Pre-Effective Amendment to Registration Statement for Securities of a Real Estate Company — Form S-11 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-11/A Pre-Effective Amendment to Registration Statement HTML 1.99M for Securities of a Real Estate Company
2: EX-3.2 Articles of Incorporation/Organization or By-Laws HTML 154K
3: EX-3.3 Articles of Incorporation/Organization or By-Laws HTML 69K
4: EX-3.4 Articles of Incorporation/Organization or By-Laws HTML 8K
5: EX-5.1 Opinion re: Legality HTML 16K
6: EX-8.1 Opinion re: Tax Matters HTML 17K
7: EX-23.1 Consent of Experts or Counsel HTML 7K
S-11/A — Pre-Effective Amendment to Registration Statement for Securities of a Real Estate Company Document Table of Contents
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
With copies to:
Rosemarie
A. Thurston
Jason
W. Goode
James
H. Sullivan
Alston &
Bird LLP
1201 West
Peachtree Street Atlanta,
GA30309
(404) 881-7000
Ettore A. Santucci
Goodwin Procter LLP
Exchange Place
53 State Street Boston, MA02109
(617) 570-1000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this registration
statement becomes effective.
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 of 1933, check the
following
box. x
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. o
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 statement number of
the earlier effective registration statement for the same
offering. o
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 statement number of
the earlier effective registration statement for the same
offering. o
Large accelerated
filer o
Accelerated
filer o
Non-accelerated
filer x
Smaller reporting company o
(Do not check if a smaller reporting
company)
The registrant hereby amends this registration statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The information in
this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed
with the Securities and Exchange Commission and the applicable
state securities commissions is effective. This prospectus is
not an offer to sell these securities and we are not soliciting
an offer to buy these securities in any state where the offer
or sale is not permitted.
NorthEnd Income Property Trust Inc. is a newly organized
corporation formed on August 19, 2008 to invest in a
diversified portfolio of institutional quality, income-producing
commercial real estate properties located in primary and
secondary metropolitan markets and other real estate related
assets. We are externally managed by our advisor, NorthEnd
Realty Advisors LLC, an affiliate of Merrill Lynch &
Co., Inc. Our advisor has engaged BlackRock Realty Advisors Inc.
as our sub-advisor. We intend to qualify as a real estate
investment trust, or REIT, for federal income tax purposes. We
are not a mutual fund and do not intend to register as an
investment company under the Investment Company Act of 1940, as
amended.
We are offering on a continuous basis up to $2,250,000,000 of
shares of our common stock, consisting of up to $2,000,000,000
of shares in our primary offering and up to $250,000,000 of
shares pursuant to our distribution reinvestment plan. We will
take purchase orders and hold investors’ funds in an
interest-bearing escrow account until (i) we receive
purchase orders for at least $100,000,000 of shares of our
common stock and (ii) our board of directors has authorized
the release to us of funds in the escrow account, at which time
we will commence our operations. Investors’ funds will not
be subject to any management fees until we commence operations.
If we do not raise the minimum offering amount and commence
operations before
,
2009 (180 days following the first date in which our shares are
offered for sale to the public), 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. Until our escrow agent has released such
funds to us, the per share purchase price for shares of our
common stock in our primary offering will be $10.25 per share.
Thereafter, the per share purchase price will vary from
day-to-day and, on any given day, will equal the sum of our net
asset value, or NAV, divided by the number of shares of our
common stock outstanding as of the end of business on such day
prior to giving effect to any share purchases or redemptions to
be effected on such day, plus any applicable selling
commissions. The minimum investment in shares of our common
stock for initial purchases is $10,000.
We do not intend to list our shares of common stock for trading
on an exchange or other trading market. In an effort to provide
our stockholders with liquidity in respect of their investment
in our shares, we have adopted a redemption plan whereby
stockholders may request on a daily basis that we redeem all or
any portion of their shares. However, our board of directors has
the right to delay, modify or suspend redemptions if it deems it
to be in the best interest of our stockholders. The redemption
price per share will be equal to our NAV per share on the date
of redemption, as calculated in the same manner as the
determination of the price per share at which new shares are
offered to the public on that day. Subject to limited
exceptions, shares redeemed within 365 days of the date of
purchase will be subject to a short-term trading discount equal
to 2% of the aggregate NAV per share of such shares redeemed
which will inure indirectly to the benefit of our remaining
stockholders. See “Pricing and
Liquidity—Redemption Plan.”
This investment involves a high degree of risk. You should
purchase these securities only if you can afford the complete
loss of your investment. See “Risk Factors” beginning
on page 17 for risks to consider before buying our shares,
including:
•
We have no prior operating history and there is no assurance
that we will achieve our investment objectives.
•
We have not yet identified any assets to be purchased with the
net proceeds from this offering and, therefore, you will not be
able to evaluate our assets prior to our investment therein.
•
We may not have sufficient resources to satisfy all redemption
requests. In addition, our board of directors may terminate,
modify or suspend our redemption plan or reject any redemption
requests.
•
There is no current public market for shares of our common
stock, and we do not expect that such a public market will ever
develop. Therefore, redemption of shares by us will likely be
the only way for you to dispose of your shares.
•
The purchase and redemption price for shares of our common stock
will be based on our NAV per share as calculated at the end of
each business day by our third party accounting agent, and will
not be based on any trading market.
•
As an externally advised REIT, we are dependent on our advisor
to conduct our business. The fees we will pay to our advisor and
its affiliates were not negotiated on an arm’s-length basis.
•
Our advisor and our sub-advisor will face conflicts of interest
as a result of, among other things, time constraints, allocation
of investment opportunities, the sourcing of financing and the
fact that the fees they receive for services rendered to us will
be based on our NAV which will be calculated under their
supervision.
•
The amount of distributions we may make is uncertain. Although
we intend to fund the payment of distributions solely from cash
flow from operations, we may pay distributions from other
sources, including the sale of assets, borrowings or return of
capital.
•
If we fail to qualify as a REIT for federal income tax purposes
and no relief provisions apply, our NAV and cash available for
distribution to our stockholders could materially decrease.
Neither the SEC nor any state securities commission has
approved or disapproved of these securities or determined if
this prospectus is truthful or complete. In addition, the
attorney general of the state of New York has not passed upon or
endorsed the merits of this offering. Any representation to the
contrary is a criminal offense. The use of forecasts in this
offering is prohibited. No one is permitted to make any oral or
written predictions about the amount or certainty of any cash
benefits or tax consequences which may result from an investment
in our common stock.
Per Share
Total Minimum
Total
Maximum (1)
Public offering
price (2)(3)
$
10.25
$
100,000,000
$
2,250,000,000
Selling
commissions (3)
$
0.25
$
2,439,024
$
48,780,487
Proceeds to us, before expenses
$
10.00
$
97,560,976
$
2,201,219,513
(1) Includes shares of common stock being offered under our
distribution reinvestment plan.
(2) The price per share shown will apply until funds are
released to us from the escrow account. Thereafter, our price
per share will vary from day-to-day and will be based on our NAV.
(3) Selling commissions may be reduced or eliminated with
regard to shares sold in the primary offering to or for the
account of certain categories of purchasers, resulting in lower
price per share amounts for such purchasers. We will pay our
distributor an asset-based distribution fee at the end of each
month during this offering equal to (a) the number of
outstanding shares of our common stock purchased in our primary
offering at least 13 months prior to the end of such month
multiplied by
(b) 1/12th of
0.35% of our average NAV per share during each month. No selling
commissions or distribution fees will be charged for sales
pursuant to our distribution reinvestment plan.
The distributor for this offering, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, is an affiliate of our
advisor. The distributor is not required to sell any specific
number or dollar amount of shares of our common stock but will
use its best efforts to sell the shares offered hereby in the
primary offering.
The shares of common stock we are offering are suitable only as
a long-term investment for persons of adequate financial means.
Because there is no public market for our shares, you may have
difficulty selling any shares that you purchase if our share
redemption plan is ever modified, suspended or terminated.
In consideration of these factors, we require that a purchaser
of shares of our common stock meet two separate suitability
standards. Under the first standard, a purchaser must have
either:
•
a net worth of at least $250,000; or
•
a gross annual income of at least $70,000 and a net worth of at
least $70,000.
For purposes of determining whether you satisfy the above
standard, your net worth should be calculated excluding the
value of your home, home furnishings and automobiles.
To meet the second standard, a purchaser must have either:
•
an individual net worth, or joint net worth with that
purchaser’s spouse, that exceeds $1,000,000; or
•
a gross annual income in excess of $200,000 in each of the two
most recent years or joint income with such purchaser’s
spouse in excess of $300,000 in each of those years and a
reasonable expectation of reaching the same income level in the
current year.
For purposes of determining whether you satisfy the second
standard, your net worth should be calculated including the
value of your home, home furnishings and automobiles.
Pennsylvania Investors: Because the minimum
offering amount is less than $150,000,000, you are cautioned to
carefully evaluate our ability to fully accomplish our stated
objectives and to inquire as to the current dollar value of our
subscriptions.
In the case of sales to fiduciary accounts (such as an
individual retirement account, or IRA, Keogh plan or pension or
profit sharing plan), these suitability standards must be met by
the fiduciary account, by the person who directly or indirectly
supplied the funds for the purchase of the shares of our common
stock or by the beneficiary of the account.
Each of the suitability standards above apply for purchases
through the date that is one year from the date of this
prospectus. After such one year period, our board of directors
may determine to eliminate the second standard described above
in consideration of various factors, including an evaluation of
the risks associated with our business at that time. Our
suitability standards will not be lower than the requirements
set forth in our charter which have been adopted in accordance
with the Statement of Policy Regarding Real Estate Investment
Trusts published by the North American Securities Administrators
Association, which we refer to as the NASAA REIT Guidelines.
Each participating broker-dealer must make every reasonable
effort to determine that the purchase of shares of our common
stock is a suitable and appropriate investment for each investor
based on information provided by the investor. Each
participating broker-dealer is required to maintain for six
years records of the information used to determine that an
investment in shares of our common stock is suitable and
appropriate for a stockholder.
The income and net worth standards set forth above do not apply
to participant-directed purchases under a 401(k) or other
defined contribution plan where the authorized plan fiduciary
has approved our shares of common stock as an available
investment option under such plan.
Please carefully read the information in this prospectus and any
accompanying prospectus supplements, which we refer to
collectively as the prospectus. You should rely only on the
information contained in this prospectus. We have not authorized
anyone to provide you with different information. This
prospectus may only be used where it is legal to sell these
securities. You should not assume that the information contained
in this prospectus is accurate as of any date later than the
date hereof or such other dates as are stated herein or as of
the respective dates of any documents or other information
incorporated herein by reference.
In this prospectus, the term “operating partnership”
refers to NorthEnd Operating Partnership LP, of which NorthEnd
Income Property Trust Inc. is the sole general partner. The
words “we,”“us,” and “our” refer
to NorthEnd Income Property Trust Inc. and our operating
partnership, taken together, unless the context requires
otherwise. The terms “advisor” and “NorthEnd
Advisor” refer to NorthEnd Realty Advisors LLC, our
advisor. The terms “sub-advisor” and “BlackRock
Realty” refer to BlackRock Realty Advisors Inc., our
sub-advisor. The term “advisors” refers collectively
to our advisor and our sub-advisor.
This prospectus is part of a registration statement that we
filed with the SEC using a continuous offering process.
