that Property Manager shall provide such management services to the
Company as an independent contractor.
NOW,
THEREFORE, in consideration of the agreements and covenants set forth herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
Section
1.
|
Definitions
.
As used in this Agreement
|
“
Act
” shall mean the
Delaware Limited Liability Company Act (currently Chapter 18 of Title 6 of the
Delaware Code), as amended from time to time.
“
Adjusted Capital Account
Deficit
” shall mean, with respect to any Member, the deficit balance, if
any, in such Member’s Capital Account as of the end of the applicable Fiscal
Year after (i) crediting such Capital Account with any amounts which such Member
is deemed to be obligated to restore pursuant to Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5), and (ii) debiting such Capital Account by the
amount of the items described in Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing
definition of Adjusted Capital Account Deficit is intended to comply with the
provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted
consistently therewith.
“
Advisor
” shall mean
any accountant, attorney or other advisor retained by a Member.
“
Affiliate
” shall mean
as to any Person any other Person that directly or indirectly controls, is
controlled by, or is under common control with such first Person. For
the purposes of this Agreement, a Person shall be deemed to control another
Person if such Person possesses, directly or indirectly, the power to direct or
cause the direction of the management, policies and/or decision making of such
other Person, whether through the ownership of voting securities, by contract or
otherwise. In addition, “Affiliate” shall include as to any Person
any other Person related to such Person within the meaning of Code Sections
267(b) or 707(b)(1). Notwithstanding the foregoing, Hawthorne and
Property Manager shall not be considered to be “Affiliates” of each
other.
“
Agreed Upon Value
”
shall mean the fair market value (net of any debt) agreed upon pursuant to a
written agreement between the Members of property contributed by a Member to the
capital of the Company, which shall for all purposes hereunder be deemed to be
the amount of the Capital Contribution applicable to such property
contributed.
“
Agreement
” shall mean
this Limited Liability Company Agreement, as amended from time to
time.
“
Annual Business Plan
”
shall mean the business plan for a Fiscal Year of the Company prepared by
Property Manager and approved by the Members as further described in
Section
9.3
.
“
Applicable Adjustment
Percentage
” shall have the meaning set forth in
Section
5.2(b)(3)
.
“
Bankruptcy Code
”
shall mean Title 11 of the United States Code, as amended or any other
applicable bankruptcy or insolvency statute or similar law.
“
Bankruptcy/Dissolution
Event
” shall mean, with respect to the affected party, (i) the entry of
an Order for Relief under the Bankruptcy Code, (ii) the admission by such party
of its inability to pay its debts as they mature, (iii) the making by it of an
assignment for the benefit of creditors generally, (iv) the filing by it of a
petition in bankruptcy or a petition for relief under the Bankruptcy Code or any
other applicable federal or state bankruptcy or insolvency statute or any
similar law, (v) the expiration of sixty (60) days after the filing of an
involuntary petition under the Bankruptcy Code without such petition being
vacated, set aside or stayed during such period, (vi) an application by such
party for the appointment of a receiver for the assets of such party, (vii) an
involuntary petition seeking liquidation, reorganization, arrangement or
readjustment of its debts under any other federal or state insolvency law,
provided that the same shall not have been vacated, set aside or stayed within
sixty (60) days after filing, (viii) the imposition of a judicial or statutory
lien on all or a substantial part of its assets unless such lien is discharged
or vacated or the enforcement thereof stayed within sixty (60) days after its
effective date, (ix) an inability to meet its financial obligations as they
accrue, or (x) a dissolution or liquidation.
“
Beneficial Owner
”
shall have the meaning provided in
Section
5.7
.
“
Bluerock
” shall have
the meaning provided in the first paragraph of this Agreement.
“
Bluerock Transferee
”
shall have the meaning set forth in
Section
12.2(b)(ii)
.
“
BR REIT
” shall have
the meaning provided in
Section
12.2(b)(ii)
.
“
BR SOIF II
” shall
mean Bluerock Special Opportunity + Income Fund II, LLC, a Delaware limited
liability company.
“
Capital Account
”
shall have the meaning provided in
Section
5.6
.
“
Capital Contribution
”
shall mean, with respect to any Member, the aggregate amount of (i) cash, and
(ii) the Agreed Upon Value of other property contributed by such Member to the
capital of the Company net of any liability secured by such property that the
Company assumes or takes subject to.
“
Cash Flow
” shall
mean, for any period for which Cash Flow is being calculated, gross cash
receipts of the Company (but excluding Capital Contributions, less the following
payments and expenditures (i) all payments of operating expenses of the Company,
(ii) all payments of principal of, interest on and any other amounts due with
respect to indebtedness, leases or other commitments or obligations of the
Company (and other loans by Members to the Company), (iii) all sums expended by
the Company for capital expenditures, (iv) all prepaid expenses of the Company,
and (v) all sums expended by the Company which are otherwise
capitalized.
“
Certificate of
Formation
” shall mean the Certificate of Formation of the Company, as
amended from time to time.
“
Code
” shall mean the
Internal Revenue Code of 1986, as amended from time to time, including the
corresponding provisions of any successor law.
“
Collateral Agreement
”
shall mean any agreement, instrument, document or covenant concurrently or
hereafter made or entered into under, pursuant to, or in connection with this
Agreement and any certifications made in connection therewith or amendment or
amendments made at any time or times heretofore or hereafter to any of the same
(including, without limitation, the Management Agreement).
“
Company
” shall mean
BR Hawthorne Springhouse JV, LLC a Delaware limited liability company organized
under the Act.
“
Company Minimum Gain
”
shall have the meaning given to the term “partnership minimum gain” in
Regulations Sections 1.704-2(b)(2) and 1.704-2(d).
“
Confidential
Information
” shall have the meaning provided in
Section
10(a)
.
“
Cure Period
” means
(1) ten (10) days after written notice specifying the nature of a default or
breach in connection with a monetary default that is not a "Noncurable Default"
(as
hereinafter
defined); (2) thirty (30) days after written notice specifying the nature of a
default or breach under this Agreement or a Collateral Agreement, in connection
with a non-monetary default that is not a Noncurable Default (provided, however,
that if such non-monetary default is not a Noncurable Default and cannot
reasonably be cured within such 30-day period, and the defaulting party promptly
commences the cure of such default and diligently pursues such cure to
completion, then such 30-day period shall be extended to the extent reasonably
necessary (but in no event after the date that is 60 days after such written
notice)); and (3) no period at all for a Noncurable Default. A
“Noncurable Default” means any of the following: (a) a knowing breach
or material unknowing breach of a representation or warranty, (b) a breach of
any restriction on assignment, hypothecation or other transfer, (c) a breach
constituting fraud, bad faith or willful misconduct, (d) taking action that is
beyond the scope of authority established by this Agreement or any Collateral
Agreement, (e) a Bankruptcy/Dissolution Event, or (f) the failure to make a
Capital Contribution required under this Agreement within the time periods
provided herein.
“
Default Amount
” shall
have the meaning provided in
Section
5.2(b)
.
“
Default Loan
” shall
have the meaning provided in
Section
5.2(b)(1)
.
“
Default Loan Rate
”
shall have the meaning provided in
Section
5.2(b)(1)
.
“
Defaulting Member
”
shall have the meaning provided in
Section
5.2(b)
.
“
Delaware UCC
” shall
mean the Uniform Commercial Code as in effect in the State of Delaware from time
to time.
“
Dissolution Event
”
shall have the meaning provided in
Section
13.2
.
“
Distributable Funds
”
with respect to any month or other period, as applicable, shall mean the sum of
(x) an amount equal to the Cash Flow of the Company for such month or other
period, as applicable, as reduced by reserves for anticipated capital
expenditures, future working capital needs and operating expenses, contingent
obligations and other purposes, the amounts of which shall be reasonably
determined from time to time by the Management Committee.
“
Distributions
” shall
mean the distributions payable (or deemed payable) to a Member (including,
without limitation, its allocable portion of Distributable Funds).
“
ERISA
” shall mean the
Employee Retirement Income Security Act of 1974, as amended from time to
time.
“
Fiscal Year
” shall
mean each calendar year ending December 31.
“
Flow Through Entity
”
shall have the meaning provided in
Section
5.7
.
“
Foreign Corrupt Practices
Act
” shall mean the Foreign Corrupt Practices Act of the United States,
15 U.S.C. Sections 78a, 78m, 78dd-1, 78dd-2, 78dd-3, and 78ff, as amended, if
applicable, or any similar law of the jurisdiction where the Property is located
or where the Company or any of its Subsidiaries transacts business or any other
jurisdiction, if applicable.
“
Hawthorne
” shall have
the meaning provided in the first paragraph of this Agreement.
“
Hawthorne Transferee
”
shall have the meaning set forth in
Section
12.2(b)(i)
.
“
Imputed Closing
Costs
” means an amount (not to exceed one and one quarters percent
(1.25%) of the purchase price) that would normally be incurred by a Subsidiary
if the Property were sold for an amount specified in
Section 15.1
or
Section 15.2
(as
applicable), for title insurance premiums, survey costs, brokerage commissions,
legal fees, and other commercially reasonable closing costs.
“
Income
” shall mean
the gross income of the Company for any month, Fiscal Year or other period, as
applicable, including gains realized on the sale, exchange or other disposition
of the Company’s assets.
“
Indemnified Party
”
shall have the meaning provided in
Section
14.4(a)
.
“
Indemnifying Party
”
shall have the meaning provided in
Section
14.4(a)
.
“
Indemnity Collateral
”
shall have the meaning provided in
Section
14.5(a)
.
“
Inducement
Agreements
” shall have the meaning provided in Section
14.4(a).
“
Inducement
Obligations
” shall have the meaning provided in Section
14.5(a).
“
Initiating Member
”
shall have the meaning provided in
Section
15.2(a)
.
“
Interest
” of any
Member shall mean the entire limited liability company interest of such Member
in the Company, which includes, without limitation, any and all rights, powers
and benefits accorded a Member under this Agreement and the duties and
obligations of such Member hereunder.
“
Key Individuals
”
shall mean Ed Harrington, Samantha Davenport and Shoffner Allison.
“
Loss
” shall mean the
aggregate of losses, deductions and expenses of the Company for any month,
Fiscal Year or other period, as applicable, including losses realized on the
sale, exchange or other disposition of the Company’s assets.
“
Major Decision
” means
any decision for the Company to take, or refrain from taking, any action or
incurring any obligation with respect to the following matters (or the
effectuation of any such action or obligation):
|
(i)
|
any
merger, conversion or consolidation involving the Company or any
Subsidiary or the sale, lease, transfer, exchange or other disposition of
all or substantially all of the Company’s assets or all of the Interests
of the Members in the Company, in one or a series of related
transactions;
|
|
(ii)
|
except
as expressly provided in
Section 12
with
respect to Transfers by Bluerock or a Bluerock Transferee to a Bluerock
Transferee and with respect to Transfers
|
|
|
by
Hawthorne as permitted thereunder, the admission or removal of any Member
or the Company’s issuance to any third party of any equity interest in the
Company (including interests convertible into, or exchangeable for, equity
interests in the Company);
|
|
(iii)
|
except
upon the occurrence of any Dissolution Event, any liquidation, dissolution
or termination of the Company;
|
|
(iv)
|
giving,
granting or undertaking any options, rights of first refusal, deeds of
trust, mortgages, pledges, ground leases, security or other interests in
or encumbering a Property, any portion thereof or any other material
assets;
|
|
(v)
|
selling,
conveying, refinancing or effecting any other direct or indirect transfer
of a Property or other material asset of the Company or any portion
thereof or the entering into of any agreement, commitment or assumption
with respect to any of the
foregoing;
|
|
(vi)
|
acquiring
by purchase, ground lease or otherwise, any real property or other
material asset or the entry into of any agreement, commitment or
assumption with respect to any of the foregoing, or the making or posting
of any deposit (refundable or non-refundable);
or
|
|
(vii)
|
taking
any action by the Company that is reasonably likely to result in any
Member or any of its Affiliates having individual liability under any so
called “bad boy” guaranties or similar agreements provided to third party
lenders in respect of financings relating to the Company, the Subsidiaries
or any of their assets which provide for recourse as a result of willful
misconduct, fraud or gross negligence or failure to comply with the
covenants or any other provisions of such “bad boy”
guaranties.
|
“
Management Agreement
”
shall mean that certain property management agreement attached hereto as
Exhibit C
to be
entered into between the Company (or a Subsidiary of the Company), as owner, and
Property Manager, as manager, pursuant to which Property Manager will provide
certain management services for the Properties.
“
Management Committee
”
shall have the meaning provided in
Section
9.2(a)
.
“
Manager
” shall have
the meaning provided in
Section
9.1(a)
.
“
Member
” and “
Members
” shall mean
Bluerock, Hawthorne and any other Person admitted to the Company pursuant to
this Agreement. For purposes of the Act, the Members shall constitute
a single class or group of members.
“
Member in Question
”
shall have the meaning provided in
Section
16.12
.
“
Member Minimum Gain
”
shall mean an amount, determined in accordance with Regulations
Section 1.704-2(i)(3) with respect to each Member Nonrecourse Debt, equal
to the Company Minimum Gain that would result if such Member Nonrecourse Debt
were treated as a Nonrecourse Liability.
“
Member Nonrecourse
Debt
” shall have the meaning given the term “partner nonrecourse debt” in
Regulations Section 1.704-2(b)(4).
“
Member Nonrecourse
Deductions
” shall have the meaning given the term “partner nonrecourse
deductions” in Regulations Section 1.704-2(i).
“
Net Income
” shall
mean the amount, if any, by which Income for any period exceeds Loss for such
period.
“
Net Loss
” shall mean
the amount, if any, by which Loss for any period exceeds Income for such
period.
“
New York UCC
” shall
have the meaning set forth in
Section
16.17
.
“
Non-Initiating
Member
” shall have the meaning provided in
Section
15.2(a)
.
“
Offer
” shall have the
meaning provided in
Section
15.2(a)
.
“
Offeror
” shall have
the meaning provided in
Section
15.1(b)
.
“
Offeree
” shall have
the meaning provided in
Section
15.1(b)
.
“
Ownership Entity
”
shall have the meaning provided in
Section
15.2(a)
.
“
Nonrecourse
Deduction
” shall have the meaning given such term in Regulations Section
1.704-2(b)(1).
“
Nonrecourse
Liability
” shall have the meaning given such term in Regulations Section
1.704-2(b)(3).
“
Percentage Interest
”
shall have the meaning provided in
Section
5.3
.
“
Person
” shall mean
any individual, corporation, partnership, joint venture, association,
joint-stock company, limited liability company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other legal entity.
“
Pledge Agreement
”
shall have the meaning provided in Section
14.5(a)
.
“
Property
” shall have
the meaning provided in
Section
3
.
“
Property Manager
”
shall mean Hawthorne Residential Partners, LLC, so long as the Management
Agreement is in full force and effect and thereafter, the entity performing
similar services for the Company with respect to the Property.
“
Property Manager
Reports
” shall have the meaning set forth in
Section
8.2(c)
.
“
Pursuer
” shall have
the meaning provided in
Section
10(c)
.
“
REIT
” shall mean a
real estate investment trust as defined in Code Section 856.
“
REIT Member
” shall
mean any Member, if such Member is a REIT or a direct or indirect subsidiary of
a REIT.
“
REIT Requirements
”
shall mean the requirements for qualifying as a REIT under the Code and
Regulations.
“
Regulations
” shall
mean the Treasury Regulations promulgated pursuant to the Code, as amended from
time to time, including the corresponding provisions of any successor
regulations.
“
Representatives
”
shall have the meaning provided in
Section
9.2(a)
.
“
Response Period
”
shall have the meaning provided in
Section
15.2(b)
.
“
Sale Notice
” shall
have the meaning provided in
Section
15.2(a)
.
“
Securities Act
” shall
mean the Securities Act of 1933, as amended.
“
Subsidiary
” shall
mean any corporation, partnership, limited liability company or other entity of
which fifty percent (50%) of which at least a majority of the capital stock or
other equity securities is owned by the Company or more is owned by the
Company.
“
Tax Matters Member
”
shall have the meaning provided in
Section
8.3
.
“
Total Investment
”
shall mean the sum of the aggregate Capital Contributions made by a
Member.
“
Transfer
” means, as a
noun, any transfer, sale, assignment, exchange, charge, pledge, gift,
hypothecation, conveyance, encumbrance or other disposition, voluntary or
involuntary, by operation of law or otherwise and, as a verb, voluntarily or
involuntarily, by operation of law or otherwise, to transfer, sell, assign,
exchange, charge, pledge, give, hypothecate, convey, encumber or otherwise
dispose of.
“
Valuation Amount
”
shall have the meaning provided in
Section
15.1(b)
.
Section
2.
|
Organization
of the Company
.
|
2.1
Name
. The
name of the Company shall be “
BR Hawthorne Springhouse JV,
LLC
”. The business and affairs of the Company shall be
conducted under such name or such other name as the Members deem necessary or
appropriate to comply with the requirements of law in any jurisdiction in which
the Company may elect to do business.
2.2
Place of Registered Office;
Registered Agent
. The address of the registered office of the
Company in the State of Delaware is 2711 Centerville Road, Wilmington, Delaware
19808. The name and address of the registered agent for service of
process on the Company in the State of Delaware is Corporation Service Company,
2711 Centerville Road, Wilmington, Delaware 19808. The Management
Committee may at any time on five (5) days
prior
notice to all Members change the location of the Company’s registered office or
change the registered agent.
2.3
Principal
Office
. The principal address of the Company shall be c/o
Bluerock Real Estate, L.L.C., 680 Fifth Avenue, New York, New York 10019 and the
principal office of Property Manager shall be c/o Hawthorne Residential
Partners, 200 Providence Road, Suite 105, Charlotte, North Carolina 28207, or,
in each case, at such other place or places as may be determined by the
Management Committee from time to time.
2.4
Filings
. On or before
execution of this Agreement, an authorized person within the meaning of the Act
shall have duly filed or caused to be filed the Certificate of Formation of the
Company with the office of the Secretary of State of Delaware, as provided in
Section 18-201 of the Act, and the Members hereby ratify such
filing. The Manager shall use its best efforts to take such other
actions as may be reasonably necessary to perfect and maintain the status of the
Company as a limited liability company under the laws of
Delaware. Notwithstanding anything contained herein to the contrary,
the Company shall not do business in any jurisdiction that would jeopardize the
limitation on liability afforded to the Members under the Act or this
Agreement.
2.5
Term
. The
Company shall continue in existence from the date hereof until January 30, 2059,
unless extended by the Members, or until the Company is dissolved as provided in
Section 13
,
whichever shall occur earlier.
2.6
Expenses of the
Company
. Other than the reimbursement of costs and expenses as
provided herein and the fees described in Section 9.7, no fees, costs or
expenses shall be payable by the Company to any Member (or its
Affiliates).
The
purpose of the Company, subject in each case to the terms hereof, shall be to
engage in the business of acquiring, owning, operating, developing, renovating,
repositioning, managing, leasing, selling, financing and refinancing the real
estate and any real estate related investments (or portions thereof) known as
Springhouse at Newport News, 100 Springhouse Way, Newport News, Virginia 23602,
which are either held by the Company directly or through entities in which the
Company owns a majority of the interests (any property acquired as aforesaid
shall hereinafter be referred to as the “
Property
”), and all
other activities reasonably necessary to carry out such purpose. The
acquisition of the Property will be effected through the utilization of a
special purpose entity formed this express purpose and, to the extent
practicable, will be structured in a tax efficient manner for each Member, in
each case as determined by the Management Committee.
4.1
Bluerock
Conditions
. The obligation of Bluerock to consummate the
transactions contemplated herein and to make the initial Capital Contributions
under
Section
5.1
is subject to fulfillment of all of the following conditions on or
prior to the date hereof:
(a) Hawthorne
shall deposit in the Company’s bank account or the designated escrow account of
First American Title Insurance Company of New York (“Title Company”) the amount
of its initial Capital Contribution set forth on
Exhibit A
hereto;
(b) The
Management Agreement shall have been executed by the Company and Property
Manager;
(c) All
of the representations and warranties of Hawthorne and Property Manager
contained in this Agreement and the Collateral Agreements shall be true and
correct as of the date hereof; and
(d) The
Company shall have received the loan proceeds contemplated by the loan documents
to be entered into between BR Springhouse, LLC and CWCapital LLC and its further
assignee, Federal Home Loan Mortgage Corporation.
(e)
[SPREADER/CONTRIBUTION
AGREEMENT]
4.2
Hawthorne
Conditions
. The obligation of Hawthorne to consummate the
transactions contemplated herein and to make the initial Capital Contributions
under
Section
5.1
is subject to fulfillment of all of the following conditions on or
prior to the date hereof:
(a) Bluerock
shall deposit into the Company’s bank account or Title Company’s designated
escrow account the amount of its initial Capital Contribution set forth on
Exhibit A
hereto;
(b) The
Company shall have received the loan proceeds contemplated by the loan documents
to be entered into between BR Springhouse, LLC and CWCapital LLC and its further
assignee, Federal Home Loan Mortgage Corporation;
(c) The
Management Agreement shall have been executed between the Company and Property
Manager;
(d) All
of the representations and warranties of Bluerock contained in this Agreement
and the Collateral Agreement shall be true and correct as of the date hereof;
and
(e)
[SPREADER/CONTRIBUTION
AGREEMENT]
Section
5.
|
Capital
Contributions, Loans, Percentage Interests and Capital
Accounts
.
|
5.1
Initial Capital
Contributions
. Subject to the conditions set forth in
Section 4
, upon
execution of this Agreement, Bluerock and Hawthorne shall each make an initial
Capital Contribution to the Company of cash in the amounts set forth in
Exhibit A
attached
hereto. The initial Capital Contribution of the Members to the Company may
include amounts for working capital.
5.2
Additional Capital
Contributions
. Additional Capital Contributions may be called
for from the Members by the Management Committee by written notice to the
Members from time to time as and to the extent capital is necessary to effect an
investment or
expenditures
approved by the Management Committee. Except as otherwise agreed by
the Members, such additional Capital Contributions shall be in an amount for
each Member equal to the product of the amount of the aggregate Capital
Contribution called for multiplied by seventy-five (75%) percent in the case of
Bluerock and twenty-five (25%) percent in the case of Hawthorne. The
Capital Contributions required to be made by Hawthorne shall be contributed or
advanced, as the case may be, in cash by Hawthorne from its own sources (and
shall not be borrowed or constitute proceeds from a Transfer of a direct or
indirect interest in Hawthorne or the Interest of Hawthorne or
otherwise). Such additional Capital Contributions shall be payable by
the Members to the Company upon the earlier of (i) twenty (20) days after
written request from the Company, or (ii) the date when the Capital Contribution
is required, as set forth in a written request from the
Company.
(b) If
a Member (a “
Defaulting Member
”)
fails to make a Capital Contribution that is required as provided in
Section 5.2(a)
within
the time frame required therein (the amount of the failed contribution and
related loan shall be the “
Default Amount
”), the
other Member, provided that it has made the Capital Contribution required to be
made by it, in addition to any other remedies it may have hereunder or at law,
shall have one or more of the following remedies:
(1) to
advance to the Company on behalf of, and as a loan to the Defaulting Member, an
amount equal to the Default Amount to be evidenced by a promissory note in form
reasonably satisfactory to the non-failing Member (each such loan, a “
Default
Loan
”). The Capital Account of the Defaulting Member shall be
credited with the amount of such Default Amount attributable to a Capital
Contribution and the aggregate of such amounts shall constitute a debt owed by
the Defaulting Member to the non-failing Member. Any Default Loan
shall bear interest at the rate of twenty (20%) percent per annum, but in no
event in excess of the highest rate permitted by applicable laws (the “
Default Loan Rate
”),
and shall be payable by the Defaulting Member on demand from the non-failing
Member and from any Distributions due to the Defaulting Member
hereunder. Interest on a Default Loan to the extent unpaid, shall
accrue and compound on a quarterly basis. A Default Loan shall be
prepayable, in whole or in part, at any time or from time to time without
penalty. Any such Default Loans shall be with full recourse to the
Defaulting Member and shall be secured by the Defaulting Member’s interest in
the Company including, without limitation, such Defaulting Member’s right to
Distributions. In furtherance thereof, upon the making of such
Default Loan, the Defaulting Member hereby pledges, assigns and grants a
security interest in its Interest to the non-failing Member and agrees to
promptly execute such documents and statements reasonably requested by the
non-failing Member to further evidence and secure such security
interest. Any advance by the non-failing Member on behalf of a
Defaulting Member pursuant to this
Section 5.2(b)(1)
shall be deemed to be a Capital Contribution made by the Defaulting Member
except as otherwise expressly provided herein. All Distributions to
the Defaulting Member hereunder shall be applied first to payment of any
interest due under any Default Loan and then to principal until all amounts due
thereunder are paid in full. While any Default Loan is outstanding,
the Company shall be obligated to pay directly to the non-failing Member, for
application to and until all Default Loans have been paid in full, the amount of
(x) any Distributions payable to the
Defaulting Member, and (y) any proceeds of the sale of the Defaulting Member’s
Interest in the Company;
(2) subject
to any applicable thin capitalization limitations on indebtedness of the
Company, to treat its portion of such Capital Contribution as a loan to the
Company (rather than a Capital Contribution) and to advance to the Company as a
loan to the Company an amount equal to the Default Amount, which loan shall be
evidenced by a promissory note in form reasonably satisfactory to the
non-failing Member and which loan shall bear interest at the Default Loan Rate
and be payable on a first priority basis by the Company from available Cash Flow
and prior to any Distributions made to the Defaulting Member. If each
Member has loans outstanding to the Company under this provision, such loans
shall be payable to each Member in proportion to the outstanding balances of
such loans to each Member at the time of payment. Any advance to the
Company pursuant to this
Section 5.2(b)(2)
shall not be treated as a Capital Contribution made by the Defaulting
Member;
(3) to
make an additional Capital Contribution to the Company equal to the Default
Amount whereupon the Percentage Interests of the Members shall be recalculated
to (i) increase the non-defaulting Member’s Percentage Interest by the
percentage (“
Applicable Adjustment
Percentage
”) determined by dividing one hundred fifty percent (150%) of
the Default Amount by the sum of the Members’ Total Investment (taking into
account the actual amount of such additional Capital Contribution) and by
increasing its Capital Account by one and one-half of the amount of the Default
Amount, and (ii) to reduce the Defaulting Member’s Percentage Interest by the
Applicable Adjustment Percentage and by decreasing its Capital Account by
one-half of the amount of the Default Amount; or
(4) in
lieu of the remedies set forth in subparagraphs (1), (2) or (3), revoke its
portion of such additional Capital Contribution, whereupon the portion of the
Capital Contribution made by the non-failing Member shall be returned within ten
(10) days with interest computed at the Default Loan Rate by the
Company.
(c) Notwithstanding
the foregoing provisions of this
Section 5.2
, no
additional Capital Contributions shall be required from any Member if (i) the
Company or any other Person shall be in default (or with notice or the passage
of time or both, would be in default) in any material respect under any loan,
indenture, mortgage, lease, agreement or instrument to which the Company or any
of its Subsidiaries is a party or by which the Company (or any of its
Subsidiaries) or any of its properties or assets is or may be bound, (ii) any
other Member, the Company or any of its Subsidiaries shall be insolvent or
bankrupt or in the process of liquidation, termination or dissolution, (iii) any
other Member, the Company or any of its Subsidiaries shall be subjected to any
pending litigation (x) in which the amount in controversy exceeds $500,000, (y)
which litigation is not being defended by an insurance company who would be
responsible for the payment of any judgment in such litigation, and (z) which
litigation if adversely determined could have a material adverse effect on such
other Member and/or the Company or any of its Subsidiaries and/or could
interfere with their ability to perform their obligations hereunder or under any
Collateral Agreement, (iv) there has been a material adverse change in
(including, but not limited to, the financial condition of) any other Member
(and/or its Affiliates)
which, in
Member’s reasonable judgment, prevents such other Member (and/or its Affiliates
from performing, or substantially interferes with their ability to perform,
their obligations hereunder or under any Collateral Agreement. If any
of the foregoing events shall have occurred and any Member elects not to make a
Capital Contribution on account thereof, then any other Member which has made
its pro rata share of such Capital Contribution shall be entitled to a return of
such Capital Contribution from the Company.
5.3
Percentage Ownership
Interest
. The Members shall have the initial percentage
ownership interests (as the same are adjusted as provided in this Agreement, a
“
Percentage
Interest
”) in the Company set forth on
Exhibit A
immediately following the Capital Contributions provided for in
Section
5.1
. The Percentage Interests of the Members in the Company
shall be adjusted monthly so that the respective Percentage Interests of the
Members at any time shall be in proportion to their respective cumulative Total
Investment made (or deemed to be made) pursuant to
Sections 5.1
and
5.2
, as the
same may be further adjusted pursuant to
Section
5.2(b)(3)
. Percentage Interests shall not be adjusted by
distributions made (or deemed made) to a Member.
5.4
Return of Capital
Contribution
. Except as approved by each of the Members, no
Member shall have any right to withdraw or make a demand for withdrawal of the
balance reflected in such Member’s Capital Account (as determined under
Section 5.6
) until
the full and complete winding up and liquidation of the business of the
Company.
5.5
No Interest on Capital
.
Interest earned on
Company funds shall inure solely to the benefit of the Company, and no interest
shall be paid upon any Capital Contributions nor upon any undistributed or
reinvested income or profits of the Company.
5.6
Capital
Accounts
. A separate capital account (the “
Capital Account
”)
shall be maintained for each Member in accordance with Section 1.704-1(b)(2)(iv)
of the Regulations. Without limiting the foregoing, the Capital Account of each
Member shall be increased by (i) the amount of any Capital Contributions
made by such Member, (ii) the amount of Income allocated to such Member and
(iii) the amount of income or profits, if any, allocated to such Member not
otherwise taken into account in this
Section
5.6
. The Capital Account of each Member shall be reduced by
(i) the amount of any cash and the fair market value of any property distributed
to the Member by the Company (net of liabilities secured by such distributed
property that the Member is considered to assume or take subject to), (ii) the
amount of Loss allocated to the Member and (iii) the amount of expenses or
losses, if any, allocated to such Member not otherwise taken into account in
this
Section
5.6
. The Capital Accounts of the Members shall not be
increased or decreased pursuant to Regulations Section 1.704-1(b)(2)(iv)(f) to
reflect a revaluation of the Company’s assets on the Company’s books in
connection with any contribution of money or other property to the Company
pursuant to
Section
5.2
by existing Members. If any property other than cash is
distributed to a Member, the Capital Accounts of the Members shall be adjusted
as if such property had instead been sold by the Company for a price equal to
its fair market value, the gain or loss allocated pursuant to
Section 7
, and the
proceeds distributed in the manner set forth in Section 6.1 or Section
13.3(e)(iii). No Member shall be obligated to restore any negative
balance in its Capital Account. No Member shall be compensated for
any positive balance in its Capital Account except as otherwise expressly
provided herein. The foregoing provisions and the other provisions of
this Agreement
relating
to the maintenance of Capital Accounts are intended to comply with the
provisions of Regulations Section 1.704-1(b)(2) and shall be interpreted
and applied in a manner consistent with such Regulations.
5.7
New
Members
. The Company may issue additional Interests and
thereby admit a new Member or Members, as the case may be, to the Company, only
if such new Member (i) has delivered to the Company its Capital Contribution,
(ii) has agreed in writing to be bound by the terms of this Agreement by
becoming a party hereto, and (iii) has delivered such additional documentation
as the Company shall reasonably require to so admit such new Member to the
Company. Without the prior written consent of each then-current
Member, a new Member may not be admitted to the Company if the Company would, or
may, have in the aggregate more than one hundred (100) members. For
purposes of determining the number of members under this
Section 5.7
, a Person
(the “
beneficial
owner
”) indirectly owning an interest in the Company through a
partnership, grantor trust or S corporation (as such terms are used in the
Code) (the “
flow-through entity
”)
shall be considered a member, but only if (i) substantially all of the value of
the beneficial owner’s interest in the flow-through entity is attributable to
the flow-through entity’s interest (direct or indirect) in the Company and (ii)
in the sole discretion of the Management Committee, a principal purpose of the
use of the flow-through entity is to permit the Company to satisfy the
100-member limitation.
Section
6.
|
Distributions
.
|
6.1
Distribution of
Distributable Funds
(a) The
Management Committee shall calculate and determine the amount of Distributable
Funds for each applicable period. Except as provided in
Sections 5.2(b), 6.1(b),
6.1(c)
or
13.3
or otherwise
provided hereunder, Distributable Funds, if any, shall be distributed to the
Members, in proportion to their Percentage Interests, on the 15
th
day
of each month or from time to time as determined by the Management
Committee.
(b) Any
distributions otherwise payable to a Member under this Agreement shall be
applied first to satisfy amounts due and payable on account of the indemnity
and/or contribution obligations of such Member under this Agreement and/or any
other agreement delivered by such Member to the Company or any other Member but
shall be deemed distributed to such Member for purposes of this
Agreement.
6.2
Distributions in
Kind
. In the discretion of the Management Committee,
Distributable Funds may be distributed to the Members in cash or in kind and
Members may be compelled to accept a distribution of any asset in kind even if
the percentage of that asset distributed to it exceeds a percentage of that
asset that is equal to the percentage in which such Member shares in
distributions from the Company. In the case of all assets to be
distributed in kind, the amount of the distribution shall equal the fair market
value of the asset distributed as determined by the Management
Committee. In the case of a distribution of publicly traded property,
the fair market value of such property shall be deemed to be the average closing
price for such property for the thirty (30) day period immediately prior to the
distribution, or if such property has not yet been publicly traded for thirty
(30) days, the average closing price of such property for the period prior to
the distribution in which the property has been publicly traded.
7.1
Allocation of Net Income and
Net Losses Other than in Liquidation
. Except as otherwise
provided in this Agreement, Net Income and Net Losses of the Company for each
Fiscal Year shall be allocated among the Members in a manner such that, as of
the end of such Fiscal Year and taking into account all prior allocations of Net
Income and Net Losses of the Company and all distributions made by the Company
through such date, the Capital Account of each Member is, as nearly as possible,
equal to the distributions that would be made to such Member pursuant to
Section 6.1
if the
Company were dissolved, its affairs wound up and assets sold for cash equal to
their tax basis (or book value in the case of assets that have been revalued in
accordance with Section 704(b) of the Code), all Company liabilities were
satisfied, and the net assets of the Company were distributed in accordance with
Section 6.1
immediately after such allocation.
7.2
Allocation of Net Income and
Net Losses in Liquidation
. Net Income and Net Losses realized
by the Company in connection with the liquidation of the Company pursuant to
Section 13
shall be allocated among the Members in a manner such that, taking into account
all prior allocations of Net Income and Net Losses of the Company and all
distributions made by the Company through such date, the Capital Account of each
Member is, as nearly as possible, equal to the amount which such Member is
entitled to receive pursuant to
Section
13.3(d)(iii)
.
7.3
U.S. Tax
Allocations
.
(a) Subject
to Section 704(c) of the Code, for U.S. federal and state income tax purposes,
all items of Company income, gain, loss, deduction and credit shall be allocated
among the Members in the same manner as the corresponding item of income, gain,
loss, deduction or credit was allocated pursuant to the preceding paragraphs of
this
Section
7
.
(b)
Code Section
704(c)
. In accordance with Code Section 704(c) and the
Treasury regulations promulgated thereunder, income and loss with respect to any
property contributed to the capital of the Company (including, if the property
so contributed constitutes a partnership interest, the applicable distributive
share of each item of income, gain, loss, expense and other items attributable
to such partnership interest whether expressly so allocated or reflected in
partnership allocations) shall, solely for U.S. federal income tax purposes, be
allocated among the Members so as to take account of any variation between the
adjusted basis of such property to the Company for U.S. federal income tax
purposes and its Agreed Upon Value at the time of contribution. Such
allocation shall be made in accordance with such method set forth in Regulations
Section 1.704-3(b) as the Manager in its reasonable discretion
approves.
Any
elections or other decisions relating to such allocations shall be made by
Bluerock in any manner that reasonably reflects the purpose and intention of
this Agreement. Allocations pursuant to this
Section 7.3.
are
solely for purposes of U.S. federal, state and local income taxes and shall not
affect, or in any way be taken into account in computing, any Member’s share of
Net Income, Net Loss, other items or distributions pursuant to any provisions of
this Agreement.
Section
8.
|
Books,
Records, Tax Matters and Bank Account
s
.
|
8.1
Books and
Records
. The books and records of account of the Company shall
be maintained in accordance with industry standards and shall be based on the
Property Manager Reports. The books and records shall be maintained
at the Company’s principal office or at a location designated by the Management
Committee, and all such books and records (and the dealings and other affairs of
the Company and its Subsidiaries) shall be available to any Member at such
location for review, investigation, audit and copying, at such Member’s sole
cost and expense, during normal business hours on at least twenty-four (24)
hours prior notice. In connection with such review, investigation or
audit, such Member (and its representatives and agents) shall have the
unfettered right to meet and consult with any and all employees of Property
Manager (or any of their respective Affiliates) and to attend meetings and
independently meet and consult with any and all third parties having dealings or
any other relationship with the Company or any of its subsidiaries or with
Property Manager in respect of the Company or any of its
Subsidiaries.