Periodically, as we make material investments or have other
material developments, we will provide a prospectus supplement
that may add, update or change information contained in this
prospectus. Any statement that we make in this prospectus will
be modified or superseded by any inconsistent statement made by
us in a subsequent prospectus supplement. The registration
statement we filed with the SEC includes exhibits that provide
more detailed descriptions of the matters discussed in this
prospectus. You should read this prospectus and the related
exhibits filed with the SEC and any prospectus supplement,
together with additional information described below under
“Where You Can Find More Information.”
We will take purchase orders and hold investors’ funds in
an interest-bearing escrow account until (i) we receive
purchase orders for at least $100,000,000 of shares of our
common stock and (ii) our board of directors has authorized
the release to us of funds in the escrow account, at which time
we will commence our operations. We refer to the period prior to
the release of offering proceeds from escrow as the “escrow
period.” After the escrow period, we will file with the SEC
after the end of each business day a prospectus supplement
disclosing the daily determination of our NAV and the
calculation of NAV per share for that business day, which we
refer to as the pricing supplement. Each business day, we will
also post that pricing supplement on our public website at
www.northendinvestments.com. The website will also
contain this prospectus, including any supplements and
amendments. You may also obtain the daily determination of our
NAV and the most recent offering price per share by calling our
toll-free, automated information line
at . We will endeavor to avoid
interruptions in the continuous offering of our shares of common
stock, including filing an amendment to the registration
statement with the SEC on or before such time as the most recent
offering price per share represents a 20% change from the $10.25
per share price set forth in the registration statement as
originally declared effective by the SEC or the price per share
set forth in the latest amendment thereto filed with the SEC.
There can be no assurance, however, that our continuous offering
will not be suspended while the SEC reviews such amendment,
until it is declared effective, if at all.
The registration statement containing this prospectus,
including, without limitation, the exhibits to the registration
statement, provides important additional information about us
and the securities offered under this prospectus. The
registration statement can be read at the SEC website,
www.sec.gov, or at the SEC public reference room
discussed herein under the caption “Where You Can Find More
Information” below.
IMPORTANT NOTE FOR BROKER-DEALERS: This
prospectus will be supplemented on each business day after the
escrow period. All sales literature used in connection with this
offering must be accompanied by (1) the original prospectus
dated ,
(2) all prospectus supplements (other than pricing
supplements) and (3) the most recent pricing
supplement filed through the close of business on the business
day immediately preceding delivery or, if delivered after
the close of business, then through the close of business on the
day such sales literature is delivered. Before delivering
this prospectus to clients, you must check
www.northendinvestments.com for the most recent pricing
supplement(s) posted.
Set forth below are some questions (and accompanying answers) we
anticipate investors interested in this offering may have. See
“Prospectus Summary” and the remainder of this
prospectus for more detailed information about this offering.
You should read this entire prospectus and the latest prospectus
supplement furnished to you before deciding to purchase shares
of our common stock.
Q:
What is NorthEnd Income Property Trust Inc.?
A:
We were formed as an externally advised, open-ended REIT to
invest in a diversified portfolio of institutional quality,
commercial real estate properties located in primary and
secondary metropolitan markets and other real estate related
assets. We primarily seek to make investments that will
(1) generate an attractive level of current income for
distribution to our stockholders, (2) realize potential
long-term capital appreciation upon sale and (3) offer an
investment option in which the per share price volatility is
correlated to commercial real estate as an asset class rather
than traditional asset classes such as stocks and bonds. It is
anticipated that over time our commercial real estate portfolio
will reflect the broad trends and returns of the
U.S. commercial real estate sector through investments in
various property types, including retail, office, industrial,
multi-family residential and other institutional quality
properties.
Although we intend to invest primarily in institutional quality,
commercial real estate, we also intend to invest a portion of
our assets in other real estate related assets, such as equity
securities of other REITs, commercial mortgage-backed
securities, mortgage loans and, to a lesser extent, cash and
cash equivalents and other short-term investments. See
“Investment Objectives, Strategy and
Guidelines—Investment Guidelines.”
Q:
What is “institutional quality” commercial real
estate?
A:
We will focus our investment efforts on direct investments in
institutional quality commercial real estate. This is the type
of commercial real property that has historically been sought
for investment by institutional investors including pension
plans, endowments and other financial institutions with
long-term investment strategies that include an allocation to
commercial real estate. Institutional quality commercial real
estate predominantly consists of the highest quality stabilized
and income-producing office, retail, industrial and apartment
properties located in or near densely populated primary and
secondary metropolitan areas in the U.S. and Canada with
projected long-term economic and demographic growth.
Q:
What is a real estate investment trust, or REIT?
A:
In general, a REIT is a company that:
•
combines the capital of many investors to acquire or provide
financing for real estate;
•
generally offers the benefit of a diversified real estate
portfolio under professional management;
•
is able to qualify as a REIT for U.S. federal income tax
purposes and is therefore generally not subject to federal
corporate income taxes on its net income that it currently
distributes to its stockholders, which substantially eliminates
the “double taxation” (i.e., taxation at both
the corporate and stockholder levels) that generally results
from investments in a corporation; and
•
must distribute to investors at least 90% of its annual REIT
taxable income.
We are not currently qualified as a REIT, but we expect to
qualify as a REIT beginning with our taxable year ending
December 31 of the year in which the escrow period concludes.
Q:
What is an open-ended REIT?
A:
We use the term “open-ended REIT” to describe an
investment vehicle of indefinite duration focused on real estate
properties and other real estate related assets, the shares of
common stock of which are sold and redeemed daily on a
continuous basis at a price equal to the sum of NAV per share
plus, in the case of sales but not redemptions and except for
certain categories of purchasers, selling commissions. This is a
structure similar to that employed by “open-ended”
investment companies, or mutual funds, except that
mutual funds invest primarily in a particular type of
securities while REITs invest primarily in real estate. Our
structure as an open-ended REIT is unique. There are currently
no other open-ended REITs with features similar to ours
available for investment in the public markets. Public and
private pension plan sponsors, endowments, foundations and other
pension funds avail themselves of private open-ended REITs as
one option for allocating a portion of their portfolio to direct
investments in commercial real estate. “Direct
investment” refers to owning real estate through an
investment vehicle that does not have its equity interests
listed for trading on a national securities exchange. Our
objective is to offer a similar investment option to a broader
universe of investors.
Q:
What is an umbrella partnership real estate investment trust,
or UPREIT?
A:
In general, an UPREIT is a REIT that holds all or substantially
all of its assets through a partnership the REIT controls as
general partner. We use this structure because a transfer of
property directly to the REIT in exchange for cash or REIT
shares is generally a taxable transaction to the transferring
property owner. In an UPREIT structure, a transferor of a
property who desires to defer taxable gain on the disposition of
his property may transfer the property to the partnership in
exchange for limited partnership interests. In addition, an
UPREIT structure allows a REIT to agree to terms for an
institutional investor interested in making a substantial
investment in its partnership that may differ from the terms of
a public offering.
Q:
Why should I consider an investment in real estate?
A:
Real estate has become a major asset class for allocation within
a diversified investment portfolio. The largest
U.S. endowments and pension funds have allocated a
significant portion of their portfolio to direct investments in
commercial real estate. In fact, according to the 2008 plan
sponsor survey of U.S. pension investors prepared by
Institutional Real Estate, Inc. and Kingsley Associates, the
target allocation to real estate increased from 8.0% for 2005 to
9.6% for 2008. Allocating some portion of your portfolio to a
direct investment in institutional quality commercial real
estate may provide you with:
•
portfolio diversification;
•
attractive risk-adjusted returns; and
•
a stable level of income relative to more traditional asset
classes, such as stocks and bonds.
In addition, direct investments in real estate also serve as a
hedge against inflation while providing the potential for
moderate capital appreciation to investors over the long-term.
During inflationary periods, commercial real estate values
typically rise, benefiting from both income and appreciation.
Many real estate property leases have embedded rental rate
increases that compensate for inflation. In addition, the costs
to replace real estate properties typically increase with
inflation which causes existing real estate values to
appreciate. As a result, including an appropriate allocation to
direct investment in commercial real estate to your investment
portfolio may provide some degree of inflation protection to
your investments.
Q:
How is investing in commercial real estate different than
investing in single-family, residential real estate?
A:
In general, commercial real estate investments offer advantages
as compared to single-family, residential real estate because:
•
commercial real estate leases tend to have a much longer
duration than single-family residential real estate leases;
•
many commercial real estate leases provide for periodic rent
escalations through the term of the lease, thereby providing for
a steady income stream that matches or exceeds the rate of
consumer price inflation; and
•
the commercial real estate market tends to be more transparent
than the residential market in terms of the availability of
financial information (specifically rental rates) and relevant
comparisons to similarly situated commercial properties.
How is an investment in shares of your common stock different
from listed REITs?
A:
While investing in REITs whose shares are listed on a national
securities exchange can be one alternative for investing in
commercial real estate, shares of listed REITs generally
fluctuate in value with the stock market as a whole. As a
result, as the value of your investments in publicly traded,
non-real estate companies fluctuates with the stock market, your
investment in listed REITs would experience similar volatility.
An investment in shares of our common stock generally differs
from listed REITs because:
•
the daily NAV per share of our common stock is based directly on
the fair value of our investments, while shares of listed REITs
are priced by the trading market, which generally causes stock
prices and a company’s market capitalization to fluctuate
based on factors such as supply (number of sellers) and demand
(number of buyers) of shares, reflecting shifting preferences
among sectors of the economy;
•
real estate as an asset class has virtually no correlation with
other traditional asset classes, such as stocks and bonds.
Academic and empirical studies have shown this lack of
correlation increases portfolio efficiency by generating higher
total returns while decreasing overall risk in the portfolio,
because the various asset classes included in a diversified
portfolio react to market conditions differently; and
•
most publicly traded REITs focus on selected property types or
geographic markets, which means that allocating part of your
investments to a well diversified real property portfolio by
owning shares of listed REITs would require you to own shares of
several publicly traded REITs with attendant transaction costs
and effort, as compared to our investment strategy of owning a
well diversified portfolio of various property types in
different geographic markets, in addition to complementary real
estate related assets.
Q:
For whom is an investment in your shares recommended?
A:
An investment in our shares may be appropriate for you if you:
•
meet the minimum suitability standards mentioned above under
“Suitability Standards;”
•
seek to allocate a portion of your investment portfolio to a
direct investment in commercial real estate;
•
seek to receive current income through our payment of
distributions;
•
wish to obtain the benefits of potential long-term capital
appreciation; and
•
are able to hold your investment in our shares as a long-term
investment.
We cannot guarantee that an investment in our shares will allow
you to realize any of these objectives. An investment in our
shares is only intended for investors with a long-term
investment horizon and who understand that the opportunity to
have their shares redeemed under our redemption plan may not
always be available. While there is no minimum holding period
for our shares, stockholders who redeem within 365 days of
the date of purchase, subject to limited exceptions, will be
subject to a short-term trading discount equal to 2% of the
aggregate NAV per share of the shares redeemed which will inure
indirectly to the benefit of our remaining stockholders.
Additionally, stockholders (other than employer-sponsored
retirement plans) who engage in frequent purchase and redemption
transactions within short periods of time will be blocked from
making additional purchases for 85 days.
Q:
What is the minimum offering amount and when will offering
proceeds be released from escrow?
A:
We will take purchase orders and hold investors’ funds in
an interest-bearing escrow account until we receive purchase
orders for at least $100,000,000 of shares of our common stock.