8.2
Reports and Financial
Statements
.
(a) Within
ninety (90) days of the end of each Fiscal Year, the Manager shall cause each
Member to be furnished with two sets of the following additional annual reports
computed as of the last day of the Fiscal Year:
|
(i)
|
An
unaudited balance sheet of the
Company;
|
|
(ii)
|
An
unaudited statement of the Company’s profit and loss;
and
|
|
(iii)
|
A
statement of the Members’ Capital Accounts and changes therein for such
Fiscal Year.
|
(b) Within
twenty (20) days of the end of each quarter of each Fiscal Year, the Property
Manager shall cause to be furnished to Bluerock such information as requested by
Bluerock as is necessary for any REIT Member to determine its qualification as a
REIT and its compliance with REIT Requirements as shall be requested by
Bluerock.
(c) The
Members acknowledges that the Property Manager is obligated to perform
Project-related accounting and furnish Project-related accounting statements
under the terms of the Management Agreement (the “Property Manager
Reports”). Manager shall be entitled to rely on the Property Manager
Reports with respect to its obligations under this Section 8, and the Members
acknowledge that the reports to be furnished shall be based on the Property
Manager Reports, without any duty on the part of the Manager to further
investigate the completeness, accuracy or adequacy of the Property Manager
Reports.
8.3
Tax Matters
Member
. Bluerock is hereby designated as the “tax matters
partner” of the Company and the Subsidiaries, as defined in Section 6231(a)(7)
of the Code (the “
Tax
Matters Member
”) and shall prepare or cause to be prepared all income and
other tax returns of the Company and the Subsidiaries pursuant to the terms and
conditions of
Section 8.5
.
Except as
otherwise provided in this Agreement, all elections required or permitted
to be made by the Company and the Subsidiaries under the Code or state tax law
shall be timely determined and made by Bluerock. The Members intend
that the Company be treated as a partnership for U.S. federal, state and local
tax purposes, and the Members will not elect or authorize any person to elect to
change the status of the Company from that of a partnership for U.S. federal,
state and local income tax purposes. Bluerock agrees to consult with
Hawthorne with respect to any written notice of any material tax elections and
any material inquiries, claims, assessments, audits, controversies or similar
events received from any taxing authority. In addition, upon the
request of any Member, the Company and each Subsidiary shall make an election
pursuant to Code Section 754 to adjust the basis of the Company’s property in
the manner provided in Code Sections 734(b) and 743(b). The Company
hereby indemnifies and holds harmless Bluerock from and against any claim, loss,
expense, liability, action or damage resulting from its acting or its failure to
take any action as the “tax matters partner” of the Company and the
Subsidiaries,
provided
that any
such action or failure to act does not constitute gross negligence or willful
misconduct.
8.4
Bank
Accounts
. All funds of the Company are to be deposited in the
Company’s name in such bank account or accounts as may be designated by the
Management Committee and shall be withdrawn on the signature of such Person or
Persons as the Management Committee may authorize.
8.5
Tax
Returns
. Manager shall cause to be prepared all income and
other tax returns of the Company and the Subsidiaries required by applicable law
and shall submit such returns to the Management Committee for its review,
comment and approval at least thirty (30) days prior to the due date thereof
(but in no event later than March 10 of each year for the preceding Fiscal Year)
and shall thereafter cause the same to be filed in a timely manner (including
extensions). No later than May 31 (for review, comment and approval)
and June 10 (in final form) of each year with respect to the preceding Fiscal
Year, Manager shall deliver or cause to be delivered to each Member a copy of
the tax returns for the Company and such Subsidiaries with respect to such
Fiscal Year, together with such information with respect to the Company and such
Subsidiaries as shall be necessary for the preparation by such Member of its
U.S. federal and state income or other tax and information returns.
8.6
Expenses
. Notwithstanding
any contrary provision of this Agreement, the Members acknowledge and agree that
the reasonable expenses and charges incurred directly or indirectly by or on
behalf of the Manager in connection with its obligations under this
Section 8
will be
reimbursed by the Company to the Manager.
Section
9.
|
Management
and Operations
.
|
9.1
Management
.
(a) The
Company shall be managed by Bluerock (“
Manager
”), who shall
have the authority to exercise all of the powers and privileges granted by the
Act, any other law or this Agreement, together with any powers incidental
thereto, and to take any other action not
prohibited
under the Act or other applicable law, so far as such powers or actions are
necessary or convenient or related to the conduct, promotion or attainment of
the business, purposes or activities of the Company. Manager shall
manage the operations and affairs of the Company, subject to the oversight and
reversal by, and direction from, the Management Committee and/or
Bluerock. Decisions on the matters set forth in
Exhibit E
require the
express approval of the Management Committee and Bluerock and shall be made
solely by the Management Committee and Bluerock as provided
therein. To the extent that Bluerock or a Bluerock Transferee
Transfers all or a portion of its Interest in accordance with Section 12 to a
Bluerock Transferee, such Bluerock Transferee may be appointed as a co-Manager
under this Section 9.1(a) by Bluerock or a Bluerock Transferee then holding all
or a portion of an Interest without any further action or authorization by any
Member.
(b) The
Management Committee may appoint individuals to act on behalf of the Company
with such titles and authority as determined from time to time by the Management
Committee. Each of such individuals shall hold office until his or
her death, resignation, replacement by the Member who appointed the individual
to the Management Committee, or removal by a vote of the Management Committee
(in which case the Member who appointed such individual shall promptly appoint a
replacement).
9.2
Management
Committee
.
(a) Bluerock
and Hawthorne hereby establish a management committee (the “
Management
Committee
”). The Management Committee shall consist of four
(4) individuals appointed to act as “representatives” of the Member that
appointed him or her (the “
Representatives
”) as
follows: (i) Bluerock shall be entitled to designate two (2) Representatives to
represent Bluerock; and (ii) Hawthorne shall be entitled to designate two (2)
Representatives to represent Hawthorne. The initial members of the
Management Committee are set forth on
Exhibit
A
. Hawthorne represents, warrants and covenants that the
Representatives designated by Hawthorne on
Exhibit A
have, and
shall at all times have, the full power and authority to make decisions and vote
as a member of the Management Committee, and that such Representatives’ votes as
members of the Management Committee will be binding on Hawthorne and any
transferee of all or a portion of Hawthorne’s Interest; unless and until such
time as Hawthorne or its transferee notifies Bluerock of a change in a
Representative, after which time this sentence shall apply only with respect to
the replacement Representative.
(b) Each
member of the Management Committee, subject to
Section 9.1(b)
, shall
hold office until death, resignation or removal at the pleasure of the Member
that appointed him or her. If a vacancy occurs on the Management
Committee, the Person with the right to appoint and remove such vacating
Representative shall appoint his/her or her successor. A Member shall
lose its right to have representatives on the Management Committee, and its
representatives on the Management Committee shall be deemed to be automatically
removed, as of the date on which such Member ceases to be a Member or as
otherwise provided in this Agreement. If Bluerock or a Bluerock
Transferee Transfers all or a portion of its Interest to a Bluerock Transferee
pursuant to
Section
12.2
, such Bluerock Transferee shall automatically, and without any
further action or authorization by any Member, succeed to the rights and powers
of Bluerock under this
Section 9
as may be
agreed to between Bluerock or the Bluerock Transferee which is transferring the
Interest, on the hand, and the Bluerock Transferee to which the Interest
is being
transferred, on the other hand, including the shared or unilateral right to
appoint the Representatives that Bluerock was theretofore entitled to appoint
pursuant to
Section
9.2(a)
.
(c) The
Management Committee shall meet once every quarter (unless waived by mutual
agreement of the Members) and at such other times as may be necessary for the
conduct of the Company’s business on at least five (5) days prior written notice
of the time and place of such meeting given by any Representative. Notice of
regular meetings of the Management Committee are not
required. Representatives may waive in writing the requirements for
notice before, at or after a special meeting, and attendance at such a meeting
without objection by a Representative shall be deemed a waiver of such notice
requirement.
(d) The
Management Committee shall have the right, but not the obligation, to elect one
of the Representatives or another person to serve as Secretary of the Management
Committee. Such person shall hold office until his/her or her death,
resignation or removal by a vote of the Management Committee. The
Secretary or a person designated by him or her shall take written minutes of the
proceedings of the meetings of the Management Committee, and such minutes shall
be filed with the records of the Company.
(e) The
only Representatives required to constitute a quorum for a meeting of the
Management Committee shall be one (1) Representative appointed by Bluerock and
one (1) Representative appointed by Hawthorne; provided, however, that if
Hawthorne has not appointed at least one (1) Representative to the Management
Committee at the time of such meeting (for example, if each Hawthorne
Representative has been removed and not replaced), then a quorum for a meeting
of the Management Committee shall be one (1) Representative appointed by
Bluerock. Each of the two (2) Representatives appointed by Bluerock
shall be entitled to cast two (2) votes on any matter that comes before the
Management Committee and each of the Representatives appointed by Hawthorne
shall be entitled to cast one (1) vote on any matter that comes before the
Management Committee. Approval by the Management Committee of any
matter shall require the affirmative vote (including votes cast by proxy) of at
least a majority of the votes of the Representatives then in office voting at a
duly held meeting of the Management Committee, except as specifically set forth
on
Exhibit
E
.
Exhibit E
may only be
amended to remove items specified therein by a unanimous vote of the
Representatives.
(f) Any
meeting of the Management Committee may be held by conference telephone call,
video conference or through similar communications equipment by means of which
all persons participating in the meeting can communicate with each
other. Participation in a telephonic and/or video conference meeting
held pursuant to this
Section
shall
constitute presence in person at such meeting.
(g) Any
action required or permitted to be taken at a meeting of the Management
Committee may be taken without a meeting, without prior notice and without a
vote if a consent or consents in writing, setting forth the action so taken,
shall be signed by the Representatives having not less than the minimum of votes
that would be necessary to authorize or take such action at a meeting at which
all Representatives entitled to vote thereon were present and
voted. All consents shall be filed with the minutes of the
proceedings of the Management Committee.
(h) Except
as otherwise expressly provided in this Agreement, none of the Members or their
Representatives (in their capacities as members of the Management Committee)
only, shall have any duties or liabilities to the Company or any other Member
(including any fiduciary duties), whether or not such duties or liabilities
otherwise arise or exist in law or in equity, and each Member hereby expressly
waives any such duties or liabilities;
provided
,
however
, that this
Section 9.2(h)
shall not eliminate or limit the liability of such Representatives or the
Members (A) for acts or omissions that involve fraud, intentional misconduct or
a knowing and culpable violation of law, or (B) for any transaction not
permitted or authorized under or pursuant to this Agreement from which such
Representative or Member derived a personal benefit unless the Management
Committee has approved in writing such transaction in accordance with this
Agreement;
provided
,
further
,
however
, that the
duty of care of each of such Representatives and the Members is to not act with
fraud, intentional misconduct or a knowing and culpable violation of
law. Except as provided in this Agreement, whenever in this Agreement
a Representative of a Member and/or a Member is permitted or required to make a
decision affecting or involving the Company, any Member or any other Person,
such Representative and/or such Member shall be entitled to consider only such
interests and factors as he, she or it desires, including a particular Member’s
interests, and shall, to the fullest extent permitted by applicable law, have no
duty or obligation to give any consideration to any interest of or factors
affecting the Company or any Member.
9.3
Annual Business
Plan
. No later than thirty (30) days prior to the end of the
then current Fiscal Year (except for the 2010 Annual Business Plan, a copy of
which is attached hereto as
Exhibit D
), Property
Manager shall prepare (or cause to be prepared) and shall deliver to the
Management Committee and Bluerock for approval pursuant to
Section 9.1
(and
Exhibit D
) the
annual business plan for the next Fiscal Year. If Property Manager
fails to deliver a proposed annual business plan or if the plan proposed is
unacceptable to the Management Committee or Bluerock, the Management Committee
and/or Bluerock shall have the right to prepare, for approval by the Management
Committee and/or Bluerock, a proposed annual business plan (a plan approved by
the Management Committee and Bluerock, is referred to herein as the “
Annual Business
Plan
”). The Annual Business Plan shall be updated on a quarterly
basis. No material changes or departures from any item in an Annual
Business Plan approved by the Management Committee shall be made by Property
Manager without the prior approval of the Management Committee. Each
Annual Business Plan shall include the information set forth in
Exhibit
B
.
9.4
Implementation of Plan by
Property
Manager
. Property Manager shall, subject to the limitations
contained herein, the availability of operating revenues and other cash flow and
any other matters outside of the reasonable control of Property Manager,
implement and shall not vary or modify the then applicable Annual Business Plan
without the approval of the Management Committee and Bluerock. Property Manager
shall promptly advise and inform the Management Committee of any transaction,
notice, event or proposal directly relating to the management and operation of
any Property, other assets of the Company or the Company or any Subsidiary which
does or is likely to significantly affect, either adversely or favorably, such
Property, other assets of the Company or the Company or such Subsidiary or cause
a significant deviation from the Annual Business Plan. Nothing
contained herein shall in any way diminish the obligations or duties of Property
Manager hereunder.
9.5
Affiliate
Transactions
. No agreement shall be entered into by the
Company or any Subsidiary with a Member or any Affiliate of a Member and no
decision shall be made in respect of any such agreement (including, without
limitation, the enforcement or termination thereof) unless such agreement or
related decision shall have been approved in writing by the Management
Committee. Without limiting the foregoing, any such agreement shall
be on arm’s length terms and conditions, be terminable on fifteen (15) days’
notice without penalty and the terms and conditions of such agreement shall be
disclosed to all Representatives prior to the execution and delivery
thereof. Further, the written approval of Bluerock shall be required
prior to the use of the name “Bluerock” in connection with any matter or
transaction.
9.6
Other
Activities
.
(a)
Right to Participation in
Other Member Ventures
. Neither the Company nor any Member (or
any Affiliate of any Member) shall have any right by virtue of this Agreement
either to participate in or to share in any other now existing or future
ventures, activities or opportunities of any of the other Members or their
Affiliates, or in the income or proceeds derived from such ventures, activities
or opportunities. Neither the Company nor any Member (or any
Affiliate of any Member) shall have any right by virtue of this Agreement either
to participate in or to share in any other now existing or future ventures,
activities or opportunities of any of the other Members or their Affiliates, or
in the income or proceeds derived from such ventures, activities or
opportunities.
(b)
Limitation on Actions of
Members; Binding Authority
.
No
Member shall, without the prior written consent of the other Members, take any
action on behalf of, or in the name of, the Company, or enter into any contract,
agreement, commitment or obligation binding upon the Company, or, in its
capacity as a Member or Manager of the Company, perform any act in any way
relating to the Company or the Company’s assets, except in a manner and to the
extent consistent with the provisions of this
Agreement. Notwithstanding any provision in this Agreement to the
contrary and without the need for any additional consent from any Person, the
Company, are hereby authorized to execute, deliver and perform that certain
Consent and Agreement of the Company attached to the Pledge
Agreement.
9.7
Management
Agreement
.
(a) The
Company has entered into the Management Agreement for the Property with Property
Manager (which Management Agreement shall be updated and supplemented from time
to time) pursuant to which Property Manager will provide the development and
management services described therein to the Company.
(b) The
Management Agreement shall be terminable by the Company and/or Bluerock for any
reason on thirty (30) days’ notice from the Management Committee or Bluerock to
Property Manager. Any delegation of the responsibilities of Property Manager or
the subcontracting for such services will be subject to Bluerock’s prior written
consent. Separate agreements may also be entered into with Hawthorne,
Bluerock, their respective Affiliates, or with third parties for certain
services to be provided to the Company, including leasing, construction
management, property management, asset management, technology services,
etc. Such arrangements shall be at market rates, and shall be entered
into only with the Management Committee’s prior written approval of the
Management
Committee
and Bluerock, consistent with an approved budget and business plan for each
asset. Unless otherwise agreed, all such contracts will be payable on
a monthly basis and will be terminable upon thirty (30) day’s notice for any
reason or no reason.
9.8
Operation in Accordance with
REOC/REIT Requirements
.
(a) The
Members acknowledge that Bluerock or one or more of its Affiliates (an “BR
Affiliate”) intends to qualify as a “real estate operating company” or “venture
capital operating company” within the meaning of U.S. Department of Labor
Regulation 29 C.F.R. §2510.3-101 (a “REOC”), and agree that the Company and its
Subsidiaries shall be operated in a manner that will enable Bluerock and such BR
Affiliate to so qualify. Notwithstanding anything herein to the
contrary, the Company and its Subsidiaries shall not take, or refrain from
taking, any action that would result in Bluerock or a BR Affiliate from failing
to qualify as a REOC. The Members acknowledge and agree that Bluerock
may assign any or all of its rights or powers under this Agreement as Manager,
to designate committee representatives, to provide consents and approvals, or
any other rights or powers to one or more of its BR Affiliates as it deems
appropriate, and the exercise of any such rights or powers by a BR Affiliate
shall have full force and effect under this Agreement without the need for any
further consent or approval. Hawthorne (a) shall not fund any Capital
Contribution "with the 'plan assets' of any 'employee benefit plan' within the
meaning of
Section
3(3)
of the Employee Retirement Income Security Act of 1974, as amended
or any 'plan' as defined by Section 4975 of the Internal Revenue Code of 1986,
as amended", and (b) shall comply with any requirements specified by Bluerock in
order to ensure compliance with this
Section
9.9
.
(b) Notwithstanding
anything in this Agreement to the contrary, unless specifically agreed to by the
Management Committee in writing, neither the Company nor its Subsidiaries shall
hold any investment, incur any indebtedness or otherwise take any action that
would cause any Member of the Company (or any Person holding an indirect
interest in the Company through an entity or series of entities treated as
partnerships for U.S. federal income tax purposes) to realize any “unrelated
business taxable income” as such term is defined in Code Sections 511 through
514. All consents shall be filed with the minutes of the proceedings
of the Management Committee.
(c) The
Company
(and any
direct or indirect Subsidiary of the Company) may not engage in any activities
or hold any assets that would constitute or result in the occurrence of a REIT
Prohibited Transaction as defined herein. Notwithstanding anything to
the contrary contained in this Agreement, during the time a REIT Member is a
Member of the Company, neither the Company, any direct or indirect Subsidiary of
the Company
,
nor any Member of the Company shall take or refrain from taking any action
which, or the effect of which, would constitute or result in the occurrence of a
REIT Prohibited Transaction by the Company or any direct or indirect
Subsidiary thereof,
including without limiting the generality of the foregoing, but in amplification
thereof:
(i)
Entering
into any lease, license, concession or other agreement or permitting any
sublease, license, concession or other agreement that provides for rent or other
payment based in whole or in part on the income or profits of any person,
excluding for this
purpose a
lease that provides for rent based in whole or in part on a fixed percentage or
percentages of gross receipts or gross sales of any person without reduction for
any costs of the lessee (and in the case of a sublease, without reduction for
any sublessor costs);
(ii)
Leasing
personal property, excluding for this purpose a lease of personal property that
is entered into in connection with a lease of real property where the rent
attributable to the personal property is less than 15% of the total rent
provided for under the lease;
(iii)
Acquiring
or holding any debt investments, excluding for these purposes “debt” solely
between wholly-owned Subsidiaries of the Company, unless (I) the amount of
interest income received or accrued by the Company under such loan does not,
directly or indirectly, depend in whole or in part on the income or profits of
any person, and (II) the debt is fully secured by mortgages on real property or
on interests in real property. Notwithstanding anything to the
contrary herein, in the case of debt issued to the Company by a Subsidiary which
is treated as a “taxable REIT subsidiary” of the REIT Member, such debt shall be
secured by a mortgage or similar security interest, or by a pledge of the equity
ownership of a subsidiary of such taxable REIT subsidiary;
(iv)
Acquiring
or holding, directly or indirectly, more than 10% of the outstanding securities
of any one issuer (by vote or value) other than an entity which either (i) is
taxable as a partnership or a disregarded entity for United States federal
income tax purposes, (ii) has properly elected to be a taxable REIT subsidiary
of the REIT Member by jointly filing with REIT, IRS Form 8875, or (iii) has
properly elected to be a real estate investment trust for U.S. federal income
tax purposes;
(v)
Entering
into any agreement where the Company receives amounts, directly or indirectly,
for rendering services to the tenants of any property that is owned, directly or
indirectly, by the Company other than (i) amounts received for services that are
customarily furnished or rendered in connection with the rental of real property
of a similar class in the geographic areas in which the Property is located
where such services are either provided by (A) an Independent Contractor (as
defined in Section 856(d)(3) of the Code) who is adequately compensated for such
services and from which the Company or REIT Member do not, directly or
indirectly, derive revenue or (B) a taxable REIT subsidiary of REIT Member who
is adequately compensated for such services or (ii) amounts received for
services that are customarily furnished or rendered in connection with the
rental of space for occupancy only (as opposed to being rendered primarily for
the convenience of the Property’s tenants);
(vi)
Entering
into any agreement where a material amount of income received or accrued by the
Company under such agreement, directly or indirectly, does not qualify as either
(i) “rents from real property” or (ii) “interest on obligations secured by
mortgages on real property or on interests in real property,” in each case as
such terms are defined in Section 856(c) of the Code;
(vii)
Holding
cash of the Company available for operations or distribution in any manner other
than a traditional bank checking or savings account;
(viii)
Selling
or disposing of any property, subsidiary or other asset of the Company prior to
(i) the completion of a two
(
2
)
year holding
period with such period to begin on the date the Company acquires a direct or
indirect interest in such property and begins to hold such property, subsidiary
or asset for the production of rental income, and (ii) the satisfaction of any
other requirements under Section 857 of the Code necessary for the avoidance of
a prohibited transaction tax on the REIT;
or
(ix) Failing to make current cash
distributions to REIT Member each year in an amount which does not at least
equal the taxable income allocable to REIT Member for such year.
Notwithstanding
the foregoing provisions of this Section 9.9(c), the Company may enter into a
REIT Prohibited Transaction if it receives the prior written approval of the
REIT Member specifically acknowledging that the REIT Member is approving a REIT
Prohibited Transaction pursuant to this Section 9.9(c). For purposes
of this Section 9.9(c), “REIT Prohibited Transactions” shall mean any of the
actions specifically set forth in this Section 9.9(c)
9.9
FCPA
.
(a) In
compliance with the Foreign Corrupt Practices Act, each Member will not, and
will ensure that its officers, directors, employees, shareholders, members,
agents and Affiliates, acting on its behalf or on the behalf of the Company or
any of its Subsidiaries or Affiliates do not, for a corrupt purpose, offer,
directly or indirectly, promise to pay, pay, promise to give, give or authorize
the paying or giving of anything of value to any official representative or
employee of any government agency or instrumentality, any political party or
officer thereof or any candidate for office in any jurisdiction, except for any
facilitating or expediting payments to government officials, political parties
or political party officials the purpose of which is to expedite or secure the
performance of a routine governmental action by such government officials or
political parties or party officials. The term “routine governmental
action” for purposes of this provision shall mean an action which is ordinarily
and commonly performed by the applicable government official in (i) obtaining
permits, licenses, or other such official documents which such Person is
otherwise legally entitled to; (ii) processing governmental papers; (iii)
providing police protection, mail pick-up and delivery or scheduling inspections
associated with contract performance or inspections related to transit of goods
across country; (iv) providing phone service, power and water supply, loading
and unloading of cargo, or protecting perishable products or commodities from
deterioration; or (v) actions of a similar nature.
The term
routine governmental action does not include any decision by a government
official whether, or on what terms, to award new business to or to continue
business with a particular party, or any action taken by an official involved in
the decision making process to encourage a decision to award new business to or
continue business with a particular party.
(b) Each
Member agrees to notify immediately the other Member of any request that such
Member or any of its officers, directors, employees, shareholders, members,
agents or Affiliates, acting on its behalf, receives to take any action that may
constitute a violation of the Foreign Corrupt Practices Act.
Section
10.
|
Confidentiality
.
|
(a) Any
information relating to a Member’s business, operation or finances which are
proprietary to, or considered proprietary by, a Member are hereinafter referred
to as “Confidential Information”. All Confidential Information in
tangible form (plans, writings, drawings, computer software and programs, etc.)
or provided to or conveyed orally or visually to a receiving Member, shall be
presumed to be Confidential Information at the time of delivery to the receiving
Member. All such Confidential Information shall be protected by the
receiving Member from disclosure with the same degree of care with which the
receiving Member protects its own Confidential Information from
disclosure. Each Member agrees: (i) not to disclose such
Confidential Information to any Person except to those of its employees or
representatives who need to know such Confidential Information in connection
with the conduct of the business of the Company and who have agreed to maintain
the confidentiality of such Confidential Information and (ii) neither it nor any
of its employees or representatives will use the Confidential Information for
any purpose other than in connection with the conduct of the business of the
Company; provided that such restrictions shall not apply if such Confidential
Information:
(x) is
or hereafter becomes public, other than by breach of this
Agreement;
(y) was
already in the receiving Member’s possession prior to any disclosure of the
Confidential Information to the receiving Member by the divulging Member;
or
(z) has
been or is hereafter obtained by the receiving Member from a third party not
bound by any confidentiality obligation with respect to the Confidential
Information;
provided
,
further
, that nothing
herein shall prevent any Member from disclosing any portion of such Confidential
Information (1) to the Company and allowing the Company to use such Confidential
Information in connection with the Company’s business, (2) pursuant to judicial
order or in response to a governmental inquiry, by subpoena or other legal
process, but only to the extent required by such order, inquiry, subpoena or
process, and only after reasonable notice to the original divulging Member, (3)
as necessary or appropriate in connection with or to prevent the audit by a
governmental agency of the accounts of Hawthorne or Bluerock, (4) in order to
initiate, defend or otherwise pursue legal proceedings between the parties
regarding this Agreement, (5) necessary in connection with a Transfer of an
Interest permitted hereunder or (6) to a Member’s respective attorneys or
accountants or other representative.
(b) The
Members and their Affiliates shall each act to safeguard the secrecy and
confidentiality of, and any proprietary rights to, any non-public information
relating to the Company and its business, except to the extent such information
is required to be disclosed by law or reasonably necessary to be disclosed in
order to carry out the business of the Company. Each Member may, from
time to time, provide the other Members written notice of its non-public
information which is subject to this
Section
10(b)
.
(c) Without
limiting any of the other terms and provisions of this Agreement (including,
without limitation,
Section 9.6
), to the
extent a Member (the “
Pursuer
”) provides
the other Member with information relating to a possible investment opportunity
then being actively pursued by the Pursuer on behalf of the Company, the other
Member receiving such information shall not use such information
to pursue
such investment opportunity for its own account to the exclusion of the Pursuer
so long as the Pursuer is actively pursuing such opportunity on behalf of the
Company and shall not disclose any Confidential Information to any Person
(except as expressly permitted hereunder) or take any other action in connection
therewith that is reasonably likely to cause damage to the
Pursuer.
Section
11.
|
Representations
and Warranties
.
|
11.1
In
General
. As of the date hereof, each of the Members hereby
makes each of the representations and warranties applicable to such Member as
set forth in
Section
11.2
. Such representations and warranties shall survive the
execution of this Agreement.
11.2
Representations and
Warranties
. Each Member hereby represents and warrants
that:
(a)
Due Incorporation or
Formation; Authorization of Agreement
. Such Member is a
corporation duly organized or a partnership or limited liability company duly
formed, validly existing and in good standing under the laws of the jurisdiction
of its incorporation or formation and has the corporate, partnership or company
power and authority to own its property and carry on its business as owned and
carried on at the date hereof and as contemplated hereby. Such Member
is duly licensed or qualified to do business and in good standing in each of the
jurisdictions in which the failure to be so licensed or qualified would have a
material adverse effect on its financial condition or its ability to perform its
obligations hereunder. Such Member has the corporate, partnership or
company power and authority to execute and deliver this Agreement and to perform
its obligations hereunder, and the execution, delivery and performance of this
Agreement has been duly authorized by all necessary corporate, partnership or
company action. This Agreement constitutes the legal, valid and
binding obligation of such Member.
(b)
No Conflict with
Restrictions; No Default
. Neither the execution, delivery or
performance of this Agreement nor the consummation by such Member (or any of its
Affiliates) of the transactions contemplated hereby (i) does or will conflict
with, violate or result in a breach of (or has conflicted with, violated or
resulted in a breach of) any of the terms, conditions or provisions of any law,
regulation, order, writ, injunction, decree, determination or award of any
court, any governmental department, board, agency or instrumentality, domestic
or foreign, or any arbitrator, applicable to such Member or any of its
Affiliates, (ii) does or will conflict with, violate, result in a breach of or
constitute a default under (or has conflicted with, violated, resulted in a
breach of or constituted a default under) any of the terms, conditions or
provisions of the articles of incorporation, bylaws, partnership agreement or
operating agreement of such Member or any of its Affiliates or of any material
agreement or instrument to which such Member or any of its Affiliates is a party
or by which such Member or any of its Affiliates is or may be bound or to which
any of its properties or assets is subject, (iii) does or will conflict with,
violate, result in (or has conflicted with, violated or resulted in) a breach
of, constitute (or has constituted) a default under (whether with notice or
lapse of time or both), accelerate or permit the acceleration of (or has
accelerated) the performance required by, give (or has given) to others any
material interests or rights or require any consent, authorization or approval
under any
indenture,
mortgage, lease, agreement or instrument to which such Member or any of its
Affiliates is a party or by which such Member or any of its Affiliates or any of
their properties or assets is or may be bound or (iv) does or will result (or
has resulted) in the creation or imposition of any lien upon any of the
properties or assets of such Member or any of its Affiliates.
(c)
Governmental
Authorizations
. Any registration, declaration or filing with,
or consent, approval, license, permit or other authorization or order by, or
exemption or other action of, any governmental, administrative or regulatory
authority, domestic or foreign, that was or is required in connection with the
valid execution, delivery, acceptance and performance by such Member under this
Agreement or consummation by such Member (or any of its Affiliates) of any
transaction contemplated hereby has been completed, made or obtained on or
before the date hereof.
(d)
Litigation
. There
are no actions, suits, proceedings or investigations pending, or, to the
knowledge of such Member or any of its Affiliates, threatened against or
affecting such Member or any of its Affiliates or any of their properties,
assets or businesses in any court or before or by any governmental department,
board, agency or instrumentality, domestic or foreign, or any arbitrator which
could, if adversely determined (or, in the case of an investigation could lead
to any action, suit or proceeding which if adversely determined could)
reasonably be expected to materially impair such Member’s ability to perform its
obligations under this Agreement or to have a material adverse effect on the
consolidated financial condition of such Member; such Member or any of its
Affiliates has not received any currently effective notice of any default, and
such Member or any of its Affiliates is not in default, under any applicable
order, writ, injunction, decree, permit, determination or award of any court,
any governmental department, board, agency or instrumentality, domestic or
foreign, or any arbitrator which could reasonably be expected to materially
impair such Member’s (or any of its Affiliate’s) ability to perform its
obligations under this Agreement or to have a material adverse effect on the
consolidated financial condition of such Member.
(e)
Investigation
. Such
Member is acquiring its Interest based upon its own investigation, and the
exercise by such Member of its rights and the performance of its obligations
under this Agreement will be based upon its own investigation, analysis and
expertise. Such Member is a sophisticated investor possessing an
expertise in analyzing the benefits and risks associated with acquiring
investments that are similar to the acquisition of its Interest.
(f)
Broker
. No
broker, agent or other person acting as such on behalf of such Member was
instrumental in consummating this transaction and that no conversations or prior
negotiations were had by such party with any broker, agent or other such person
concerning the transaction that is the subject of this Agreement.
(g)
Investment Company
Act
. Neither such Member nor any of its Affiliates is, nor
will the Company as a result of such Member holding an interest therein be, an
“investment company” as defined in, or subject to regulation under, the
Investment Company Act of 1940, as amended.
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(i)
|
None
of the Interests are registered under the Securities Act or any state
securities laws. Such Member understands that the offering,
issuance and sale of the Interests are intended to be exempt from
registration under the Securities Act, based, in part, upon the
representations, warranties and agreements contained in this
Agreement. Such Member is an “accredited investor” as such term
is defined in Rule 501 of Regulation D promulgated under the Securities
Act.
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(ii)
|
Neither
the Securities and Exchange Commission nor any state securities commission
has approved the Interests or passed upon or endorsed the merits of the
offer or sale of the Interests. Such Member is acquiring the
Interests solely for such Member’s own account for investment and not with
a view to resale or distribution thereof in violation of the Securities
Act.
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(iii)
|
Such
Member is unaware of, and in no way relying on, any form of general
solicitation or general advertising in connection with the offer and sale
of the Interests, and no Member has taken any action which could give rise
to any claim by any person for brokerage commissions, finders’ fees
(without regard to any finders’ fees payable by the Company directly) or
the like relating to the transactions contemplated
hereby.
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(iv)
|
Such
Member is not relying on the Company or any of its officers, directors,
employees, advisors or representatives with regard to the tax and other
economic considerations of an investment in the Interests, and such Member
has relied on the advice of only such Member’s
advisors.
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(v)
|
Such
Member understands that the Interests may not be sold, hypothecated or
otherwise disposed of unless subsequently registered under the Securities
Act and applicable state securities laws, or an exemption from
registration is available. Such Member agrees that it will not
attempt to sell, transfer, assign, pledge or otherwise dispose of all or
any portion of the Interests in violation of this
Agreement.
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(vi)
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Such
Member has adequate means for providing for its current financial needs
and anticipated future needs and possible contingencies and emergencies
and has no need for liquidity in the investment in the
Interests. Except for Bluerock, such Member was not formed for
the specific purpose of acquiring the
Interests.
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(vii)
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Such
Member has significant prior investment experience, including investment
in non-listed and non-registered securities. Such Member is
knowledgeable about investment considerations and has a sufficient net
worth to sustain a loss of such Member’s entire investment in the Company
in the event such a loss should occur. Such Member’s overall
commitment to investments which are not readily marketable is not
excessive in view of such Member’s net worth and financial circumstances
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and
the purchase of the Interests will not cause such commitment to become
excessive. The investment in the Interests is suitable for such
Member.
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(viii)
|
Such
Member represents to the Company that the information contained in this
subparagraph (h) and in all other writings, if any, furnished to the
Company with regard to such Member (to the extent such writings relate to
its exemption from registration under the Securities Act) is complete and
accurate and may be relied upon by the Company in determining the
availability of an exemption from registration under federal and state
securities laws in connection with the sale of the
Interests.
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Section
12.
|
Sale,
Assignment, Transfer or other
Disposition
.
|
12.1
Prohibited
Transfers
. Except as otherwise provided in this
Section 12
,
Sections 5.2(b)
or
14.5
or as
approved by the Management Committee, no Member shall Transfer all or any part
of its Interest, whether legal or beneficial, in the Company, and any attempt to
so Transfer such Interest (and such Transfer) shall be null and void and of no
effect. Notwithstanding the foregoing, either Member shall have the
right, with the consent of the other Member, at any time to pledge to a lender
or creditor, directly or indirectly, all or any part of its Interest in the
Company for such purposes as it deems necessary in the ordinary cause of its
business and operations.
12.2
Affiliate
Transfers
.
(a) Subject
to the provisions of Section 12.2(b) hereof, and subject in each case to the
prior written approval of each Member (such approval not to be unreasonably
withheld), any Member may Transfer all or any portion of its Interest in the
Company at any time to an Affiliate of such Member, provided that such Affiliate
shall remain an Affiliate of such Member at all times that such Affiliate holds
such Interest. If such Affiliate shall thereafter cease being an
Affiliate of such Member while such Affiliate holds such Interest, such
cessation shall be a non-permitted Transfer and shall be deemed
void ab initio
, whereupon the
Member having made the Transfer shall, at its own and sole expense, cause such
putative transferee to disgorge all economic benefits and otherwise indemnify
the Company and the other Member(s) against loss or damage under any Collateral
Agreement.
(b) Notwithstanding
anything to the contrary contained in this Agreement, the following Transfers
shall not require the approval set forth in Section 12.2(a):
(i) Any
Transfer by Hawthorne of up to forty-nine percent (49%) of its Interest as of
the date of this Agreement to any Person (a “
Hawthorne
Transferee
”); and
(ii)
Any
Transfer by Bluerock or a Bluerock Transferee of up to one hundred percent
(100%) of its Interest to any Affiliate of Bluerock, including but not limited
to (A) Bluerock Enhanced Multifamily Trust, Inc. (“
BR REIT
”) or any
Person that is directly or indirectly owned by BR REIT; and/or (B) Bluerock
Special Opportunity + Income Fund II, LLC
(“
BR SOIF II
”) or any
Person that is directly or indirectly owned by BR SOIF II (collectively, a
“
Bluerock
Transferee
”);
provided
however, as to subparagraphs (b)(i) and (b)(ii), and as to subparagraph (a), no
Transfer shall be permitted and shall be
void ab initio
if it shall
violate any “Transfer” provision of any applicable Collateral Agreement with
third party lenders.
(c)
Upon the
execution by any such Hawthorne Transferee or Bluerock Transferee of such
documents necessary to admit such party into the Company and to cause the
Hawthorne Transferee or Bluerock Transferee (as applicable) to become bound by
this Agreement, the Hawthorne Transferee or Bluerock Transferee (as applicable)
shall become a Member, without any further action or authorization by any
Member.
(d)
The
Transfer of any interest in Manager and any transferee of an interest in Manager
shall be recognized and permitted under this Agreement and by the Members,
without any further action or authorization by any Member.
12.3
Admission of
Transferee
;
Partial Transfers
. Notwithstanding anything in this
Section 12
to the
contrary and except as provided in
Sections 5.2(b)
, and
14.5
, no
Transfer of Interests in the Company shall be permitted unless the potential
transferee is admitted as a Member under this
Section
12.3:
(a)
If a
Member Transfers all or any portion of its Interest in the Company, such
transferee may become a Member if (i) such transferee executes and agrees to be
bound by this Agreement, (ii) the transferor and/or transferee pays all
reasonable legal and other fees and expenses incurred by the Company in
connection with such assignment and substitution and (iii) the transferor and
transferee execute such documents and deliver such certificates to the Company
and the remaining Members as may be required by applicable law or otherwise
advisable; and
(b)
Notwithstanding
the foregoing, any Transfer or purported Transfer of any Interest, whether to
another Member or to a third party, shall be of no effect and
void ab initio
, and such
transferee shall not become a Member or an owner of the purportedly transferred
Interest, if the Management Committee determines in its sole discretion
that:
(i) the
Transfer would require registration of any Interest under, or result in a
violation of, any federal or state securities laws;
(ii) the
Transfer would result in a termination of the Company under Code
Section 708(b); provided, however, that any such determination under this
Section 12.3(b)(ii) shall require the reasonable determination and approval of
at least one (1) Representative appointed by Hawthorne.
(iii) as
a result of such Transfer the Company would be required to register as an
investment company under the Investment Company Act of 1940, as amended, or any
rules or regulations promulgated thereunder;
(iv) if
as a result of such Transfer the aggregate value of Interests held by “benefit
plan investors” including at least one benefit plan investor that is subject to
ERISA, could be “significant” (as such terms are defined in U.S. Department of
Labor Regulation 29 C.F.R. 2510.3-101(f)(2)) with the result that the assets of
the Company could be deemed to be “plan assets” for purposes of
ERISA;
(v) as
a result of such Transfer, the Company would or may have in the aggregate more
than one hundred (100) members and material adverse federal income tax
consequences would result to a Member. For purposes of determining
the number of members under this
Section 12.3(b)(v)
, a
Person (the “
beneficial owner
”)
indirectly owning an interest in the Company through a partnership, grantor
trust or S corporation (as such terms are used in the Code) (the “
flow-through entity
”)
shall be considered a member, but only if (i) substantially all of the value of
the beneficial owner’s interest in the flow-through entity is attributable to
the flow-through entity’s interest (direct or indirect) in the Company and (ii)
in the sole discretion of the Management Committee, a principal purpose of the
use of the flow-through entity is to permit the Company to satisfy the
100-member limitation; or
(vi) the
transferor failed to comply with the provisions of Sections 12.2(a) or
(b).
The
Management Committee may require the provision of a certificate as to the legal
nature and composition of a proposed transferee of an Interest of a Member and
from any Member as to its legal nature and composition and shall be entitled to
rely on any such certificate in making such determinations under this
Section
12.3
.
12.4
Withdrawals
. Each
of the Members does hereby covenant and agree that it will not withdraw, resign,
retire or disassociate from the Company, except as a result of a Transfer of its
entire Interest in the Company permitted under the terms of this Agreement and
that it will carry out its duties and responsibilities hereunder until the
Company is terminated, liquidated and dissolved under
Section
13
. No Member shall be entitled to receive any distribution or
otherwise receive the fair market value of its Interest in compensation for any
purported resignation or withdrawal not in accordance with the terms of this
Agreement.
Section
13.
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Dissolution
.
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13.1
Limitations
. The
Company may be dissolved, liquidated and terminated only pursuant to the
provisions of this
Section 13
, and, to
the fullest extent permitted by law but subject to the terms of this Agreement,
the parties hereto do hereby irrevocably waive any and all other rights they may
have to cause a dissolution of the Company or a sale or partition of any or all
of the Company’s assets.
13.2
Exclusive Events Requiring
Dissolution
. The Company shall be dissolved only upon the
earliest to occur of the following events (a “
Dissolution
Event
”):
(a) the
expiration of the specific term set forth in
Section
2.5
;
(b) at
any time at the election of the Management Committee in writing;
(c) at
any time there are no Members (unless otherwise continued in accordance with the
Act); or
(d) the
entry of a decree of judicial dissolution pursuant to Section 18-802 of the
Act.
13.3
Liquidation
. Upon
the occurrence of a Dissolution Event, the business of the Company shall be
continued to the extent necessary to allow an orderly winding up of its affairs,
including the liquidation of the assets of the Company pursuant to the
provisions of this
Section 13.3
, as
promptly as practicable thereafter, and each of the following shall be
accomplished:
(a) The
Management Committee shall cause to be prepared a statement setting forth the
assets and liabilities of the Company as of the date of dissolution, a copy of
which statement shall be furnished to all of the Members.
(b) The
property and assets of the Company shall be liquidated or distributed in kind
under the supervision of the Management Committee as promptly as possible, but
in an orderly, businesslike and commercially reasonable manner.
(c) Any
gain or loss realized by the Company upon the sale of its property shall be
deemed recognized and allocated to the Members in the manner set forth in
Section
7.2
. To the extent that an asset is to be distributed in kind,
such asset shall be deemed to have been sold at its fair market value on the
date of distribution, the gain or loss deemed realized upon such deemed sale
shall be allocated in accordance with
Section 7.2
and the
amount of the distribution shall be considered to be such fair market value of
the asset.
(d) The
proceeds of sale and all other assets of the Company shall be applied and
distributed as follows and in the following order of priority:
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(i)
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to
the satisfaction of the debts and liabilities of the Company (contingent
or otherwise) and the expenses of liquidation or distribution (whether by
payment or reasonable provision for payment), other than liabilities to
Members or former Members for
distributions;
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(ii)
|
to
the satisfaction of loans made pursuant to
Section 5.2(b)
in proportion to the outstanding balances of such loans at the time of
payment;
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(iii)
|
the
balance, if any, to the Members in accordance with
Sections
6.1
.
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13.4
Continuation of the
Company
. Notwithstanding anything to the contrary contained
herein, the death, retirement, resignation, expulsion, bankruptcy, dissolution
or removal of a Member shall not in and of itself cause the dissolution of the
Company, and the Members are expressly authorized to continue the business of
the Company in such event, without any further action on the part of the
Members.
Section
14.
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Indemnification
.
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14.1
Exculpation of
Members
. No Member, Manager, Representative or officer of the
Company shall be liable to the Company or to the other Members for damages or
otherwise with respect to any actions or failures to act taken or not taken
relating to the Company, except to the extent any related loss results from
fraud, gross negligence or willful or wanton misconduct on the part of such
Member, Manager, representative or officer or the willful breach of any
obligation under this Agreement.
14.2
Indemnification by
Company
. The Company hereby indemnifies, holds harmless and
defends the Members, the Manager, Representatives, the officers and each of
their respective agents, officers, directors, members, partners, shareholders
and employees from and against any loss, expense, damage or injury suffered or
sustained by them (including but not limited to any judgment, award, settlement,
reasonable attorneys’ fees and other costs or expenses incurred in connection
with the defense of any actual or threatened action, proceeding or claim) by
reason of or arising out of (i) their activities on behalf of the Company or in
furtherance of the interests of the Company, including, without limitation, the
provision of guaranties to third party lenders in respect of financings relating
to the Company or any of its assets (but specifically excluding from such
indemnity by the Company any so called “bad boy” guaranties or similar
agreements which provide for recourse as a result of failure to comply with
covenants, willful misconduct or gross negligence, (ii) their status as Members,
Managers, representatives, employees or officers of the Company, or (iii) the
Company’s assets, property, business or affairs (including, without limitation,
the actions of any officer, director, member or employee of the Company or any
of its Subsidiaries), if the acts or omissions were not performed or omitted
fraudulently or as a result of gross negligence or willful or wanton misconduct
by the indemnified party or as a result of the willful breach of any obligation
under this Agreement by the indemnified party. For the purposes of
this
Section 14.2
,
officers, directors, employees and other representatives of Affiliates of a
Member who are functioning as representatives of such Member in connection with
this Agreement shall be considered representatives of such Member for the
purposes of this
Section
14
. Reasonable expenses incurred by the indemnified party in
connection with any such proceeding relating to the foregoing matters shall be
paid or reimbursed by the Company in advance of the final disposition of such
proceeding upon receipt by the Company of (x) written affirmation by the Person
requesting indemnification of its good faith belief that it has met the standard
of conduct necessary for indemnification by the Company and (y) a written
undertaking by or on behalf of such Person to repay such amount if it shall
ultimately be determined by a court of competent jurisdiction that such Person
has not met such standard of conduct, which undertaking shall be an unlimited
general obligation of the indemnified party but need not be
secured.
14.3
Indemnification by Members
for Misconduct
.
(a) Hawthorne
hereby indemnifies, defends and holds harmless the Company, Bluerock, each
Bluerock Transferee and each of their subsidiaries and their agents, officers,
directors, members, partners, shareholders and employees from and against all
losses, costs, expenses, damages, claims and liabilities (including reasonable
attorneys’ fees) as a result of or arising out of any fraud, gross negligence or
willful or wanton misconduct on the part of, or by,
Hawthorne,
any Key Individual, any entity controlled directly or indirectly by one or more
of the Key Individuals that directly or indirectly controls Hawthorne, or any
Representative appointed by Hawthorne.
(b) Bluerock
hereby indemnifies, defends and holds harmless the Company, Hawthorne, Hawthorne
Transferee and each of their subsidiaries and their agents, officers, directors,
members, partners, shareholders and employees from and against all losses,
costs, expenses, damages, claims and liabilities (including reasonable
attorneys’ fees) as a result of or arising out of any fraud, gross negligence or
willful or wanton misconduct on the part of, or by, Bluerock or any
Representative appointed by Bluerock.
14.4
General Indemnification by
the Members
.
(a) Notwithstanding
any other provision contained herein, each Member (the “
Indemnifying Party
”)
hereby indemnifies and holds harmless the other Members, the Company and each of
their subsidiaries and their agents, officers, directors, members, partners,
shareholders and employees (each, an “
Indemnified Party
”)
from and against all losses, costs, expenses, damages, claims and liabilities
(including reasonable attorneys’ fees) as a result of or arising out of (i) any
breach of any obligation of the Indemnifying Party under this Agreement, or (ii)
any breach of any obligation by or any inaccuracy in or breach of any
representation or warranty made by the Indemnifying Party, whether in this
Agreement or in any other agreement with respect to the conveyance, assignment,
contribution or other transfer of the Properties (or interests therein), assets,
agreements, rights or other interests conveyed, assigned, contributed or
otherwise transferred to the Company (collectively, the “
Inducement
Agreements
”).
(b) Except
as otherwise provided herein or in any other agreement, recourse for the
indemnity obligation of the Members under this
Section 14.4
shall be
limited to such Indemnifying Party’s Interest in the Company; provided, however,
that recourse against Bluerock under its indemnity obligations under this
Agreement or otherwise shall be further limited to an aggregate amount equal to
the value of Hawthorne’s Interest as determined by and being limited to the then
current liquidation value of Hawthorne’s Interest assuming the Company were
liquidated in an orderly fashion and all net proceeds thereof were distributed
in accordance with Article 6.
(c) The
indemnities, contributions and other obligations under this Agreement shall be
in addition to any rights that any Indemnified Party may have at law, in equity
or otherwise. The terms of this
Section 14
shall
survive termination of this Agreement.
14.5
Pledge of Hawthorne
Interest
.
(a) As
security for the indemnity obligations of Hawthorne under Sections
14.3(a)
(the “
Inducement
Obligation
”), Hawthorne shall execute and deliver to Bluerock a certain
Pledge Agreement (the “
Pledge Agreement
”)
and related documents pursuant to which Hawthorne grants to Bluerock a lien upon
and a continuing interest in Hawthorne’s Interest in the Company including all
payments due or to become due to Hawthorne hereunder from and after the entry of
a judgment described in Section
14.5(c)
and such
other rights pledged under the Pledge Agreement (collectively, the “
Indemnity
Collateral
”). Any Transfer by Hawthorne of its
Interest
shall be subject to the lien and security interest granted hereby until and
unless such lien and security interest are released by
Bluerock.
(b) Hawthorne
shall, on the date hereof, have prepared and filed UCC financing statements and
such other documents and have taken such other action necessary to grant to
Bluerock a fully perfected first priority security interest in all of
Hawthorne’s Interest in the Company. Each Indemnified Party shall
have all of the rights now or hereafter existing under applicable law, and all
rights as a secured creditor under the Uniform Commercial Code in all relevant
jurisdictions, with respect to the Indemnity Collateral, and Hawthorne agrees to
take all such actions as may be reasonably requested of it by an Indemnified
Party to ensure that the Indemnified Parties can realize on such security
interest.
(c) In
the event an Indemnified Party obtains a judgment on account of an Inducement
Obligation, then Bluerock shall, to the fullest extent permitted by law, be
deemed, without payment of further consideration or the taking of further action
by Hawthorne or any of its Subsidiaries, to have acquired from Hawthorne such
portion of the Indemnity Collateral as shall be equal in value to the amount of
the judgment; provided, at the request of Bluerock, Hawthorne shall execute and
deliver to Bluerock an amendment to this Agreement to reflect the change in the
Interests and Percentage Interests of the Members.
15.1
Push / Pull
Rights
.
(a)
Availability of
Rights
. At any time (i) after the third anniversary of this
Agreement or (ii) that the Members are unable to agree on a Major Decision and
such failure to agree has continued for fifteen (15) days after written notice
from one Member to the other Member indicating an intention to exercise rights
under this
Section
15.1
, either Member may exercise its right to initiate the provisions of
this
Section
15.1
. In addition, upon the occurrence of a Hawthorne Change
Event, Bluerock may exercise its right to initiate the provisions of this
Section
15.1
.
(b)
Exercise
. The
Member wishing to exercise its rights pursuant to this
Section 15.1
(the
“
Offeror
”)
shall do so by giving notice to the other Member (the “
Offeree
”) setting
forth a statement of intent to invoke its rights under this
Section 15.1
, stating
therein the aggregate dollar amount (the “
Valuation Amount
”)
that the Offeror would be willing to pay for the assets of the Company as of the
Closing Date (as defined below) free and clear of all liabilities, and setting
forth all oral or written offers and inquiries received by the Offeror during
the previous twelve-month period relating to the financing, disposition or
leasing of any Company property (including proposals for the formation of a new
entity for the ownership and operation of the Property).
(c)
Offeree
Response
. After receipt of such notice, the Offeree shall
elect to either (i) sell its entire Interest to the Offeror for an amount equal
to the amount the Offeree would have been entitled to receive if the Company had
sold its assets for the Valuation Amount on the Closing Date and the Company had
immediately paid all Company liabilities and Imputed Closing Costs and
distributed the net proceeds of sale to the Members in satisfaction of their
Interests pursuant to
Section 13.3
, or (ii)
purchase the entire Interest of the Offeror for an amount equal to the amount
the Offeror would have been entitled to receive if the Company had sold all of
its assets for the Valuation Amount on the Closing Date and the Company had
immediately paid all Company liabilities and Imputed Closing Costs and
distributed the net proceeds of the sale to the Members in satisfaction of
their
Interests pursuant to
Section
13.3
. The Offeree shall have thirty (30) days from the giving
of the Offeror’s notice in which to exercise either of its options by giving
written notice to the Offeror. If the Offeree does not elect to
acquire the Offeror’s Interest within such time period, the Offeree shall be
deemed to have elected to sell its Interest to the Offeror as provided in
subsection (i) above.
(d)
Earnest
Money
. Within five (5) business days after an election has
been made or deemed made under
Section 13.1(c)
, the
acquiring Member shall deposit with a mutually acceptable third-party escrow
agent a non-refundable earnest money deposit in the amount of five percent (5%)
of the amount the selling Member is entitled to receive for its Interest under
this
Section
15.1
, which amount shall be applied to the purchase price at
closing. If the acquiring Member should thereafter fail to consummate
the transaction for any reason other than a default by the selling Member or a
refusal by any lender of the Company who has a right under its loan documents to
consent to such transfer to so consent, (i) (A) the earnest money deposit shall
be distributed from escrow to the selling Member, free of all claims of the
acquiring Member, as liquidated damages and constituting the sole and exclusive
remedy available to the selling Member because of a default by the acquiring
Member or (B) the selling Member may, by delivering to the acquiring Member
written notice thereof, elect to buy the acquiring Member’s entire Interest for
an amount equal to the amount the acquiring Member would have been entitled to
receive if the Company had sold all of its assets for the Valuation Amount and
the Company had immediately paid all Company liabilities and Imputed Closing
Costs and distributed the net proceeds of the sale to the Members in
satisfaction of their Interests pursuant to
Section 13.3
, in
which case, the Closing Date therefor shall be the date specified in the selling
Member’s notice, and (ii) if the acquiring Member was the Offeror, the
non-refundable earnest money deposit for any future election by the acquiring
Member to buy the selling Member’s Interest shall be twenty percent (20%) of the
amount the selling Member is entitled to receive for its Interest in connection
with such future election.
(e)
Closing
. The
closing of an acquisition pursuant to this
Section 15.1
shall be
held at the principal place of business of the Company on a mutually acceptable
date (the “
Closing
Date
”) not later than sixty (60) days (or, if the Offeree is the
acquiring Member, ninety (90) days) after an election has been made or deemed
made under
Section
15.1(c)
. At such closing, the following shall
occur:
(i)
The
selling Member shall assign to the acquiring Member or its designee the selling
Member’s Interest in accordance with the instructions of the acquiring Member,
and shall execute and deliver to the acquiring Member all documents which may be
required to give effect to the disposition and acquisition of such interests, in
each case free and clear of all liens, claims, and encumbrances, with covenants
of general warranty; and
(ii)
The
acquiring Member shall pay to the selling Member the consideration therefor in
cash.
(f)
Enforcement
. It
is expressly agreed that the remedy at law for breach of the obligations of the
Members set forth in this
Section 15.1
is
inadequate in view of (i) the complexities and uncertainties in measuring the
actual damage to be sustained by reason of the failure of a Member to comply
fully with such obligations, and (ii) the uniqueness of the Company’s business
and the Members’ relationships. Accordingly, each of such obligations
shall be, and is hereby expressly made, enforceable by an order of specific
performance.
15.2
Forced Sale
Rights
.
(a)
Offers
. If,
at any time following the third anniversary of the date that a Property is
acquired by a Subsidiary, (i) either Member desires to offer the Property for
sale on specified terms, or (ii) receives from an unaffiliated purchaser a
bona
fide
written cash offer
(i.e., not seller financed) for the purchase of such Property on terms that such
Member desires for the Company, or the Subsidiaries that own such Property
(individually or collectively, the “
Ownership Entity
”) to
accept (such specified terms or
bona
fide
offer being herein
called the “
Offer
”), then the
Member desiring to make or accept the Offer (the “
Initiating Member
”)
shall provide written notice of the terms of such Offer (the “
Sale Notice
”) to the
other Member (the “
Non-Initiating
Member
”). Any offer must be in an amount at least equal to the
amount of any indebtedness secured by such Property plus the aggregate
Unreturned Investment Amount.
(b)
Response
. The
Non-Initiating Member shall have thirty (30) days from the date of the Sale
Notice (the “
Response
Period
”) to provide written notice to the Initiating Member of whether
the Ownership Entity should make or accept the Offer; the failure to timely
deliver such notice shall be deemed to constitute an election to accept the
Offer and sell such Property or Properties on the terms of the
Offer.
(c)
Offer
Unacceptable
. If the Non-Initiating Member does not wish for
the Company, or the Ownership Entity, to make or accept the Offer, the
Initiating Member may elect to sell its Interest to the Non-Initiating Member,
in which case the Non-Initiating Member must purchase the Initiating Member’s
Interest for an amount equal to the amount that would be distributable to the
Initiating Member if the Company had accepted the Offer, closed the sale
pursuant to such Offer and wound up its affairs pursuant to
Section
13
.
For
purposes of the foregoing calculations, the purchase price for a sale shall be
reduced by Imputed Closing Costs therefor. The Initiating Member must
exercise this option, if at all, by delivering written notice thereof to the
Non-Initiating Member within twenty (20) days after the end of the Response
Period. The Non-Initiating Member shall pay the Company cash for each
Ownership Entity or the Initiating Member cash for its Interest, as the case may
be. Closing shall take place on or before the date specified in the
Sale Notice, but if the Non-Initiating Member is purchasing the Initiating
Member’s Interest or one or more Ownership Entities, the Non-Initiating Member
shall have until 120 days after the Sale Notice in which to close. If
the Initiating Member or the Non-Initiating Member defaults at closing, the
non-defaulting party shall have the right to bring suit for damages, for
specific performance, or
exercise
any other remedy available at law or in equity. Upon payment at
closing, the Initiating Member shall execute and deliver all documents
reasonably required to transfer the interest being sold.
(d)
Offer
Acceptable
. If the Non-Initiating Member consents (or is
deemed to have consented) to the Company or the Ownership Entities selling the
Property on the terms of the Offer, then the Initiating Member shall be allowed
to sell such Property for cash on the terms of the Offer for a period of up to
one hundred eighty (180) days following the expiration of the Response
Period. If the Initiating Member obtains a
bona
fide
third party contract to
sell any such Property on the terms of the offer within such one hundred eighty
(180) day period, the Initiating Member shall have an additional period of
ninety (90) days after the date of such contract (that is, not to exceed 270
days after the expiration of the Response Period) in which to consummate the
sale. If after having received the consent (or deemed consent) of the
Non-Initiating Member to the sale of such Property on the terms of the Offer,
the Initiating Member is unable to obtain a
bona
fide
contract within such one
hundred eighty (180) day period, or if after having obtained such
bona
fide
contract, the Initiating
Member is unable to consummate such sale within 270 days after the expiration of
the Response Period, then the Initiating Member must again submit an Offer to
the Non-Initiating Member under the terms of this
Section 15.2
before
it may sell such Property.
Section
16.
|
Miscellaneous
.
|
16.1
Notices
.
(a) All
notices, requests, approvals, authorizations, consents and other communications
required or permitted under this Agreement shall be in writing and shall be (as
elected by the Person giving such notice) hand delivered by messenger or
overnight courier service, mailed (airmail, if international) by registered or
certified mail (postage prepaid), return receipt requested, or sent via
facsimile (provided such facsimile is immediately followed by the delivery of an
original copy of same via one of the other foregoing delivery methods) addressed
to:
If to
Bluerock:
c/o Bluerock Real Estate, L.L.C.
680 Fifth Avenue
New York, New York 10019
Attention: Jim Babb
with a
copy to:
c/o
Bluerock Real Estate, L.L.C.
680 5th
Avenue, 16th Floor
New York,
New York 10019
Attention: Michael
Konig, Esq.
If to
Hawthorne:
Hawthorne
Residential Partners
200
Providence Road
Suite
105
Charlotte,
North Carolina 28207
with a
copy to:
K&L Gates, LLP.
Hearst Tower, 47
th
Floor
214 North Tryon Street
Charlotte, NC 28202
Attention: David H. Jones
Telephone: 704-331-7481
Facsimile: 704-353-3181
E-mail:
david.jones@klgates.com
(b) Each
such notice shall be deemed delivered (a) on the date delivered if by hand
delivery or overnight courier service or facsimile, and (b) on the date upon
which the return receipt is signed or delivery is refused or the notice is
designated by the postal authorities as not deliverable, as the case may be, if
mailed (provided, however, if such actual delivery occurs after 5:00 p.m. (local
time where received), then such notice or demand shall be deemed delivered on
the immediately following business day after the actual day of
delivery).
(c) By
giving to the other parties at least fifteen (15) days written notice thereof,
the parties hereto and their respective successors and assigns shall have the
right from time to time and at any time during the term of this Agreement to
change their respective addresses.
16.2
Governing
Law
. This Agreement and the rights of the Members hereunder
shall be governed by, and interpreted in accordance with, the laws of the State
of Delaware. Each of the parties hereto irrevocably submits to the
jurisdiction of the New York State courts and the Federal courts sitting in the
State of New York and agree that all matters involving this Agreement shall be
heard and determined in such courts. Each of the parties
hereto waives irrevocably the defense of inconvenient forum to the maintenance
of such action or proceeding. Each of the parties hereto designates
CT Corporation System, 1633 Broadway, New York, New York 10019, as
its agent for service of process in the State of New York, which designation may
only be changed on not less than ten (10) days’ prior notice to all of the other
parties.
16.3
Successors
. This
Agreement shall be binding upon, and inure to the benefit of, the parties and
their successors and permitted assigns. Except as otherwise provided
herein, any Member who Transfers its Interest as permitted by the terms of this
Agreement shall
have no
further liability or obligation hereunder, except with respect to claims arising
prior to such Transfer.
16.4
Pronouns
. Whenever
from the context it appears appropriate, each term stated in either the singular
or the plural shall include the singular and the plural, and pronouns stated in
either the masculine, the feminine or the neuter gender shall include the
masculine, feminine and neuter.
16.5
Table of Contents and
Captions Not Part of Agreement
. The table of contents and
captions contained in this Agreement are inserted only as a matter of
convenience and in no way define, limit or extend the scope or intent of this
Agreement or any provisions hereof.
16.6
Severability
. If
any provision of this Agreement shall be held invalid, illegal or unenforceable
in any jurisdiction or in any respect, then the validity, legality and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired, and the Members shall use their best efforts to amend
or substitute such invalid, illegal or unenforceable provision with enforceable
and valid provisions which would produce as nearly as possible the rights and
obligations previously intended by the Members without renegotiation of any
material terms and conditions stipulated herein.
16.7
Counterparts
. This
Agreement may be executed in several counterparts, each of which shall be deemed
an original but all of which shall constitute one and the same
instrument.
16.8
Entire Agreement and
Amendment
. This Agreement and the other written agreements
described herein between the parties hereto entered into as of the date hereof,
constitute the entire agreement between the Members relating to the subject
matter hereof. In the event of any conflict between this Agreement or
such other written agreements, the terms and provisions of this Agreement shall
govern and control. Bluerock may amend this Agreement at any time
provided that no amendment (other than an amendment necessary to implement the
rights of the parties and/or any decisions made hereunder) which would have a
material adverse effect on Hawthorne shall be effective without the prior
written consent of Hawthorne. No amendment or waiver by Bluerock
shall be enforceable against Bluerock unless it is in writing and duly executed
by Bluerock.
16.9
Further
Assurances
. Each Member agrees to execute and deliver any and
all additional instruments and documents and do any and all acts and things as
may be necessary or expedient to effectuate more fully this Agreement or any
provisions hereof or to carry on the business contemplated
hereunder.
16.10
No Third Party
Rights
. The provisions of this Agreement are for the exclusive
benefit of the Members and the Company, and no other party (including, without
limitation, any creditor of the Company) shall have any right or claim against
any Member by reason of those provisions or be entitled to enforce any of those
provisions against any Member.
16.11
Incorporation by
Reference
. Every Exhibit and Annex attached to this Agreement is
incorporated in this Agreement by reference.
16.12
Limitation on
Liability
. Except as set forth in
Section 14
and with
respect to a Default Loan as set forth in
Section 5.2(b)
, the
Members shall not be bound by, or be personally liable for, by reason of being a
Member, a judgment, decree or order of a court or in any other manner, for the
expenses, liabilities or obligations of the Company, and the liability of each
Member shall be limited solely to the amount of its Capital Contributions as
provided under
Section
5
. Except as set forth in
Section 14.3(a)
and
with respect to a Default Loan as set forth in
Section 5.2(b)
, any
claim against any Member (the “
Member in Question
”)
which may arise under this Agreement shall be made only against, and shall be
limited to, such Member in Question’s Interest, the proceeds of the sale by the
Member in Question of such Interest or the undivided interest in the assets of
the Company distributed to the Member in Question pursuant to
Section 13.3(d)
hereof. Except as set forth in
Section 14.3(a)
and
with respect to a Default Loan as set forth in
Section 5.2(b)
, any
right to proceed against (i) any other assets of the Member in Question or (ii)
any agent, officer, director, member, partner, shareholder or employee of the
Member in Question or the assets of any such Person, as a result of such a claim
against the Member in Question arising under this Agreement or otherwise, is
hereby irrevocably and unconditionally waived.
16.13
Remedies
Cumulative
. The rights and remedies given in this Agreement
and by law to a Member shall be deemed cumulative, and the exercise of one of
such remedies shall not operate to bar the exercise of any other rights and
remedies reserved to a Member under the provisions of this Agreement or given to
a Member by law. In the event of any dispute between the parties
hereto, the prevailing party shall be entitled to recover from the other party
reasonable attorney’s fees and costs incurred in connection
therewith.
16.14
No
Waiver
. One or more waivers of the breach of any provision of
this Agreement by any Member shall not be construed as a waiver of a subsequent
breach of the same or any other provision, nor shall any delay or omission by a
Member to seek a remedy for any breach of this Agreement or to exercise the
rights accruing to a Member by reason of such breach be deemed a waiver by a
Member of its remedies and rights with respect to such breach.
16.15
Limitation On Use of
Names
. Notwithstanding anything contained in this Agreement or
otherwise to the contrary, each of Bluerock and Hawthorne as to itself agree
that neither it nor any of its Affiliates, agents, or representatives is granted
a license to use or shall use the name of the other under any circumstances
whatsoever, except such name may be used in furtherance of the business of the
Company but only as and to the extent unanimously approved by the
Members. Any change in the Name of the Property must be approved by
Management Committiee.
16.16
Publicly Traded Partnership
Provision
. Each Member hereby severally covenants and agrees
with the other Members for the benefit of such Members, that (i) it is not
currently making a market in Interests in the Company and will not in the future
make such a market and (ii) it will not Transfer its Interest on an established
securities market, a secondary market or an over-the-counter market or the
substantial equivalent thereof within the meaning of
Code
Section 7704 and the Regulations, rulings and other pronouncements of the U.S.
Internal Revenue Service or the Department of the Treasury
thereunder. Each Member further agrees that it will not assign any
Interest in the Company to any assignee unless such assignee agrees to be bound
by this
Section
and to assign such Interest only to such Persons who agree to be similarly
bound.
16.17
Uniform Commercial
Code
. The interest of each Member in the Company shall be an
“uncertificated security” governed by Article 8 of the Delaware UCC and the UCC
as enacted in the State of New York (the “
New York UCC
”),
including, without limitation, (i) for purposes of the definition of a
“security” thereunder, the interest of each Member in the Company shall be a
security governed by Article 8 of the Delaware UCC and the New York UCC and (ii)
for purposes of the definition of an “uncertificated security”
thereunder.
16.18
Public
Announcements
. Neither Hawthorne nor any of its Affiliates
shall, without the prior approval of Bluerock, issue any press releases or
otherwise make any public statements with respect to the Company or the
transactions contemplated by this Agreement, except as may be required by
applicable law or regulation or by obligations pursuant to any listing agreement
with any national securities exchange so long as Hawthorne or such Affiliate has
used reasonable efforts to obtain the approval of Bluerock prior to issuing such
press release or making such public disclosure.
16.19
No Construction Against
Drafter
. This Agreement has been negotiated and prepared by
Bluerock and Hawthorne and their respective attorneys and, should any provision
of this Agreement require judicial interpretation, the court interpreting or
construing such provision shall not apply the rule of construction that a
document is to be construed more strictly against one party.
Section
17.
Insurance
.
During
the Term, Property Manager, on behalf of and at the expense of the Company,
shall procure and maintain insurance as is determined to be appropriate by
either Bluerock or the Management Committee (in form and with endorsements,
waivers and deductibles and with insurance companies, designated or approved by
Bluerock) naming the Company, Bluerock and Hawthorne as insureds
thereunder.
IN
WITNESS WHEREOF, this Agreement is executed by the Members, effective as of the
date first set forth above.
|
BR
SPRINGHOUSE MANAGING MEMBER,
|
|
LLC,
a Delaware limited liability company
|
|
By:
Bluerock Real Estate, L.L.C., a Delaware
limited
liability company, its manager
|
|
|
|
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By:
|
Name:
Jordan Ruddy
|
|
|
Title:
President
|
|
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HAWTHORNE
SPRINGHOUSE, LLC, a North
|
|
Carolina
limited liability company
|
|
By:
|
Hawthorne
Springhouse II, LLC, a North
|
|
|
Carolina
limited liability company, its manager
|
|
|
|
|
|
|
By:
|
Name:
|
|
|
Title:
|
|
|
|
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For
purposes of Sections 8.2(b), 9.3 and 9.4
only
and only for the term Hawthorne
Residential
Partners, LLC is Property
Manager
under the Management Agreement.
|
|
|
|
HAWTHORNE
RESIDENTIAL PARTNERS,
|
|
LLC,
a North Carolina limited liability company
|
|
|
|
|
|
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By:
|
Name:
|
|
|
Title:
|
|
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Initial Capital
Contributions and Percentage Interests
Member Name
|
|
Initial
Capital
Contribution
|
|
Vl
|
|
Percentage Interest
|
|
BR
Springhouse Managing Member, LLC
|
|
$
|
[ ]
|
|
|
|
|
[
]
|
%
|
Hawthorne
Springhouse, LLC
|
|
$
|
[
]
|
|
|
|
|
[
]
|
%
|
Management Committee
Representatives
Bluerock:
James G.
Babb, III
Jordan
Ruddy
Hawthorne:
Shoffner
Allison
Edward
Harrington
Annual Business Plan
Information
|
1.
|
a
narrative description of any acquisitions or sales that are planned and
any other activities proposed to be
undertaken;
|
|
2.
|
a
projected annual income statement (accrual basis) on a quarter-by-quarter
basis;
|
|
3.
|
a
projected balance sheet as of the end of the next Fiscal
Year;
|
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4.
|
a
schedule of projected operating cash flow (including itemized operating
revenues, project costs and project expenses) for such Fiscal Year on a
quarter-by-quarter basis, including a schedule of projected operating
deficits, if any;
|
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5.
|
a
marketing plan indicating the portions of the Properties that Hawthorne
recommends be made available for sale or lease and the proposed terms and
conditions relating thereto;
|
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6.
|
a
detailed budget reflecting on a line by line basis all projected operating
expenses and any proposed construction and capital expenditures for the
Properties, including projected dates for commencement and completion of
the foregoing;
|
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7.
|
a
description of the proposed investment of any funds of the Company which
are (or are expected to become) available for
investment;
|
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8.
|
a
description, including the identity of the recipient (if known) and the
amount and purpose, of all fees and other payments proposed, expected or
projected to be paid for professional services and, if a fee or payment
exceeds $25,000, for other services rendered to or on behalf of the
Company by third parties;
|
|
9.
|
a
projection of the amount of any anticipated additional Capital
Contributions which may be called for pursuant to
Section 5.2(a)
and the purposes for which such additional Capital Contributions may be
used; and
|
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10.
|
such
other information requested from time to time by any
Member.
|
Management
Agreement
Initial Annual Business
Plan
Certain Rights of Management
Committee
Notwithstanding
anything contained herein or elsewhere to the contrary (but without limitation
of the independent rights of Bluerock set forth in this Agreement), the
Management Committee shall have the authority to affirmatively cause to occur or
take action with respect to all or any of the following matters, and no act
shall be taken, sum expended, decision made or obligation incurred by the
Company (and the Company shall not permit any act to be taken, sum expended,
decision made or obligation incurred by any Subsidiary) with respect to the
following matters without (x) the approval of the Management Committee, with
such heightened approval requirements as set forth below, and (y) the additional
written approval of Bluerock acting in its capacity as a Member, in each case
from time to time and whether or not set forth in the Annual Business Plan or
previously approved by the Management Committee:
(i) any
merger, conversion or consolidation involving the Company or any Subsidiary or
the sale, lease, transfer, exchange or other disposition of all or substantially
all of the Company’s assets or all of the Interests of the Members in the
Company, in one or a series of related transactions;
(ii) except
as expressly provided in
Section 12
, the
admission or removal of any Member or the Company’s issuance to any third party
of any equity interest in the Company (including interests convertible into, or
exchangeable for, equity interests in the Company);
(iii) any
amendment of this Agreement or the Certificate of Formation;
(iv) except
as provided in
Section
13
, any liquidation, dissolution or termination of the
Company;
(v) employing
any individual or establishing or entering into any employment contracts,
agreements with respect to salaries or bonus compensation or other employee
benefit plans;
(vi) the
incurrence by the Company or any Subsidiary, in an amount in excess of US
$25,000, of any indebtedness for borrowed money or any capitalized lease
obligation or the entry into of any agreement, commitment, assumption or
guarantee with respect to any of the foregoing;
(vii) expenditures
or distributions of cash or property by the Company or any Subsidiary, in an
amount in excess of US $25,000, which are not otherwise provided for in this
Agreement or the establishment of any reserves;
(viii) entering
into any material agreement, including without limitation any management
agreement or development agreement, contract, license or lease that could result
in an obligation or liability of the Company or any Subsidiary in excess of US
$25,000;
(ix) doing
any act which would make it impossible or unreasonably burdensome to carry on
the business of the Company;
(x) any
material change in the strategic direction of the Company or any material
expansion of the business of the Company, whether into new or existing lines of
business or any change in the structure of the Company;
(xi) adoption
of, and any supplement to, revision of, or deviation from the Annual Business
Plan, and any activity by the Company, which is inconsistent with the Annual
Business Plan in any material respect;
(xii) constructing
any new discretionary capital improvements on any Property or replacing on a
discretionary basis an existing capital improvement following completion of
construction thereof or the entering into of any contract or agreement
therefor;
(xiii) giving
or granting any options, rights of first refusal, deeds of trust, mortgages,
pledges, ground leases, security or other interests encumbering a Property or
any portion thereof;
(xiv) selling,
conveying, refinancing or effecting any other transfer of a Property or other
material asset of the Company or any portion thereof or the entering into of any
agreement, commitment or assumption with respect to any of the foregoing;
provided, however, that any decision with regard to this item (xiv) will require
the approval of at least one (1) Representative appointed by
Hawthorne.