Upon receipt of purchase orders for at least $100,000,000 in
shares, our board of directors will have
until ,
2009 (180 days following the first date on which our shares
are offered for sale to the public, which we refer to as the
initial offering date) to authorize the release of the escrowed
funds to us so that we can commence our operations. We refer to
the period prior to the release of escrowed funds to us as the
“escrow period.” We expect that our board of directors
will authorize the release of escrowed funds to us at such time
as our advisors have identified suitable initial investments in
accordance with our investment guidelines that will allow us to
acquire commercial real estate properties
and/or real
estate related assets that would support a daily NAV calculation
for our continuous offering and generate income for distribution
to stockholders.
During the escrow period, the per share price for shares of our
common stock purchased in this offering will be $10.25. After
the escrow period, the per share price for our shares will vary
from day-to-day and, on any given day, will be equal to our NAV
divided by the number of shares of our common stock outstanding
as of the end of business on such day prior to giving effect to
any share purchases or redemptions to be effected on such day,
plus, except for certain categories of purchasers, selling
commissions. If we do not raise the minimum amount and commence
our operations within 180 days following the initial
offering date, 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.
Notwithstanding the foregoing, you may elect to withdraw your
purchase order and request a full refund of your investment with
interest and without deduction for escrow expenses at any time
before the escrowed funds are released to us.
Q:
What will you do with the capital raised in this offering?
A:
We intend to contribute the net proceeds from this offering,
which are not used to pay the fees and expenses attributable to
this offering or our operations, to our operating partnership.
Our operating partnership will use the net proceeds received
from us: (1) to make investments in accordance with our
investment strategy and policies; (2) to reduce borrowings
and repay indebtedness incurred under various financing
instruments into which we may enter; (3) for working
capital purposes; and (4) to fund redemptions of our common
stock. See “Use of Proceeds” and “Our Structure
and Formation Transactions.” Regardless of the price at
which shares of our common stock are sold on any given day, the
aggregate net proceeds we receive, after deducting any amount we
may use to fund redemptions on the same day, will be contributed
to our operating partnership.
Q:
Will you use leverage?
A:
Yes, we intend to use conservative amounts of leverage. Our
targeted leverage after we have acquired a substantial portfolio
is 30% of the gross value of our assets, which we believe is
generally lower than the amount of borrowings utilized by other
available real estate investment products. During the period
when we are acquiring our initial portfolio, we may employ
greater leverage in order to quickly build a diversified
portfolio of assets. Please see “Investment Objectives,
Strategy and Guidelines” for more details.
Q:
What is the per share purchase price?
A:
During the escrow period, the per share purchase price for
shares of our common stock will be $10.25. Thereafter, the per
share purchase price will vary from day-to-day and, on any given
business day, will be equal to our NAV divided by the number of
shares outstanding as of the end of business on such day, in
each case prior to giving effect to any share purchases or
redemptions to be effected on such day, plus, except for certain
categories of purchasers, selling commissions. After the escrow
period, we will file with the SEC after the close of business on
each business day a prospectus supplement disclosing the daily
determination of our NAV per share. Any purchase orders that we
receive prior to 4:00 p.m. Eastern time on a given day
will be executed at a price equal to our NAV per share for that
day, as calculated after the close of business on that day, plus
any applicable selling commissions. Purchase orders that we
receive after 4:00 p.m. Eastern time will be executed
at a price equal to our NAV per share as calculated after the
close of business on the next business day, plus any applicable
selling commissions. Purchase orders placed on a day that is not
a business day will be executed as if they were received prior
to the close of business on the immediately following business
day. Settlement of share purchases will be on the fifth business
day immediately following the business day on which the purchase
order is received. Investors are entitled to cancel their orders
until the close of business on the settlement date. Please see
“Share Purchases and
Redemptions—Buying
Shares” for more details.
Q:
How will NAV be calculated?
A:
We will engage an independent valuation expert to validate and
manage our commercial real estate valuation process, which is
integral to calculating the value of our operating
partnership’s assets, and ultimately, determining our NAV.
Our accounting agent, under the supervision of our advisors,
will have
responsibility for calculating our NAV after the end of each
business day following the escrow period by subtracting
(1) our liabilities, including the accrued estimated
management fee, the accrued estimated distribution fee and other
expenses attributable to this offering and our operations, from
(2) our assets, which will consist almost entirely of the
value of our interest in our operating partnership. The value of
our operating partnership is the excess of the fair value of its
assets (including commercial real estate properties, real estate
related assets and other investments) over the fair value of its
liabilities (including debt and the expenses attributable to its
operations). Our board of directors, including a majority of our
independent directors, will adopt valuation guidelines that
contain a comprehensive set of methodologies to be used by our
sub-advisor, our independent valuation expert and our
independent appraisers, as applicable, when valuing commercial
real estate properties, real estate related assets and
liabilities in connection with the calculation of our NAV. These
valuation methodologies are largely based upon standard industry
practices used by private open-ended real estate funds. Our
sub-advisor will calculate quarterly valuations of our
commercial real estate properties and manage the independent
appraisers. Real estate related assets will also be valued by
our advisors quarterly, or in the case of liquid securities,
daily. We intend to engage an independent valuation expert to
manage our commercial real estate valuation process and to
assist our advisors in calculating quarterly valuations of our
properties and managing the independent appraisers. The value of
our interest in our operating partnership, in turn, will depend
on our equity ownership relative to that of limited partners.
Initially, the only limited partner will be NorthEnd Holding
Company LLC, a wholly owned subsidiary of ML & Co. that we
refer to as NorthEnd Holding, and the value of its equity
ownership will be the $200,000 it has contributed in exchange
for limited partnership interests. Our NAV per share as of the
end of any business day will be determined by dividing our NAV
on such day by the number of shares of our common stock
outstanding as of the end of such day prior to giving effect to
any share purchases or redemptions to be effected on such day.
At the close of business on the date that is five business days
before each record date for any declared distribution, our NAV
will be reduced to reflect the accrual of our liability to pay
such distribution to our stockholders of record as of such date.
See “Pricing and Liquidity—Valuation” for more
details about how our NAV will be calculated.
Q:
Will I be charged selling commissions?
A:
Yes, subject to exceptions for certain categories of purchasers.
Investors will generally pay selling commissions as part of the
price per share of our common stock purchased in our primary
offering. Selling commissions will equal up to $.25 per share
during the escrow period and thereafter will equal up to 2.5% of
the NAV per share of the shares you purchase in the primary
offering as of the date of purchase, in each case subject to
certain limitations and exceptions. No selling commissions will
be charged for shares purchased by investors whose contracts for
investment advisory and related brokerage services include a
fixed or “wrap” fee feature or other asset-based fee
arrangement. Discounts are also available for certain volume
purchases in the primary offering. See “Plan of
Distribution—Volume and Other Discounts.” No selling
commissions will be charged for purchases pursuant to the
distribution reinvestment plan. The net proceeds to us will not
be affected by any such reductions in selling commissions.
Q:
What is the term or expected life of this offering?
A:
Pursuant to the registration statement of which this prospectus
is a part, we have registered $2,250,000,000 of shares of
our common stock in anticipation of our initial public offering.
We intend to conduct a continuous offering that will begin
immediately following the initial offering date and will not
have a predetermined duration, subject to continued compliance
with the rules and regulations of the SEC and applicable state
laws. Such date will be determined by us and is expected to be
promptly after the registration statement is declared effective
by the SEC. The amount of shares we have registered pursuant to
the registration statement is the amount we reasonably expect to
be offered and sold within two years from the initial effective
date of the registration statement. Pursuant to this prospectus,
we are offering to the public all of the shares of our common
stock that we have registered consisting of up to $2,000,000,000
of shares to be sold in our primary offering and up to
$250,000,000 of shares to be sold pursuant to our distribution
reinvestment plan. We may reallocate the shares of common stock
we are offering between the primary offering and the
distribution reinvestment plan in order to meet investor demand.
We intend to file a new registration statement with the
SEC prior to the end of each three-year period following the
commencement of this offering described in Rule 415 under
the Securities Act of 1933, as amended, so that we may
continuously offer shares of common stock over an unlimited time
period. In certain states, the offering may continue for only
one year pursuant to initial clearance by applicable state
authorities, after which we will need to renew the offering for
additional one-year periods (or longer, if permitted by the laws
of each particular state).
Q:
Is there any minimum investment required?
A:
Subject to limited exceptions, the minimum initial investment in
shares of our common stock is $10,000, and the minimum
subsequent investment in our shares is $1,000 per transaction.
The minimum subsequent investment amount does not apply to
purchases made under our distribution reinvestment plan.
Q:
How do I buy shares?
A:
You can buy shares pursuant to this prospectus provided that you
satisfy the suitability standards described above under the
caption “Suitability Standards.” If you meet the
suitability standards and choose to purchase shares in this
offering, you will need to (1) direct your financial
advisor to purchase shares in this offering and (2) pay for
the shares at the time you submit your purchase order. Please
see “Share Purchases and Redemptions” for more
information about how to purchase shares.
Q:
If I buy shares, will I receive distributions and how
often?
A:
We intend to make distributions on a quarterly basis to
stockholders of record as of the last business day of each
quarter commencing in the first quarter after the escrow period
concludes. Any distributions we make will be at the discretion
of our board of directors, in accordance with our earnings, cash
flow, capital needs and general financial condition. Our board
of directors’ discretion as to the payment of distributions
will be directed, in substantial part, by its obligation to
cause us to comply with the REIT requirements. To maintain our
qualification as a REIT, we generally are required to make
aggregate annual distributions to our stockholders of at least
90% of our REIT taxable income. See “Description of Capital
Stock—Distributions” and “Material United States
Federal Income Tax Considerations.”
Q:
Will the distributions I receive be taxable as ordinary
income?
A:
Generally, distributions that you receive will be considered
ordinary income to the extent they are from current or
accumulated earnings and profits. Dividends received from REITs
are generally not eligible to be taxed at the lower rates
applicable to individuals for “qualified dividends”
from taxable corporations. To the extent we recognize capital
gains from sales of assets, we may designate a portion of
distributions as capital gain dividends taxable at capital gain
rates. In addition, because depreciation expense reduces taxable
income but does not reduce cash available for the payment of
distributions, and because we initially expect such depreciation
expense to exceed our non-deductible expenditures, a portion of
your distributions may be considered return of capital for tax
purposes. These amounts will not be subject to tax, but will
instead reduce the tax basis of your investment. This in effect
defers a portion of your tax until you redeem or sell your
shares or we are liquidated, at which time you generally will be
taxed at capital gains rates.
For illustrative purposes only, assume that we make a
distribution of $1,000 to our stockholders. If the distribution
is taxed as ordinary income and assuming your marginal tax rate
is 30%, you will pay $300 in taxes on the distribution. If the
distribution is designated as a capital gain dividend, you will
pay $150 in taxes, assuming a capital gains tax rate of 15%. If
the distribution is a return of capital, the full amount of the
distribution will reduce the tax basis of your investment (not
below zero), and you will not pay taxes on the distribution,
except to the extent, if any, that the distribution exceeds your
basis in your shares. Because each investor’s tax position
is different, we suggest you consult with your tax advisor. See
“Material United States Federal Income Tax
Considerations.”
Q:
May I reinvest my cash distributions in additional shares?
A:
Yes. We have adopted a distribution reinvestment plan whereby
investors may elect to have their cash distributions
automatically reinvested in additional shares of our common
stock. The purchase price for
shares purchased under our distribution reinvestment plan will
be equal to our NAV per share on the date that the distribution
is payable, after giving effect to the distribution. No selling
commissions will be charged for shares purchased under our
distribution reinvestment plan. See “Description of Capital
Stock—Distribution Reinvestment Plan” for more
information regarding reinvestment of distributions you may
receive from us.