(xv) confessing
a judgment against the Company (or any Subsidiary), submitting a Company (or
Subsidiary) claim to arbitration or engaging, terminating and/or replacing
counsel to defend or prosecute on behalf of the Company (or any Subsidiary) any
action or proceeding;
(xvi) acquiring
by purchase, ground lease or otherwise, any real property or other material
asset or the entry into of any agreement, commitment or assumption with respect
to any of the foregoing, or the making or posting of any deposit (refundable or
non-refundable);
(xvii) entering
into, renewing or terminating any property management, leasing or development
contract, including the Management Agreement;
(xviii) the
amount of, whether and when to make, contributions to the Company (other than
the contributions under
Section 5.1(a)
made
contemporaneously with the execution of this Agreement) and Distributions by the
Company; or
(xix) without
limiting any of the foregoing, any other matter determined from time to time by
any Member to require the approval of, or be subject to the modification by, the
Management Committee (including, without limitation, the establishment of rules
and procedures relating to the affairs and dealings of the Company and its
Subsidiaries).
Exhibit
10.10
Prepared
by, and after recording
return
to:
Brian J.
Iwashyna,
Esquire
Tax Map ID/Tax Parcel
Number:
Troutman
Sanders
LLP
Post
Office Box 1122
Richmond,
Virginia 23218-1122
MULTIFAMILY DEED OF
TRUST,
ASSIGNMENT OF
RENTS
AND SECURITY
AGREEMENT
BR SPRINGHOUSE, LLC FOR THE
BENEFIT OF CW CAPITAL, LLC DATED
DECEMBER 3, 2009
(VIRGINIA
– REVISION DATE 03-31-2008)
FHLMC
Loan No. 968718426
Springhouse
at Newport Apartments
MULTIFAMILY
DEED OF TRUST,
ASSIGNMENT
OF RENTS AND
SECURITY
AGREEMENT
AND SECURITY
AGREEMENT
BY BR SPRINGHOUSE, LLC
FOR THE BENEFIT OF CW CAPITAL, LLC
DATED DECEMBER 3, 2009
(VIRGINIA
– REVISION DATE 03-31-2008)
THIS
MULTIFAMILY DEED OF TRUST, ASSIGNMENT OF RENTS AND SECURITY AGREEMENT (the
"
Instrument
") is made to
be effective as of the
3
rd
day of December, 2009, by
BR
SPRINGHOUSE, LLC
, a limited liability company organized and existing
under the laws of Delaware, whose address is 680 Fifth Avenue, Suite 1601, New
York, New York 10019, as grantor ("
Borrower
"), to
MARK S. SHIEMBOB
, whose
business address is c/o Troutman Sanders LLP, 1001 Haxall Point, Richmond,
Virginia 23219, as trustee ("
Trustee
"), for the benefit of
CWCAPITAL LLC
, a limited
liability company organized and existing under the laws of Massachusetts, whose
address is One Charles River Place, 63 Kendrick Street, Needham, Massachusetts
02494, as beneficiary ("
Lender
"). Borrower's
organizational identification number, if applicable, is OE-4735748.
Borrower,
in consideration of the Indebtedness and the trust created by this Instrument,
irrevocably grants, conveys and assigns to Trustee, in trust, with power of
sale, the Mortgaged Property, including the Land located in the City of Newport
News, Commonwealth of Virginia and described in Exhibit A attached to this
Instrument.
TO
SECURE TO LENDER the repayment of the Indebtedness evidenced by Borrower's
Multifamily Note payable to Lender, dated as of the date of this Instrument, and
maturing on January 1, 2020 (the "
Maturity Date
"), the principal
amount of $23,400,000.00, and all renewals, extensions and modifications of the
Indebtedness, and the performance of the covenants and agreements of Borrower
contained in the Loan Documents.
Borrower
represents and warrants that Borrower is lawfully seized of the Mortgaged
Property, has the right, power and authority to grant, convey and assign the
Mortgaged Property, and that the Mortgaged Property is unencumbered, except as
shown on the schedule of exceptions to coverage in the title policy issued to
and accepted by Lender contemporaneously with the execution and recordation of
this Instrument and insuring Lender's interest in the Mortgaged Property (the
"
Schedule of Title
Exceptions
"). Borrower covenants that Borrower will warrant
and defend generally the title to the Mortgaged Property against all claims and
demands, subject to any easements and restrictions listed in the Schedule of
Title Exceptions.
UNIFORM
COVENANTS-CME
REVISION
DATE 8-14-2009
Covenants.
In
consideration of the mutual promises set forth in this Instrument, Borrower and
Lender covenant and agree as follows:
1.
DEFINITIONS.
The
following terms, when used in this Instrument (including when used in the above
recitals), shall have the following meanings:
(a)
“
Affiliate
” of any Person means
(i) any other Person which, directly or indirectly, is in Control of, is
Controlled by or is under common Control with, such Person; (ii) any other
Person who is a director or officer of (A) such Person, (B) any subsidiary of
such Person, or (C) any Person described in clause (i) above; or (iii) any
corporation, limited liability company or partnership which has as a director
any Person described in subsection (ii) above.
(b)
“
Approved Seller/Servicer
” is
defined in Section 43(b).
(c)
“
Assignment of Management
Agreement
” means Assignment of Management Agreement and Subordination of
Management Fee of even date herewith among Borrower, Lender and Property
Manager, including all schedules, riders, allonges and addenda, as such
Assignment of Management Agreement may be amended from time to
time.
(d)
“
Attorneys’ Fees and Costs
”
means (i) fees and out of pocket costs of Lender’s and Loan Servicer’s
attorneys, as applicable, including costs of Lender’s and Loan Servicer’s
in-house counsel, support staff costs, costs of preparing for litigation,
computerized research, telephone and facsimile transmission expenses, mileage,
deposition costs, postage, duplicating, process service, videotaping and similar
costs and expenses; (ii) costs and fees of expert witnesses, including
appraisers; (iii) investigatory fees; and (iv) the costs for any opinion
required by Lender pursuant to the terms of the Loan Documents.
(e)
“
Borrower
” means all entities
identified as “Borrower” in the first paragraph of this Instrument, together
with their successors and assigns.
(f)
“
Business Day
” means any day
other than a Saturday, a Sunday or any other day on which Lender or the national
banking associations are not open for business.
(g)
“
Claim
” is defined in Section
18(l).
(h)
“
Collateral Agreement
” means
any separate agreement between Borrower and Lender for the purpose of
establishing replacement reserves for the Mortgaged Property, establishing a
fund to assure the completion of repairs or improvements specified in that
agreement, or assuring reduction of the outstanding principal balance of the
Indebtedness if the occupancy of or income from the Mortgaged Property does not
increase to a level specified in that agreement, or any other agreement or
agreements between Borrower and Lender which provide for the establishment of
any other fund, reserve or account.
(i)
“
Condemnation
” is defined in
Section 20(a).
(j)
“
Control
” means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person whether through ownership of voting
securities, beneficial interests, by contract or otherwise. The
definition is to be construed to apply equally to variations of the word
“Control,” including “Controlled,” “Controlling” or “Controlled
by.”
(k)
“
Controlling Entity
” means an
entity which, directly or indirectly through one or more intermediaries, (i)
owns or Controls a general partnership interest or a Controlling Interest of the
limited partnership interests in Borrower (if Borrower is a partnership), (ii)
is a Manager of Borrower or owns a Controlling Interest in a manager of Borrower
or a Controlling Interest of the ownership or membership interests in Borrower
(if Borrower is a limited liability company), or (iii) owns or Controls a
Controlling Interest of any class of voting stock of Borrower (if
Borrower
is a corporation). The SPE Equity Owner, if applicable, shall be
considered a Controlling Entity for purposes of this
definition.
(l)
“
Controlling Interest
” means
(i) 50 percent or more of the direct or indirect ownership interests in an
entity, or (ii) a percentage ownership interest in an entity of less than 50
percent, if the owner(s) of that interest actually Control(s) the business and
affairs of the entity without the requirement of consent of any other
party.
(m)
“
Cut-off Date
” is defined in
the Note.
(n)
“
Defeasance
” is defined in
Section 44.
(o)
“
Defeasance Closing Date
” is
defined in Section 44(b).
(p)
“
Defeasance Collateral
” means
(i) a Freddie Mac Debt Security, (ii) a Fannie Mae Debt Security, (iii) U.S.
Treasury Obligations, or (iv) FHLB Obligations.
(q)
“
Defeasance Date
” means the
second (2
nd
)
anniversary of the “startup date” of the last REMIC within the meaning of
Section 860G(a)(9) of the Tax Code which holds all or any portion of the
Loan.
(r)
“
Defeasance Fee
” is defined in
Section 44(c).
(s)
“
Defeasance Notice
” is defined
in Section 44(b).
(t)
“
Defeasance Period
” is defined
in the Note.
(u)
“
Disclosure Document
” is
defined in Section 39.
(v)
“
Eligible Account
” means an
identifiable account which is separate from all other funds held by the holding
institution that is either (i) an account or accounts maintained with the
corporate trust department of a federal or state-chartered depository
institution or trust company which complies with the definition of Eligible
Institution or (ii) a segregated trust account or accounts maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company acting in its fiduciary capacity which, in the case
of a state chartered depository institution or trust company is subject to
regulations substantially similar to 12 C.F.R. §9.10(b), having in either case a
combined capital and surplus of at least $50,000,000 and subject to supervision
or examination by federal and state authority. An Eligible Account
will not be evidenced by a certificate of deposit, passbook or other
instrument.
(w)
“
Eligible Institution
” means a
federal or state chartered depository institution or trust company insured by
the Federal Deposit Insurance Corporation, the short term unsecured debt
obligations or commercial paper of which are rated at least A-1 by Standard
& Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.,
P-1 by Moody’s Investors Service, Inc. and F-1 by Fitch, Inc. in the case of
accounts in which funds are held for thirty (30) days or less or, in the case of
letters of credit or accounts in which funds are held for more than thirty (30)
days, the long term unsecured debt obligations of which are rated at least “A”
by Fitch, Inc. and Standard & Poor’s Ratings Services, a division of The
McGraw-Hill Companies, Inc., and “A2” by Moody’s Investors Service,
Inc. If at any time an Eligible Institution does not meet the
required rating, the Loan Servicer must move the Eligible Account within thirty
(30) days of such event to an appropriately rated Eligible
Institution.
(x)
“
Environmental Inspections
” is
defined in Section 18(g).
(y)
“
Environmental Permit
” means
any permit, license, or other authorization issued under any Hazardous Materials
Law with respect to any activities or businesses conducted on or in relation to
the Mortgaged Property.
(z)
“
ERISA
” is defined in Section
48(d).
(aa)
“
Event of Default
” means the
occurrence of any event listed in Section 22.
(bb)
“
Fannie Mae Debt Security
”
means any non-callable bond, debenture, note, or other similar debt obligation
issued by Federal National Mortgage Association.
(cc)
“
FHLB Obligations
” mean direct,
non-callable and non-redeemable securities issued, or fully insured as to
payment, by any consolidated bank that is a member of the Federal Home Loan
Banks.
(dd)
“
First Mortgage
” is defined in
Section 43(b).
(ee)
“
Fixtures
” means all property
owned by Borrower which is so attached to the Land or the Improvements as to
constitute a fixture under applicable law, including: machinery, equipment,
engines, boilers, incinerators, installed building materials; systems and
equipment for the purpose of supplying or distributing heating, cooling,
electricity, gas, water, air, or light; antennas, cable, wiring and conduits
used in connection with radio, television, security, fire prevention, or fire
detection or otherwise used to carry electronic signals; telephone systems and
equipment; elevators and related machinery and equipment; fire detection,
prevention and extinguishing systems and apparatus; security and access control
systems and apparatus; plumbing systems; water heaters, ranges, stoves,
microwave ovens, refrigerators, dishwashers, garbage disposers, washers, dryers
and other appliances; light fixtures, awnings, storm windows and storm doors;
pictures, screens, blinds, shades, curtains and curtain rods; mirrors; cabinets,
paneling, rugs and floor and wall coverings; fences, trees and plants; swimming
pools; and exercise equipment.
(ff)
“
Freddie Mac
” is defined in
Section 43(a).
(gg)
“
Freddie Mac Debt Security
”
means any non-callable bond, debenture, note, or other similar debt obligation
issued by Freddie Mac.
(hh)
“
Governmental Authority
” means
any board, commission, department or body of any municipal, county, state or
federal governmental unit, or any subdivision of any of them, that has or
acquires jurisdiction over the Mortgaged Property or the use, operation or
improvement of the Mortgaged Property or over the Borrower.
(ii)
“
Hazard Insurance
” is defined
in Section 19.
(jj)
“
Hazardous Materials
” means
petroleum and petroleum products and compounds containing them, including
gasoline, diesel fuel and oil; explosives; flammable materials; radioactive
materials; polychlorinated biphenyls (“
PCBs
”) and compounds
containing them; lead and lead-based paint; asbestos or asbestos containing
materials in any form that is or could become friable; underground or
above-ground storage tanks, whether empty or containing any substance; any
substance the presence of which on the Mortgaged Property is prohibited by
any
federal, state or local authority; any substance that requires special handling
and any other material or substance now or in the future that (i) is
defined as a “hazardous substance,” “hazardous material,” “hazardous waste,”
“toxic substance,” “toxic pollutant,” “contaminant,” or “pollutant” by or within
the meaning of any Hazardous Materials Law, or (ii) is regulated in any way by
or within the meaning of any Hazardous Materials Law.
(kk)
“
Hazardous Materials Laws
”
means all federal, state, and local laws, ordinances and regulations and
standards, rules, policies and other governmental requirements, administrative
rulings and court judgments and decrees in effect now or in the future and
including all amendments, that relate to Hazardous Materials or the protection
of human health or the environment and apply to Borrower or to the Mortgaged
Property. Hazardous Materials Laws include, but are not limited to, the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601,
et
seq.
, the Resource Conservation and Recovery Act of 1976, 42 U.S.C.
Section 6901,
et
seq.
, the Toxic Substance Control Act, 15 U.S.C. Section 2601,
et seq.
, the Clean
Water Act, 33 U.S.C. Section 1251,
et seq.
, and the
Hazardous Materials Transportation Act, 49 U.S.C. Section 5101,
et seq.
, and their
state analogs.
(ll)
“
Impositions
” and “
Imposition Deposits
” are
defined in Section 7(a).
(mm)
“
Improvements
” means the
buildings, structures, improvements, and alterations now constructed or at any
time in the future constructed or placed upon the Land, including any future
replacements and additions.
(nn)
“
Indebtedness
” means the
principal of, interest at the fixed or variable rate set forth in the Note on,
and all other amounts due at any time under, the Note, this Instrument or any
other Loan Document, including prepayment premiums, late charges, default
interest, and advances as provided in Section 12 to protect the security of this
Instrument.
(oo)
“
Indemnitees
” is defined in
Section 18(j).
(pp)
“
Initial Owners
” means, with
respect to Borrower or any other entity, the Persons that (i) on the date of the
Note, or (ii) on the date of a Transfer to which Lender has consented, own in
the aggregate 100 percent of the ownership interests in Borrower or that
entity.
(qq)
“
Intercreditor Agreement
” is
defined in Section 43(b).
(rr)
“
Issuer Group
” is defined in
Section 47.
(ss)
“
Issuer Person
” is defined in
Section 47.
(tt)
“
Junior Lender
” is defined in
Section 43(e).
(uu)
“
Land
” means the land described
in Exhibit A.
(vv)
“
Leases
” means all present and
future leases, subleases, licenses, concessions or grants or other possessory
interests now or hereafter in force, whether oral or written, covering or
affecting the Mortgaged Property, or any portion of the Mortgaged Property
(including proprietary leases or occupancy agreements if Borrower is a
cooperative housing corporation), and all modifications, extensions or
renewals.
(ww)
“
Lender
” means the entity
identified as “Lender” in the first paragraph of this Instrument, or any
subsequent holder of the Note.
(xx)
“
Lien
” is defined in Section
16.
(yy)
“
Loan
” means the loan evidenced
by the Note.
(zz)
“
Loan Documents
” means the
Note, this Instrument, the Assignment of Management Agreement, all guaranties,
all indemnity agreements, all Collateral Agreements, O&M Programs, the MMP
and any other documents now or in the future executed by Borrower, any guarantor
or any other Person in connection with the Loan evidenced by the Note, as such
documents may be amended from time to time.
(aaa)
“
Loan Servicer
” means the
entity that from time to time is designated by Lender or its designee to collect
payments and deposits and receive Notices under the Note, this Instrument and
any other Loan Document, and otherwise to service the Loan evidenced by the Note
for the benefit of Lender. Unless Borrower receives Notice to the
contrary, the Loan Servicer is the entity identified as “Lender” in the first
paragraph of this Instrument.
(bbb)
“
Lockout Period
” is defined in
the Note.
(ccc)
“
Manager
”
or
“
Managers
” means a Person who
is named or designated as a manager or managing member or otherwise acts in the
capacity of a manager or managing member of a limited liability company in a
limited liability company agreement or similar instrument under which the
limited liability company is formed or operated.
(ddd)
“
Material Adverse Effect
” is
defined in Section 48(f).
(eee)
“
MMP
” means a moisture
management plan to control water intrusion and prevent the development of Mold
or moisture at the Mortgaged Property throughout the term of this
Instrument. At a minimum, the MMP must contain a provision for (i)
staff training, (ii) information to be provided to tenants, (iii) documentation
of the plan, (iv) the appropriate protocol for incident response and remediation
and (v) routine, scheduled inspections of common space and unit
interiors.
(fff)
“
Mold
” means mold, fungus,
microbial contamination or pathogenic organisms.
(ggg)
“
Mortgaged Property
” means all
of Borrower’s present and future right, title and interest in and to all of the
following:
(v)
|
all
current and future rights, including air rights, development rights,
zoning rights and other similar rights or interests, easements, tenements,
rights of way, strips and gores of land, streets, alleys, roads, sewer
rights,
|
|
waters,
watercourses, and appurtenances related to or benefiting the Land or the
Improvements, or both, and all rights-of-way, streets, alleys and roads
which may have been or may in the future be
vacated;
|
(vi)
|
all
proceeds paid or to be paid by any insurer of the Land, the Improvements,
the Fixtures, the Personalty or any other part of the Mortgaged Property,
whether or not Borrower obtained the insurance pursuant to Lender’s
requirement;
|
(vii)
|
all
awards, payments and other compensation made or to be made by any
municipal, state or federal authority with respect to the Land, the
Improvements, the Fixtures, the Personalty or any other part of the
Mortgaged Property, including any awards or settlements resulting from
condemnation proceedings or the total or partial taking of the Land, the
Improvements, the Fixtures, the Personalty or any other part of the
Mortgaged Property under the power of eminent domain or otherwise and
including any conveyance in lieu
thereof;
|
(viii)
|
all
contracts, options and other agreements for the sale of the Land, the
Improvements, the Fixtures, the Personalty or any other part of the
Mortgaged Property entered into by Borrower now or in the future,
including cash or securities deposited to secure performance by parties of
their obligations;
|
(ix)
|
all
proceeds from the conversion, voluntary or involuntary, of any of the
above into cash or liquidated claims, and the right to collect such
proceeds;
|
(x)
|
all
Rents and Leases;
|
(xi)
|
all
earnings, royalties, accounts receivable, issues and profits from the
Land, the Improvements or any other part of the Mortgaged Property, and
all undisbursed proceeds of the Loan secured by this
Instrument;
|
(xii)
|
all
Imposition Deposits;
|
(xiii)
|
all
refunds or rebates of Impositions by any municipal, state or federal
authority or insurance company (other than refunds applicable to periods
before the real property tax year in which this Instrument is
dated);
|
(xiv)
|
all
tenant security deposits which have not been forfeited by any tenant under
any Lease and any bond or other security in lieu of such deposits;
and
|
(xv)
|
all
names under or by which any of the above Mortgaged Property may be
operated or known, and all trademarks, trade names, and goodwill relating
to any of the Mortgaged Property.
|
(hhh)
“
New Commercial Lease
” is
defined in Section 4(f).
(iii)
“
Note
” means the Multifamily
Note described on page 1 of this Instrument, including all schedules, riders,
allonges and addenda, as such Multifamily Note may be amended from time to
time.
(jjj)
“
Notice
” is defined in Section
31(a).
(kkk)
“
O&M Program
” is defined in
Section 18(d).
(lll)
“
Person”
means any natural
person, sole proprietorship, corporation, general partnership, limited
partnership, limited liability company, limited liability limited partnership,
joint venture, association, joint stock company, bank, trust, estate,
unincorporated organization, any federal, state, county or municipal government
(or any agency or political subdivision thereof), endowment fund or any other
form of entity.
(mmm)
“
Personalty
” means
all:
(i)
|
accounts
(including deposit accounts) of Borrower related to the Mortgaged
Property;
|
(ii)
|
equipment
and inventory owned by Borrower, which are used now or in the future in
connection with the ownership, management or operation of the Land or
Improvements or are located on the Land or Improvements, including
furniture, furnishings, machinery, building materials, goods, supplies,
tools, books, records (whether in written or electronic form), and
computer equipment (hardware and
software);
|
(iii)
|
other
tangible personal property owned by Borrower which is used now or in the
future in connection with the ownership, management or operation of the
Land or Improvements or is located on the Land or in the Improvements,
including ranges, stoves, microwave ovens, refrigerators, dishwashers,
garbage disposers, washers, dryers and other appliances (other than
Fixtures);
|
(iv)
|
any
operating agreements relating to the Land or the
Improvements;
|
(v)
|
any
surveys, plans and specifications and contracts for architectural,
engineering and construction services relating to the Land or the
Improvements;
|
(vi)
|
all
other intangible property, general intangibles and rights relating to the
operation of, or used in connection with, the Land or the Improvements,
including all governmental permits relating to any activities on the Land
and including subsidy or similar payments received from any sources,
including a governmental authority;
and
|
(vii)
|
any
rights of Borrower in or under letters of
credit.
|
(nnn)
“
Pledge Agreement
” is defined
in Section 44(f).
(ooo)
“
Preapproved Transfer
” is
defined in Section 21(c).
(ppp)
“
Prior Lien
” is defined in
Section 12.
(qqq)
“
Proceeding
” means, whether
voluntary or involuntary, any case, proceeding or other action against Borrower
or any SPE Equity Owner under any existing or future law of any jurisdiction
relating to bankruptcy, insolvency, reorganization or relief of
debtors.
(rrr)
“
Prohibited Activities or
Conditions
” is defined in Section 18(a).
(sss)
“
Property Jurisdiction
” is
defined in Section 30(a).
(ttt)
“
Property Manager
” means
Hawthorne Residential Partners, LLC, a North Carolina limited liability
company.
(uuu)
“
Rating Agencies
” means Fitch,
Inc.; Moody’s Investors Service, Inc.; or Standard & Poor’s Ratings
Services, a division of The McGraw-Hill Companies, Inc., or any successor entity
of the foregoing, or any other nationally recognized statistical rating
organization.
(vvv)
“
Rating Confirmation
” means a
written confirmation from each of the Rating Agencies which has rated the
Securitization which includes the Loan (unless otherwise agreed by Lender) or
any portion thereof or interest therein, that an action shall not result in a
downgrade, withdrawal or qualification of any securities issued in connection
with the Securitization, unless such Rating Agency has elected to waive its
right to issue a Rating Confirmation.
(www)
“
Release Instruments
” is
defined in Section 44(f).
(xxx)
“
Remedial Work
” is defined in
Section 18(h).
(yyy)
“
Rent Schedule
” means a written
schedule for the Mortgaged Property showing the name of each tenant, and for
each tenant, the space occupied, the lease expiration date, the rent payable for
the current month, the date through which rent has been paid, and any related
information requested by Lender.
(zzz)
“
Rents
” means all rents
(whether from residential or non-residential space), revenues and other income
of the Land or the Improvements, parking fees, laundry and vending machine
income and fees and charges for food, health care and other services provided at
the Mortgaged Property, whether now due, past due, or to become due, and
deposits forfeited by tenants, and, if Borrower is a cooperative housing
corporation or association, maintenance fees, charges or assessments payable by
shareholders or residents under proprietary leases or occupancy agreements,
whether now due, past due, or to become due.
(aaaa)
“
Required DSCR
” is defined in
Section 43(b).
(bbbb)
“
Required LTV
” is defined in
Section 43(b).
(cccc)
“
Restoration
” is defined in
Section 19(f).
(dddd)
“
Scheduled Debt Payments
” is
defined in Section 44(g).
(eeee)
“
Secondary Market Transaction”
means (a) any sale or assignment of this Instrument, the Note and the other Loan
Documents to one or more investors as a whole loan; (b) a participation of the
Loan to one or more investors; (c) any deposit of this Instrument, the Note
and the
other Loan Documents with a trust or other entity which may sell certificates or
other instruments to investors evidencing an ownership interest in the assets of
such trust or other entity; or (d) any other sale, assignment or transfer of the
Loan or any interest therein to one or more investors.
(ffff)
“
Securities Liabilities
” is
defined in Section 47.
(gggg)
“
Securitization
” means when the
Note is assigned to a REMIC trust.
(hhhh)
“
Servicing Arrangement
” is
defined in Section 36(b).
(iiii)
“
Single Purpose Entity
” is
defined in Section 33(b).
(jjjj)
“
SPE Equity Owner
” is NOT
APPLICABLE-Borrower shall not be required to maintain an SPE Equity Owner in its
organizational structure during the term of the Loan and all references to SPE
Equity Owner in this Instrument and in the Note shall be of no force or
effect.
(kkkk)
“
Successor Borrower
” is defined
in Section 44(h).
(llll)
“
Supplemental Mortgage
” is
defined in Section 43(b).
(mmmm)
“
Supplemental Mortgage Product
”
is defined in Section 43(a).
(nnnn)
“
Tax Code
” means the Internal
Revenue Code of the United States.
(oooo)
“
Taxes
” means all taxes,
assessments, vault rentals and other charges, if any, whether general, special
or otherwise, including all assessments for schools, public betterments and
general or local improvements, which are levied, assessed or imposed by any
public authority or quasi-public authority, and which, if not paid, will become
a lien on the Land or the Improvements.
(pppp)
“
Third Party Information
” is
defined in Section 47.
(qqqq)
“
Transfer
” is defined in
Section 21.
(rrrr)
“
Transfer and Assumption
Agreement
” is defined in Section 44(f).
(ssss)
“
UCC Collateral
” is defined in
Section 2.
(tttt)
“
Underwriter Group
” is defined
in Section 47.
(uuuu)
“
U.S. Treasury Obligations
”
means direct, non-callable and non-redeemable securities issued, or fully
insured as to payment, by the United States of America.
2.
UNIFORM
COMMERCIAL CODE SECURITY AGREEMENT.
(a)
This
Instrument is also a security agreement under the Uniform Commercial Code for
any of the Mortgaged Property which, under applicable law, may be subjected to a
security interest under the Uniform Commercial Code, whether such Mortgaged
Property is owned now or acquired in the future, and all products and cash and
non-cash proceeds thereof (collectively, “
UCC Collateral
”), and Borrower
hereby grants to Lender a security interest in the UCC
Collateral. Borrower
hereby authorizes Lender to prepare and file financing statements, continuation
statements and financing statement amendments in such form as Lender may require
to perfect or continue the perfection of this security interest and Borrower
agrees, if Lender so requests, to execute and deliver to Lender such financing
statements, continuation statements and amendments. Borrower shall
pay all filing costs and all costs and expenses of any record searches for
financing statements and/or amendments that Lender may
require. Without the prior written consent of Lender, Borrower shall
not create or permit to exist any other lien or security interest in any of the
UCC Collateral.
(b)
Unless
Borrower gives Notice to Lender within 30 days after the occurrence of any of
the following, and executes and delivers to Lender modifications or supplements
of this Instrument (and any financing statement which may be filed in connection
with this Instrument) as Lender may require, Borrower shall not (i) change its
name, identity, structure or jurisdiction of organization; (ii) change the
location of its place of business (or chief executive office if more than one
place of business); or (iii) add to or change any location at which any of the
Mortgaged Property is stored, held or located.
(c)
If an
Event of Default has occurred and is continuing, Lender shall have the remedies
of a secured party under the Uniform Commercial Code, in addition to all
remedies provided by this Instrument or existing under applicable
law. In exercising any remedies, Lender may exercise its remedies
against the UCC Collateral separately or together, and in any order, without in
any way affecting the availability of Lender’s other remedies.
(d)
This
Instrument constitutes a financing statement with respect to any part of the
Mortgaged Property that is or may become a Fixture, if permitted by applicable
law.
3.
ASSIGNMENT
OF RENTS; APPOINTMENT OF RECEIVER; LENDER IN POSSESSION.
(a)
As part
of the consideration for the Indebtedness, Borrower absolutely and
unconditionally assigns and transfers to Lender all Rents. It is the
intention of Borrower to establish a present, absolute and irrevocable transfer
and assignment to Lender of all Rents and to authorize and empower Lender to
collect and receive all Rents without the necessity of further action on the
part of Borrower. Promptly upon request by Lender, Borrower agrees to
execute and deliver such further assignments as Lender may from time to time
require. Borrower and Lender intend this assignment of Rents to be
immediately effective and to constitute an absolute present assignment and not
an assignment for additional security only. For purposes of giving
effect to this absolute assignment of Rents, and for no other purpose, Rents
shall not be deemed to be a part of the Mortgaged Property. However,
if this present, absolute and unconditional assignment of Rents is not
enforceable by its terms under the laws of the Property Jurisdiction, then the
Rents shall be included as a part of the Mortgaged Property and it is the
intention of the Borrower that in this circumstance this Instrument create and
perfect a lien on Rents in favor of Lender, which lien shall be effective as of
the date of this Instrument.
(b)
After the
occurrence of an Event of Default, Borrower authorizes Lender to collect, sue
for and compromise Rents and directs each tenant of the Mortgaged Property to
pay all Rents to, or as directed by, Lender. However, until the
occurrence of an Event of Default, Lender hereby grants to Borrower a revocable
license to collect and receive all Rents, to hold all Rents in trust for the
benefit of Lender and to apply all Rents to pay the installments of interest and
principal then due and payable under the Note and the other amounts then due and
payable under the other Loan Documents, including Imposition Deposits, and to
pay the current costs and
expenses
of managing, operating and maintaining the Mortgaged Property, including
utilities, Taxes and insurance premiums (to the extent not included in
Imposition Deposits), tenant improvements and other capital
expenditures. So long as no Event of Default has occurred and is
continuing, the Rents remaining after application pursuant to the preceding
sentence may be retained by Borrower free and clear of, and released from,
Lender’s rights with respect to Rents under this Instrument. From and after the
occurrence of an Event of Default, and without the necessity of Lender entering
upon and taking and maintaining control of the Mortgaged Property directly, or
by a receiver, Borrower’s license to collect Rents shall automatically terminate
and Lender shall without Notice be entitled to all Rents as they become due and
payable, including Rents then due and unpaid. Borrower shall pay to
Lender upon demand all Rents to which Lender is entitled. At any time
on or after the date of Lender’s demand for Rents, (i) Lender may give, and
Borrower hereby irrevocably authorizes Lender to give, notice to all tenants of
the Mortgaged Property instructing them to pay all Rents to Lender, (ii) no
tenant shall be obligated to inquire further as to the occurrence or continuance
of an Event of Default, and (iii) no tenant shall be obligated to pay to
Borrower any amounts which are actually paid to Lender in response to such a
notice. Any such notice by Lender shall be delivered to each tenant
personally, by mail or by delivering such demand to each rental
unit. Borrower shall not interfere with and shall cooperate with
Lender’s collection of such Rents.
(c)
Borrower
represents and warrants to Lender that Borrower has not executed any prior
assignment of Rents (other than an assignment of Rents securing any prior
indebtedness that is being assigned to Lender, or paid off and discharged with
the proceeds of the Loan evidenced by the Note), that Borrower has not
performed, and Borrower covenants and agrees that it will not perform, any acts
and has not executed, and shall not execute, any instrument which would prevent
Lender from exercising its rights under this Section 3, and that at the time of
execution of this Instrument there has been no anticipation or prepayment of any
Rents for more than two months prior to the due dates of such
Rents. Borrower shall not collect or accept payment of any Rents more
than two months prior to the due dates of such Rents.
(d)
If an
Event of Default has occurred and is continuing, Lender may, regardless of the
adequacy of Lender’s security or the solvency of Borrower and even in the
absence of waste, enter upon and take and maintain full control of the Mortgaged
Property in order to perform all acts that Lender in its discretion determines
to be necessary or desirable for the operation and maintenance of the Mortgaged
Property, including the execution, cancellation or modification of Leases, the
collection of all Rents, the making of repairs to the Mortgaged Property and the
execution or termination of contracts providing for the management, operation or
maintenance of the Mortgaged Property, for the purposes of enforcing the
assignment of Rents pursuant to Section 3(a), protecting the Mortgaged Property
or the security of this Instrument, or for such other purposes as Lender in its
discretion may deem necessary or desirable. Alternatively, if an
Event of Default has occurred and is continuing, regardless of the adequacy of
Lender’s security, without regard to Borrower’s solvency and without the
necessity of giving prior notice (oral or written) to Borrower, Lender may apply
to any court having jurisdiction for the appointment of a receiver for the
Mortgaged Property to take any or all of the actions set forth in the preceding
sentence. If Lender elects to seek the appointment of a receiver for
the Mortgaged Property at any time after an Event of Default has occurred and is
continuing, Borrower, by its execution of this Instrument, expressly consents to
the appointment of such receiver, including the appointment of a receiver
ex parte
if permitted
by applicable law. If Borrower is a housing cooperative corporation
or association, Borrower hereby agrees that if a receiver is appointed, the
order appointing the receiver may contain a provision requiring the receiver to
pay the installments of interest and principal then due and payable under the
Note and the other amounts then due and payable under the other Loan Documents,
including Imposition Deposits, it being
acknowledged
and agreed that the Indebtedness is an obligation of the Borrower and must be
paid out of maintenance charges payable by the Borrower's tenant shareholders
under their proprietary leases or occupancy agreements. Lender or the
receiver, as the case may be, shall be entitled to receive a reasonable fee for
managing the Mortgaged Property. Immediately upon appointment of a
receiver or immediately upon the Lender’s entering upon and taking possession
and control of the Mortgaged Property, Borrower shall surrender possession of
the Mortgaged Property to Lender or the receiver, as the case may be, and shall
deliver to Lender or the receiver, as the case may be, all documents, records
(including records on electronic or magnetic media), accounts, surveys, plans,
and specifications relating to the Mortgaged Property and all security deposits
and prepaid Rents. In the event Lender takes possession and control
of the Mortgaged Property, Lender may exclude Borrower and its representatives
from the Mortgaged Property. Borrower acknowledges and agrees that
the exercise by Lender of any of the rights conferred under this Section 3 shall
not be construed to make Lender a mortgagee-in-possession of the Mortgaged
Property so long as Lender has not itself entered into actual possession of the
Land and Improvements.