Q:
Do you have a redemption plan?
A:
Yes. In an effort to provide our stockholders with liquidity in
respect of their investment in shares of our common stock, we
have adopted a redemption plan whereby on a daily basis,
stockholders may request that we redeem all or any portion of
their shares. Our board of directors may terminate our
redemption plan at any time following the first anniversary of
the initial offering date. In addition, our board of directors
may delay, modify or suspend, without limitation, share
redemptions or the redemption plan at any time if it determines
that such action is in our and our stockholders’ best
interests. See “Pricing and
Liquidity—Redemption Plan” for more information
regarding this plan.
Q:
What is the redemption price?
A:
The redemption price per share on any business day will be equal
to our NAV divided by the number of shares of our common stock
outstanding as of the end of business on such day prior to
giving effect to any share purchases or redemptions to be
effected on such day. However, our board of directors may
determine in the future to reduce the redemption price to an
amount that reflects a discount to our NAV per share if it
determines it would be in the best interests of our stockholders
to do so in order to reduce the volume of redemption requests.
Subject to limited exceptions, shares redeemed within
365 days of the date of purchase will be subject to a
short-term trading discount equal to 2% of the aggregate NAV per
share of such shares redeemed which will inure indirectly to the
benefit of our remaining stockholders. See “Pricing and
Liquidity—Redemption Plan.” At the close of
business on the date that is five business days prior to the
record date for any declared distributions, the amount of
distributions declared will be treated as a liability for
purposes of computing NAV and our NAV will be reduced to reflect
the accrual of our liability to pay the distribution to our
stockholders of record as of such date.
Q:
What fees and expenses will you incur and how will they
affect my investment?
A:
Except with respect to fees and expenses related to establishing
our escrow account, we will not incur any fees or expenses until
after the escrow period has concluded, at which time we will
commence our operations. We will pay management fees to our
advisor and distribution fees to our distributor for their
services as discussed elsewhere in this prospectus. We will not
pay management fees to our sub-advisor, as those fees will be
paid by our advisor. In addition, we will incur expenses payable
to persons who are not affiliated with our advisor or our
distributor in connection with this offering and our on-going
operations, such as audit fees, filing fees, printing expenses,
legal fees, independent valuation expert fees, property
management fees and appraisal fees. All of the fees and expenses
we incur will reduce the amount of capital we have to invest and
therefore reduce our NAV. Our advisor has agreed to advance
offering expenses incurred on our behalf through the escrow
period, which we will reimburse to our advisor over the five
year period following the initial offering date.
Q:
Will I be notified of how my investment is doing?
A:
Yes. We will provide you with periodic updates on the
performance of your investment with us, including:
•
three quarterly financial reports;
•
an annual report;
•
in the case of certain U.S. stockholders, an annual IRS
Form
1099-DIV
and/or
Form 1099-B,
if required, and, in the case of
non-U.S. stockholders,
an annual IRS
Form 1042-S;
•
confirmation statements (after transactions affecting your
balance, except reinvestment of distributions in us and certain
transactions through automatic investment or withdrawal
programs); and
if you participate in our distribution reinvestment plan, an
annual statement providing all material information regarding
the plan and your participation in it, including the tax
consequences thereof.
Depending on legal requirements, we will provide this
information to you via one or more of the following methods:
In general, the above materials will be provided to you via
U.S. mail unless you affirmatively elect to receive them
via electronic delivery. Except for an annual report and any
other reports required to be physically delivered to
stockholders, we will not mail stockholders periodic or other
reports we file with the SEC that are available to you on the
SEC’s website at www.sec.gov.
In addition, on each business day after the escrow period, our
current NAV per share will be posted on our website and made
publicly available on our toll-free, automated information
line, ,
after it has been calculated at the end of each business day.
Also, depending on how you purchased shares of our common stock,
you may receive additional reports; for example, if you purchase
shares through a brokerage account that you have with
ML & Co. or any of its consolidated subsidiaries, you
will receive monthly or quarterly account statements (detailing
balances and all transactions completed in the account during
the prior month or quarter).
Q:
When will I get my detailed tax information?
A: In the case of certain U.S. stockholders, your
Form 1099-DIV
and/or
Form 1099-B
tax information, if required, will be mailed by February 15 of
each year. In the case of
non-U.S. stockholders,
Form 1042-S
will be mailed by March 15 of each year.
Q:
Who can help answer my questions?
A:
If you have more questions about this offering or if you would
like additional copies of this prospectus, you should contact
your registered selling representative or:
NorthEnd
Income Property Trust Inc.
4 World Financial Center New York, NY10080
(212) 449-1000
This summary highlights some of the most significant
information contained elsewhere in this prospectus. Because it
is a summary, it does not contain all of the information that
may be important to you. To understand this offering fully, you
should read the entire prospectus carefully, including, without
limitation, the information discussed under the caption
“Risk Factors” before making a decision to invest in
our shares.
NorthEnd
Income Property Trust Inc.
NorthEnd Income Property Trust Inc. is a Maryland
corporation formed on August 19, 2008 to invest in a
diversified portfolio of institutional quality, income-producing
commercial real estate properties and other real estate related
assets. Our portfolio will consist primarily of commercial real
estate properties that are located in or near densely populated
metropolitan areas in the U.S. and Canada of various
property types, including retail, office, industrial,
multi-family residential and other commercial properties. We
intend to qualify as a REIT for federal income tax purposes
beginning with our taxable year ending December 31 of the year
in which the escrow period concludes. We are not a mutual fund
and do not intend to register as an investment company under the
Investment Company Act. We intend to hold all of our investments
through our operating partnership, of which we are the sole
general partner.
Our office is located at 4 World Financial Center, New York, NY10080. Our telephone number at that address is
(212) 449-1000
or toll free
at .
Our fax number at that address is
212-449-7165,
and the
e-mail
address of our investor relations department
is .
We maintain a toll-free, automated information line
at ,
where you may obtain the daily determination of our NAV and the
most recent offering price per share. You may find additional
information about us at our website,
www.northendinvestments.com. The contents of that website
are not incorporated by reference in, and are not otherwise a
part of, this prospectus.
Summary
Risk Factors
An investment in shares of our common stock involves significant
risks, and is intended only for investors with a long-term
investment horizon and who do not require immediate liquidity or
guaranteed income. Some of the more significant risks relating
to an investment in shares of our common stock include those
listed below.
•
If we do not meet the minimum offering requirements for this
offering, you may earn a lower rate of return on your escrowed
funds than could have been achieved from an alternative
investment.
•
We are a newly formed corporation and have no operating history.
There is no assurance that we will be able to achieve our
investment objectives.
•
This is a “blind pool” offering because we have not
yet identified any assets to be purchased with the net proceeds
from this offering and, therefore, you will not be able to
evaluate such assets prior to our investment therein.
•
Because we do not expect that there will ever be a public
trading market for shares of our common stock, redemption of
shares by us will likely be the only way for you to dispose of
your shares promptly. However, we may not have sufficient
resources to satisfy all redemption requests. In addition, our
board of directors may terminate, modify or temporarily or
indefinitely suspend our redemption plan, or delay or reject any
one or more redemption requests if it determines that such
action is in our or our remaining stockholders’ best
interest. This may include modification of the frequency of
redemptions from daily to a less frequent basis or to reduce the
redemption price to an amount that reflects a discount to our
NAV per share in order to reduce the volume of redemption
requests.
•
After the escrow period, the purchase and redemption price for
shares of our common stock will be determined at the end of each
business day based upon our NAV, and will not be based on any
established trading price. You will not know the purchase or
redemption price at the time you submit your purchase order or
redemption request. The purchase price for our shares may
decrease after you
purchase your shares, and the redemption price for our shares
may increase after you submit your redemption request.
•
The amount of distributions we may pay, if any, is uncertain.
Although we intend to fund the payment of distributions solely
from cash flow from operations, we may pay distributions from
other sources, including the sale of assets, borrowings or
return of capital.
•
As an externally advised REIT, we are dependent upon our advisor
and our sub-advisor to conduct our operations and to select our
investments. We will pay substantial fees to our advisor for
these services, and the agreement governing these services was
not negotiated on an arm’s-length basis. Our advisor and
our sub-advisor will face conflicts of interest because the fees
they receive are based on our NAV which will be calculated under
their supervision.
•
Our sub-advisor will face conflicts of interest relating to
allocating investment opportunities and the time of its
personnel among us and other real estate programs, and the
compensation arrangements among our sub-advisor, its respective
affiliates and us, which arrangements create incentives for our
sub-advisor that may conflict with our best interests. These
conflicts may negatively affect our ability to successfully
execute our strategy.
•
We will be subject to risks generally incident to the ownership
of real property.
•
Our use of leverage increases the risk of your investment and
could hinder our ability to pay distributions to our
stockholders.
•
Our investment and operational policies may be changed without
stockholder consent.
•
If we fail to qualify as a REIT and no relief provisions apply,
our NAV and cash available for distribution to our stockholders
could materially decrease. Even if relief provisions allow us to
maintain our REIT status, we may incur a material tax liability
if we otherwise fail to qualify as a REIT.
Our Board
of Directors
We operate under the direction of our board of directors, the
members of which are accountable to us and our stockholders as
fiduciaries. Our board of directors has ultimate responsibility
for our operations, governance, financial controls, compliance
and disclosure. Prior to the commencement of this offering, we
will have seven directors, four of whom will be independent of
us, our advisors and their respective affiliates.
Our
Advisor
We are externally managed and advised by NorthEnd Realty
Advisors LLC, a newly formed Delaware limited liability company
that we refer to as our advisor or NorthEnd Advisor. Our advisor
is an affiliate of ML & Co. and was formed on
August 25, 2008. ML & Co. is one of the
world’s leading wealth management, capital markets and
advisory companies, providing financial advice and investment
banking services through offices in 40 countries and territories
with total client assets under management of approximately
$1.5 trillion as of September 26, 2008. On
September 15, 2008, ML & Co. entered into an
Agreement and Plan of Merger (as amended by Amendment No. 1
dated as of October 21, 2008) with Bank of America
Corporation. Pursuant to the Agreement and Plan of Merger, on
January 1, 2009, a wholly owned subsidiary of Bank of
America Corporation merged with and into ML & Co.,
with ML & Co. continuing as the surviving corporation
and a subsidiary of Bank of America Corporation.
Our advisor will use its best efforts, subject to the oversight,
review and approval of our board of directors, to, among other
things, determine the allocation of our portfolio among
commercial real estate properties and other real estate related
assets. Our board of directors has delegated to our advisor
authority to manage our day-to-day business in accordance with
our investment objectives, strategy, guidelines, policies and
limitations. Our advisor will perform its duties and
responsibilities under an advisory agreement as our fiduciary.
Our advisor has engaged BlackRock Realty Advisors Inc., a
subsidiary of BlackRock, Inc., to serve as our sub-advisor and
perform the functions related to selecting and managing our
investments and carrying out our investment strategy. We refer
to BlackRock Realty Advisors Inc. as our sub-advisor or
BlackRock Realty, and collectively with NorthEnd Advisor,
referred to as our advisors. BlackRock Realty is a full service
U.S. real estate equity investment manager and asset
manager, managing approximately $23.3 billion in real
estate assets nationwide as of September 30, 2008, in all
major property types on behalf of investors in commingled funds
and separate account relationships. Through its predecessors,
BlackRock Realty has been providing real estate advisory
services in the U.S. since 1972. BlackRock Realty has more
than 250 real estate professionals engaged in investing and
managing these private market assets, including portfolio
management, acquisitions, asset management, dispositions,
finance, research, valuation, legal and accounting. BlackRock
Realty is headquartered in New Jersey, with corporate offices in
Boston, San Francisco, Chicago, and Newport Beach,
California. Since the beginning of 2004, BlackRock Realty has
completed nearly 580 property transactions totaling over
$31 billion of property value on behalf of separate account
and commingled fund clients.
The parent company of BlackRock Realty, BlackRock, Inc., is a
leading provider of global investment management, risk
management and advisory services, and is one of the largest
publicly traded investment management firms in the
U.S. with approximately $1.26 trillion of assets under
management as of September 30, 2008 on behalf of
institutional and individual investors worldwide. As of
September 30, 2008, ML & Co. owned approximately
48.5% of the capital stock of BlackRock, Inc.
Our sub-advisor will provide services related to the
acquisition, management and disposition of commercial real
estate properties and other real estate related assets and the
selection of property managers and other service providers, in
accordance with our investment objectives, strategy, guidelines,
policies and limitations. In addition, our sub-advisor will be
primarily responsible for, among other things, valuing our
commercial real estate properties and real estate related assets
in accordance with valuation guidelines approved by our board of
directors. Our sub-advisor will also provide marketing, investor
relations and other administrative services. The fees paid to
our sub-advisor will not be paid by us, but will instead be paid
by our advisor out of the management fee that we pay to our
advisor. Our sub-advisor will perform its duties and
responsibilities under a sub-advisory agreement with our advisor.
Our
Operating Partnership
We intend to own all of our investments through NorthEnd
Operating Partnership LP, which we refer to as our operating
partnership, in order to be organized as an UPREIT. UPREIT
stands for “Umbrella Partnership Real Estate Investment
Trust.” An UPREIT is a REIT that holds all or substantially
all of its assets through a partnership which the REIT controls
as general partner. We have elected to use an UPREIT structure
to facilitate acquisitions of commercial real estate properties.
A sale of property directly to a REIT is generally a taxable
transaction to the selling property owner. In an UPREIT
structure, a seller of appreciated property who desires to defer
taxable gain on the transfer of such property may transfer the
property to our operating partnership in exchange for limited
partnership interests. Such exchange could be made on a tax-free
basis. Being able to offer a seller the opportunity to defer
taxation of gain until the seller redeems its interests in our
operating partnership for cash may give us a competitive
advantage in acquiring desired properties relative to buyers who
cannot offer this opportunity. In addition, investing in our
operating partnership, rather than in shares of our common
stock, may be more attractive to certain institutional or other
investors due to their business or tax structure. Following the
third anniversary of the initial offering date, if an
institutional investor is interested in making a substantial
investment in our operating partnership, we may agree to terms
for such investment different from the terms of this offering of
common stock. For example, we may be willing to agree that lower
management fees and distribution fees will be payable by such
investor in consideration of the size of its investment or the
investor’s commitment not to request redemption of such
investment for a negotiated period of time. Our UPREIT structure
can accommodate such different terms, while applicable tax laws
generally restrict an entity that qualifies as a REIT from
charging different fee rates among its stockholders. We are the
sole general partner of our operating partnership and have
contributed
$1,000 to our operating partnership in exchange for our general
partner interest. NorthEnd Holding is its initial limited
partner and has contributed $200,000 to our operating
partnership in exchange for limited partnership interests. See
“Our Structure and Formation Transactions” for a chart
showing our ownership structure.
Investment
Objectives
Our primary investment objectives are:
•
to generate an attractive level of current income for
distribution to our stockholders;
•
to provide our stockholders with the potential for long-term
capital appreciation; and
•
to offer an investment option in which the per share price
volatility is correlated to commercial real estate as an asset
class rather than traditional asset classes such as stocks and
bonds.
Investment
Strategy
We intend to achieve our investment objectives by investing
primarily in a diversified portfolio of (1) institutional
quality, income-producing commercial real estate properties in
multiple sectors, (2) other real estate related assets,
including debt and equity interests backed principally by real
estate and (3) cash, cash equivalents and other short-term
investments. See “Investment Objectives, Strategy and
Guidelines” for more details regarding our investment
strategy.
Investment
Guidelines
Our investment guidelines have been adopted by our board of
directors. Our directors will formally review at a duly called
meeting our investment guidelines on an annual basis and our
portfolio on a quarterly basis or, in each case, more often as
they deem appropriate. Changes to our investment guidelines must
be approved by our board of directors. The guidelines delegate
to our advisor, and our advisor will engage and delegate to our
sub-advisor, the authority to execute (1) commercial real
estate property acquisitions and dispositions and
(2) investments in other real estate related assets, in
each case so long as such investments are consistent with the
investment guidelines approved by our board of directors. Our
board of directors will at all times have ultimate oversight
over our investments and may change from time to time the scope
of authority delegated to our advisor, which in turn will modify
the scope of authority of our sub-advisor, with respect to
acquisition and disposition transactions. See “Investment
Objectives, Strategy and Guidelines” for more details
regarding our investment guidelines.
Leverage
We intend to use a conservative amount of leverage to provide
additional funds to support our investment activities. Our
target leverage after we have acquired an initial substantial
portfolio of diversified investments is 30% of the gross value
of our assets, which we believe is generally lower than the
amount of borrowings utilized by other available real estate
investment products. During the period when we are beginning our
operations and growing our portfolio, we may employ greater
leverage in order to quickly build a diversified portfolio of
assets. Our board of directors may from time to time modify our
leverage policy in light of then-current economic conditions,
relative costs of debt and equity capital, fair values of our
properties, general conditions in the market for debt and equity
securities, growth and acquisition opportunities or other
factors. Our charter generally restricts the amount of
indebtedness that we may incur to 300% of our net assets, which
generally approximates 75% of the cost of our investments, but
does not restrict the form of indebtedness we may incur.
Notwithstanding the foregoing, our aggregate indebtedness may
exceed such limit, but only if such excess is approved by a
majority of our independent directors. See “Investment
Objectives, Strategy and Guidelines” for more details
regarding our leverage policies.
Our
Distributor
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
which we refer to as our distributor, is distributing the shares
of our common stock offered hereby on a best efforts basis. Our
distributor is a wholly owned subsidiary of ML & Co.
and is a member of the Financial Industry Regulatory Authority,
or FINRA. Our distributor will advise us regarding this
offering, manage our relationships with participating
broker-dealers
and financial advisors and provide assistance in connection with
compliance matters relating to the offering, including
compliance regarding any sales literature that we may prepare.
Fees and
Expenses
We will pay our advisor and our distributor the fees and
reimbursements described below in connection with performing
services for us. We will not pay acquisition or disposition fees
to our advisor or its affiliates in connection with the purchase
or sale of our investments.
Type of Compensation –
Recipient
Method of Compensation
Estimated Amount
Selling Commission – Our Distributor; Your
Financial Advisor
You will pay selling commissions of up to 2.5% of the NAV per share of the shares you purchase in the primary offering as of the date of purchase.
Selling commissions will not be paid for shares purchased in fee-based accounts or for shares purchased in our distribution reinvestment plan, and are subject to reduction for volume purchases.
The actual amount will depend on the number of shares sold, the
NAV per share and the type of accounts that purchase shares.
Aggregate selling commissions will equal $2,439,024 if we sell
the minimum offering and $48,780,487 if we sell the maximum
offering, assuming that the full selling commission of 2.5% is
paid for each primary offering share, that our NAV per share
remains $10, that no volume discounts apply and no reallocation
of shares between our primary offering and our distribution
reinvestment plan.
Distribution Fee – Our Distributor; Your Financial
Advisor
We will pay our distributor an asset-based distribution fee
following the end of each month equal to (a) the number of
outstanding shares of our common stock purchased in our primary
offering at least 13 months prior to such month end,
multiplied by (b) 1/12th of 0.35% of our average NAV
per share during each month. The distribution fee will be
calculated as of the last day of each month and payable in
arrears beginning the 13th month following the initial
purchase of shares of our common stock in our primary offering.
The distribution fee will not be paid with respect to shares
issued under our distribution reinvestment plan. Our distributor
may, in its discretion, reallow to participating broker-dealers
up to 100% of the distribution fee for services that such
broker-dealers perform in connection with the distribution of
the shares of our common stock.
Actual amounts depend upon our daily NAV and, therefore, cannot
be determined at this time. After 13 months following the
initial purchase of shares in our primary offering, the monthly
distribution fee will equal approximately $29,166 if we sell the
minimum offering and approximately $583,333 if we sell the
maximum offering, assuming that our NAV per share remains $10.
We will cease paying distribution fees at the earlier of
(1) 30 years from the date of this prospectus or
(2) the date at which the aggregate asset-based
distribution fees and other items of underwriting compensation
that we have paid equal 10% of the gross proceeds from our
primary offering.
Organization and Offering Expense Reimbursement –
Our Advisor
We will reimburse our advisor for organization and offering
expenses that it incurs on our behalf (other than selling
commissions and distribution fees).
We estimate our organization and offering expenses to be between
approximately $3,130,000 and $5,290,000, depending on the size
of this offering.
Acquisition Expense Reimbursement – Our Advisor
We will reimburse our advisor for out-of-pocket expenses in
connection with the acquisition of commercial real estate
properties, real estate related assets and other investments.
The actual amount will depend upon actual expenses incurred and,
therefore, cannot be determined at this time.
Operating Expense Reimbursement – Our Advisor
We will reimburse our advisor for out-of-pocket expenses in
connection with providing services to us.
Actual amounts are dependent upon actual expenses incurred and,
therefore, cannot be determined at this time.
Management Fee – Our Advisor
We will pay our advisor a management fee equal to (i) a
fixed rate component of 1.25% per annum of our average daily
NAV, payable quarterly in arrears, plus (ii) a
performance-based component calculated on the basis of our total
return to stockholders, payable annually in arrears, such that
for any year in which our total return on stockholders’
capital exceeds 7% per annum, our advisor will share in the
excess total return until it has received 10% of the aggregate
total return for such year. The management fee will be accrued
daily for purposes of determining our NAV per share. See
“Management—The Advisory Agreement—Management Fee
and Expense Reimbursements.”
Actual amounts depend upon our daily NAV and future performance
and, therefore, cannot be calculated at this time.
Redemption
of Shares
We expect that there will be no regular secondary trading market
for shares of our common stock. In an effort to provide our
stockholders with liquidity in respect of their investment, we
have adopted a redemption plan, whereby on a daily basis
stockholders may request that we redeem all or any portion of
their shares. The redemption price per share will be equal to
our NAV per share on the date of redemption, as calculated in
the same manner as the determination of the price per share at
which new shares are offered to the public in our primary
offering on that day. Our board of directors may terminate the
redemption plan at any time following the first anniversary of
the initial offering date. In addition, our board of directors
may, delay, modify or suspend share redemptions at any time it
determines that such action is in our or our remaining
stockholders’ best interest. See “Pricing and
Liquidity—Redemption Plan—Redemption
Limitations.” We may fund redemptions from any available
cash sources at our disposal, including proceeds from the sale
of shares of our common stock, excess cash flow from operations,
cash on hand, proceeds from the sale of our liquid investments
in other real estate related assets, proceeds from the
incurrence of indebtedness (including line of
credit borrowings) and, if necessary, proceeds from the
disposition of commercial real estate properties. We intend to
use commercially reasonable efforts to manage our portfolio with
the objective of maintaining relatively available liquidity in
an amount between 20% and 40% of our gross asset value to fund
redemptions through a combination of the different sources
described above. We expect to have sufficient available funds to
offer daily redemptions; however, there can be no assurances
that such level of liquidity can be maintained at all times and
significant redemptions of shares of our common stock may
adversely affect our ability to do so.