(e)
If Lender
enters the Mortgaged Property, Lender shall be liable to account only to
Borrower and only for those Rents actually received. Except to the
extent of Lender’s gross negligence or willful misconduct, Lender shall not be
liable to Borrower, anyone claiming under or through Borrower or anyone having
an interest in the Mortgaged Property, by reason of any act or omission of
Lender under Section 3(d), and Borrower hereby releases and discharges Lender
from any such liability to the fullest extent permitted by law.
(f)
If the
Rents are not sufficient to meet the costs of taking control of and managing the
Mortgaged Property and collecting the Rents, any funds expended by Lender for
such purposes shall become an additional part of the Indebtedness as provided in
Section 12.
(g)
Any
entering upon and taking of control of the Mortgaged Property by Lender or the
receiver, as the case may be, and any application of Rents as provided in this
Instrument shall not cure or waive any Event of Default or invalidate any other
right or remedy of Lender under applicable law or provided for in this
Instrument.
4.
ASSIGNMENT
OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY.
(a)
As part
of the consideration for the Indebtedness, Borrower absolutely and
unconditionally assigns and transfers to Lender all of Borrower’s right, title
and interest in, to and under the Leases, including Borrower’s right, power and
authority to modify the terms of any such Lease, or extend or terminate any such
Lease. It is the intention of Borrower to establish a present,
absolute and irrevocable transfer and assignment to Lender of all of Borrower’s
right, title and interest in, to and under the Leases. Borrower and
Lender intend this assignment of the Leases to be immediately effective and to
constitute an absolute present assignment and not an assignment for additional
security only. For purposes of giving effect to this absolute
assignment of the Leases, and for no other purpose, the Leases shall not be
deemed to be a part of the Mortgaged Property. However, if this
present, absolute and unconditional assignment of the Leases is not enforceable
by its terms under the laws of the Property Jurisdiction, then the Leases shall
be included as a part of the Mortgaged Property and it is the intention of the
Borrower that in this circumstance this Instrument create and perfect a lien on
the Leases in favor of Lender, which lien shall be effective as of the date of
this Instrument.
(b)
Until
Lender gives Notice to Borrower of Lender’s exercise of its rights under this
Section 4, Borrower shall have all rights, power and authority granted to
Borrower under any Lease (except as otherwise limited by this Section or any
other provision of this Instrument), including the right, power and authority to
modify the terms of any Lease or extend or terminate any Lease. Upon
the occurrence of an Event of Default, the permission given to Borrower pursuant
to the preceding sentence to exercise all rights, power and authority under
Leases shall automatically terminate. Borrower shall comply with and
observe Borrower’s obligations under all Leases, including Borrower’s
obligations pertaining to the maintenance and disposition of tenant security
deposits.
(c)
Borrower
acknowledges and agrees that the exercise by Lender, either directly or by a
receiver, of any of the rights conferred under this Section 4 shall not be
construed to make Lender a mortgagee-in-possession of the Mortgaged Property so
long as Lender has not itself entered into actual possession of the Land and the
Improvements. The acceptance by Lender of the assignment of the
Leases pursuant to Section 4(a) shall not at any time or in any event obligate
Lender to take any action under this Instrument or to expend any money or to
incur any expenses. Except to the extent of Lender’s gross negligence
or willful misconduct, Lender shall not be liable in any way for any injury or
damage to person or property sustained by any Person or Persons in or about the
Mortgaged Property. Prior to Lender’s actual entry into and taking
possession of the Mortgaged Property, Lender shall not (i) be obligated to
perform any of the terms, covenants and conditions contained in any Lease (or
otherwise have any obligation with respect to any Lease); (ii) be obligated to
appear in or defend any action or proceeding relating to the Lease or the
Mortgaged Property; or (iii) be responsible for the operation, control, care,
management or repair of the Mortgaged Property or any portion of the Mortgaged
Property. The execution of this Instrument by Borrower shall
constitute conclusive evidence that all responsibility for the operation,
control, care, management and repair of the Mortgaged Property is and shall be
that of Borrower, prior to such actual entry and taking of
possession.
(d)
Upon
delivery of Notice by Lender to Borrower of Lender’s exercise of Lender’s rights
under this Section 4 at any time after the occurrence of an Event of Default,
and without the necessity of Lender entering upon and taking and maintaining
control of the Mortgaged Property directly, by a receiver, or by any other
manner or proceeding permitted by the laws of the Property Jurisdiction, Lender
immediately shall have all rights, powers and authority granted to Borrower
under any Lease, including the right, power and authority to modify the terms of
any such Lease, or extend or terminate any such Lease.
(e)
Borrower
shall, promptly upon Lender’s request, deliver to Lender an executed copy of
each residential Lease then in effect. All Leases for residential
dwelling units shall be on forms approved by Lender, shall be for initial terms
of at least six months and not more than two years, and shall not include
options to purchase.
(f)
|
(i) Except
as set forth below, Borrower shall not enter into a Lease for any portion
of the Mortgaged Property for non-residential use without the prior
written consent of Lender.
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(ii)
Borrower
shall not modify the terms of, or extend or terminate, any Lease for
non-residential use (including any Lease in existence on the date of this
Instrument) without the prior written consent of Lender; provided,
however, Lender’s consent shall not be required for the modification or
extension of a non-residential Lease if such modification or extension is
on terms at least as favorable to Borrower as those customary at that
time
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in
the applicable market and the income from the extended or modified Lease
will not be less than the income received from the Lease as of the date of
this Instrument.
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(iii)
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Lender’s
consent shall not be required for Borrower to enter into a new Lease for
space occupied as of the date of this Instrument for non-residential use
(“
New Commercial
Lease
”), provided that such New Commercial Lease satisfies the
following requirements:
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(A)
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the
aggregate of the income derived from the space leased by the New
Commercial Lease accounts for less than five percent (5%) of the gross
income of the Mortgaged Property on the date of this
Instrument;
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(B)
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the
tenant under the New Commercial Lease is not an Affiliate of the Borrower
or any guarantor;
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(C)
|
terms
of the New Commercial Lease are at least as favorable to Borrower as those
customary on the date of this Instrument in the applicable
market;
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(D)
|
the
rents paid to the Borrower pursuant to the New Commercial Lease are
greater than or equal to the rents paid to Borrower pursuant to the Lease
for that portion of the Mortgaged Property that was in effect prior to the
New Commercial Lease; and
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(E)
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the
New Commercial Lease must provide that the space may not be used or
operated, in whole or in part, for any of the following: (1)
the operation of a so-called “head shop” or other business devoted to the
sale of articles or merchandise normally used or associated with illegal
or unlawful activities such as, but not limited to, the sale of
paraphernalia used in connection with marijuana or controlled drugs or
substances, (2) a gun shop, shooting gallery or firearms range, (3) a
so-called massage parlor or any business which sells, rents or permits the
viewing of so-called “adult” or pornographic materials such as, but not
limited to, adult magazines, books, movies, photographs, sexual aids,
sexual articles and sex paraphernalia, (4) for the sale or distribution of
any flammable liquids, gases or other Hazardous Materials as defined under
this Instrument, (5) an off-track betting parlor or arcade, (6) a liquor
store or other business whose primary business is the sale of alcoholic
beverages for off-site consumption, (7) a burlesque or strip club, or (8)
any other illegal activity.
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(iv)
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Borrower
shall, without request by Lender, deliver a fully executed copy of each
non-residential Lease to Lender promptly after such Lease is
signed.
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(v)
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All
non-residential Leases, regardless of whether Lender’s consent or approval
is required, including renewals or extensions of existing Leases, shall
specifically provide that (A) such Leases are subordinate to the lien
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of
this Instrument; (B) the tenant shall attorn to Lender and any purchaser
at a foreclosure sale, such attornment to be self-executing and effective
upon acquisition of title to the Mortgaged Property by any purchaser at a
foreclosure sale or by Lender in any manner; (C) the tenant agrees to
execute such further evidences of attornment as Lender or any purchaser at
a foreclosure sale may from time to time request; (D) the Lease shall not
be terminated by foreclosure or any other transfer of the Mortgaged
Property; (E) after a foreclosure sale of the Mortgaged Property, Lender
or any other purchaser at such foreclosure sale may, at Lender’s or such
purchaser’s option, accept or terminate such Lease; and (F) upon receipt
of a written request from Lender following the occurrence of an Event of
Default, pay all Rents payable under the Lease to
Lender.
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(g)
Borrower
shall not receive or accept Rent under any Lease (whether residential or
non-residential) for more than two months in advance.
(h) If
Borrower is a cooperative housing corporation or association, notwithstanding
anything to the contrary contained in this subsection or in Section 21, so long
as Borrower remains a cooperative housing corporation or association and is not
in breach of any covenant of this Instrument, Lender hereby consents
to:
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(i)
|
the
execution of leases of apartments for a term in excess of two years from
Borrower to a tenant shareholder of Borrower, so long as such leases,
including proprietary leases, are and will remain subordinate to the lien
of this Instrument; and
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(ii)
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the
surrender or termination of such leases of apartments where the
surrendered or terminated lease is immediately replaced or where the
Borrower makes its best efforts to secure such immediate replacement by a
newly executed lease of the same apartment to a tenant shareholder of the
Borrower. However, no consent is hereby given by Lender to any
execution, surrender, termination or assignment of a lease under terms
that would waive or reduce the obligation of the resulting tenant
shareholder under such lease to pay cooperative assessments in full when
due or the obligation of the former tenant shareholder to pay any unpaid
portion of such assessments.
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5.
PAYMENT OF INDEBTEDNESS; PERFORMANCE
UNDER LOAN DOCUMENTS; PREPAYMENT PREMIUM.
Borrower shall pay
the Indebtedness when due in accordance with the terms of the Note and the other
Loan Documents and shall perform, observe and comply with all other provisions
of the Note and the other Loan Documents. Borrower shall pay a
prepayment premium in connection with certain prepayments of the Indebtedness,
including a payment made after Lender’s exercise of any right of acceleration of
the Indebtedness, as provided in the Note.
6.
EXCULPATION.
Borrower’s
personal liability for payment of the Indebtedness and for performance of the
other obligations to be performed by it under this Instrument is limited in the
manner, and to the extent, provided in the Note.
7.
DEPOSITS
FOR TAXES, INSURANCE AND OTHER CHARGES.
(a)
Unless
this requirement is waived in writing by Lender, which waiver may be contained
in this Section 7(a), Borrower shall deposit with Lender on the day monthly
installments of principal or interest, or both, are due under the Note (or on
another day designated in writing by Lender), until the Indebtedness is paid in
full, an additional amount sufficient to accumulate with Lender the entire sum
required to pay, when due, the items marked “Collect” below. Lender
will not require the Borrower to make Imposition Deposits with respect to the
items marked “Deferred” below.
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[Collect]
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Hazard
Insurance premiums or other insurance premiums required by Lender under
Section 19,
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[Deferred]
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water
and sewer charges (that could become a lien on the Mortgaged
Property),
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[Deferred]
|
assessments
or other charges (that could become a lien on the Mortgaged
Property)
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The
amounts deposited under the preceding sentence are collectively referred to in
this Instrument as the “
Imposition
Deposits
.” The obligations of Borrower for which the
Imposition Deposits are required are collectively referred to in this Instrument
as “
Impositions
.” The
amount of the Imposition Deposits shall be sufficient to enable Lender to pay
each Imposition before the last date upon which such payment may be made without
any penalty or interest charge being added. Lender shall maintain
records indicating how much of the monthly Imposition Deposits and how much of
the aggregate Imposition Deposits held by Lender are held for the purpose of
paying Taxes, insurance premiums and each other Imposition.
(b)
Imposition
Deposits shall be deposited in an Eligible Account at an Eligible Institution
(which may be Lender, if Lender is such an institution) or invested in
“permitted investments” as then defined and required by the Rating
Agencies. Lender shall not be obligated to open additional accounts
or deposit Imposition Deposits in additional institutions when the amount of the
Imposition Deposits exceeds the maximum amount of the federal deposit insurance
or guaranty. Lender shall apply the Imposition Deposits to pay
Impositions so long as no Event of Default has occurred and is
continuing. Unless applicable law requires, Lender shall not be
required to pay Borrower any interest, earnings or profits on the Imposition
Deposits. As additional security for all of Borrower’s obligations
under this Instrument and the other Loan Documents, Borrower hereby pledges and
grants to Lender a security interest in the Imposition Deposits and all proceeds
of, and all interest and dividends on, the Imposition Deposits. Any
amounts deposited with Lender under this Section 7 shall not be trust funds, nor
shall they operate to reduce the Indebtedness, unless applied by Lender for that
purpose under Section 7(e).
(c)
If Lender
receives a bill or invoice for an Imposition, Lender shall pay the Imposition
from the Imposition Deposits held by Lender. Lender shall have no
obligation to pay any Imposition to the extent it exceeds Imposition Deposits
then held by Lender. Lender may pay an Imposition according to any
bill, statement or estimate from the appropriate public office or insurance
company without inquiring into the accuracy of the bill, statement or estimate
or into the validity of the Imposition.
(d)
If at any
time the amount of the Imposition Deposits held by Lender for payment of a
specific Imposition exceeds the amount reasonably deemed necessary by Lender,
the excess
shall be
credited against future installments of Imposition Deposits. If at
any time the amount of the Imposition Deposits held by Lender for payment of a
specific Imposition is less than the amount reasonably estimated by Lender to be
necessary, Borrower shall pay to Lender the amount of the deficiency within 15
days after Notice from Lender.
(e)
If an
Event of Default has occurred and is continuing, Lender may apply any Imposition
Deposits, in any amounts and in any order as Lender determines, in Lender’s
discretion, to pay any Impositions or as a credit against the Indebtedness. Upon
payment in full of the Indebtedness, Lender shall refund to Borrower any
Imposition Deposits held by Lender.
(f)
If Lender
does not collect an Imposition Deposit with respect to an Imposition either
marked “Deferred” in Section 7(a) or pursuant to a separate written waiver by
Lender, then on or before the date each such Imposition is due, or on the date
this Instrument requires each such Imposition to be paid, Borrower must provide
Lender with proof of payment of each such Imposition for which Lender does not
require collection of Imposition Deposits. Lender may revoke its
deferral or waiver and require Borrower to deposit with Lender any or all of the
Imposition Deposits listed in Section 7(a), regardless of whether any such item
is marked “Deferred” in such section, upon Notice to Borrower, (i) if Borrower
does not timely pay any of the Impositions, (ii) if Borrower fails to provide
timely proof to Lender of such payment, or (iii) at any time during the
existence of an Event of Default.
(g)
In the
event of a Transfer prohibited by or requiring Lender’s approval under Section
21, Lender’s waiver of the collection of any Imposition Deposit in this Section
7 may be modified or rendered void by Lender at Lender’s option by Notice to
Borrower and the transferee(s) as a condition of Lender’s approval of such
Transfer.
8.
COLLATERAL
AGREEMENTS.
Borrower shall deposit with Lender such amounts as
may be required by any Collateral Agreement and shall perform all other
obligations of Borrower under each Collateral Agreement.
9.
APPLICATION OF
PAYMENTS.
If at any time Lender receives, from Borrower or
otherwise, any amount applicable to the Indebtedness which is less than all
amounts due and payable at such time, then Lender may apply that payment to
amounts then due and payable in any manner and in any order determined by
Lender, in Lender’s discretion. Neither Lender’s acceptance of an
amount that is less than all amounts then due and payable nor Lender’s
application of such payment in the manner authorized shall constitute or be
deemed to constitute either a waiver of the unpaid amounts or an accord and
satisfaction. Notwithstanding the application of any such amount to
the Indebtedness, Borrower’s obligations under this Instrument and the Note
shall remain unchanged.
10.
COMPLIANCE WITH LAWS
AND ORGANIZATIONAL
DOCUMENTS
.
(a)
Borrower
shall comply with all laws, ordinances, regulations and requirements of any
Governmental Authority and all recorded lawful covenants and agreements relating
to or affecting the Mortgaged Property, including all laws, ordinances,
regulations, requirements and covenants pertaining to health and safety,
construction of improvements on the Mortgaged Property, fair housing, disability
accommodation, zoning and land use, and Leases. Borrower also shall
comply with all applicable laws that pertain to the maintenance and disposition
of tenant security deposits.
(b)
Borrower
shall at all times maintain records sufficient to demonstrate compliance with
the provisions of this Section 10.
(c)
Borrower
shall take appropriate measures to prevent, and shall not engage in or knowingly
permit, any illegal activities at the Mortgaged Property that could endanger
tenants or visitors, result in damage to the Mortgaged Property, result in
forfeiture of the Mortgaged Property, or otherwise materially impair the lien
created by this Instrument or Lender’s interest in the Mortgaged
Property. Borrower represents and warrants to Lender that no portion
of the Mortgaged Property has been or will be purchased with the proceeds of any
illegal activity.
(d) Borrower
shall at all times comply with all laws, regulations and requirements of any
Governmental Authority relating to Borrower's formation, continued existence and
good standing in the Property Jurisdiction. Borrower shall at all
times comply with its organizational documents, including but not limited to its
partnership agreement (if Borrower is a partnership), its by-laws (if Borrower
is a corporation or housing cooperative corporation or association) or its
operating agreement (if Borrower is an limited liability company or
tenancy-in-common). If Borrower is a housing cooperative corporation
or association, Borrower shall at all times maintain its status as a
"cooperative housing corporation" as such term is defined in Section 216(b) of
the Internal revenue Code of 1986, as amended, or any successor statute
thereto.
(e) Borrower
represents and warrants that Borrower, any commercial tenant of the Mortgaged
Property and/or any operator of the Mortgaged Property were in possession of all
material licenses, permits and authorizations required for use of the Mortgaged
Property which were valid and in full force and effect as of the date of this
Instrument. Borrower warrants that it, any commercial tenant of the
Mortgaged Property and/or any operator of the Mortgaged Property shall remain in
material compliance with all material licenses, permits and other legal
requirements necessary and required to conduct its business.
11.
USE OF
PROPERTY.
Unless required by applicable law, Borrower shall
not (a) allow changes in the use for which all or any part of the Mortgaged
Property is being used at the time this Instrument was executed, except for any
change in use approved by Lender, (b) convert any individual dwelling units or
common areas to commercial use, (c) initiate a change in the zoning
classification of the Mortgaged Property or acquiesce without Notice to and
consent of Lender in a change in the zoning classification of the Mortgaged
Property, (d) establish any condominium or cooperative regime with respect to
the Mortgaged Property, (e) combine all or any part of the Mortgaged Property
with all or any part of a tax parcel which is not part of the Mortgaged
Property, or (f) subdivide or otherwise split any tax parcel constituting all or
any part of the Mortgaged Property without the prior consent of
Lender. The Mortgaged Property (x) permits ingress and egress, (y) is
served by public utilities and services generally available in the surrounding
community or otherwise appropriate for the use in which the Mortgaged Property
is currently being utilized, and (z) constitutes one or more separate tax
parcels or the Lender’s title policy contains one or more endorsements with
respect to the matters described in (x) or (z). Notwithstanding
anything contained in this Section to the contrary, if Borrower is a housing
cooperative corporation or association, Lender acknowledges and consents to
Borrower's use of the Mortgaged Property as a housing cooperative.
12.
PROTECTION
OF LENDER’S SECURITY; INSTRUMENT SECURES FUTURE ADVANCES.
(a)
If
Borrower fails to perform any of its obligations under this Instrument or any
other Loan Document, or if any action or proceeding is commenced which purports
to affect the
Mortgaged
Property, Lender’s security or Lender’s rights under this Instrument, including
eminent domain, insolvency, code enforcement, civil or criminal forfeiture,
enforcement of Hazardous Materials Laws, fraudulent conveyance or
reorganizations or proceedings involving a bankrupt or decedent, then Lender at
Lender’s option may make such appearances, file such documents, disburse such
sums and take such actions as Lender reasonably deems necessary to perform such
obligations of Borrower and to protect Lender’s interest, including (i) payment
of Attorneys’ Fees and Costs, (ii) payment of fees and out-of-pocket expenses of
accountants, inspectors and consultants, (iii) entry upon the Mortgaged Property
to make repairs or secure the Mortgaged Property, (iv) procurement of the
insurance required by Section 19, (v) payment of amounts which Borrower has
failed to pay under Sections 15 and 17, and (vi) advances made by Lender to pay,
satisfy or discharge any obligation of Borrower for the payment of money that is
secured by a pre-existing mortgage, deed of trust or other lien encumbering the
Mortgaged Property (a "
Prior
Lien
").
(b)
Any
amounts disbursed by Lender under this Section 12, or under any other provision
of this Instrument that treats such disbursement as being made under this
Section 12, shall be secured by this Instrument, shall be added to, and become
part of, the principal component of the Indebtedness, shall be immediately due
and payable and shall bear interest from the date of disbursement until paid at
the “
Default Rate
,” as
defined in the Note.
(c)
Nothing
in this Section 12 shall require Lender to incur any expense or take any
action.
13.
INSPECTION.
(a)
Lender,
its agents, representatives, and designees may make or cause to be made entries
upon and inspections of the Mortgaged Property (including environmental
inspections and tests) during normal business hours, or at any other reasonable
time, upon reasonable notice to Borrower if the inspection is to include
occupied residential units (which notice need not be in
writing). Notice to Borrower shall not be required in the case of an
emergency, as determined in Lender’s discretion, or when an Event of Default has
occurred and is continuing.
(b)
If Lender
determines that Mold has developed as a result of a water intrusion event or
leak, Lender, at Lender’s discretion, may require that a professional inspector
inspect the Mortgaged Property as frequently as Lender determines is necessary
until any issue with Mold and its cause(s) are resolved to Lender’s
satisfaction. Such inspection shall be limited to a visual and
olfactory inspection of the area that has experienced the Mold, water intrusion
event or leak. Borrower shall be responsible for the cost of such
professional inspection and any remediation deemed to be necessary as a result
of the professional inspection. After any issue with Mold, water
intrusion or leaks is remedied to Lender’s satisfaction, Lender shall not
require a professional inspection any more frequently than once every three
years unless Lender is otherwise aware of Mold as a result of a subsequent water
intrusion event or leak.
(c)
If Lender
or Loan Servicer determines not to conduct an annual inspection of the Mortgaged
Property, and in lieu thereof Lender requests a certification, Borrower shall be
prepared to provide and must actually provide to Lender a factually correct
certification each year that the annual inspection is waived to the following
effect:
Borrower
has not received any written complaint, notice, letter or other written
communication from tenants, management agent or governmental authorities
regarding
mold, fungus, microbial contamination or pathogenic organisms (“Mold”) or any
activity, condition, event or omission that causes or facilitates the growth of
Mold on or in any part of the Mortgaged Property or if Borrower has received any
such written complaint, notice, letter or other written communication that
Borrower has investigated and determined that no Mold activity, condition or
event exists or alternatively has fully and properly remediated such
activity, condition, event or omission in compliance with the Moisture
Management Plan for the Mortgaged Property.
If
Borrower is unwilling or unable to provide such certification, Lender may
require a professional inspection of the Mortgaged Property at Borrower’s
expense.
14.
BOOKS
AND RECORDS; FINANCIAL REPORTING.
(a)
Borrower
shall keep and maintain at all times at the Mortgaged Property or the management
agent’s office, and upon Lender’s request shall make available at the Mortgaged
Property (or, at Borrower’s option, at the management agent’s office), complete
and accurate books of account and records (including copies of supporting bills
and invoices) adequate to reflect correctly the operation of the Mortgaged
Property, in accordance with GAAP consistently applied (or such other method
which is reasonably acceptable to Lender), and copies of all written contracts,
Leases, and other instruments which affect the Mortgaged
Property. The books, records, contracts, Leases and other instruments
shall be subject to examination and inspection by Lender at any reasonable
time.
(b)
Borrower
shall furnish to Lender each of the following:
(i)
|
if,
in connection with this Loan, the Borrower purchased the Mortgaged
Property, a statement of income and expenses for Borrower’s operation of
the Mortgaged Property from the origination date to the end of the first
full calendar quarter following such origination date, such statement to
be provided within twenty-five (25) days after the end of such quarter;
or
|
(ii)
|
for
all other cases (for example, a refinance of a loan, a purchase of
partnership or other interests, or new debt being placed on the Mortgaged
Property), a statement of income and expenses for Borrower’s operation of
the Mortgaged Property for the trailing six (6) months, such statement to
be provided within twenty-five (25) days after the end of such
quarter.
|
|
(iii)
|
after
Borrower has furnished such statements required by Section 14(b)(i) or
(ii) above, within twenty-five (25) days after the end of each subsequent
calendar quarter of Borrower,
|
(B)
|
a
statement of income and expenses for Borrower’s operation of the Mortgaged
Property for that calendar
quarter;
|
(c)
Within
ninety (90) days after the end of each fiscal year of Borrower, Borrower shall
furnish to Lender each of the following:
(i)
|
an
annual statement of income and expenses for Borrower’s operation of the
Mortgaged Property for that fiscal
year;
|
(ii)
|
a
statement of changes in financial position of Borrower relating to the
Mortgaged Property for that fiscal
year;
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(iii)
|
a
balance sheet showing all assets and liabilities of Borrower relating to
the Mortgaged Property as of the end of that fiscal year and a profit and
loss statement for Borrower; and
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(iv)
|
an
accounting of all security deposits held pursuant to all Leases, including
the name of the institution (if any) and the names and identification
numbers of the accounts (if any) in which such security deposits are held
and the name of the person to contact at such financial institution, along
with any authority or release necessary for Lender to access information
regarding such accounts.
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(d)
Borrower
shall furnish to Lender each of the following:
(i)
|
prior
to a Securitization, and thereafter upon Lender’s reasonable request, a
monthly Rent Schedule and a monthly statement of income and expenses for
Borrower’s operation of the Mortgaged
Property;
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(ii)
|
prior
to a Securitization, and thereafter upon Lender’s reasonable request,
Borrower shall furnish to Lender a statement that identifies all owners of
any interest in Borrower and any Controlling Entity and the interest held
by each (unless Borrower or any Controlling Entity is a publicly-traded
entity in which case such statement of ownership shall not be required),
and if Borrower or a Controlling Entity is a corporation, all officers and
directors of Borrower and the Controlling Entity, and if Borrower or a
Controlling Entity is a limited liability company, all Managers who are
not members;
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(iii)
|
copies
of all tax returns filed by Borrower, within thirty (30) days after the
date of filing; and
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(iv)
|
such
other financial information or property management information (including,
without limitation, information on tenants under Leases to the extent such
information is available to Borrower, copies of bank account statements
from financial institutions where funds owned or controlled by Borrower
are maintained, and an accounting of security deposits) as may be required
by Lender from time to time.
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(e)
At any
time upon Lender’s request, Borrower shall furnish to Lender a monthly property
management report for the Mortgaged Property, showing the number of inquiries
made and rental applications received from tenants or prospective tenants and
deposits received from tenants and any other information requested by
Lender. However, Lender shall not require the foregoing more
frequently than quarterly except when there has been an Event of Default and
such
Event of Default is continuing, in which case Lender may require Borrower to
furnish the foregoing more frequently.
(f)
A natural
person having authority to bind Borrower (or the SPE Equity Owner or guarantor,
as applicable) shall certify each of the statements, schedules and reports
required by Sections 14(b) through 14(e) and 14(h) to be complete and
accurate. Each of the statements, schedules and reports required by
Sections 14(b) through 14(e) and 14(h) shall be in such form and contain such
detail as Lender may reasonably require. Lender also may require that
any of the statements, schedules or reports listed in Section 14(b) through
14(c) and Section 14(d)(i) and (iv) be audited at Borrower’s expense by
independent certified public accountants acceptable to Lender, at any time when
an Event of Default has occurred and is continuing or at any time that Lender,
in its reasonable judgment, determines that audited financial statements are
required for an accurate assessment of the financial condition of Borrower or of
the Mortgaged Property.
(g)
If
Borrower fails to provide in a timely manner the statements, schedules and
reports required by Sections 14(b) through 14(e) and 14(h), Lender shall give
Borrower Notice specifying the statements, schedules and reports required by
Section 14(b) through 14(e) and 14(h) that Borrower has failed to
provide. If Borrower has not provided the required statements,
schedules and reports within 10 Business Days following such Notice, then Lender
shall have the right to have Borrower’s books and records audited, at Borrower’s
expense, by independent certified public accountants selected by Lender in order
to obtain such statements, schedules and reports, and all related costs and
expenses of Lender shall become immediately due and payable and shall become an
additional part of the Indebtedness as provided in Section 12. Notice
to Borrower shall not be required in the case of an emergency, as determined in
Lender’s discretion, or when an Event of Default has occurred and is
continuing.
(h)
Borrower
shall cause each guarantor and, at Lender’s request, any SPE Equity Owner, to
provide to Lender (i) within ninety (90) days after the close of such party’s
fiscal year, such party’s balance sheet and profit and loss statement (or if
such party is a natural person, within ninety (90) days after the close of each
calendar year, such party’s personal financial statements) in form reasonably
satisfactory to Lender and certified by such party to be accurate and complete;
and (ii) such additional financial information (including, without limitation,
copies of state and federal tax returns with respect to any SPE Equity Owner but
Lender shall only require copies of such tax returns with respect to each
guarantor if an Event of Default has occurred and is continuing) as Lender may
reasonably require from time to time and in such detail as reasonably required
by Lender.
(i)
If an
Event of Default has occurred and is continuing, Borrower shall deliver to
Lender upon written demand all books and records relating to the Mortgaged
Property or its operation.
(j)
Borrower
authorizes Lender to obtain a credit report on Borrower at any
time.
15.
TAXES;
OPERATING EXPENSES.
(a)
Subject
to the provisions of Section 15(c) and Section 15(d), Borrower shall pay, or
cause to be paid, all Taxes when due and before the addition of any interest,
fine, penalty or cost for nonpayment.
(b)
Subject
to the provisions of Section 15(c), Borrower shall (i) pay the expenses of
operating, managing, maintaining and repairing the Mortgaged Property (including
utilities,
repairs
and replacements) before the last date upon which each such payment may be made
without any penalty or interest charge being added, and (ii) pay insurance
premiums at least 30 days prior to the expiration date of each policy of
insurance, unless applicable law specifies some lesser
period.
(c)
If Lender
is collecting Imposition Deposits, to the extent that Lender holds sufficient
Imposition Deposits for the purpose of paying a specific Imposition, then
Borrower shall not be obligated to pay such Imposition, so long as no Event of
Default exists and Borrower has timely delivered to Lender any bills or premium
notices that it has received. If an Event of Default exists, Lender
may exercise any rights Lender may have with respect to Imposition Deposits
without regard to whether Impositions are then due and
payable. Lender shall have no liability to Borrower for failing to
pay any Impositions to the extent that (i) any Event of Default has occurred and
is continuing, (ii) insufficient Imposition Deposits are held by Lender at the
time an Imposition becomes due and payable or (iii) Borrower has failed to
provide Lender with bills and premium notices as provided above.
(d)
Borrower,
at its own expense, may contest by appropriate legal proceedings, conducted
diligently and in good faith, the amount or validity of any Imposition other
than insurance premiums, if (i) Borrower notifies Lender of the commencement or
expected commencement of such proceedings, (ii) the Mortgaged Property is not in
danger of being sold or forfeited, (iii) if Borrower has not already paid the
Imposition, Borrower deposits with Lender reserves sufficient to pay the
contested Imposition, if requested by Lender, and (iv) Borrower furnishes
whatever additional security is required in the proceedings or is reasonably
requested by Lender.
(e)
Borrower
shall promptly deliver to Lender a copy of all notices of, and invoices for,
Impositions, and if Borrower pays any Imposition directly, Borrower shall
furnish to Lender, on or before the date this Instrument requires such
Impositions to be paid, receipts evidencing that such payments were
made.
16.
LIENS;
ENCUMBRANCES.
Borrower acknowledges that, to the extent
provided in Section 21, the grant, creation or existence of any mortgage, deed
of trust, deed to secure debt, security interest or other lien or encumbrance (a
“
Lien
”) on the Mortgaged
Property (other than the lien of this Instrument) or on certain ownership
interests in Borrower, whether voluntary, involuntary or by operation of law,
and whether or not such Lien has priority over the lien of this Instrument, is a
“
Transfer
” which
constitutes an Event of Default and subjects Borrower to personal liability
under the Note.
17.
PRESERVATION,
MANAGEMENT AND MAINTENANCE OF MORTGAGED PROPERTY.
(a)
Borrower
shall not commit waste or permit impairment or deterioration of the Mortgaged
Property.
(b)
Borrower
shall not abandon the Mortgaged Property.
(c)
Borrower
shall restore or repair promptly, in a good and workmanlike manner, any damaged
part of the Mortgaged Property to the equivalent of its original condition, or
such other condition as Lender may approve in writing, whether or not insurance
proceeds or condemnation awards are available to cover any costs of such
restoration or repair; however, Borrower shall not be obligated to perform such
restoration or repair if (i) no Event of Default
has
occurred and is continuing, and (ii) Lender has elected to apply any available
insurance proceeds and/or condemnation awards to the payment of Indebtedness
pursuant to Section 19(h)(ii) through (viii), or pursuant to Section 20(d)(ii)
through (viii).
(d) Borrower
shall keep the Mortgaged Property in good repair, including the replacement of
Personalty and Fixtures with items of equal or better function and
quality.
(e) Borrower
shall provide for professional management of the Mortgaged Property by the
Property Manager or by a residential rental property manager satisfactory to
Lender at all times under a property management agreement approved by Lender in
writing. Borrower shall not surrender, terminate, cancel, modify, renew or
extend its property management agreement, or enter into any other agreement
relating to the management or operation of the Property with Property Manager or
any other Person, or consent to the assignment by the Property Manager of its
interest under such property management agreement, in each case without the
consent of Lender, which consent shall not be unreasonably withheld; provided,
however, with respect to a new property manager such consent may be conditioned
upon Borrower delivering a Rating Confirmation as to such new property manager
and the related property management agreement. If at any time Lender
consents to the appointment of a new property manager, such new property manager
and Borrower shall, as a condition of Lender’s consent, execute an assignment of
management agreement in a form acceptable to Lender. If any such
replacement property manager is an Affiliate of Borrower, and if a
nonconsolidation opinion was delivered at the origination of the Loan, Borrower
shall deliver to Lender an updated nonconsolidation opinion in form and
substance satisfactory to the Rating Agencies (unless waived by the Rating
Agencies) with regard to nonconsolidation.
(f) Borrower
shall give Notice to Lender of and, unless otherwise directed in writing by
Lender, shall appear in and defend any action or proceeding purporting to affect
the Mortgaged Property, Lender’s security or Lender’s rights under this
Instrument. Borrower shall not (and shall not permit any tenant or
other person to) remove, demolish or alter the Mortgaged Property or any part of
the Mortgaged Property, including any removal, demolition or alteration
occurring in connection with a rehabilitation of all or part of the Mortgaged
Property, except (i) in connection with the replacement of tangible Personalty,
(ii) if Borrower is a cooperative housing corporation or association, to the
extent permitted with respect to individual dwelling units under the form of
proprietary lease or occupancy agreement and (iii) repairs and replacements in
connection with making an individual unit ready for a new occupant.
(g)
Unless
otherwise waived by Lender in writing, Borrower must have or must establish and
must adhere to the MMP. If the Borrower is required to have an MMP,
the Borrower must keep all MMP documentation at the Mortgaged Property or at the
management agent’s office and available for the Lender or the Loan Servicer to
review during any annual assessment or other inspection of the Mortgaged
Property that is required by Lender.
(h) If
Borrower is a housing cooperative corporation or association, until the
Indebtedness is paid in full Borrower shall not reduce the maintenance fees,
charges or assessments payable by shareholders or residents under proprietary
leases or occupancy agreements below a level which is sufficient to pay all
expenses of the Borrower, including, without limitation, all operating and other
expenses for the Mortgaged Property and all payments due pursuant to the terms
of the Note and any Loan Documents.
18.
ENVIRONMENTAL
HAZARDS.
(a)
Except
for matters described in Section 18(b), Borrower shall not cause or permit any
of the following:
(i)
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the
presence, use, generation, release, treatment, processing, storage
(including storage in above ground and underground storage tanks),
handling, or disposal of any Hazardous Materials on or under the Mortgaged
Property;
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(ii)
|
the
transportation of any Hazardous Materials to, from, or across the
Mortgaged Property;
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(iii)
|
any
occurrence or condition on the Mortgaged Property, which occurrence or
condition is or may be in violation of Hazardous Materials
Laws;
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(iv)
|
any
violation of or noncompliance with the terms of any Environmental Permit
with respect to the Mortgaged Property;
or
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(v)
|
any
violation or noncompliance with the terms of any O&M Program as
defined in subsection (d).
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The
matters described in clauses (i) through (v) above, except as otherwise provided
in Section 18(b), are referred to collectively in this Section 18 as “
Prohibited Activities or
Conditions
.”