Subject to limited exceptions, shares redeemed within
365 days of the date of purchase will be subject to a
short-term trading discount equal to 2% of the aggregate NAV per
share of such shares redeemed which will inure indirectly to the
benefit of our remaining stockholders.
Our
Structure
The organizational chart in the section “Our Structure and
Formation Transactions” shows our ownership structure and
our relationship with our advisor, our sub-advisor, our
distributor and NorthEnd Holding upon consummation of the
formation transactions. Our operating partnership will own our
investments in commercial real estate properties and other
assets, directly or indirectly, generally through special
purpose entities.
Conflicts
of Interest
Our advisor, our sub-advisor, our distributor and their
respective affiliates, officers and directors will experience
conflicts of interests in connection with the management of our
business, including those listed below.
•
We will rely on the personnel of our advisors and their
respective affiliates to manage our assets and daily operations.
Our officers and our non-independent directors are also officers
of our advisor and therefore will have conflicts of interest in
allocating their time, services and functions among us and other
real estate programs or business ventures that our advisor or
its affiliates organize or serve.
•
The management fee we pay to our advisor and the fee our advisor
pays to our sub-advisor are each based upon our NAV, and our
advisors will have significant influence on the valuation of our
assets and will be responsible for overseeing the calculation of
our NAV. Moreover, the calculation of NAV includes certain
subjective judgments on the part of our sub-advisor, including
estimates of fair value of particular assets, and therefore may
not correspond to realizable value upon a sale of those assets.
•
Our advisor will rely on our sub-advisor to identify and select
our investments. Our sub-advisor and its officers also advise
other investment programs that invest in commercial real estate
properties and could face conflicts of interest in allocating
their time, services and functions among our company and such
other programs, and in determining which programs will have the
opportunity to acquire properties as they become available. Our
sub-advisor has developed an allocation policy for investment
opportunities that is designed to minimize actual conflicts in
determining which investors or programs will have access to
available opportunities.
•
The compensation payable by us to our advisor, our distributor
and their respective affiliates may not be on terms that would
result from arm’s-length negotiations between unaffiliated
parties.
Our charter contains provisions, and our advisors have adopted
policies and procedures, that are designed to eliminate or
mitigate many of the various conflicts of interest.
In addition, our duties as general partner to our operating
partnership and its limited partners may come into conflict with
the duties of our directors and officers to our corporation and
our stockholders. See “Conflicts of Interest.”
In order to qualify as a REIT, we are required to make aggregate
annual distributions to our stockholders of at least 90% of our
REIT taxable income. For these purposes, REIT taxable income is
computed without regard to the dividends-paid deduction and
excludes net capital gain. Further, REIT taxable income does not
necessarily equal net income as calculated in accordance with
generally accepted accounting principles in the United States,
or GAAP. Our board of directors may authorize distributions in
excess of those required for us to maintain REIT status
depending on our financial condition and such other factors as
our board of directors deems relevant. We may pay distributions
from any source, including from the proceeds of this offering,
from borrowings or from the sale of properties or other
investments, among others. Distributions may constitute a return
of capital. We have not established a minimum distribution level.
We have adopted a distribution reinvestment plan, whereby
stockholders will be able to elect to have their cash
distributions automatically reinvested in additional shares of
common stock. The per share purchase price for shares purchased
pursuant to the distribution reinvestment plan will be equal to
our NAV per share on the distribution date, after giving effect
to all distributions. No selling commissions will be charged
with respect to shares purchased pursuant to the distribution
reinvestment plan. See “Description of Common
Stock—Distribution Reinvestment Plan.”
Our
Status Under the Investment Company Act
We do not believe that we are required, and we do not intend to
register, as an investment company under the Investment Company
Act. If we were obligated to register as an investment company,
we would have to comply with a variety of substantive
requirements under the Investment Company Act that would
restrict our activities and significantly increase our operating
expenses. See “Risk Factors—Risks Related to our
Corporate Structure—Your investment return may be reduced
if we are deemed to be an investment company under the
Investment Company Act.”
An investment in shares of our common stock involves risks.
You should carefully consider the following risk factors in
addition to the other information contained in this prospectus
before purchasing shares. The occurrence of any of the following
risks might cause you to lose all or part of your investment.
Some statements in this prospectus, including statements in the
following risk factors, constitute forward-looking statements.
Please refer to the section entitled “Statements Regarding
Forward-Looking Information.”
Risks
Related to this Offering
If we do not meet the minimum offering requirements for
this offering, you may earn a lower rate of return on your
escrowed funds than could have been achieved from an alternative
investment.
We will take purchase orders and hold investors’ funds in
an interest-bearing escrow account until we receive purchase
orders for at least $100,000,000 of shares of our common stock
and our board of directors authorizes our escrow agent to
release the escrowed funds to us within the 180 days
following the initial offering date. Our board of directors may
determine not to authorize the release of the escrowed funds if
it believes that investment opportunities available during such
180 day period are not suitable to allow us to acquire
commercial real estate properties
and/or real
estate related assets that meet our investment criteria. If
(i) we do not receive purchase orders for the minimum
offering amount within such 180 day period or
(ii) after raising the minimum offering amount, our board
of directors does not authorize the release to us of the
escrowed funds prior to the expiration of such 180 day
period, this offering will terminate and any funds that you
deposited into escrow will be returned to you, along with any
interest earned thereon. 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.
We have no operating history as a REIT or a public
company.
We have no operating history as a REIT and prior to the
commencement of this offering, have never operated as a public
company. We will rely on our advisor, who will engage and rely
on our sub-advisor, to implement our investment strategy and on
our board of directors to make important decisions. Our advisor
is a newly formed entity and our management has not previously
managed a REIT. We cannot assure you that our management’s,
our advisor’s or our sub-advisor’s past experiences
will be sufficient to allow us to successfully operate as a REIT
or a public company.
This is a blind-pool offering because we have not
identified any assets to be purchased with the net proceeds of
this offering and, therefore, you will not be able to evaluate
such assets prior to our investment therein.
This is a blind-pool offering because we have not yet identified
the assets to be purchased with the net proceeds of this
offering. Therefore, there could be a delay between the time you
invest in shares of our common stock and the time the net
proceeds are invested by us. This could cause a substantial
delay in the time it takes for your investment to realize its
full potential return, and could adversely affect your total
return. If we fail to timely invest the net proceeds of this
offering or to invest in quality assets, our ability to achieve
our investment objectives, including, without limitation,
diversification of our commercial real estate property portfolio
by property type and location, could be materially adversely
affected. In addition, because we have not identified the assets
to be purchased with the net proceeds of this offering, the
uncertainty and risk associated with an investment in our shares
of common stock is increased as you will be unable to evaluate
the manner in which the net proceeds are to be invested and the
economic merit of a particular asset prior to investment.
Our board of directors will not approve each investment
decision made by our advisors.
Our board of directors has approved investment guidelines that
delegate to our advisor, and our advisor will engage and grant
to our sub-advisor, the authority to execute (1) commercial
real estate property acquisitions and dispositions and
(2) investments in other real estate related assets, in
each case so long as such investments are consistent with the
investment guidelines. As a result, our sub-advisor, under the
supervision of our advisor, will have substantial latitude
within these broad parameters in determining the types of assets
that are proper investments for us. Our directors will review
our investment guidelines on an annual basis and our investment
portfolio on a quarterly basis or, in each case, as often as
they deem appropriate. The prior approval of our board of
directors will be required only for the acquisition or
disposition of assets that are not in accordance with our
investment guidelines. In addition, in conducting periodic
reviews, our directors will rely primarily on information
provided to them by our advisors. Furthermore, transactions
entered into on our behalf by our sub-advisor may be costly,
difficult or impossible to unwind when they are subsequently
reviewed by our board of directors.
Our ability to redeem our shares may be limited, and our
board of directors may modify or suspend our redemption plan at
any time.
Our ability to redeem our shares pursuant to our redemption plan
may be limited. Although we currently do not intend to maintain
any quantitative ceilings or other automatic limitations on the
number of our shares that may be redeemed at any particular
time, our board of directors may adopt such limitations in the
future. In addition, we may not always hold, particularly during
the period when we are building our portfolio, or be able to
borrow or generate, an amount of cash sufficient to satisfy all
redemption requests. The general illiquid nature of real estate
assets may limit our ability to generate an amount of cash
sufficient to satisfy redemption requests. Our board of
directors may not terminate the redemption plan before
12 months from the initial offering date. Our board of
directors may, however, modify or suspend our redemption plan at
any time, or delay or reject any one or more redemption requests
at any time, including if our board of directors determines that
such suspension, delay or rejection is in our or our
stockholders’ best interest or is necessary or advisable to
protect non-redeeming stockholders, to ensure our continued
qualification as a REIT for federal income tax purposes, to
avoid any change in our tax or regulatory status or to avoid any
violation of applicable law, rule or regulation. Our board of
directors could also determine to reduce the redemption price to
an amount that reflects a discount to our NAV per share in order
to reduce the volume of redemption requests.
Our advisor has engaged our sub-advisor to select
investments and manage our portfolio. We will rely on the
performance of our sub-advisor in implementing our investment
strategy.
Our advisor has engaged our sub-advisor to select our
investments and manage our portfolio pursuant to a sub-advisory
agreement between our advisor and sub-advisor. We do not have a
direct contractual relationship with our sub-advisor. Our
sub-advisor will have substantial discretion, within our
investment guidelines, to make decisions related to our
investment portfolio, the acquisition, management and
disposition of our commercial real estate properties and real
estate related assets and the selection of property managers and
other service providers. If our sub-advisor does not succeed in
implementing our investment strategy, our performance will
suffer. In addition, even though our advisor will have the
ability to terminate our sub-advisor with 90 days’
prior written notice after the third anniversary of the
commencement of this offering, it will likely be difficult and
costly to terminate and replace our sub-advisor.
If we pay distributions from sources other than our cash
flow from operations, we will have less funds available for
investments and your overall return may be reduced.
Our organizational documents permit us to pay distributions from
any source. If we fund distributions from financings or the net
proceeds from this offering, we will have less funds available
for investment in commercial real estate properties, real estate
related assets and other investments and your overall return may
be reduced. We expect that our cash flow from operations
available for distribution will be lower in the initial stages
of this offering until we have raised significant capital and
made substantial investments. Further, because we may receive
income at various times during our fiscal year and because we
may need cash flow from operations during a particular period to
fund expenses, we expect that during the early stages of our
development and from time to time thereafter, we may declare
distributions in anticipation of cash flow that we expect to
receive during a later period and these distributions would be
paid 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 the
sale of assets, the net proceeds from this offering
and/or the
issuance of additional securities.
In the event we are able to quickly raise a substantial
amount of capital, we may have difficulty investing it in
commercial real estate properties.
After we have acquired a substantial portfolio of real estate
investments, we intend to have up to 80% of our assets invested
in commercial real estate properties. If we are able to quickly
raise capital during this offering, we may have difficulty in
identifying and purchasing suitable commercial real estate
properties in order to meet our preferred investment allocation,
which may impact our ability to pay distributions to you.
There is no public market for shares of our common stock.
In addition, the price payable upon redemption of our shares may
be subject to a short-term trading discount.
There is no current public market for shares of our common
stock, and we do not expect that such a public market will ever
develop. Therefore, redemption of shares by us will likely be
the only way for you to dispose of your shares. Subject to
limited exceptions, shares redeemed within 365 days of the
date of purchase will be subject to a short-term trading
discount equal to 2% of the aggregate NAV per share of the
shares redeemed which will inure indirectly to the benefit of
our remaining stockholders.
Economic events that may cause our stockholders to seek to
redeem their shares may materially adversely affect our cash
flow and our ability to achieve our investment
objectives.
Economic events affecting the U.S. economy, such as the
general negative performance of the commercial real estate
sector, could cause our stockholders to seek to redeem their
shares. Even though we may be able to satisfy all resulting
redemption requests, our cash flow could be materially adversely
affected. In addition, as we may determine to sell valuable
assets to satisfy redemption requests, our ability to achieve
our investment objectives, including, without limitation,
diversification of our commercial real estate property portfolio
by property type and location, moderate financial leverage,
conservative operating risk and an attractive level of current
income, could be materially adversely affected.
We may change our investment and operational policies
without stockholder consent.
Except for changes to the investment objectives and investment
restrictions contained in our charter, which requires
stockholder consent to amend, we may change our investment and
operational policies, including our policies with respect to
investments, acquisitions, growth, operations, indebtedness,
capitalization and distributions, at any time without the
consent of our stockholders, which could result in our making
investments that are different from, and possibly riskier than,
the types of investments described in this prospectus. A change
in our investment strategy may, among other things, increase our
exposure to interest rate risk, default risk and commercial real
estate market fluctuations, all of which could materially affect
our ability to achieve our investment objectives.
Valuations and appraisals of our commercial real estate
properties and valuations of our investments in real estate
related assets are estimates of fair value and may not
necessarily correspond to realizable value.
Our commercial real estate properties will initially be valued
at cost which we expect to represent fair value at that time.
Going forward, valuations, which will include appraisals of each
of our properties by independent appraisers at least once during
every calendar year after the respective calendar year in which
such property was acquired, will be conducted in accordance with
our valuation guidelines. Within the parameters of our valuation
guidelines, the valuation methodologies used to value our
commercial real estate properties will involve subjective
judgments regarding such factors as comparable sales, rental and
operating expense data, the capitalization
and/or
discount rate, and projections of future rent and expenses based
on appropriate analysis. Our investments in real estate related
assets will initially be valued at cost, and thereafter will be
valued quarterly, or in the case of liquid securities, daily, as
applicable, at fair value as determined by our advisors in good
faith. See “Pricing and Liquidity—Valuation.”
Although our valuation guidelines are designed to determine the
accurate fair value of our assets, appraisals and valuations of
our commercial real estate properties and valuations of our
investments in real estate related assets will be only estimates
of fair value and therefore may not correspond to realizable
value upon a sale of those assets.
The NAV per share that we publish may not necessarily
reflect changes in our NAV that are not immediately
quantifiable.
From time to time, we may experience extraordinary events with
respect to our investments that may have a material impact on
our NAV. For example, an unexpected termination or renewal of a
material lease, a material change in vacancies or an
unanticipated structural or environmental event at a property
may cause the value of a commercial real estate property to
change materially. Our NAV per share as published on any given
day may not reflect such extraordinary events to the extent that
their financial impact is not immediately quantifiable. As a
result, the NAV per share published after the announcement of an
extraordinary event may differ significantly from our actual NAV
until such time as the financial impact is quantified and our
NAV is appropriately adjusted in accordance with our valuation
guidelines.
Our sub-advisor will, on a quarterly basis, determine the value
of our wholly-owned commercial real estate properties that are
not otherwise determined by independent appraisers during such
quarter. More frequent valuations may be conducted if our
advisor or our sub-advisor believes that the value of a wholly
owned commercial real estate property has changed materially
since the most recent quarterly valuation. However, because our
NAV per share will be calculated daily by our accounting agent
based, in part, upon estimates and projections of the value of
our commercial real estate properties, the published NAV per
share on any given day may not necessarily reflect realizable
value and could differ from the actual NAV until the value of
these commercial real estate properties are confirmed by our
sub-advisor on a quarterly, or more frequent, basis depending
upon the circumstances noted above.
Risks
Related to Our Relationship with Our Advisors and Their
Respective Affiliates
We depend on our advisor, who will engage and depend on
our sub-advisor, and we may not be able to find a suitable
replacement if our advisor terminates the advisory agreement or
our advisor or sub-advisor terminates the sub-advisory
agreement.
Our ability to make distributions and achieve our investment
objectives is dependent upon the performance of our advisors in
the acquisition of commercial real estate properties and other
real estate related assets, the management of our portfolio, the
selection of tenants for our properties and the determination of
any financing arrangements. If either our advisor or sub-advisor
suffers or is distracted by adverse financial or operational
problems in connection with its operations unrelated to us, it
may be unable to allocate time and resources to our operations.
If either our advisor or sub-advisor is unable to allocate
sufficient resources to oversee and perform our operations for
any reason, we may be unable to achieve our investment
objectives or to pay distributions to our stockholders. See
“Conflicts of Interest—Allocation of Our
Advisor’s and Sub-Advisor’s Time.”
There are conflicts of interest in our relationship with
our advisors and their affiliates, which could result in
decisions that are not in the best interest of our
stockholders.
We are subject to potential conflicts of interest arising out of
our relationship with our advisors and their respective
affiliates. Conflicts of interest (including, but not limited
to, conflicts with respect to the allocation of investment
opportunities, the sourcing of financing, and other products and
services) may arise among our advisor or sub-advisor and their
respective affiliates, on the one hand, and us and our
stockholders, on the other hand. As a result of these conflicts,
our advisor or sub-advisor may favor its own interests and the
interests of its affiliates over the interest of our
stockholders. We will rely on the personnel of our advisor and
its affiliates, and our advisor will rely on our sub-advisor, to
manage our assets and daily operations. Our officers and our
non-independent directors are also officers of our advisor and
therefore will have conflicts of interest in allocating their
time, services and functions among us and other real estate
programs or business ventures that our advisor or its affiliates
organize or serve. In addition, the agreements and arrangements,
including those relating to compensation, between us and our
advisor are not the result of arm’s-length negotiations and
their terms may not be as favorable to us as if they had been
negotiated with an unaffiliated third party.
Our sub-advisor will face a conflict of interest with
respect to the allocation of investment opportunities between us
and other real estate programs that it advises.
Our advisor will rely on our sub-advisor to identify and select
potential investments in commercial real estate properties and
other real estate related assets in which we may be interested.
In addition to the services that our sub-advisor will provide to
us, our sub-advisor and its officers will advise other
investment programs that invest in commercial real estate
properties and real estate related assets in which we may be
interested. Our sub-advisor could face conflicts of interest in
allocating its time, services and functions, and in determining
which programs will have the opportunity to acquire and
participate in such investments as they become available. As a
result, other investment programs advised by our sub-advisor may
compete with us with respect to certain investments that we may
want to acquire.
Our advisors will face a conflict of interest because the
fees they will receive for services performed are based on our
NAV which will be calculated under their supervision.
Each of our advisor and our sub-advisor will be paid a fee for
their services based on our daily NAV, which will be calculated
by our accounting agent under the supervision of our advisor and
our sub-advisor in accordance with our valuation guidelines. The
calculation of our NAV in accordance with our valuation
guidelines includes certain subjective judgments on the part of
our sub-advisor, including estimates of fair value of particular
assets, and therefore may not correspond to realizable value
upon a sale of those assets. Our advisors may benefit by us
retaining ownership of our assets at times when our stockholders
may be better served by the sale or disposition of our assets in
order to avoid a reduction in our NAV. In addition, our
sub-advisor may recommend that we purchase assets that increase
our NAV but that are not necessarily the most suitable
investments for our portfolio. If our NAV is calculated in a way
that is not reflective of our actual NAV, then the purchase
price of shares of our common stock on a given date may not
accurately reflect the value of our portfolio, and your shares
may be worth less than the purchase price.
Payment of fees and expenses to our advisor and our
distributor will reduce the cash available for distribution and
will increase the risk that you will not be able to recover the
amount of your investment in our shares.
Our advisor will perform services for us in connection with the
selection and acquisition of our investments, the management of
our assets and certain administrative services. We will pay our
advisor management fees and expense reimbursements for these
services, which will reduce the amount of cash available for
further investments or distribution to our stockholders. We will
also pay our distributor an asset-based distribution fee.
Additionally, to the extent that we are unable to invest the
proceeds of this offering in assets that generate substantial
returns to us, our payment of those fees will reduce our NAV
over time. The fees we pay to our advisor and our distributor
increase the risk that stockholders may receive a lower price
when they tender their shares to us for redemption than the
purchase price they initially pay for their shares.
If we are unable to raise substantial funds in this
offering, we will be limited in the number and type of
investments we may make which could negatively impact your
investment.
This offering is being made on a “best efforts” basis,
whereby our distributor is only required to use its best efforts
to sell shares of our common stock and has no firm commitment or
obligation to purchase any of the shares of our common stock. As
a result, the amount of proceeds we raise in this offering may
be less than the amount we would need to achieve a broadly
diversified portfolio. Our inability to raise substantial funds
would increase our fixed operating expenses as a percentage of
gross income, and our financial condition and ability to make
distributions could be adversely affected. Additionally, if we
are unable to raise substantial funds, we will make fewer
investments resulting in less diversification in terms of the
number of investments owned, the geographic regions in which our
property investments are located and the types of investments
that we make. In that case, the likelihood that any single
investment’s performance would adversely affect our
profitability will increase.
The termination or replacement of our advisors could
trigger a default or repayment event under our mortgage loans
for some of our properties and the credit agreement governing
our line of credit.
Lenders for certain of our properties may request provisions in
the mortgage loan documentation that would make the termination
or replacement of our advisors an event of default or an event
requiring the immediate repayment of the full outstanding
balance of the loan. While we will attempt to negotiate not to
include such provisions, lenders may require them. The
termination or replacement of our advisors could trigger an
event of default under the credit agreement governing our line
of credit. If an event of default or repayment event occurs with
respect to any of our properties, our ability to achieve our
investment objectives could be materially adversely affected.
Because our distributor is an affiliate of our advisor,
you will not have the benefit of an independent third party
review of us or the prospectus customarily undertaken in
underwritten offerings.
Generally, offerings of securities to the public are
underwritten by an independent third party underwriter within
the meaning of the Securities Act. However, there is no third
party underwriter involved in this offering, and we instead rely
upon our distributor to facilitate the distribution of our
shares. Our distributor is an affiliate of our advisor and will
not make an independent review of us or this offering. Further,
the due diligence investigation of us by our distributor cannot
be considered to be an independent review and, therefore, is not
as meaningful as a review conducted by an unaffiliated third
party underwriter. The absence of an independent due diligence
review of us and of this offering increases the risk and
uncertainty you face as a potential investor in our common stock.
ML & Co. and BlackRock, Inc., and certain of
their respective subsidiaries and affiliates, are parties to
various legal actions that could impact their ability to provide
services to us.
ML & Co. and BlackRock, Inc., including certain of
their respective subsidiaries and affiliates, have been named as
parties in various legal actions, including arbitrations, class
actions, regulatory actions and other litigation arising in
connection with their activities as global diversified financial
services institutions. Some of these legal actions include
claims for compensatory
and/or
punitive damages. See “Management — Legal
Proceedings” for a description of these actions. If any of
these actions are resolved in a manner materially adverse to
ML & Co. or BlackRock, Inc., these actions could
impact their ability to provide services to us.