(b)
Prohibited
Activities or Conditions shall not include lawful conditions permitted by an
O&M Program or the safe and lawful use and storage of quantities of (i)
pre-packaged supplies, cleaning materials and petroleum products customarily
used in the operation and maintenance of comparable multifamily properties, (ii)
cleaning materials, personal grooming items and other items sold in pre-packaged
containers for consumer use and used by tenants and occupants of residential
dwelling units in the Mortgaged Property; and (iii) petroleum products used in
the operation and maintenance of motor vehicles from time to time located on the
Mortgaged Property’s parking areas, so long as all of the foregoing are used,
stored, handled, transported and disposed of in compliance with Hazardous
Materials Laws.
(c)
Borrower
shall take all commercially reasonable actions (including the inclusion of
appropriate provisions in any Leases executed after the date of this Instrument)
to prevent its employees, agents, and contractors, and all tenants and other
occupants from causing or permitting any Prohibited Activities or
Conditions. Borrower shall not lease or allow the sublease or use of
all or any portion of the Mortgaged Property to any tenant or subtenant for
nonresidential use by any user that, in the ordinary course of its business,
would cause or permit any Prohibited Activity or Condition.
(d)
As
required by Lender, Borrower shall also have established a written operations
and maintenance program with respect to certain Hazardous
Materials. Each such operations and maintenance program and any
additional or revised operations and maintenance programs established for the
Mortgaged Property pursuant to this Section 18 must be approved by Lender and
shall be referred to herein as an “
O&M
Program
.” Borrower shall comply in a timely manner with, and
cause all employees, agents, and contractors of Borrower and any other Persons
present on the Mortgaged Property to comply with each O&M
Program. Borrower shall pay all costs of performance of Borrower’s
obligations under any O&M Program, and Lender’s out of pocket costs incurred
in connection with the monitoring and review of each O&M Program and
Borrower’s performance shall be paid by Borrower upon demand by
Lender. Any
such
out-of-pocket costs of Lender that Borrower fails to pay promptly shall become
an additional part of the Indebtedness as provided in Section
12.
(e)
Borrower
represents and warrants to Lender that, except as previously disclosed by
Borrower to Lender in writing (which written disclosure may be in certain
environmental assessments and other written reports accepted by Lender in
connection with the funding of the Indebtedness and dated prior to the date of
this Instrument):
(i)
|
Borrower
has not at any time engaged in, caused or permitted any Prohibited
Activities or Conditions on the Mortgaged
Property;
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(ii)
|
to
the best of Borrower’s knowledge after reasonable and diligent inquiry, no
Prohibited Activities or Conditions exist or have existed on the Mortgaged
Property;
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(iii)
|
the
Mortgaged Property does not now contain any underground storage tanks,
and, to the best of Borrower’s knowledge after reasonable and diligent
inquiry, the Mortgaged Property has not contained any underground storage
tanks in the past. If there is an underground storage tank
located on the Mortgaged Property that has been previously disclosed by
Borrower to Lender in writing, that tank complies with all requirements of
Hazardous Materials Laws;
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(iv)
|
to
the best of Borrower’s knowledge after reasonable and diligent inquiry,
Borrower has complied with all Hazardous Materials Laws, including all
requirements for notification regarding releases of Hazardous
Materials. Without limiting the generality of the foregoing,
Borrower has obtained all Environmental Permits required for the operation
of the Mortgaged Property in accordance with Hazardous Materials Laws now
in effect and all such Environmental Permits are in full force and
effect;
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(v)
|
to
the best of Borrower’s knowledge after reasonable and diligent inquiry, no
event has occurred with respect to the Mortgaged Property that
constitutes, or with the passing of time or the giving of notice would
constitute, noncompliance with the terms of any Environmental
Permit;
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(vi)
|
there
are no actions, suits, claims or proceedings pending or, to the best of
Borrower’s knowledge after reasonable and diligent inquiry, threatened
that involve the Mortgaged Property and allege, arise out of, or relate to
any Prohibited Activity or Condition;
and
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(vii)
|
Borrower
has not received any written complaint, order, notice of violation or
other communication from any Governmental Authority with regard to air
emissions, water discharges, noise emissions or Hazardous Materials, or
any other environmental, health or safety matters affecting the Mortgaged
Property.
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(f)
Borrower
shall promptly notify Lender in writing upon the occurrence of any of the
following events:
(i)
|
Borrower’s
discovery of any Prohibited Activity or
Condition;
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(ii)
|
Borrower’s
receipt of or knowledge of any written complaint, order, notice of
violation or other communication from any tenant, management agent,
Governmental Authority or other Person with regard to present or future
alleged Prohibited Activities or Conditions, or any other environmental,
health or safety matters affecting the Mortgaged Property;
or
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(iii)
|
Borrower’s
breach of any of its obligations under this Section
18.
|
Any such
notice given by Borrower shall not relieve Borrower of, or result in a waiver
of, any obligation under this Instrument, the Note, or any other Loan
Document.
(g)
Borrower
shall pay promptly the costs of any environmental inspections, tests or audits,
a purpose of which is to identify the extent or cause of or potential for a
Prohibited Activity or Condition (“
Environmental Inspections
”),
required by Lender in connection with any foreclosure or deed in lieu of
foreclosure, or as a condition of Lender’s consent to any Transfer under Section
21, or required by Lender following a reasonable determination by Lender that
Prohibited Activities or Conditions may exist. Any such costs
incurred by Lender (including Attorneys’ Fees and Costs and the costs of
technical consultants whether incurred in connection with any judicial or
administrative process or otherwise) that Borrower fails to pay promptly shall
become an additional part of the Indebtedness as provided in Section
12. As long as (i) no Event of Default has occurred and is
continuing, (ii) Borrower has actually paid for or reimbursed Lender for all
costs of any such Environmental Inspections performed or required by Lender, and
(iii) Lender is not prohibited by law, contract or otherwise from doing so,
Lender shall make available to Borrower, without representation of any kind,
copies of Environmental Inspections prepared by third parties and delivered to
Lender. Lender hereby reserves the right, and Borrower hereby
expressly authorizes Lender, to make available to any party, including any
prospective bidder at a foreclosure sale of the Mortgaged Property, the results
of any Environmental Inspections made by or for Lender with respect to the
Mortgaged Property. Borrower consents to Lender notifying any party
(either as part of a notice of sale or otherwise) of the results of any
Environmental Inspections made by or for Lender. Borrower
acknowledges that Lender cannot control or otherwise assure the truthfulness or
accuracy of the results of any Environmental Inspections and that the release of
such results to prospective bidders at a foreclosure sale of the Mortgaged
Property may have a material and adverse effect upon the amount that a party may
bid at such sale. Borrower agrees that Lender shall have no liability
whatsoever as a result of delivering the results to any third party of any
Environmental Inspections made by or for Lender, and Borrower hereby releases
and forever discharges Lender from any and all claims, damages, or causes of
action, arising out of, connected with or incidental to the results of, the
delivery of any of Environmental Inspections made by or for Lender.
(h)
If any
investigation, site monitoring, containment, clean-up, restoration or other
remedial work (“
Remedial
Work
”) is necessary to comply with any Hazardous Materials Law or order
of any Governmental Authority that has or acquires jurisdiction over the
Mortgaged Property or the use, operation or improvement of the Mortgaged
Property, or is otherwise required by Lender as a consequence of any Prohibited
Activity or Condition or to prevent the occurrence of a Prohibited Activity or
Condition, Borrower shall, by the earlier of (i) the applicable deadline
required by Hazardous Materials Law or (ii) 30 days after Notice from Lender
demanding such action, begin performing the Remedial Work, and thereafter
diligently prosecute it to completion, and shall in any event complete the work
by the time required by applicable Hazardous Materials Law. If
Borrower fails to begin on a timely basis or diligently prosecute any required
Remedial Work, Lender may, at its option, cause the Remedial Work to
be
completed, in which case Borrower shall reimburse Lender on demand for the cost
of doing so. Any reimbursement due from Borrower to Lender shall
become part of the Indebtedness as provided in Section 12.
(i)
Borrower
shall comply with all Hazardous Materials Laws applicable to the Mortgaged
Property. Without limiting the generality of the previous sentence,
Borrower shall (i) obtain and maintain all Environmental Permits required by
Hazardous Materials Laws and comply with all conditions of such Environmental
Permits; (ii) cooperate with any inquiry by any Governmental Authority; and
(iii) comply with any governmental or judicial order that arises from any
alleged Prohibited Activity or Condition.
(j)
Borrower
shall indemnify, hold harmless and defend (i) Lender, including any custodian,
trustee and any other fiduciaries who hold or have held a full or partial
interest in the Loan for the benefit of third parties, (ii) any prior owner or
holder of the Note, (iii) the Loan Servicer, (iv) any prior Loan Servicer, (v)
the officers, directors, shareholders, partners, employees and trustees of any
of the foregoing, and (vi) the heirs, legal representatives, successors and
assigns of each of the foregoing (collectively, the “
Indemnitees
”) from and against
all proceedings, claims, damages, penalties and costs (whether initiated or
sought by Governmental Authorities or private parties), including Attorneys’
Fees and Costs and remediation costs, whether incurred in connection with any
judicial or administrative process or otherwise, arising directly or indirectly
from any of the following:
(i)
|
any
breach of any representation or warranty of Borrower in this Section
18;
|
(ii)
|
any
failure by Borrower to perform any of its obligations under this Section
18;
|
(iii)
|
the
existence or alleged existence of any Prohibited Activity or
Condition;
|
(iv)
|
the
presence or alleged presence of Hazardous Materials on or under the
Mortgaged Property or in any of the Improvements;
and
|
(v)
|
the
actual or alleged violation of any Hazardous Materials
Law.
|
(k)
Counsel
selected by Borrower to defend Indemnitees shall be subject to the approval of
those Indemnitees. In any circumstances in which the indemnity under
this Section 18 applies, Lender may employ its own legal counsel and consultants
to prosecute, defend or negotiate any claim or legal or administrative
proceeding and Lender, with the prior written consent of Borrower (which shall
not be unreasonably withheld, delayed or conditioned) may settle or compromise
any action or legal or administrative proceeding. However, unless an
Event of Default has occurred and is continuing, or the interests of Borrower
and Lender are in conflict, as determined by Lender in its discretion, Lender
shall permit Borrower to undertake the actions referenced in this Section 18 in
accordance with this Section 18(k) and Section 18(l) so long as Lender approves
such action, which approval shall not be unreasonably withheld or
delayed. Borrower shall reimburse Lender upon demand for all costs
and expenses incurred by Lender, including all costs of settlements entered into
in good faith, consultants’ fees and Attorneys’ Fees and Costs.
(l)
Borrower
shall not, without the prior written consent of those Indemnitees who are named
as parties to a claim or legal or administrative proceeding (a “
Claim
”), settle or
compromise
the Claim if the settlement (i) results in the entry of any judgment that does
not include as an unconditional term the delivery by the claimant or plaintiff
to Lender of a written release of those Indemnitees, satisfactory in form and
substance to Lender; or (ii) may materially and adversely affect Lender, as
determined by Lender in its discretion.
(m)
Borrower’s
obligation to indemnify the Indemnitees shall not be limited or impaired by any
of the following, or by any failure of Borrower or any guarantor to receive
notice of or consideration for any of the following:
(i)
|
any
amendment or modification of any Loan
Document;
|
(ii)
|
any
extensions of time for performance required by any Loan
Document;
|
(iii)
|
any
provision in any of the Loan Documents limiting Lender’s recourse to
property securing the Indebtedness, or limiting the personal liability of
Borrower or any other party for payment of all or any part of the
Indebtedness;
|
(iv)
|
the
accuracy or inaccuracy of any representations and warranties made by
Borrower under this Instrument or any other Loan
Document;
|
(v)
|
the
release of Borrower or any other Person, by Lender or by operation of law,
from performance of any obligation under any Loan
Document;
|
(vi)
|
the
release or substitution in whole or in part of any security for the
Indebtedness; and
|
(vii)
|
Lender’s
failure to properly perfect any lien or security interest given as
security for the Indebtedness.
|
(n)
Borrower
shall, at its own cost and expense, do all of the following:
(i)
|
pay
or satisfy any judgment or decree that may be entered against any
Indemnitee or Indemnitees in any legal or administrative proceeding
incident to any matters against which Indemnitees are entitled to be
indemnified under this Section 18;
|
(ii)
|
reimburse
Indemnitees for any expenses paid or incurred in connection with any
matters against which Indemnitees are entitled to be indemnified under
this Section 18; and
|
(iii)
|
reimburse
Indemnitees for any and all expenses, including Attorneys’ Fees and Costs,
paid or incurred in connection with the enforcement by Indemnitees of
their rights under this Section 18, or in monitoring and participating in
any legal or administrative
proceeding.
|
(o)
The
provisions of this Section 18 shall be in addition to any and all other
obligations and liabilities that Borrower may have under applicable law or under
other Loan Documents, and each Indemnitee shall be entitled to indemnification
under this Section 18 without regard to whether Lender or that Indemnitee has
exercised any rights against the Mortgaged Property or any other security,
pursued
any
rights against any guarantor, or pursued any other rights available under the
Loan Documents or applicable law. If Borrower consists of more than one Person,
the obligation of those Persons to indemnify the Indemnitees under this Section
18 shall be joint and several. The obligation of Borrower to indemnify the
Indemnitees under this Section 18 shall survive any repayment or discharge of
the Indebtedness, any foreclosure proceeding, any foreclosure sale, any delivery
of any deed in lieu of foreclosure, and any release of record of the lien of
this Instrument. Notwithstanding the foregoing, if Lender has never
been a mortgagee-in-possession of, or held title to, the Mortgaged Property,
Borrower shall have no obligation to indemnify the Indemnitees under this
Section 18 after the date of the release of record of the lien of this
Instrument by payment in full at the Maturity Date or by voluntary prepayment in
full.
19.
PROPERTY
AND LIABILITY INSURANCE.
(a)
At all
times during the term hereof, Borrower shall maintain, at its sole cost and
expense, for the mutual benefit of Borrower and Lender, the following policies
of insurance:
(i)
|
Insurance
against any peril included within the classification “All Risks of
Physical Loss” with extended coverage in amounts at all times sufficient
to prevent Borrower from becoming a co-insurer within the terms of the
applicable policies, but in any event such insurance shall be maintained
in an amount equal to the full insurable value of the Mortgaged
Property. The policy referred to in this Section 19 shall
contain a replacement cost endorsement and a waiver of
depreciation. As used in this Instrument, “full insurable
value” means the actual replacement cost of the Improvements and
Personalty (without taking into account any depreciation), determined
annually by an insurer or by Borrower or, at the request of Lender, by an
insurance broker (subject to Lender’s reasonable approval). In
all cases where any of the Improvements or the use of the Mortgaged
Property shall at any time constitute legal non-conforming structures or
uses under applicable legal requirements of any Governmental Authority,
the policy referred to in this Section 19 must include “Ordinance and Law
Coverage,” with “Time Element,” “Loss to the Undamaged Portion of the
Building,” “Demolition Cost” and “Increased Cost of Construction”
endorsements, in the amount of coverage required by
Lender;
|
(ii)
|
Commercial
general liability insurance, including contractual injury, bodily injury,
broad form death and property damage liability against any and all claims,
including all legal liability to the extent insurable imposed upon
Borrower and all Attorneys’ Fees and Costs, arising out of or connected
with the possession, use, leasing, operation, maintenance or condition of
the Mortgaged Property with a combined limit of not less than $2,000,000
in the aggregate and $1,000,000 per occurrence, plus umbrella or excess
liability coverage with minimum limits in the aggregate and per occurrence
of $1,000,000 for Improvements that have 1 to 3 stories and an additional
$2,000,000 in coverage for each additional story with maximum required
coverage of $15,000,000, plus
motor vehicle
liability coverage for all owned and non-owned vehicles (including,
without limitation, rented and leased vehicles) containing minimum limits
per occurrence, including umbrella coverage, of
$1,000,000.
|
(iii)
|
Statutory
workers’ compensation insurance;
|
(iv)
|
Business
interruption including loss of rental value insurance for the Mortgaged
Property in an amount equal to not less than twelve (12) months’ estimated
gross Rents attributable to the Mortgaged Property and based on gross
Rents for the immediately preceding year and otherwise sufficient to avoid
any co-insurance penalty with a 90 day extended period of indemnity (but a
minimum of eighteen (18) months’ estimated gross Rents attributable to the
Mortgaged Property and based on gross Rents for the immediately preceding
year and otherwise sufficient to avoid any co-insurance penalty with a 90
day extended period of indemnity when (A) the Improvements have 5 or more
stories or (B) at all times during which the Indebtedness is
equal to or greater than
$50,000,000);
|
(v)
|
If
any portion of the Improvements are located within a federally designated
flood hazard zone, flood insurance in an amount equal to the full
insurable value of the portion of such Improvements within such flood
hazard zone. Such coverage may need to be purchased through
excess carriers if the required coverage exceeds the maximum insurance
allowed under the federal flood insurance
program;
|
(vi)
|
Insurance
against loss or damage from (A) leakage of sprinkler systems and (B)
explosion of steam boilers, air conditioning equipment, pressure vessels
or similar apparatus now or hereafter installed at the Mortgaged Property,
in such amounts as Lender may from time to time reasonably require and
which are customarily required by institutional lenders with respect to
similar properties similarly
situated;
|
(vii)
|
The
insurance required under clauses (i) and (iv) above shall cover perils of
terrorism and acts of terrorism and Borrower shall maintain commercial
property insurance for loss resulting from perils and acts of terrorism on
terms (including amounts) consistent with those required under clauses (i)
and (iv) above at all times during the term of the Loan evidenced by the
Note;
|
(viii)
|
During
any period of Restoration, builder’s “all risk” insurance in an amount
equal to not less than the full insurable value of the Property against
such risks (including fire and extended coverage and collapse of the
Improvements to agreed limits) as Lender may request, in form and
substance acceptable to Lender; and
|
(ix)
|
Such
other insurance with respect to the Improvements and Personalty located on
the Property against loss or damage as required by Lender (including,
without limitation, liquor/dramshop, Mold, hurricane, windstorm and
earthquake insurance) provided such insurance is of the kind for risks
from time to time customarily insured against and in such minimum coverage
amounts and maximum deductibles as are generally required by institutional
lenders for properties comparable to the Mortgaged Property or which
Lender may deem necessary in its reasonable discretion; provided, however,
if Lender requires earthquake insurance, the amount of coverage must be
equal to 150% of the probable
|
|
maximum
loss for the Mortgaged Property but Lender shall not require earthquake
insurance if the probable maximum loss for the Mortgaged Property is less
than twenty percent (20%). In the event any updated reports or
other documentation are reasonably required by Lender in order to
determine whether such additional insurance is necessary or prudent,
Borrower shall pay for all such documentation at its sole cost and
expense.
|
All
insurance required pursuant to subsections (i) and subsections (iv) through (ix)
shall be referred to as “Hazard Insurance”.
(b)
All
premiums on insurance policies required under Section 19(a) shall be paid in the
manner provided in Section 7, unless Lender has designated in writing another
method of payment. All such policies shall also be in a form approved
by Lender. All policies of Hazard Insurance must include a
non-contributing, non-reporting mortgagee clause in favor of, and in a form
approved by, Lender. All policies for general liability insurance
must contain a standard additional insured provision, in favor of, and in a form
approved by Lender. Borrower shall deliver to Lender a legible copy
of each insurance policy (or duplicate original), and Borrower shall promptly
deliver to Lender a copy of all renewal and other notices received by Borrower
with respect to the policies and all receipts for paid premiums. At
least 30 days prior to the expiration date of any insurance policy, Borrower
shall deliver to Lender evidence acceptable to Lender that the policy has been
renewed. If Borrower has not delivered a legible copy of each renewal
policy (or a duplicate original) prior to the expiration date of any insurance
policy, Borrower shall deliver a legible copy of each renewal policy (or a
duplicate original) in a form satisfactory to Lender within 60 days after the
expiration date of the original policy.
(c)
Borrower
will maintain the insurance coverage described in this Section 19 with companies
acceptable to Lender and with a claims paying ability of at least (i) “A-” or
its equivalent by Fitch, Inc., (ii) “A-” or its equivalent by Standard &
Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., (iii)
“A3” or its equivalent by Moody’s Investors Service, Inc. or (iv) “A VIII” or
its equivalent by A.M. Best Company. All insurers providing insurance
required by this Instrument must be authorized to issue insurance in the
Property Jurisdiction.
(d)
All
insurance policies and renewals of insurance policies required by this Section
19 shall be for such periods as Lender may from time to time
require.
(e)
Borrower
shall comply with all insurance requirements and shall not permit any condition
to exist on the Mortgaged Property that would invalidate any part of any
insurance coverage that this Instrument requires Borrower to
maintain.
(f)
In the
event of loss, Borrower shall give immediate written notice to the insurance
carrier and to Lender. Borrower hereby authorizes and appoints Lender
as attorney in fact for Borrower to make proof of loss, to adjust and compromise
any claims under policies of Hazard Insurance, to appear in and prosecute any
action arising from such Hazard Insurance policies, to collect and receive the
proceeds of Hazard Insurance, to hold the proceeds of Hazard Insurance, and to
deduct from such proceeds Lender’s expenses incurred in the collection of such
proceeds. This power of attorney is coupled with an interest and
therefore is irrevocable. However, nothing contained in this Section
19 shall require Lender to incur any expense or take any
action. Lender may, at Lender’s option, (i) require a “repair or
replacement” settlement, in which case the proceeds will be used to reimburse
Borrower for the cost of restoring and repairing the Mortgaged Property to the
equivalent of its original condition or to a condition approved by
Lender
(the “
Restoration
”), or
(ii) require an “actual cash value” settlement in which case the proceeds may be
applied to the payment of the Indebtedness, whether or not then due. To the
extent Lender determines to require a repair or replacement settlement and apply
insurance proceeds to Restoration, Lender shall apply the proceeds in accordance
with Lender’s then-current policies relating to the restoration of casualty
damage on similar multifamily properties.
(g)
Notwithstanding
any provision to the contrary in this Section 19, as long as no Event of
Default, or any event which, with the giving of Notice or the passage of time,
or both, would constitute an Event of Default, has occurred and is
continuing,
(i)
|
in
the event of a casualty resulting in damage to the Mortgaged Property
which will cost $25,000 or less to repair, the Borrower shall have the
sole right to make proof of loss, adjust and compromise the claim and
collect and receive any proceeds directly without the approval or prior
consent of the Lender so long as the insurance proceeds are used solely
for the Restoration of the Mortgaged Property;
and
|
(ii)
|
in
the event of a casualty resulting in damage to the Mortgaged Property
which will cost more than $25,000 but less than $100,000 to repair, the
Borrower is authorized to make proof of loss and adjust and compromise the
claim without the prior consent of Lender, and Lender shall hold the
applicable insurance proceeds to be used to reimburse Borrower for the
cost of Restoration of the Mortgaged Property and shall not apply such
proceeds to the payment of sums due under this
Instrument.
|
(h)
Lender
will have the right to exercise its option to apply insurance proceeds to the
payment of the Indebtedness only if Lender determines that at least one of the
following conditions is met:
(i)
|
an
Event of Default (or any event, which, with the giving of Notice or the
passage of time, or both, would constitute an Event of Default) has
occurred and is continuing;
|
(ii)
|
Lender
determines, in its discretion, that there will not be sufficient funds
from insurance proceeds, anticipated contributions of Borrower of its own
funds or other sources acceptable to Lender to complete the
Restoration;
|
(iii)
|
Lender
determines, in its discretion, that the rental income from the Mortgaged
Property after completion of the Restoration will not be sufficient to
meet all operating costs and other expenses, Imposition Deposits, deposits
to reserves and Loan repayment obligations relating to the Mortgaged
Property;
|
(iv)
|
Lender
determines, in its discretion, that the Restoration will not be completed
by the earlier of (A) at least one year before the Maturity Date (or six
months before the Maturity Date if Lender determines in its discretion
that re-leasing of the Mortgaged Property will be completed within such
six-month period) or (B) the expiration of the business interruption
coverage;
|
(v)
|
Lender
determines that the Restoration will not be completed within one year
after the date of the loss or
casualty;
|
(vi)
|
the
casualty involved an actual or constructive loss of more than 30% of the
fair market value of the Mortgaged Property, and rendered untenantable
more than 30% of the aggregate rentable square footage of the Mortgaged
Property;
|
(vii)
|
after
Restoration the fair market value of the Mortgaged Property is expected to
be less than the fair market value of the Mortgaged Property immediately
prior to such casualty (assuming the affected portion of the Mortgaged
Property is relet within a reasonable period after the date of such
casualty); or
|
(viii)
|
Leases
covering at least 65% of the aggregate rentable square footage of the
Mortgaged Property shall not remain in full force and effect during and
after the completion of
Restoration.
|
(i)
If the
Mortgaged Property is sold at a foreclosure sale or Lender acquires title to the
Mortgaged Property, Lender shall automatically succeed to all rights of Borrower
in and to any insurance policies and unearned insurance premiums and in and to
the proceeds resulting from any damage to the Mortgaged Property prior to such
sale or acquisition.
(j)
Unless
Lender otherwise agrees in writing, any application of any insurance proceeds to
the Indebtedness shall not extend or postpone the due date of any monthly
installments referred to in the Note, Section 7 of this Instrument or any
Collateral Agreement, or change the amount of such installments.
(k)
Borrower
agrees to execute such further evidence of assignment of any insurance proceeds
as Lender may require.
20.
CONDEMNATION.
(a)
Borrower
shall promptly notify Lender in writing of any action or proceeding or notice
relating to any proposed or actual condemnation or other taking, or conveyance
in lieu thereof, of all or any part of the Mortgaged Property, whether direct or
indirect (a “
Condemnation
”). Borrower
shall appear in and prosecute or defend any action or proceeding relating to any
Condemnation unless otherwise directed by Lender in writing. Borrower
authorizes and appoints Lender as attorney in fact for Borrower to commence,
appear in and prosecute, in Lender’s or Borrower’s name, any action or
proceeding relating to any Condemnation and to settle or compromise any claim in
connection with any Condemnation, after consultation with Borrower and
consistent with commercially reasonable standards of a prudent
lender. This power of attorney is coupled with an interest and
therefore is irrevocable. However, nothing contained in this Section
20 shall require Lender to incur any expense or take any
action. Borrower hereby transfers and assigns to Lender all right,
title and interest of Borrower in and to any award or payment with respect to
(i) any Condemnation, or any conveyance in lieu of Condemnation, and (ii) any
damage to the Mortgaged Property caused by governmental action that does not
result in a Condemnation.
(b)
Lender
may hold such awards or proceeds and apply such awards or proceeds, after the
deduction of Lender’s expenses incurred in the collection of such amounts
(including
Attorneys’
Fees and Costs) at Lender’s option, to the restoration or repair of the
Mortgaged Property or to the payment of the Indebtedness, with the balance, if
any, to Borrower. Unless Lender otherwise agrees in writing, any
application of any awards or proceeds to the Indebtedness shall not extend or
postpone the due date of any monthly installments referred to in the Note,
Section 7 of this Instrument or any Collateral Agreement, or change the amount
of such installments. Borrower agrees to execute such further
evidence of assignment of any awards or proceeds as Lender may
require.
(c)
Notwithstanding
any provision to the contrary in this Section 20, in the event of a partial
Condemnation of the Mortgaged Property, as long as no Event of Default, or any
event which, with the giving of Notice or the passage of time, or both, would
constitute an Event of Default, has occurred and is continuing,
(i)
|
in
the event of a partial Condemnation resulting in proceeds or awards in the
amount of $25,000 or less, the Borrower shall have the sole right to make
proof of loss, adjust and compromise the claim and collect and receive any
proceeds directly without the approval or prior consent of the Lender so
long as the proceeds or awards are used solely for the Restoration of the
Mortgaged Property; and
|
(ii)
|
in
the event of a partial Condemnation resulting in proceeds or awards in the
amount of more than $25,000 but less than $100,000, the Borrower is
authorized to make proof of loss and adjust and compromise the claim
without the prior consent of Lender, and Lender shall hold the applicable
proceeds or awards to be used to reimburse Borrower for the cost of
Restoration of the Mortgaged Property and shall not apply such proceeds
and awards to the payment of sums due under this
Instrument.
|
(d)
In the
event of a partial Condemnation of the Mortgaged Property resulting in proceeds
or awards in the amount of $100,000 or more, Lender will have the right to
exercise its option to apply Condemnation proceeds to the payment of the
Indebtedness only if Lender determines that at least one of the following
conditions is met:
(i)
|
an
Event of Default (or any event, which, with the giving of Notice or the
passage of time, or both, would constitute an Event of Default) has
occurred and is continuing;
|
(ii)
|
Lender
determines, in its discretion, that there will not be sufficient funds
from Condemnation proceeds, anticipated contributions of Borrower of its
own funds or other sources acceptable to Lender to complete the
Restoration;
|
(iii)
|
Lender
determines, in its discretion, that the rental income from the Mortgaged
Property after completion of the Restoration will not be sufficient to
meet all operating costs and other expenses, Imposition Deposits, deposits
to reserves and Loan repayment obligations relating to the Mortgaged
Property;
|
(iv)
|
Lender
determines, in its discretion, that the Restoration will not be completed
at least one year before the Maturity Date (or six months
before
|
|
the
Maturity Date if Lender determines in its discretion that re-leasing of
the Mortgaged Property will be completed within such six-month
period
|
(v)
|
Lender
determines that the Restoration will not be completed within one year
after the date of the Condemnation;
|
(vi)
|
the
Condemnation involved an actual or constructive loss of more than 15% of
the fair market value of the Mortgaged Property, and rendered untenantable
more than 25% of the aggregate rentable square footage of the Mortgaged
Property;
|
(vii)
|
after
Restoration the fair market value of the Mortgaged Property is expected to
be less than the fair market value of the Mortgaged Property immediately
prior to the Condemnation (assuming the affected portion of the Mortgaged
Property is relet within a reasonable period after the date of the
Condemnation); or
|
(viii)
|
Leases
covering at least 65% of the aggregate rentable square footage of the
Mortgaged Property shall not remain in full force and effect during and
after the completion of
Restoration.
|
(e)
If the
Mortgaged Property is sold at a foreclosure sale or Lender acquires title to the
Mortgaged Property, Lender shall automatically succeed to all rights of Borrower
in and to any Condemnation proceeds and awards prior to such sale or
acquisition.
(f)
Borrower
agrees to execute such further evidence of assignment of any Condemnation
proceeds as Lender may require.
21.
TRANSFERS OF THE MORTGAGED PROPERTY
OR INTERESTS IN BORROWER. [RIGHT TO UNLIMITED TRANSFERS -- WITH
LENDER APPROVAL].
Notwithstanding anything to the contrary in
this Section 21, no Transfer will be permitted under this Section 21 unless the
provisions of Section 33 are satisfied.
(a)
“
Transfer
” means
(i)
|
a
sale, assignment, transfer or other disposition or divestment of any
interest therein (whether voluntary, involuntary or by operation of
law);
|
(ii)
|
the
granting, creating or attachment of a lien, encumbrance or security
interest (whether voluntary, involuntary or by operation of
law);
|
(iii)
|
the
issuance or other creation of an ownership interest in a legal entity,
including a partnership interest, interest in a limited liability company
or corporate stock;
|
(iv)
|
the
withdrawal, retirement, removal or involuntary resignation of a partner in
a partnership or a member or Manager in a limited liability company;
or
|
(v)
|
the
merger, dissolution, liquidation, or consolidation of a legal entity or
the reconstitution of one type of legal entity into another type of legal
entity.
|
For
purposes of defining the term “Transfer,” the term “partnership” shall mean a
general partnership, a limited partnership, and a joint venture, and the term
“partner” shall mean a general partner, a limited partner and a joint
venturer.
(b)
“Transfer”
does not include
(i)
|
a
conveyance of the Mortgaged Property at a judicial or non-judicial
foreclosure sale under this
Instrument,
|
(ii)
|
the
Mortgaged Property becoming part of a bankruptcy estate by operation of
law under the United States Bankruptcy Code,
or
|
(iii)
|
a
lien against the Mortgaged Property for local taxes and/or assessments not
then due and payable.
|
(c)
The
occurrence of any of the following Transfers shall not constitute an Event of
Default under this Instrument, notwithstanding any provision of Section 21(e) to
the contrary:
(i)
|
a
Transfer to which Lender has
consented;
|
(ii)
|
a
Transfer that occurs in accordance with Section
21(d);
|
(iii)
|
the
grant of a leasehold interest in an individual dwelling unit for a term of
two years or less not containing an option to
purchase;
|
(iv)
|
a
Transfer of obsolete or worn out Personalty or Fixtures that are
contemporaneously replaced by items of equal or better function and
quality, which are free of liens, encumbrances and security interests
other than those created by the Loan Documents or consented to by
Lender;
|
(v)
|
the
creation of a mechanic’s, materialman’s, or judgment lien against the
Mortgaged Property, which is released of record or otherwise remedied to
Lender’s satisfaction within 60 days of the date of
creation;
|
(vi)
|
if
Borrower is a housing cooperative corporation or association, the Transfer
of more than 49 percent of the shares in the housing cooperative or the
assignment of more than 49 percent of the occupancy agreements or leases
relating thereto by tenant shareholders of the housing cooperative or
association to other tenant
shareholders;
|
(vii)
|
any
Transfer of an interest in Borrower or any interest in a Controlling
Entity (which, if such Controlling Entity were Borrower, would result in
an Event of Default) listed in (A) through (F) below (a “
Preapproved Transfer
”),
under the terms and conditions listed as items (1) through (10)
below:
|
(A)
|
a
sale or transfer to one or more of the transferor’s immediate family
members; or
|
(B)
|
a
sale or transfer to any trust having as its sole beneficiaries the
transferor and/or one or more of the transferor’s immediate family
members; or
|
(C)
|
a
sale or transfer from a trust to any one or more of its beneficiaries who
are immediate family members of the transferor ;
or
|
(D)
|
the
substitution or replacement of the trustee of any trust with a trustee who
is an immediate family member of the transferor;
or
|
(E)
|
a
sale or transfer to an entity owned and Controlled by the transferor or
the transferor’s immediate family members;
or
|
(F)
|
a
sale or transfer to a natural person or entity that has an existing
interest in the Borrower or in a Controlling
Entity.
|
(1)
|
Borrower
shall provide Lender with prior written Notice of the proposed Preapproved
Transfer, which Notice must be accompanied by a non-refundable review fee
in the amount of $3,000.00.
|
(2)
|
For
the purposes of these Preapproved Transfers, a transferor’s immediate
family members will be deemed to include a spouse, parent, child or
grandchild of such transferor.
|
(3)
|
Either
directly or indirectly, [See Exhibit B] shall retain at all times a
Controlling Interest in the Borrower and manage the day-to-day operations
of the Borrower.
|
(4)
|
At
the time of the proposed Preapproved Transfer, no Event of Default shall
have occurred and be continuing and no event or condition shall have
occurred and be continuing that, with the giving of Notice or the passage
of time, or both, would become an Event of
Default.
|
(5)
|
Lender
shall be entitled to collect all costs, including the cost of all title
searches, title insurance and recording costs, and all Attorneys’ Fees and
Costs.
|
(6)
|
Lender
shall not be entitled to collect a transfer fee as a result of these
Preapproved Transfers.
|
(7)
|
In
the event of a Transfer prohibited by or requiring Lender’s approval under
this Section 21, this Section (c)(vii) may be modified or rendered void by
Lender at Lender’s option by Notice to Borrower and the transferee(s), as
a condition of Lender’s consent.
|
(8)
|
if
any certificates evidencing the Securitization remain outstanding, a
Rating Confirmation.
|
(9)
|
If
a nonconsolidation opinion was delivered at origination of the Loan and
if, after giving effect to all Preapproved Transfers and all prior
Transfers, fifty percent (50%) or more in the aggregate of direct or
indirect interests in Borrower are owned by any Person and its Affiliates
that owned less than a fifty percent (50%) direct or indirect interest in
Borrower as of the origination of the Loan, an opinion of counsel for
Borrower, in form and substance satisfactory to Lender and to the Rating
Agencies, with regard to
nonconsolidation.
|
(10)
|
Confirmation
acceptable to Lender that Section 33 continues to be satisfied;
and
|
(viii)
|
a
Supplemental Mortgage that complies with Section 43 or Defeasance that
complies with Section 44.
|
(d)
The
occurrence of any of the following Transfers shall not constitute an Event of
Default under this Instrument, provided such Transfer does not constitute an
Event of Default under any other Section of this Instrument:
(i)
|
a
Transfer that occurs by devise, descent, or by operation of law upon the
death of a natural person to one or more members of the immediate family
of such natural person or to a trust or family conservatorship established
for the benefit of such immediate family member or members, provided
that:
|
|
(A)
|
The
Property Manager (or a replacement property manager approved by Lender),
if applicable, continues to be responsible for the management of the
Mortgaged Property, and such Transfer shall not result in a change in the
day-to-day operations of the Mortgaged
Property;
|
|
(B)
|
those
persons responsible for the management and control of Borrower remain
unchanged as a result of such Transfer, or any replacement management is
approved by Lender;
|
|
(C)
|
Lender
receives confirmation acceptable to Lender that Section 33 continues to be
satisfied;
|
|
(D)
|
each
guarantor executes such documents and agreements as Lender shall
reasonably require to evidence and effectuate the ratification of each
guaranty and indemnity agreement, or in the event of the death of any
guarantor or indemnitor, the Borrower causes one or more natural persons
or entities acceptable to Lender to execute and deliver to Lender a
guaranty in a form acceptable to Lender, without any cost or expense to
Lender;
|
|
(E)
|
Borrower
shall give Lender Notice of such Transfer together with copies of all
documents effecting such Transfer not less than thirty (30) calendar days
after the date of such Transfer, and
|
|
|
contemporaneously
therewith, shall (1) reaffirm the warranties and representations under
Section 10 and Section 48 of this Instrument and (2) satisfy Lender, in
its discretion, that such Transferee’s organization, credit and experience
in the management of similar properties are deemed to be appropriate to
the overall structure and documentation of the existing
financing;
|
|
(F)
|
such
legal opinions from Transferee’s counsel as Lender deems necessary,
including an opinion that the Transferee and any SPE Equity Owner is in
compliance with Section 33 of this Instrument, a nonconsolidation opinion
(if a nonconsolidation opinion was delivered at origination of the Loan
and if required by Lender), an opinion that the ratification of the Loan
Documents and guaranty, if applicable, has been duly authorized, executed,
and delivered and that the ratification documents and guaranty, if
applicable, are enforceable as the obligation of the
Transferee;
|
|
(G)
|
if
any certificates evidencing the Securitization remain outstanding, a
Rating Confirmation; and
|
|
(H)
|
Borrower
shall pay or reimburse Lender for all costs and expenses incurred by
Lender in connection with such Transfer (including all Attorneys’ Fees and
Costs); and
|
(ii)
|
the
grant of an easement, if before the grant Lender determines that the
easement will not materially affect the operation or value of the
Mortgaged Property or Lender’s interest in the Mortgaged Property, and
Borrower pays to Lender, upon demand, all costs and expenses, including
Attorneys’ Fees and Costs, incurred by Lender in connection with reviewing
Borrower’s request; and, if the Note is held by a REMIC trust and if
required by Lender, an opinion of counsel for Borrower, in form and
substance satisfactory to Lender, to the effect that (A) the grant of such
easement has been effected in accordance with the requirements of Treasury
Regulation Section 1.860G-2(a)(8) (as such regulation may be modified,
amended or replaced from time to time), (B) the qualification and status
of the REMIC trust as a REMIC will not be adversely affected or impaired
as a result of such grant, and (C) the REMIC trust will not incur a tax
under Section 860G(d) of the Tax Code as a result of such
grant.
|
(e)
The
occurrence of any of the following Transfers shall constitute an Event of
Default under this Instrument:
(i)
|
a
Transfer of all or any part of the Mortgaged Property or any interest in
the Mortgaged Property;
|
(ii)
|
if
Borrower is a limited partnership, a Transfer of (A) any general
partnership interest, or (B) limited partnership interests in Borrower
that would cause the Initial Owners of Borrower to own less than 50% of
all limited partnership interests in
Borrower;
|
(iii)
|
if
Borrower is a limited liability company, (A) a Transfer of any membership
interest in Borrower which would cause the Initial Owners to own less than
50% of all the membership interests in Borrower or (B) a Transfer that
results in a change of Manager;
|
(iv)
|
if
Borrower is a corporation (A) the Transfer of any voting stock in Borrower
which would cause the Initial Owners to own less than 50% of any class of
voting stock in Borrower or (B) if the outstanding voting stock in
Borrower is held by 100 or more shareholders, one or more Transfers by a
single transferor within a 12-month period affecting an aggregate of 5
percent or more of that stock;
|
(v)
|
a
Transfer of any interest in a Controlling Entity which, if such
Controlling Entity were Borrower, would result in an Event of Default
under any of Sections 21(e)(i) through (iv)
above.
|
Lender
shall not be required to demonstrate any actual impairment of its security or
any increased risk of default in order to exercise any of its remedies with
respect to an Event of Default under this Section 21.
(f)
Lender
shall consent, without any adjustment to the rate at which the Indebtedness
secured by this Instrument bears interest or to any other economic terms of the
Indebtedness set forth in the Note, to a Transfer that would otherwise violate
this Section 21 if, prior to the Transfer, Borrower has satisfied each of the
following requirements:
(i)
|
the
submission to Lender of all information required by Lender to make the
determination required by this Section
21(f);
|
(ii)
|
the
absence of any Event of Default;
|
(iii)
|
the
transferee (the “
Transferee
”) meets
Lender’s eligibility, credit, management and other standards satisfactory
to Lender in its sole discretion;
|
(iv)
|
the
Transferee’s organization, credit and experience in the management of
similar properties are deemed by the Lender, in its discretion, to be
appropriate to the overall structure and documentation of the existing
financing;
|
(v)
|
the
Mortgaged Property will be managed by a property manager meeting the
requirements of Section 17(e);
|
(vi)
|
the
Mortgaged Property, at the time of the proposed Transfer, meets all
standards as to its physical condition, occupancy, net operating income
and the collection of reserves satisfactory to Lender in its sole
discretion;
|
(vii)
|
in
the case of a Transfer of all or any part of the Mortgaged Property, (A)
the execution by the Transferee of Lender’s then-standard assumption
agreement that, among other things, requires the Transferee to perform all
obligations of Borrower set forth in the Note, this Instrument and any
other Loan Documents, and may require that the Transferee comply
with
|
|
any
provisions of this Instrument or any other Loan Document which previously
may have been waived or modified by Lender, (B) if Lender requires, the
Transferee causes one or more natural persons or entities acceptable to
Lender to execute and deliver to Lender a guaranty in a form acceptable to
Lender, and (C) the Transferee executes such additional Collateral
Agreements as Lender may require;
|
(viii)
|
in
the case of a Transfer of any interest in a Controlling Entity, if a
guaranty has been executed and delivered in connection with the Note, this
Instrument or any of the other Loan Documents, the Borrower causes one or
more natural persons or entities acceptable to Lender to execute and
deliver to Lender a guaranty in a form acceptable to
Lender;
|
(ix)
|
If
a Supplemental Mortgage is outstanding, the Borrower obtains the consent
of the lender for the Supplemental
Mortgage;
|
(x)
|
Lender’s
receipt of all of the following:
|
(A)
|
a
review fee in the amount of
$3,000.00;
|
(B)
|
a
transfer fee in an amount equal to one percent of the unpaid principal
balance of the Indebtedness immediately before the applicable Transfer;
and
|
(C)
|
the
amount of Lender’s out of pocket costs (including reasonable Attorneys’
Fees and Costs) incurred in reviewing the Transfer request and any fees
charged by the Rating Agencies; and
|
(xi)
|
evidence
satisfactory to Lender that the Transferee and any SPE Equity Owner of
such Transferee meet the requirements of Section
33;
|
(xii)
|
such
legal opinions from Transferee’s counsel as Lender deems necessary,
including an opinion that the Transferee and any SPE Equity Owner is in
compliance with Section 33 of this Instrument, a nonconsolidation opinion
(if a nonconsolidation opinion was delivered at origination of the Loan
and if required by Lender), an opinion that the assignment and assumption
of the Loan Documents has been duly authorized, executed, and delivered
and that the assignment documents and the Loan Documents are enforceable
as the obligation of the Transferee;
and
|
(xiii)
|
if
any certificates evidencing the Securitization remain outstanding, a
Rating Confirmation.
|
22.
EVENTS OF
DEFAULT.
The occurrence of any one or more of the following
shall constitute an Event of Default under this Instrument:
(a)
any
failure by Borrower to pay or deposit when due any amount required by the Note,
this Instrument or any other Loan Document;
(b)
any
failure by Borrower to maintain the insurance coverage required by Section
19;
(c)
any
failure by Borrower or any SPE Equity Owner to comply with the provisions of
Section 33 or if any of the assumptions contained in any nonconsolidation
opinions delivered to Lender at any time is or shall become untrue in any
material respect;
(d)
fraud or
material misrepresentation or material omission by Borrower, any of its
officers, directors, trustees, general partners or managers, any SPE Equity
Owner or any guarantor in connection with (i) the application for or creation of
the Indebtedness, (ii) any financial statement, Rent Schedule, or other report
or information provided to Lender during the term of the Indebtedness, or (iii)
any request for Lender’s consent to any proposed action, including a request for
disbursement of funds under any Collateral Agreement;
(e)
any
failure by Borrower to comply with the provisions of Section 20;
(f)
any Event
of Default under Section 21;
(g)
the
commencement of a forfeiture action or proceeding, whether civil or criminal,
which could result in a forfeiture of the Mortgaged Property or otherwise
materially impair the lien created by this Instrument or Lender’s interest in
the Mortgaged Property;
(h)
any
failure by Borrower to perform any of its obligations under this Instrument
(other than those specified in Sections 22(a) through (g)), as and when
required, which continues for a period of 30 days after Notice of such failure
by Lender to Borrower. However, if Borrower’s failure to perform its
obligations as described in this Section 22(h) is of the nature that it cannot
be cured within the 30 day grace period but reasonably could be cured within 90
days, then Borrower shall have additional time as determined by Lender in its
discretion, not to exceed an additional 60 days, in which to cure such default,
provided that Borrower has diligently commenced to cure such default during the
30-day grace period and diligently pursues the cure of such
default. However, no such Notice or grace periods shall apply in the
case of any such failure which could, in Lender’s judgment, absent immediate
exercise by Lender of a right or remedy under this Instrument, result in harm to
Lender, impairment of the Note or this Instrument or any other security given
under any other Loan Document;
(i)
any
failure by Borrower to perform any of its obligations as and when required under
any Loan Document other than this Instrument which continues beyond the
applicable cure period, if any, specified in that Loan Document;
(j)
any
exercise by the holder of any other debt instrument secured by a mortgage, deed
of trust or deed to secure debt on the Mortgaged Property of a right to declare
all amounts due under that debt instrument immediately due and
payable;
(k)
if (i)
Borrower or any SPE Equity Owner shall commence any case, Proceeding or other
action under any existing or future law of any jurisdiction, domestic or
foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or
relief of debtors (A) seeking to have an order for relief entered with respect
to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debt, or (B) seeking
appointment of a receiver, trustee, custodian, conservator or other similar
official for it or for all or any substantial part of its assets; or (ii) there
shall be commenced against Borrower or any SPE Equity Owner any case,
Proceeding, or other action of a nature referred to in clause (i) above by any
party other than Lender which (A) results in the entry of an order for relief or
any such adjudication or appointment, or (B) remains undismissed, undischarged
or unbonded for a period of ninety (90)
days; or
(iii) there shall be commenced against Borrower or any SPE Equity Owner any
case, Proceeding or other action seeking issuance of a warrant of attachment,
execution, distraint or similar process against all or any substantial part of
its assets which results in the entry of any order by a court of competent
jurisdiction for any such relief which shall not have been vacated, discharged,
or stayed or bonded pending appeal within ninety (90) days from the entry
thereof; or (iv) Borrower or any SPE Equity Owner shall take any action in
furtherance of, or indicating its consent to, approval of, or acquiescence in,
any of the acts set forth in clause (i), (ii) or (iii) above;
and
(l)
any
representations and warranties by Borrower or any SPE Equity Owner in this
Instrument that are false or misleading in any material respect.
23.
REMEDIES CUMULATIVE; REMEDIES OF
BORROWER.
Each right and remedy provided in this Instrument is
distinct from all other rights or remedies under this Instrument or any other
Loan Document or afforded by applicable law, and each shall be cumulative and
may be exercised concurrently, independently, or successively, in any
order. In the event that a claim or adjudication is made that Lender
has acted unreasonably or unreasonably delayed acting in any case where, by law
or under this Instrument or the other Loan Documents, Lender has an obligation
to act reasonably or promptly, Lender shall not be liable for any monetary
damages, and Borrower’s sole remedy shall be limited to commencing an action
seeking injunctive relief or declaratory judgment. Any action or
proceeding to determine whether Lender has acted reasonably shall be determined
by an action seeking declaratory judgment.
24.
FORBEARANCE.
(a)
Lender
may (but shall not be obligated to) agree with Borrower, from time to time, and
without giving notice to, or obtaining the consent of, or having any effect upon
the obligations of, any guarantor or other third party obligor, to take any of
the following actions: extend the time for payment of all or any part
of the Indebtedness; reduce the payments due under this Instrument, the Note, or
any other Loan Document; release anyone liable for the payment of any amounts
under this Instrument, the Note, or any other Loan Document; accept a renewal of
the Note; modify the terms and time of payment of the Indebtedness; join in any
extension or subordination agreement; release any Mortgaged Property; take or
release other or additional security; modify the rate of interest or period of
amortization of the Note or change the amount of the monthly installments
payable under the Note; and otherwise modify this Instrument, the Note, or any
other Loan Document.
(b)
Any
forbearance by Lender in exercising any right or remedy under the Note, this
Instrument, or any other Loan Document or otherwise afforded by applicable law,
shall not be a waiver of or preclude the exercise of any other right or remedy,
or the subsequent exercise of any right or remedy. The acceptance by
Lender of payment of all or any part of the Indebtedness after the due date of
such payment, or in an amount which is less than the required payment, shall not
be a waiver of Lender’s right to require prompt payment when due of all other
payments on account of the Indebtedness or to exercise any remedies for any
failure to make prompt payment. Enforcement by Lender of any security for the
Indebtedness shall not constitute an election by Lender of remedies so as to
preclude the exercise of any other right available to
Lender. Lender’s receipt of any awards or proceeds under Sections 19
and 20 shall not operate to cure or waive any Event of Default.
25.
LOAN CHARGES.
If
any applicable law limiting the amount of interest or other charges permitted to
be collected from Borrower is interpreted so that any charge provided for in any
Loan Document, whether considered separately or together with other charges
levied in connection with any other Loan Document, violates that law, and
Borrower is entitled to the benefit of that law, that charge is hereby reduced
to the extent necessary to eliminate that violation. The amounts, if
any, previously paid to Lender in excess of the permitted amounts shall be
applied by Lender to reduce the principal of the Indebtedness. For
the purpose of determining whether any applicable law limiting the amount of
interest or other charges permitted to be collected from Borrower has been
violated, all Indebtedness which constitutes interest, as well as all other
charges levied in connection with the Indebtedness which constitute interest,
shall be deemed to be allocated and spread over the stated term of the
Note. Unless otherwise required by applicable law, such allocation
and spreading shall be effected in such a manner that the rate of interest so
computed is uniform throughout the stated term of the Note.
26.
WAIVER OF STATUTE OF LIMITATIONS,
OFFSETS, AND COUNTERCLAIMS.
Borrower hereby waives the right
to assert any statute of limitations as a bar to the enforcement of the lien of
this Instrument or to any action brought to enforce any Loan
Document. Borrower hereby waives the right to assert a counterclaim,
other than a compulsory counterclaim, in any action or proceeding brought
against it by Lender or otherwise to offset any obligations to make the payments
required by the Loan Documents. No failure by Lender to perform any
of its obligations hereunder shall be a valid defense to, or result in any
offset against, any payments that Borrower is obligated to make under any of the
Loan Documents.
27.
WAIVER OF
MARSHALLING.
Notwithstanding the existence of any other
security interests in the Mortgaged Property held by Lender or by any other
party, Lender shall have the right to determine the order in which any or all of
the Mortgaged Property shall be subjected to the remedies provided in this
Instrument, the Note, any other Loan Document or applicable
law. Lender shall have the right to determine the order in which any
or all portions of the Indebtedness are satisfied from the proceeds realized
upon the exercise of such remedies. Borrower and any party who now or
in the future acquires a security interest in the Mortgaged Property and who has
actual or constructive notice of this Instrument waives any and all right to
require the marshalling of assets or to require that any of the Mortgaged
Property be sold in the inverse order of alienation or that any of the Mortgaged
Property be sold in parcels or as an entirety in connection with the exercise of
any of the remedies permitted by applicable law or provided in this
Instrument.
28.
FURTHER ASSURANCES; LENDER’S
EXPENSES.
Borrower shall execute, acknowledge, and deliver, at
its sole cost and expense, all further acts, deeds, conveyances, assignments,
estoppel certificates, financing statements or amendments, transfers and
assurances as Lender may require from time to time in order to better assure,
grant, and convey to Lender the rights intended to be granted, now or in the
future, to Lender under this Instrument and the Loan
Documents. Borrower acknowledges and agrees that, in connection with
each request by Borrower under this Instrument or any Loan Document, Borrower
shall pay all reasonable Attorneys’ Fees and Costs and expenses incurred by
Lender, including any fees charged by the Rating Agencies, regardless of whether
the matter is approved, denied or withdrawn. Any amounts payable by Borrower
hereunder shall be deemed a part of the Indebtedness, shall be secured by this
Instrument and shall bear interest at the Default Rate if not fully paid within
ten (10) days of written demand for payment.
29.
ESTOPPEL
CERTIFICATE.
Within 10 days after a request from Lender,
Borrower shall deliver to Lender a written statement, signed and acknowledged by
Borrower,
certifying
to Lender or any Person designated by Lender, as of the date of such statement,
(i) that the Loan Documents are unmodified and in full force and
effect (or, if there have been modifications, that the Loan Documents
are in full force and effect as modified and setting forth such modifications);
(ii) the unpaid principal balance of the Note; (iii) the date to which interest
under the Note has been paid; (iv) that Borrower is not in default in paying the
Indebtedness or in performing or observing any of the covenants or agreements
contained in this Instrument or any of the other Loan Documents (or, if the
Borrower is in default, describing such default in reasonable detail); (v)
whether or not there are then existing any setoffs or defenses known to Borrower
against the enforcement of any right or remedy of Lender under the Loan
Documents; and (vi) any additional facts requested by Lender.
30.
GOVERNING
LAW; CONSENT TO JURISDICTION AND VENUE.
(a)
This
Instrument, and any Loan Document which does not itself expressly identify the
law that is to apply to it, shall be governed by the laws of the jurisdiction in
which the Land is located (the “
Property
Jurisdiction
”).
(b)
Borrower
agrees that any controversy arising under or in relation to the Note, this
Instrument, or any other Loan Document may be litigated in the Property
Jurisdiction. The state and federal courts and authorities with
jurisdiction in the Property Jurisdiction shall have jurisdiction over all
controversies that shall arise under or in relation to the Note, any security
for the Indebtedness, or any other Loan Document. Borrower
irrevocably consents to service, jurisdiction, and venue of such courts for any
such litigation and waives any other venue to which it might be entitled by
virtue of domicile, habitual residence or otherwise. However, nothing
in this Section 30 is intended to limit Lender’s right to bring any suit, action
or proceeding relating to matters under this Instrument in any court of any
other jurisdiction.
31.
NOTICE.
(a)
All
Notices, demands and other communications (“
Notice
”) under or concerning
this Instrument shall be in writing. Each Notice shall be addressed
to the intended recipient at its address set forth in this Instrument, and shall
be deemed given on the earliest to occur of (i) the date when the Notice is
received by the addressee; (ii) the first Business Day after the Notice is
delivered to a recognized overnight courier service, with arrangements made for
payment of charges for next Business Day delivery; or (iii) the third Business
Day after the Notice is deposited in the United States mail with postage
prepaid, certified mail, return receipt requested.
(b)
Any party
to this Instrument may change the address to which Notices intended for it are
to be directed by means of Notice given to the other party in accordance with
this Section 31. Each party agrees that it will not refuse or reject
delivery of any Notice given in accordance with this Section 31, that it will
acknowledge, in writing, the receipt of any Notice upon request by the other
party and that any Notice rejected or refused by it shall be deemed for purposes
of this Section 31 to have been received by the rejecting party on the date so
refused or rejected, as conclusively established by the records of the U.S.
Postal Service or the courier service.
(c)
Any
Notice under the Note and any other Loan Document that does not specify how
Notices are to be given shall be given in accordance with this Section
31.
32.
SALE OF NOTE; CHANGE IN SERVICER;
LOAN SERVICING.
The Note or a partial interest in the Note
(together with this Instrument and the other Loan Documents)
may be
sold one or more times without prior Notice to Borrower. A sale may
result in a change of the Loan Servicer. There also may be one or
more changes of the Loan Servicer unrelated to a sale of the Note. If
there is a change of the Loan Servicer, Borrower will be given Notice of the
change. All actions regarding the servicing of the Loan evidenced by the Note,
including the collection of payments, the giving and receipt of Notice,
inspections of the Mortgaged Property, inspections of books and records, and the
granting of consents and approvals, may be taken by the Loan Servicer unless
Borrower receives Notice to the contrary. If Borrower receives
conflicting Notices regarding the identity of the Loan Servicer or any other
subject, any such Notice from Lender shall govern.
33.
SINGLE PURPOSE
ENTITY.
(a)
Until the
Indebtedness is paid in full, each Borrower and SPE Equity Owner shall remain a
Single Purpose Entity.
(b)
A “
Single Purpose Entity
” means a
corporation, limited partnership, or limited liability company which, at all
times since its formation and thereafter:
(i)
|
shall
not engage in any business or activity, other than the ownership,
operation and maintenance of the Mortgaged Property and activities
incidental thereto;
|
(ii)
|
shall
not acquire, own, hold, lease, operate, manage, maintain, develop or
improve any assets other than the Mortgaged Property and such Personalty
as may be necessary for the operation of the Mortgaged Property and shall
conduct and operate its business as presently conducted and
operated;
|
(iii)
|
shall
preserve its existence as an entity duly organized, validly existing and
in good standing (if applicable) under the laws of the jurisdiction of its
formation or organization and shall do all things necessary to observe
organizational formalities;
|
(iv)
|
shall
not merge or consolidate with any other
Person;
|
(v)
|
shall
not take any action to dissolve, wind-up, terminate or liquidate in whole
or in part; to sell, transfer or otherwise dispose of all or substantially
all of its assets; to change its legal structure; transfer or permit the
direct or indirect transfer of any partnership, membership or other equity
interests, as applicable, other than Transfers permitted hereunder; issue
additional partnership, membership or other equity interests, as
applicable; or seek to accomplish any of the
foregoing;
|
(vi)
|
shall
not, without the prior unanimous written consent of all of the Borrower’s
partners, members, or shareholders, as applicable, and, if applicable, the
prior unanimous written consent of one hundred percent (100%) of the
members of the board of directors or of the board of managers of the
Borrower or the SPE Equity Owner: (A) file any insolvency, or
reorganization case or proceeding, to institute proceedings to have the
Borrower or any SPE Equity Owner be adjudicated bankrupt or insolvent, (B)
institute proceedings under any applicable insolvency law, (C) seek any
relief under any law relating to relief from debts or the
|
|
protection
of debtors, (D) consent to the filing or institution of bankruptcy or
insolvency proceedings against the Borrower or any SPE Equity Owner, (E)
file a petition seeking, or consent to, reorganization or relief with
respect to the Borrower or any SPE Equity Owner under any applicable
federal or state law relating to bankruptcy or insolvency, (F) seek or
consent to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator, custodian, or any similar official for the Borrower or a
substantial part of its property or for any SPE Equity Owner or a
substantial part of its property, (G) make any assignment for the benefit
of creditors of the Borrower or any SPE Equity Owner, (H) admit in writing
the Borrower’s or any SPE Equity Owner’s inability to pay its debts
generally as they become due, or (I) take action in furtherance of any of
the foregoing;
|
(vii)
|
shall
not amend or restate its organizational documents if such change would
modify the requirements set forth in this Section
33;
|
(viii)
|
shall
not own any subsidiary or make any investment in, any other
Person;
|
(ix)
|
shall
not commingle its assets with the assets of any other Person and shall
hold all of its assets in its own
name;
|
(x)
|
shall
not incur any debt, secured or unsecured, direct or contingent (including,
without limitation, guaranteeing any obligation), other than, (A) the
Indebtedness (and any further indebtedness as described in Section 43 with
regard to Supplemental Mortgages) and (B) customary unsecured trade
payables incurred in the ordinary course of owning and operating the
Mortgaged Property provided the same are not evidenced by a promissory
note, do not exceed, in the aggregate, at any time a maximum amount of two
percent (2%) of the original principal amount of the Indebtedness and are
paid within sixty (60) days of the date
incurred;
|
(xi)
|
shall
maintain its records, books of account, bank accounts, financial
statements, accounting records and other entity documents separate and
apart from those of any other Person and shall not list its assets as
assets on the financial statement of any other Person; provided, however,
that the Borrower’s assets may be included in a consolidated financial
statement of its Affiliate provided that (A) appropriate notation shall be
made on such consolidated financial statements to indicate the
separateness of the Borrower from such Affiliate and to indicate that the
Borrower’s assets and credit are not available to satisfy the debts and
other obligations of such Affiliate or any other Person and (B) such
assets shall also be listed on the Borrower’s own separate balance
sheet;
|
(xii)
|
except
for capital contributions or capital distributions permitted under the
terms and conditions of its organizational documents, shall only enter
into any contract or agreement with any general partner, member,
shareholder, principal or Affiliate of Borrower or any guarantor, or any
general partner, member, principal or Affiliate thereof, upon terms and
conditions that are commercially reasonable and substantially similar to
those that would be available on an arm’s-length basis with third
parties;
|
(xiii)
|
shall
not maintain its assets in such a manner that will be costly or difficult
to segregate, ascertain or identify its individual assets from those of
any other Person;
|
(xiv)
|
shall
not assume or guaranty (excluding any guaranty that has been executed and
delivered in connection with the Note) the debts or obligations of any
other Person, hold itself out to be responsible for the debts of another
Person, pledge its assets to secure the obligations of any other Person or
otherwise pledge its assets for the benefit of any other Person, or hold
out its credit as being available to satisfy the obligations of any other
Person;
|
(xv)
|
shall
not make or permit to remain outstanding any loans or advances to any
other Person except for those investments permitted under the Loan
Documents and shall not buy or hold evidence of indebtedness issued by any
other Person (other than cash or investment-grade
securities);
|
(xvi)
|
shall
file its own tax returns separate from those of any other Person, except
to the extent that the Borrower is treated as a “disregarded entity” for
tax purposes and is not required to file tax returns under applicable law,
and shall pay any taxes required to be paid under applicable
law;
|
(xvii)
|
shall
hold itself out to the public as a legal entity separate and distinct from
any other Person and conduct its business solely in its own name, shall
correct any known misunderstanding regarding its separate identity and
shall not identify itself or any of its Affiliates as a division or
department of any other Person;
|
(xviii)
|
shall
maintain adequate capital for the normal obligations reasonably
foreseeable in a business of its size and character and in light of its
contemplated business operations and shall pay its debts and liabilities
from its own assets as the same shall become
due;
|
(xix)
|
shall
allocate fairly and reasonably shared expenses with Affiliates (including,
without limitation, shared office space) and use separate stationery,
invoices and checks bearing its own
name;
|
(xx)
|
shall
pay (or cause the Property Manager to pay on behalf of the Borrower from
the Borrower’s funds) its own liabilities (including, without limitation,
salaries of its own employees) from its own
funds;
|
(xxi)
|
shall
not acquire obligations or securities of its partners, members,
shareholders, or Affiliates, as
applicable;
|
(xxii)
|
except
as contemplated or permitted by the property management agreement with
respect to the Property Manager, shall not permit any Affiliate or
constituent party independent access to its bank
accounts;
|
(xxiii)
|
shall
maintain a sufficient number of employees (if any) in light of its
contemplated business operations and pay the salaries of its own
employees, if any, only from its own
funds;
|
(xxiv)
|
if
such entity is a single member limited liability company, such entity
shall (A) be formed and organized under Delaware law, (B) have either (1)
one springing member that is a corporation whose stock is 100% owned by
the sole member of Borrower and that satisfies the requirements for a
corporate springing member set forth below in this subsection or (2) two
springing members who are natural persons and (C) otherwise comply with
all Rating Agencies criteria for single member limited liability companies
(including, without limitation, the delivery of Delaware single member
limited liability company opinions acceptable in all respects to Lender
and to the Rating Agencies). If the springing member is a
corporation, such springing member shall at all times comply, and will
cause Borrower to comply, with each of the representations, warranties and
covenants contained in this Section 33 as if such representation, warranty
or covenant were made directly by such corporation. If there is
more than one springing member, only one springing member shall be the
sole member of Borrower at any one time, and the second springing member
shall become the sole member only upon the first springing member ceasing
to be a member, so that at all times Borrower has one and only one
member;
|
(xxv)
|
if
such entity is a single member limited liability company that is
board-managed, such entity shall have a board of managers separate from
that of guarantor and any other Person and shall cause its board of
managers to keep minutes of board meetings and actions and observe all
other Delaware limited liability company required formalities;
and
|
(xxvi)
|
if
a SPE Equity Owner is required pursuant to Section 1(jjjj) of this
Instrument, if the Borrower is (A) a limited liability company with more
than one member, then the Borrower has and shall have at least one (1)
member that is an SPE Equity Owner that has satisfied and shall satisfy
the requirements of Section 33(c) below and such member is its managing
member, or (B) a limited partnership, then all of its general partners are
SPE Equity Owners that have satisfied and shall satisfy the requirements
of Section 33(c) below.
|
(c)
With
respect to each SPE Equity Owner, if applicable, a “
Single Purpose Entity
” means a
corporation or a Delaware single member limited liability company which, at all
times since its formation and thereafter complies in its own right (subject to
the modifications set forth below), and shall cause Borrower to comply, with
each of the requirements contained in Section 33(b). Upon the
withdrawal or the disassociation of an SPE Equity Owner from Borrower, Borrower
shall immediately appoint a new SPE Equity Owner, whose organizational documents
are substantially similar to those of the withdrawn or disassociated SPE Equity
Owner, and deliver a new nonconsolidation opinion to the Rating Agencies and
Lender in form and substance satisfactory to Lender and to the Rating Agencies
(unless the opinion is waived by the Rating Agencies), with regard to
nonconsolidation by a bankruptcy court of the assets of each of the Borrower and
SPE Equity Owner with those of its Affiliates.
(i)
|
With
respect to Sections 33(b)(i) and 33(b)(x) the SPE Equity Owner shall not
engage in any business or activity other than being the sole managing
member or general partner, as the case may be, of the Borrower and owning
at least a 0.5% equity interest in
Borrower;
|
(ii)
|
With
respect to Section 33(b)(ii), the SPE Equity Owner has not and shall not
acquire or own any assets other than its equity interest in the Borrower
and personal property related thereto;
and
|
(iii)
|
With
respect to Section 33(b)(viii), the SPE Equity Owner shall not own any
subsidiary or make any investment in any other Person, except for
Borrower;
|
(iv)
|
With
respect to Section 33(b)(xiv), the SPE Equity Owner shall not assume or
guaranty the debts or obligations of any other Person, hold itself out to
be responsible for the debts of another Person, pledge its assets to
secure the obligations of any other Person or otherwise pledge its assets
for the benefit of any other Person, or hold out its credit as being
available to satisfy the obligations of any other Person, except for in
its capacity as general partner of the Borrower (if
applicable);
|
(v)
|
With
respect to Section 33(b)(x), the SPE Equity Owner has not and shall not
incur any debt, secured or unsecured, direct or contingent (including,
without limitation, guaranteeing any obligation), other than (A) customary
unsecured payables incurred in the ordinary course of owning the Borrower
provided the same are not evidenced by a promissory note, do not exceed,
in the aggregate, at any time a maximum amount of $10,000 and are paid
within sixty (60) days of the date incurred and (B) except in its capacity
as general partner of the Borrower (if
applicable).
|
(d)
[INTENTIONALLY
DELETED]
(e) Notwithstanding
anything to the contrary in this Instrument, no Transfer will be permitted under
Sections 21(c), (d), (e) or (f) unless the provisions of this Section 33 are
satisfied at all times.
34.
SUCCESSORS AND ASSIGNS
BOUND.
This Instrument shall bind, and the rights granted by
this Instrument shall inure to, the respective successors and assigns of Lender
and Borrower. However, a Transfer not permitted by Section 21 shall
be an Event of Default.
35.
JOINT AND SEVERAL
LIABILITY.
If more than one Person signs this Instrument as
Borrower, the obligations of such Persons shall be joint and
several.
36.
RELATIONSHIP
OF PARTIES; NO THIRD PARTY BENEFICIARY.
(a)
The
relationship between Lender and Borrower shall be solely that of creditor and
debtor, respectively, and nothing contained in this Instrument shall create any
other relationship between Lender and Borrower.
(b)
No
creditor of any party to this Instrument and no other Person shall be a third
party beneficiary of this Instrument or any other Loan
Document. Without limiting the generality of the preceding sentence,
(i) any arrangement (a “
Servicing Arrangement
”)
between the Lender and any Loan Servicer for loss sharing or interim advancement
of funds shall constitute a contractual obligation of such Loan Servicer that is
independent of the obligation of Borrower for the payment of the Indebtedness,
(ii) Borrower shall not be a third party beneficiary
of any
Servicing Arrangement, and (iii) no payment by the Loan Servicer under any
Servicing Arrangement will reduce the amount of the Indebtedness.
37.
SEVERABILITY;
AMENDMENTS.
The invalidity or unenforceability of any
provision of this Instrument shall not affect the validity or enforceability of
any other provision, and all other provisions shall remain in full force and
effect. This Instrument contains the entire agreement among the
parties as to the rights granted and the obligations assumed in this
Instrument. This Instrument may not be amended or modified except by
a writing signed by the party against whom enforcement is sought; provided,
however, that in the event of a Transfer prohibited by or requiring Lender’s
approval under Section 21, any or some or all of the Modifications to Instrument
set forth in Exhibit B (if any) may be modified or rendered void by Lender at
Lender’s option by Notice to Borrower and the transferee(s).
38.
CONSTRUCTION.
The
captions and headings of the Sections of this Instrument are for convenience
only and shall be disregarded in construing this Instrument. Any
reference in this Instrument to an “Exhibit” or a “Section” shall, unless
otherwise explicitly provided, be construed as referring, respectively, to an
Exhibit attached to this Instrument or to a Section of this
Instrument. All Exhibits attached to or referred to in this
Instrument are incorporated by reference into this Instrument. Any
reference in this Instrument to a statute or regulation shall be construed as
referring to that statute or regulation as amended from time to
time. Use of the singular in this Agreement includes the plural and
use of the plural includes the singular. As used in this Instrument,
the term “including” means “including, but not limited to.”
39.
DISSEMINATION OF
INFORMATION
. Borrower acknowledges that Lender may provide to
third parties with an existing or prospective interest in the servicing,
enforcement, evaluation, performance, ownership, purchase, participation or
Securitization of the Loan, including, without limitation, any of the Rating
Agencies, any entity maintaining databases on the underwriting and performance
of commercial mortgage loans, as well as governmental regulatory agencies having
regulatory authority over Lender, any and all information which Lender now has
or may hereafter acquire relating to the Loan, the Mortgaged Property, Borrower,
any SPE Equity Owner or any guarantor, as Lender determines necessary or
desirable and that such information may be included in disclosure documents in
connection with a Securitization or syndication of participation
interests, including, without limitation, a prospectus, prospectus supplement,
offering memorandum, private placement memorandum or similar document (each, a
“Disclosure Document”
)
and also may be included in any filing with the Securities and Exchange
Commission pursuant to the Securities Act or the Securities Exchange
Act. To the fullest extent permitted under applicable law, Borrower
irrevocably waives all rights, if any, to prohibit such disclosure, including,
without limitation, any right of privacy.
40.
NO CHANGE IN FACTS OR
CIRCUMSTANCES.
Borrower warrants that (a) all information in
the application for the Loan submitted to Lender (the “
Loan Application
”) and in all
financial statements, Rent Schedules, reports, certificates and other documents
submitted in connection with the Loan Application are complete and accurate in
all material respects; and (b) there has been no material adverse change in any
fact or circumstance that would make any such information incomplete or
inaccurate.
41.
SUBROGATION.
If,
and to the extent that, the proceeds of the Loan evidenced by the Note, or
subsequent advances under Section 12, are used to pay, satisfy or discharge a
Prior Lien, such Loan proceeds or advances shall be deemed to have been advanced
by Lender at Borrower's request, and Lender shall automatically, and without
further action on its part, be
subrogated
to the rights, including lien priority, of the owner or holder of the obligation
secured by the Prior Lien, whether or not the Prior Lien is
released.
42.
[INTENTIONALLY
DELETED]
43.
SUPPLEMENTAL
FINANCING.
(a)
This
Section shall apply only if at the time of any application referred to below,
the Federal Home Loan Mortgage Corporation (“
Freddie Mac
”) has in effect a
product described in its
Multifamily Seller/Servicer
Guide
under which it purchases supplemental mortgages on multifamily
properties that meet specified criteria (a “
Supplemental Mortgage
Product
”).
(b)
After the
first anniversary of the date of this Instrument (the “
First Mortgage
”), Freddie Mac
will consider an application from an originating lender that is generally
approved by Freddie Mac to sell mortgages to Freddie Mac under the Supplemental
Mortgage Product (an “
Approved
Seller/Servicer
”) for the purchase by Freddie Mac of a proposed
indebtedness of Borrower to the Approved Seller/Servicer to be secured by one or
more supplemental mortgages on the Mortgaged Property (such indebtedness and
supplemental mortgages being referred to together as a “
Supplemental
Mortgage
”). Freddie Mac will purchase each Supplemental
Mortgage secured by the Mortgaged Property if the following conditions are
satisfied:
(i)
|
At
the time of the proposed Supplemental Mortgage, no Event of Default shall
have occurred and be continuing and no event or condition shall have
occurred and be continuing that, with the giving of Notice or the passage
of time, or both, would become an Event of
Default;
|
(ii)
|
Borrower
and the Mortgaged Property must be acceptable to Freddie Mac under its
Supplemental Mortgage Product;
|
(iii)
|
New
loan documents must be entered into to reflect each Supplemental Mortgage,
such documents to be acceptable to Freddie Mac in its sole
discretion;
|
(iv)
|
Each
Supplemental Mortgage will not cause the combined debt service coverage
ratio of the Mortgaged Property after each Supplemental Mortgage to be
less than 1.25:1, subject to increase in accordance with Freddie Mac’s
then-current policies (“
Required DSCR
”), as
determined by Freddie Mac. As used in this Section, the term “combined
debt service coverage ratio” means, with respect to the Mortgaged
Property, the ratio of (A) the annual net operating income from the
operations of the Mortgaged Property at the time of the proposed
Supplemental Mortgage to (B) the aggregate of the annual principal and
interest payable on (I) the Indebtedness under this Instrument (using a
30-year amortization schedule), (II) any “Indebtedness” as defined in any
security instruments recorded against the Mortgaged Property (using a
30-year amortization schedule for any Supplemental Mortgages) and (III)
the proposed “Indebtedness” for any Supplemental Mortgage (using a 30-year
amortization schedule). The annual net operating income of the Mortgaged
Property will be as determined by Freddie Mac in its sole discretion
considering factors such as income in place at the time of the proposed
|
|
Supplemental
Mortgage and income during the preceding twelve (12) months, and actual,
historical and anticipated operating expenses. Freddie Mac
shall determine the combined debt service coverage ratio of the Mortgaged
Property based on its underwriting. Borrower shall provide
Freddie Mac such financial statements and other information Freddie Mac
may require to make these
determinations;
|
(v)
|
Each
Supplemental Mortgage will not cause the combined loan to value ratio of
the Mortgaged Property after each Supplemental Mortgage to exceed 80%
(“
Required LTV
”), as
determined by Freddie Mac. As used in this Section, “combined
loan to value ratio” means, with respect to the Mortgaged Property, the
ratio, expressed as a percentage, of (A) the aggregate outstanding
principal balances of (I) the Indebtedness under this Instrument, (II) any
“Indebtedness” as defined in any security instruments recorded against the
Mortgaged Property and (III) the proposed “Indebtedness” for any
Supplemental Mortgage, to (B) the value of the Mortgaged
Property. Freddie Mac shall determine the combined loan to
value ratio of the Mortgaged Property based on its
underwriting. Borrower shall provide Freddie Mac such financial
statements and other information Freddie Mac may require to make these
determinations. In addition, Freddie Mac, at Borrower’s
expense, may obtain MAI appraisals of the Mortgaged Property in order to
assist Freddie Mac in making the determinations hereunder. If
Freddie Mac requires an appraisal, then the value of the Mortgaged
Property that will be used to determine whether the Required LTV has been
met shall be the lesser of (A) the appraised value set forth in such
appraisal or (B) the value of the Mortgaged Property as determined by
Freddie Mac;
|
(vi)
|
The
Borrower’s organizational documents are amended to permit the Borrower to
incur additional debt in the form of Supplemental Mortgages (Lender shall
consent to such amendment(s));
|
(vii)
|
One
or more natural persons or entities acceptable to Freddie Mac executes and
delivers to the Approved Seller/Servicer a guaranty in a form acceptable
to Freddie Mac with respect to the exceptions to non-recourse liability
described in Freddie Mac’s form promissory note, unless Freddie Mac has
elected to waive its requirement for a
guaranty;
|
(viii)
|
The
loan term of each Supplemental Mortgage shall be coterminous with the
First Mortgage or longer than the First Mortgage, including any “Extension
Period” described in the Note secured by the First Mortgage, at Freddie
Mac’s discretion;
|
(ix)
|
The
Prepayment Premium Period (as defined in the Note) of each Supplemental
Mortgage shall be coterminous with the Prepayment Premium Period or the
combined Lockout Period and Defeasance Period (all, as defined in the
Note), as applicable, of the First
Mortgage;
|
(x)
|
The
interest rate of each Supplemental Mortgage will be determined by Freddie
Mac in its sole and absolute
discretion;
|
(xi)
|
The
Lender enters into an intercreditor agreement (“
Intercreditor
Agreement
”) acceptable to Freddie Mac and to Lender for each
Supplemental Mortgage;
|
(xii)
|
Borrower’s
payment of fees and other expenses charged by Lender, Freddie Mac, the
Approved Seller/Servicer, and the Rating Agencies (including reasonable
Attorneys’ Fees and Costs) in connection with reviewing and originating
each Supplemental Mortgage;
|
(xiii)
|
Notwithstanding
anything to the contrary in Section 7 of this Instrument, Borrower shall
make deposits under this First Mortgage for the payment of any
Impositions, so long as a Supplemental Mortgage is outstanding, and such
deposits shall be credited to the payment of such Impositions under any
Supplemental Mortgage;
|
(xiv)
|
If
any Supplemental Mortgage is outstanding, the Borrower must obtain the
consent of the lender for each Supplemental Mortgage prior to agreeing to
any modifications or amendments to the Loan
Documents;
|
(xv)
|
All
other requirements of the Supplemental Mortgage Product must be met,
unless Freddie Mac has elected to waive one or more of its
requirements.
|
(c)
No later
than 5 Business Days after Lender’s receipt of a written request from Borrower,
Lender shall provide the following information to an Approved Seller/Servicer
upon Borrower’s written request. Lender shall only be obligated to
provide this information in connection with Borrower’s request for a
Supplemental Mortgage from an Approved Seller/Servicer; provided, however, if
Freddie Mac is the owner of the Note, Lender shall not be obligated to provide
such information:
(i)
|
the
then-current outstanding principal balance of the First
Mortgage;
|
(ii)
|
payment
history of the First Mortgage;
|
(iii)
|
whether
taxes, insurance, ground rents, replacement reserves, repair escrows, or
other escrows are being collected on the First Mortgage and the amount of
each such escrow as of the date of the
request;
|
(iv)
|
whether
any repairs, capital replacements or improvements or rental achievement or
burn-off guaranty requirements are existing or outstanding under the terms
of the First Mortgage;
|
(v)
|
a
copy of the most recent inspection report for the Mortgaged
Property;
|
(vi)
|
whether
any modifications or amendments have been made to the Loan Documents for
the First Mortgage since origination of the First Mortgage and, if
applicable, a copy of such modifications and amendments;
and
|
(vii)
|
whether
to Lender’s knowledge any Event of Default exists under the First
Mortgage.
|
(d)
Lender
shall have no obligation to consent to any mortgage or lien on the Mortgaged
Property that secures any indebtedness other than the Indebtedness, except as
set forth herein.
(e)
If a
Supplemental Mortgage is made to Borrower, Borrower agrees that the terms of the
Intercreditor Agreement shall govern with respect to any distributions of excess
proceeds by Lender to the Approved Seller/Servicer, Freddie Mac or their
successors and/or assigns (collectively, the “
Junior Lender
”), and Borrower
agrees that Lender may distribute any excess proceeds received by Lender
pursuant to the Loan Documents to Junior Lender pursuant to the Intercreditor
Agreement.
44.
DEFEASANCE (Section Applies if Loan
is Assigned to REMIC Trust Prior to the Cut-off Date)
. This
Section 44 shall apply in the event the Note is assigned to a REMIC trust prior
to the Cut-off Date, and, subject to Section 44(a) and (c) below, Borrower shall
have the right to defease the Loan in whole (“
Defeasance
”) and obtain the
release of the Mortgaged Property from the lien of this Instrument upon the
satisfaction of the following conditions:
(a) Borrower
shall not have the right to obtain Defeasance at any of the following
times:
|
(i)
|
if
the Loan is not assigned to a REMIC
trust;
|
|
(ii)
|
during
the Lockout Period (as defined in the
Note);
|
|
(iii)
|
after
the expiration of the Defeasance Period (as defined in the Note);
or
|
|
(iv)
|
after
Lender has accelerated the maturity of the unpaid principal balance of,
accrued interest on, and other amounts payable under, the Note pursuant to
Section 6 of the Note.
|
(b) Borrower
shall give Lender Notice (the
“Defeasance Notice”
)
specifying a Business Day (the
“Defeasance Closing Date”)
on
which Borrower desires to close the Defeasance. The Defeasance
Closing Date specified by Borrower may not be more than 60 calendar days, nor
less than 30 calendar days, after the date on which the Defeasance Notice is
received by Lender. Lender will acknowledge receipt of the Defeasance
Notice and will state in such receipt whether Lender will designate the
Successor Borrower or will permit Borrower to designate the Successor
Borrower.
(c) The
Defeasance Notice must be accompanied by a $10,000 non-refundable fee (the
“
Defeasance
Fee
”). If Lender does not receive the Defeasance Fee, then
Borrower’s right to obtain Defeasance pursuant to that Defeasance Notice shall
terminate.
(d) (i) If Borrower timely
pays the Defeasance Fee, but Borrower fails to perform its other obligations
hereunder, Lender shall have the right to retain the Defeasance Fee as
liquidated damages for Borrower’s default and, except as provided in Section
44(d)(ii), Borrower shall be released from all further obligations under this
Section 44. Borrower acknowledges that Lender will incur financing
costs in arranging and preparing for the release of the Mortgaged Property from
the lien of this Instrument in reliance on the executed Defeasance
Notice. Borrower agrees that the Defeasance Fee represents a fair and
reasonable estimate, taking into
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|
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account
all circumstances existing on the date of this Instrument, of the damages
Lender will incur by reason of Borrower’s
default.
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(ii)
|
In
the event that the Defeasance is not consummated on the Defeasance Closing
Date for any reason, Borrower agrees to reimburse Lender for all third
party costs and expenses (other than financing costs covered by Section
44(d)(i) above) incurred by Lender in reliance on the executed Defeasance
Notice, within 5 Business Days after Borrower receives a written demand
for payment, accompanied by a statement, in reasonable detail, of Lender’s
third party costs and expenses.
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(iii)
|
All
payments required to be made by Borrower to Lender pursuant to this
Section 44 shall be made by wire transfer of immediately available funds
to the account(s) designated by Lender in its acknowledgement of the
Defeasance Notice.
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(e) No
Event of Default has occurred and is continuing.
(f) The
documents required to be delivered to Lender on or prior to the Defeasance
Closing Date are:
(i)
|
an
opinion of counsel for Borrower, in form and substance satisfactory to
Lender, to the effect that Lender has a valid and perfected lien and
security interest of first priority in the Defeasance Collateral and the
proceeds thereof;
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(ii)
|
an
opinion of counsel for Borrower, in form and substance satisfactory to
Lender, to the effect that the Pledge Agreement is duly authorized,
executed, delivered and enforceable against Borrower in accordance with
the respective terms;
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(iii)
|
unless
waived by Lender or unless Lender designates the Successor Borrower, an
opinion of counsel for Successor Borrower, in form and substance
satisfactory to Lender, to the effect that the Transfer and Assumption
Agreement is duly authorized, executed, delivered and enforceable against
Successor Borrower in accordance with the respective
terms;
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(iv)
|
unless
waived by Lender or unless Lender designates the Successor Borrower, an
opinion of counsel for Successor Borrower, in form and substance
satisfactory to Lender, to the effect that the Successor Borrower has been
validly created;
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(v)
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if
Borrower designates the Successor Borrower, an opinion of counsel for
Successor Borrower, in form and substance satisfactory to Lender and to
the Rating Agencies, with regard to nonconsolidation of the assets of the
Successor Borrower with those of its Affiliates by a bankruptcy
court;
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(vi)
|
unless
waived by Lender, an opinion of counsel for Borrower, in form and
substance satisfactory to Lender, to the effect
that:
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(A)
|
if,
as of the Defeasance Closing Date, the Note is held by a REMIC trust, (1)
the Defeasance has been effected in accordance with the requirements of
Treasury Regulation Section 1.860G-2(a)(8) (as such regulation may be
modified, amended or replaced from time to time), (2) the qualification
and status of the REMIC trust as a REMIC will not be adversely affected or
impaired as a result of the Defeasance, and (3) the REMIC trust will not
incur a tax under Section 860G(d) of the Tax Code as a result of the
Defeasance, and
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(B)
|
the
Defeasance will not result in a “sale or exchange” of the Note within the
meaning of Section 1001(c) of the Tax Code and the temporary and final
regulations promulgated thereunder;
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(vii)
|
if
any certificates evidencing the Securitization remain outstanding, a
Rating Confirmation;
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(viii)
|
unless
waived by Lender, a written certificate from an independent certified
public accounting firm (reasonably acceptable to Lender), confirming that
the Defeasance Collateral will generate cash sufficient to make all
Scheduled Debt Payments as they fall due under the Note, including full
payment due on the Note on the Maturity
Date;
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(ix)
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Lender’s
form of a pledge and security agreement (“
Pledge Agreement
”) and
financing statements which pledge and create a first priority security
interest in the Defeasance Collateral in favor of
Lender;
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(x)
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Lender’s
form of a transfer and assumption agreement (“
Transfer and Assumption
Agreement
”), whereupon Borrower and any guarantor (in each case,
subject to satisfaction of all requirements hereunder) shall be
relieved
from
liability in connection with the Loan (other than any liability under
Section 18 of this Instrument for events that occur prior to the
Defeasance Closing Date, whether discovered before or after the Defeasance
Closing Date) and Successor Borrower shall assume all remaining
obligations;
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(xi)
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Forms
of all documents necessary to release the Mortgaged Property from the
liens created by this Instrument and related UCC financing statements
(collectively, “
Release
Instruments
”), each in appropriate form required by the state in
which the Property
is located;
and
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(xii)
|
such
other opinions, certificates, documents or instruments as Lender may
reasonably request;
|
(g) Borrower
shall deliver to Lender on or prior to the Defeasance Closing Date:
(i)
|
The
Defeasance Collateral which meets all requirements of Section 44(g)(ii)
below and is owned by Borrower, free and clear of all liens and claims of
third-parties;
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(ii)
|
The
Defeasance Collateral must be in an amount to provide for (A) redemption
payments to occur prior, but as close as possible, to all successive
Installment Due Dates occurring under the Note after the Defeasance
Closing Date and (B) deliver redemption proceeds at least equal to the
amount of principal and interest due on the Note on each Installment Due
Date including full payment due on the Note on the Maturity Date (“
Scheduled Debt
Payments
”). The Defeasance Collateral shall be arranged
such that redemption payments received from the Defeasance Collateral are
paid directly to Lender to be applied on account of the Scheduled Debt
Payments. Unless otherwise agreed in writing by Lender, the
pledge of the Defeasance Collateral shall be effectuated through the
book-entry facilities of a qualified securities intermediary designated by
Lender in conformity with all applicable laws;
and
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(iii)
|
All
accrued and unpaid interest and all other sums due under the Note, this
Instrument and under the other Loan Documents, including, without
limitation, all amounts due under Section 44(i) below, up to the
Defeasance Closing Date shall be paid in full on or prior to the
Defeasance Closing Date.
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(h) If
Lender permits Borrower to designate the Successor Borrower, then Borrower
shall, at Borrower’s expense, designate or establish an accommodation borrower
(“
Successor Borrower
”)
satisfactory to Lender (or Lender, at its option, may designate the Successor
Borrower) which satisfies Lender’s then current requirements for a “Single
Purpose Entity” to assume at the time of Defeasance ownership of the Defeasance
Collateral and liability for all of Borrower’s obligations under the Pledge
Agreement and the Loan Documents (to the extent that liability thereunder
survives release of this Instrument). Borrower shall pay to Successor
Borrower a fee of $1,000.00 as consideration of Successor Borrower’s assumption
of Borrower’s obligations under the Loan Documents. Notwithstanding
any contrary provision hereunder, no Transfer fee is payable to Lender upon a
Transfer of the Loan in accordance with this Section.
(i) Borrower
shall pay all reasonable costs and expenses incurred by Lender in connection
with the Defeasance in full on or prior to the Defeasance Closing Date, which
payment is required prior to Lender’s issuance of the Release Instruments and
whether or not Defeasance is completed. Such expenses include,
without limitation, all fees, costs and expenses incurred by Lender and its
agents in connection with the Defeasance (including, without limitation,
reasonable Attorneys’ Fees and Costs for the review and preparation of the
Pledge Agreement and of the other materials described herein and any related
documentation, and any servicing fees, Rating Agencies’ fees or other costs
related to the Defeasance); the cost incurred by Lender to obtain a Rating
Confirmation contemplated hereunder; reasonable Attorneys’ Fees and Costs; and a
processing fee to cover Lender’s administrative costs to process Borrower’s
Defeasance request. Lender reserves the right to require that
Borrower post a deposit to cover costs which Lender reasonably anticipates will
be incurred.
45.
INTENTIONALLY
DELETED.
46.
LENDER’S RIGHTS TO SELL OR
SECURITIZE
. Borrower acknowledges that Lender, and each
successor to Lender’s interest, may (without prior Notice to Borrower or
Borrower’s prior consent), sell or grant participations in the Loan (or any part
thereof), sell or subcontract the servicing rights related to the Loan,
securitize the Loan or include the Loan as part of a trust. Borrower,
at its expense, agrees to cooperate with all reasonable requests of
Lender in
connection with any of the foregoing including, without limitation, executing
any financing statements or other documents deemed necessary by Lender or its
transferee to create, perfect or preserve the rights and interest to be acquired
by such transferee, providing any updated financial information with appropriate
verification through auditors letters, delivering a so called “10b-5” opinion,
revised organizational documents and counsel opinions satisfactory to the Rating
Agencies, executed amendments to the Loan Documents, and review information
contained in a preliminary or final private placement memorandum, prospectus,
prospectus supplements or other Disclosure Document, and providing a mortgagor
estoppel certificate and such other information about Borrower, any SPE Equity
Owner, any guarantor, any Property Manager or the Mortgaged Property as Lender
may require for Lender’s offering materials.
47.
SECURITIZATION
INDEMNIFICATION
. Borrower and each guarantor agree to provide
in connection with each Disclosure Document, an indemnification certificate: (a)
certifying that all sections of such Disclosure Document relating to Borrower,
any SPE Equity Owner, any guarantors, any Property Manager, their respective
Affiliates, the Loan, the Loan Documents and the Mortgaged Property, and any
risks or special considerations relating thereto, including, without limitation,
the sections entitled “Special Considerations,” and/or “Risk Factors,” and
“Certain Legal Aspects of the Mortgage Loan,” or similar sections, as such
sections relate thereto, have been carefully examined, and that, to the best of
such indemnitor’s knowledge, such sections (and any other sections reasonably
requested) do not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading; (b)
indemnifying Lender (and for purposes of this Section 47, Lender shall include
its officers and directors) and any Affiliate of Lender that (i) has filed the
registration statement, if any, relating to the Securitization and/or (ii) which
is acting as issuer, depositor, sponsor and/or in a similar capacity with
respect to the Securitization (any entity described in (i) or (ii), an
“Issuer Person”
), and each
director and officer of any Issuer Person, and each entity who Controls any
Issuer Person within the meaning of Section 15 of the Securities Act or Section
20 of the Securities Exchange Act (collectively,
“Issuer Group”
), and each
entity which is acting as an underwriter, manager, placement agent, initial
purchaser or in a similar capacity with respect to the Securitization, each of
its directors and officers and each entity who Controls any such entity within
the meaning of Section 15 of the Securities Act or Section 20 of the Securities
Exchange Act which is acting as an underwriter, manager, placement agent,
initial purchaser or in a similar capacity with respect to the Securitization,
each of its directors and officers and each entity who Controls any such entity
within the meaning of Section 15 of the Securities Act and Section 20 of the
Securities Exchange Act (collectively,
“Underwriter Group”
) for any
losses to which Lender, the Issuer Group or the Underwriter Group may become
subject insofar as the losses arise out of or are based upon any untrue
statement of any material fact contained in such section or arise out of or are
based upon the omission to state therein a material fact required to be stated
in such sections necessary in order to make the statements in such sections or
in light of the circumstances under which they were made, not misleading
(collectively,
“Securities
Liabilities”
); and (c) agreeing to reimburse Lender, the Issuer Group and
the Underwriter Group for any legal or other expenses reasonably incurred by
Lender, the Issuer Group and the Underwriter Group in investigating or defending
the Securities Liabilities; provided, however, that indemnitor will be liable
under clauses (b) or (c) above only to the extent that such Securities
Liabilities arise out of, or are based upon, any such untrue statement or
omission made therein in reliance upon, and in conformity with, information
furnished to Lender or any member of the Issuer Group or Underwriter Group by or
on behalf of Borrower or a guarantor in connection with the preparation of the
Disclosure Documents or in connection with the underwriting of the Loan,
including, without limitation, financial statements of Borrower, any SPE Equity
Owner or any guarantor, and operating statements, rent rolls, environmental site
assessment
reports and property condition reports with respect to the Mortgaged Property
(other than any such misstatements contained in (or omissions from) third party
reports prepared by third parties not affiliated directly or indirectly with
Borrower). This indemnity is in addition to any liability which
Borrower may otherwise have and shall be effective whether or not an
indemnification certificate described above is provided and shall be applicable
based on information previously provided by or on behalf of Borrower or a
guarantor if the indemnification certificate is not
provided. Notwithstanding the foregoing, any indemnification
certificate may expressly exclude any information contained in third party
reports prepared by parties that are not Affiliates of Borrower or any guarantor
(“
Third Party
Information
”), and the obligations and liability of Borrower and any
guarantor pursuant to this Section shall not extend to the Third Party
Information.
48.
WARRANTIES OF
BORROWER
. Borrower, for itself and its successors and assigns,
does hereby represent, warrant and covenant to and with Lender, its successors
and assigns, that:
(a)
The
representations, warranties and covenants contained in this Instrument survive
for as long as any Indebtedness remains outstanding;
(b)
None of
the items shown in the Schedule of Title Exceptions will materially or adversely
affect (i) the ability of the Borrower to pay the Loan in full, (ii) the use for
which all or any part of the Mortgaged Property is being used at the time this
Instrument was executed, except as set forth in Section 11 of this Instrument,
(iii) the operation of the Mortgaged Property or (iv) the value of the Mortgaged
Property;
(c)
Borrower
is not an “investment company”, or a company Controlled by an “investment
company,” as such terms are defined in the Investment Company Act of 1940, as
amended;
(d)
Borrower
is not an “employee benefit plan,” as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended (“
ERISA
”), which is subject to
Title I of ERISA and the assets of Borrower do not constitute “plan assets” of
one or more such plans within the meaning of 29 C.F.R. Section
2510.3-101;
(e)
Borrower
will give prompt written Notice to Lender of any litigation or governmental
proceedings pending or, to the best of Borrower’s knowledge, threatened (in
writing) against Borrower which might have a Material Adverse Effect as defined
below.
(f)
There are
no judicial, administrative, mediation or arbitration actions, suits or
proceedings pending or, to the best of Borrower’s knowledge, threatened (in
writing) against or affecting Borrower (and, if Borrower is a limited
partnership, any of its general partners or if Borrower is a limited liability
company, any member of Borrower) or the Mortgaged Property which, if adversely
determined, would have a material adverse effect on (i) the Mortgaged Property,
(ii) the business, prospects, profits, operations or condition (financial or
otherwise) of Borrower, (iii) the enforceability, validity, perfection or
priority of the lien of any Loan Document, or (iv) the ability of Borrower to
perform any obligations under any Loan Document (collectively, a “
Material Adverse
Effect
”).
(g)
With
regard to ERISA:
(i)
|
Borrower
shall not engage in any transaction which would cause an obligation, or
action taken or to be taken, hereunder (or the exercise by Lender of any
of its rights under the Note, this Instrument or any of the other Loan
Documents) to be a non-exempt (under a statutory or administrative class
exemption) prohibited transaction under
ERISA.
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(ii)
|
Borrower
further covenants and agrees to deliver to Lender such certifications or
other evidence from time to time throughout the term of this Instrument,
as requested by Lender in its sole discretion, that (A) Borrower is not an
“employee benefit plan” as defined in Section 3(e) of ERISA, which is
subject to Title I of ERISA, or a “governmental plan” within the meaning
of Section 3(3) of ERISA; (B) Borrower is not subject to state statutes
regulating investments and fiduciary obligations with respect to
governmental plans; and (C) one or more of the following circumstances is
true:
|
(1)
|
Equity
interests in Borrower are publicly offered securities within the meaning
of 29 C.F.R. Section 2510.3-101(b)(2), as amended from time to time or any
successor provision;
|
(2)
|
Less
than twenty-five percent (25%) of each outstanding class of equity
interests in Borrower are held by “benefit plan investors” within the
meaning of 29 C.F.R. 2510.3-101(f)(2), as amended from time to time or any
successor provision; or
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(3)
|
Borrower
qualifies as an “operating company” or a “real estate operating company”
within the meaning of 29 C.F.R. Section 2510.3-101(c), as amended from
time to time or any successor provision, or within the meaning of 29
C.F.R. Section 2510.3-101(e) as an investment company registered under the
Investment Company Act of 1940.
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(iii)
|
BORROWER SHALL INDEMNIFY LENDER
AND DEFEND AND HOLD LENDER HARMLESS FROM AND AGAINST ALL CIVIL PENALTIES,
EXCISE TAXES, OR OTHER LOSS, COST, DAMAGE AND EXPENSE (INCLUDING, WITHOUT
LIMITATION, REASONABLE ATTORNEYS’ FEES AND COSTS INCURRED IN THE
INVESTIGATION, DEFENSE AND SETTLEMENT OF CLAIMS AND LOSSES INCURRED IN
CORRECTING ANY PROHIBITED TRANSACTION OR IN THE SALE OF A PROHIBITED LOAN,
AND IN OBTAINING ANY INDIVIDUAL PROHIBITED TRANSACTION EXEMPTION UNDER
ERISA THAT MAY BE REQUIRED, IN LENDER’S SOLE DISCRETION) THAT LENDER MAY
INCUR, DIRECTLY OR INDIRECTLY, AS A RESULT OF DEFAULT UNDER THIS SECTION
48. THIS INDEMNITY SHALL SURVIVE ANY TERMINATION, SATISFACTION
OR FORECLOSURE OF THIS
INSTRUMENT.
|
49.
COOPERATION WITH RATING AGENCIES AND
INVESTORS
. Borrower covenants and agrees that in the event
Lender decides to include the Loan as an asset
of a
Secondary Market Transaction, Borrower shall (a) at Lender’s request, meet with
representatives of the Rating Agencies and/or investors to discuss the business
and operations of the Mortgaged Property, and (b) permit Lender or its
representatives to provide related information to the Rating Agencies and/or
investors, and (c) cooperate with the reasonable requests of the Rating Agencies
and/or investors in connection with all of the foregoing.
50.
RESERVED.
51.
RESERVED.
52.
RESERVED.
53.
RESERVED.
54.
RESERVED.
55.
RESERVED.
56.
RESERVED.
57.
RESERVED.
58.
RESERVED.
59.
RESERVED.
60.
ACCELERATION; REMEDIES.
At any time during the
existence of an Event of Default, Lender, at Lender's option, may declare the
Indebtedness to be immediately due and payable without further demand, and may
invoke the power of sale and any other remedies permitted by Virginia law or
provided in this Instrument or in any other Loan Document. Borrower
acknowledges that Lender may exercise the power of sale granted by this
Instrument without prior judicial hearing to the extent allowed by Virginia
law. Borrower has the right to bring an action to assert that an
Event of Default does not exist or to raise any other defense Borrower may have
to acceleration and sale. Lender shall be entitled to collect all
costs and expenses incurred in pursuing such remedies, including fees and
out-of-pocket costs of attorneys, including Lender's in-house counsel, and costs
of documentary evidence, abstracts and title reports.
If
Lender invokes the power of sale, Lender or Trustee shall deliver a copy of a
notice of sale to Borrower in the manner prescribed by Virginia
law. Trustee shall give public notice of the sale in the manner
prescribed by Virginia law and shall sell the Mortgaged Property in accordance
with Virginia law. Trustee, without demand on Borrower, shall sell
the Mortgaged Property at public auction to the highest bidder at the time and
place and under the terms designated in the notice of sale in one or more
parcels and in such order as Trustee may determine. Trustee may
postpone the sale of all or any part of the Mortgaged Property in accordance
with Virginia law. Lender or Lender's designee may purchase the
Mortgaged Property at any sale.
Trustee
shall deliver to the purchaser at the sale, within a reasonable time after the
sale, a deed conveying the Mortgaged Property so sold with special warranty of
title. The recitals in Trustee's deed shall be prima facie evidence
of the truth of the statements made in the recitals.
Trustee
shall apply the proceeds of the sale in the following order unless Virginia law
recites a different order of distribution: (a) to all costs and
expenses of the sale, including Trustee's fees in an amount prescribed by
Virginia law, or if Trustee's fees are not so prescribed, in an amount equal to
5 percent of the gross sale price, attorneys' fees and costs of title evidence;
(b) to the discharge of all Taxes, if any, as provided by Virginia law; (c) to
the Indebtedness in such order as Lender, in Lender's discretion, directs; and
(d) the excess, if any, to the person or persons legally entitled to the excess,
including, if any, the holders of liens inferior to this Instrument in the order
of their priority, provided that Trustee has actual notice of such
liens. Trustee shall not be required to take possession of the
Mortgaged Property before the sale or to deliver possession of the Mortgaged
Property to the purchaser at the sale.
61.
RELEASE.
Upon payment of the
Indebtedness, Lender shall request Trustee to release this Instrument and shall
deliver the Note to Trustee. Trustee shall release this
Instrument. Borrower shall pay Trustee's reasonable costs incurred in
releasing this Instrument.
62.
SUBSTITUTE
TRUSTEE.
Lender may from time to time, in Lender's discretion,
remove Trustee and appoint a successor trustee to any Trustee appointed under
this Instrument. Without conveyance of the Mortgaged Property, the
successor trustee shall succeed to all the title, power and duties conferred
upon the predecessor Trustee and by applicable law.
63.
STATUTORY PROVISIONS.
The
following provisions of Section 55-60, Code of Virginia (1950), as amended, are
made applicable to this Instrument:
Exemptions
waived
Subject
to call upon default
Renewal
or extension permitted
Substitution
of trustee permitted
Any
trustee may act
64.
WAIVER OF TRIAL BY
JURY
. BORROWER AND LENDER EACH (A) COVENANTS AND AGREES NOT TO
ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS INSTRUMENT
OR THE RELATIONSHIP BETWEEN THE PARTIES AS BORROWER AND LENDER THAT IS TRIABLE
OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO
SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE
FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY
EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL
COUNSEL.
ATTACHED
EXHIBITS.
The following Exhibits are attached to this
Instrument:
X
|
|
Exhibit
A
|
Description
of the Land (required).
|
|
|
|
|
X
|
|
Exhibit
B
|
Modifications
to Instrument
|
IN WITNESS WHEREOF
, Borrower
has signed and delivered this Instrument or has caused this Instrument to be
signed and delivered by its duly authorized representative.
|
BR SPRINGHOUSE, LLC
, a
Delaware limited liability company
|
|
By: BR
Springhouse KB, LLC, a Delaware limited liability company, its
manager
|
By:____________________________(SEAL)
Jordan
Ruddy
President
STATE OF
______________________
CITY/COUNTY
OF _______________, to-wit:
The
foregoing instrument was acknowledged before me in the above-stated jurisdiction
this _____ day of _____________, 2009 by Jordan Ruddy who is President of BR
Springhouse KB, LLC, a Delaware limited liability company, the manager of BR
Springhouse, LLC, a Delaware limited liability company, for and on behalf of the
limited liability company.
Notary
Public
Notary
Registration No.__________________
My
commission
expires:
EXHIBIT
A
[DESCRIPTION
OF THE LAND]
EXHIBIT
B
MODIFICATIONS
TO INSTRUMENT
The
following modifications are made to the text of the Instrument that precedes
this Exhibit:
1. Section
17 is modified to add the following new subsection (i):
|
“(i)
|
Borrower
shall maintain the contract for termite control services with a qualified
service provider at the Mortgaged Property for so long as the Indebtedness
remains outstanding.”
|
2.
|
Section
19(g)(i) is revised to delete “$25,000” and replace it with “$50,000”; and
Section 19(g)(ii) is revised to delete “$25,000” and replace it with
“$50,000” and to delete “$100,000” and replace it with
“$200,000”.
|
3.
|
The
first paragraph of Section 21(c)(vii) is deleted in its entirety and
replaced with the following:
|
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“(vii)
|
any
Transfer
of an interest in Borrower or any interest in a Controlling Entity (which,
if such Controlling Entity were Borrower, would result in an Event of
Default) listed in (A) through (I) below (a "
Preapproved Transfer
"),
subject to the terms and conditions listed as items (1) through (8)
appearing beneath subsection (I)
below:”
|
4.
|
The
existing subparagraph 21(c)(vii)(F) is deleted in its entirety and
replaced with the following sections (F), (G), (H), and
(I):
|
|
“(F)
|
a
sale or transfer to an individual or entity that has an existing interest
in the Borrower or in a Controlling Entity, provided that, e
ither directly or
indirectly, James G. Babb III and Ramin Kamfar shall retain at all times a
managing interest in the
Borrower
;
|
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(G)
|
any
transfer by (i) BR Springhouse Managing Member, LLC (“
BR Springhouse
”) or
Bluerock Special Opportunity + Income Fund, LLC to a Bluerock Affiliate
(as defined below), or (ii) Hawthorne Springhouse, LLC or Hawthorne
Springhouse II, LLC to a Hawthorne Affiliate (as defined
below);
|
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(H)
|
any
transfer of BR Hawthorne Springhouse JV, LLC’s (“
BR Entity
”) direct or
indirect interest in the profits, losses and distributions of the Borrower
which transfer does not grant the transferee the right to become a partner
in or member of, directly or indirectly, Borrower;
or
|
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(I)
|
any
change in the manager of Borrower, BR Entity or BR Springhouse so long as
the replacement manager is an entity that is wholly owned and controlled
by James G. Babb III and Ramin
Kamfar.”
|
5.
|
Sections
21(c)(vii)(F)(1) - (10) are deleted in their entirety and replaced with
the following language beneath Section 21(c)(vii)(I) as provided
above:
|
|
“(1)
|
Borrower
shall provide Lender with prior written Notice of the proposed Preapproved
Transfer, which Notice must be accompanied by a non-refundable review fee
in the amount of $3,000.00.
|
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(2)
|
For
the purposes of these Preapproved Transfers, a transferor's immediate
family members will be deemed to include a spouse, parent, child or
grandchild of such transferor.
|
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(3)
|
At
the time of the proposed Preapproved Transfer, no Event of Default shall
have occurred and be continuing and no event or condition shall have
occurred and be continuing that, with the giving of Notice or the passage
of time, or both, would become an Event of
Default.
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|
(4)
|
Lender
shall be entitled to collect all reasonable costs, including the cost of
all title searches, title insurance and recording costs, and all
Attorneys' Fees and Costs.
|
|
(5)
|
Lender
shall not be entitled to collect a transfer fee as a result of these
Preapproved Transfers.
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|
(6)
|
If
any certificates evidencing the Securitization remain outstanding, a
Rating Confirmation.
|
|
(7)
|
If
a nonconsolidation opinion was delivered at origination of the Loan and
if, after giving effect to all Preapproved Transfers and all prior
Transfers, fifty percent (50%) or more in the aggregate of direct or
indirect interests in Borrower are owned by any Person and its Affiliates
that owned less than a fifty percent (50%) direct or indirect interest in
Borrower as of the origination of the Loan, an opinion of counsel for
Borrower, in form and substance satisfactory to Lender and to the Rating
Agencies, with regard to
nonconsolidation.
|
|
(8)
|
Confirmation
acceptable to Lender that Section 33 continues to be
satisfied.
|
As used
in this Section 21(c), the term “
Bluerock Affiliate
” means an
entity that is wholly owned and/or controlled by James G. Babb III, and Ramin
Kamfar; and the term “Hawthorne Affiliate” means an entity that is wholly owned
and/or controlled by Ed Harrington and Samantha Davenport.”
PAGE B-2