Risks
Related to Investments in Real Estate
Our operating results will be affected by economic and
regulatory changes that impact the real estate market in
general.
We will be subject to risks generally attributable to the
ownership of real property, including:
•
changes in global, national, regional or local economic,
demographic or real estate market conditions;
•
changes in supply of or demand for similar properties in a given
market or metropolitan area which will result in changes in
market rental rates or occupancy levels;
•
increased competition for real property investments targeted by
our investment strategy;
•
bankruptcies, financial difficulties or lease defaults by our
tenants;
•
changes in interest rates and availability of financing; and
•
changes in government rules, regulations and fiscal policies,
including changes in tax, real estate, environmental and zoning
laws.
All of these factors are beyond our control. Any negative
changes in these factors could affect our ability to meet our
obligations and make distributions to stockholders.
We face risks associated with property
acquisitions.
We intend to acquire properties and portfolios of properties,
including large portfolios that will increase our size and
result in changes to our capital structure. Our acquisition
activities and their success are subject to the following risks:
•
we may be unable to complete an acquisition after making a
non-refundable deposit and incurring certain other
acquisition-related costs;
•
we may be unable to obtain financing for acquisitions on
favorable terms or at all;
•
acquired properties may fail to perform as expected;
•
the actual costs of repositioning or redeveloping acquired
properties may be greater than our estimates;
•
acquired properties may be located in new markets in which we
may face risks associated with a lack of market knowledge or
understanding of the local economy, lack of business
relationships in the area and unfamiliarity with local
governmental and permitting procedures; and
•
we may be unable to quickly and efficiently integrate new
acquisitions, particularly acquisitions of portfolios of
properties, into our existing operations.
Potential losses or damage to our properties may not be
covered by insurance.
We plan to carry comprehensive liability, fire, extended
coverage, business interruption and rental loss insurance
covering all of the properties in our portfolio under a blanket
policy. Our sub-advisor will select policy specifications and
insured limits which it believes to be appropriate and adequate
given the relative risk of loss, the cost of the coverage and
industry practice. Insurance policies on our properties may
include some coverage for losses that are generally catastrophic
in nature, such as losses due to terrorism, earthquakes and
floods, but we cannot assure you that it will be adequate to
cover all losses and some of our policies will be insured
subject to limitations involving large deductibles or
co-payments and policy limits which may not be sufficient to
cover losses. If we or one or more of our tenants experience a
loss which is uninsured or which exceeds policy limits, we could
lose the capital invested in the damaged properties as well as
the anticipated future cash flows from those properties. In
addition, if the damaged properties are subject to recourse
indebtedness, we would continue to be liable for the
indebtedness, even if these properties were irreparably damaged.
Our properties will face significant competition.
We will face significant competition from owners, operators and
developers of commercial real estate properties. Substantially
all of our properties will face competition from similar
properties in the same market. This competition may affect our
ability to attract and retain tenants and may reduce the rents
we are able to charge. These competing properties may have
vacancy rates higher than our properties, which may result in
their owners being willing to lease available space at lower
prices than the space in our properties. Due to such
competition, the terms and conditions of any lease that we enter
into with our tenants may vary substantially from those we
describe in this prospectus.
We will face potential difficulties or delays renewing
leases or re-leasing space.
We will derive a significant portion of our net income from rent
received from our tenants. We will seek to lease the rentable
square feet at our commercial real estate properties to
creditworthy tenants. However, if a tenant experiences a
downturn in its business or other types of financial distress,
it may be unable to make timely rental payments. Also, when our
tenants decide not to renew their leases or terminate early, we
may not be able to re-let the space. Even if tenants decide to
renew or lease new space, the terms of renewals or new leases,
including the cost of required renovations or concessions to
tenants, may be less favorable to us than current lease terms.
As a result, our net income and ability to pay distributions to
stockholders could be materially adversely affected.
We may have difficulty selling our commercial real estate
properties, which may limit our flexibility and ability to pay
distributions.
Because real estate investments are relatively illiquid, it
could be difficult for us to promptly sell one or more of our
commercial real estate properties on favorable terms. This may
limit our ability to change our portfolio promptly in response
to adverse changes in the performance of any such property or
economic or market trends. In addition, federal tax laws that
impose a 100% excise tax on gains from sales of dealer property
by a REIT (generally, property held for sale, rather than
investment) could limit our ability to sell properties and may
affect our ability to sell properties without adversely
affecting returns to our stockholders. These restrictions could
adversely affect our ability to achieve our investment
objectives.
In the event we obtain options to acquire commercial real
estate properties, we may lose the amount paid for such options
whether or not the underlying property is purchased.
We may obtain options to acquire certain commercial real estate
properties. The amount paid for an option, if any, is normally
surrendered if the property is not purchased and may or may not
be credited against the purchase price if the property is
purchased. Any unreturned option payments will reduce the amount
of cash available for further investments or distributions to
our stockholders.
Joint venture investments could be adversely affected by
our lack of sole decision-making authority, our reliance on the
financial condition of co-venturers and disputes between us and
our co-venturers.
We may co-invest in the future with third parties through
partnerships or other entities, which we collectively refer to
as joint ventures, acquiring non-controlling interests in or
sharing responsibility for managing the affairs of the joint
venture. In such event, we would not be in a position to
exercise sole decision-making authority regarding the joint
venture. Investments in joint ventures may, under certain
circumstances, involve risks not present were a third party not
involved, including the possibility that partners or
co-venturers might become bankrupt or fail to fund their
required capital contributions. Co-venturers may have economic
or other business interests or goals which are inconsistent with
our business interests or goals, and may be in a position to
take actions contrary to our policies or objectives. Such
investments may also have the potential risk of impasses on
decisions, such as a sale, because neither we nor the
co-venturer would have full control over the joint venture.
Disputes between us and co-venturers may result in litigation or
arbitration that would increase our expenses and prevent our
officers
and/or
directors from focusing their time and effort on our business.
Consequently, actions by or disputes with co-venturers might
result in subjecting properties owned by the joint venture to
additional risk. In addition, we may in certain circumstances be
liable for the actions of our co-venturers.
We may make investments in properties outside of the
United States, which will subject us to unique risks.
Foreign real estate investments involve risks not generally
associated with investments in the United States. Foreign real
estate investments are subject to foreign currency risk due to
potential fluctuations in exchange rates between foreign
currencies and the U.S. dollar. Changes in the relation of
any such foreign currency to U.S. dollars may adversely
affect our cash flow, which in turn could adversely affect our
net income and ability to pay distributions. Foreign properties
will also face risks in connection with unexpected changes in
regulatory requirements, political and economic instability,
potential imposition of adverse or confiscatory taxes, possible
challenges to the anticipated tax treatment of the structures
that allow us to acquire and hold investments, possible currency
transfer restrictions, expropriation, the difficulty in
enforcing obligations in other countries and the burden of
complying with a wide variety of foreign laws. In addition, to
preserve our qualification as a REIT, we generally will be
required to operate any
non-U.S. investments
in accordance with the rules applicable to U.S. REITs,
which may be inconsistent with local practices.
Costs of complying with governmental laws and regulations
may reduce our net income and the cash available for
distributions to our stockholders.
Real property and the operations conducted on real property are
subject to federal, state and local laws and regulations
relating to environmental protection and human health and
safety. We could be subject to liability in the form of fines or
damages for noncompliance with these laws and regulations. These
laws and
regulations generally govern wastewater discharges, air
emissions, the operation and removal of underground and
above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid hazardous materials, the
remediation of contaminated property associated with the
disposal of solid and hazardous materials and other health and
safety-related concerns.
Our properties may be subject to the Americans with Disabilities
Act of 1990, as amended, or the ADA. Under the ADA, all places
of public accommodation must meet federal requirements related
to access and use by persons with disabilities. The ADA’s
requirements could require removal of access barriers and could
result in the imposition of injunctive relief, monetary
penalties or, in some cases, an award of damages. Additional or
new federal, state and local laws also may require modifications
to our properties, or restrict our ability to renovate
properties. We will attempt to acquire properties that comply
with the ADA and other similar legislation or place the burden
on the seller or other third party, such as a tenant, to ensure
compliance with such legislation. However, we cannot assure you
that we will be able to acquire properties or allocate
responsibilities in this manner. If we cannot, or if changes to
the ADA mandate further changes to our properties, then our
funds used for ADA compliance may reduce cash available for
distributions and the amount of distributions to you.
We will rely on third party property managers to operate
our properties and leasing agents to lease vacancies in our
properties.
Our sub-advisor intends to hire third party property managers to
manage our properties and leasing agents to lease vacancies in
our commercial real estate properties. The third party property
managers will have significant decision-making authority with
respect to the management of our properties. Our ability to
direct and control how our properties are managed may be
limited. We will not supervise any of the property managers or
leasing agents or any of their respective personnel on a
day-to-day basis. Thus, the success of our business may depend
in large part on the ability of our third party property
managers to manage the day-to-day operations and the ability of
our leasing agents to lease vacancies in our properties. Any
adversity experienced by our property managers or leasing agents
could adversely impact the operation and profitability of our
properties and, consequently, our ability to achieve our
investment objectives, including, without limitation,
diversification of our commercial real estate properties
portfolio by property type and location, moderate financial
leverage, conservative levels of operating risk and an
attractive level of current income.
Risks
Related to Investments in Real Estate Related Assets
The real estate related equity securities in which we may
invest are 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.
We may invest in common and preferred stock of both publicly
traded and private real estate companies, which involves a
higher degree of risk than debt securities due to a variety of
factors, including that such investments are subordinate to
creditors and are not secured by the issuer’s property. Our
investments in real estate related equity securities will
involve special risks relating to the particular issuer of the
equity securities, including the financial condition and
business outlook of the issuer. Issuers of real estate related
common equity securities generally invest in real estate or real
estate related assets and are subject to the inherent risks
associated with real estate discussed in this prospectus,
including risks relating to rising interest rates.
The value of the real estate related securities that we
may invest in may be volatile.
The value of real estate related securities, including those of
REITs, fluctuates in response to issuer, political, market and
economic developments. In the short term, equity prices can
fluctuate dramatically in response to these developments.
Different parts of the market and different types of equity
securities can react differently to these developments and they
can affect a single issuer, multiple issuers within an industry
or economic sector or geographic region or the market as a
whole. The real estate industry is sensitive to economic
downturns. The value of securities of companies engaged in real
estate activities can be affected by changes in real estate
values and rental income, property taxes, interest rates and tax
and regulatory
requirements. In addition, the value of a REIT’s equity
securities can depend on the structure and amount of cash flow
generated by the REIT.
We expect a portion of our securities portfolio to be
illiquid, and we may not be able to adjust our portfolio in
response to changes in economic and other conditions.
We may purchase real estate related securities in connection
with privately negotiated transactions that are not registered
under the relevant securities laws, resulting in a prohibition
against their transfer, sale, pledge or other disposition except
in a transaction that is exempt from the registration
requirements of, or is otherwise in accordance with, those laws.
As a result, our ability to vary our portfolio in response to
changes in economic and other conditions may be relatively
limited. The mezzanine and bridge loans we may purchase will be
particularly illiquid investments due to their short life, their
unsuitability for securitization and the greater risk of our
inability to recover loaned amounts in the event of a
borrower’s default.
Commercial mortgage-backed securities in which we may
invest are subject to several types of risks.
Commercial mortgage-backed securities are bonds which evidence
interests in, or are secured by, a single commercial mortgage
loan or a pool of commercial mortgage loans. Accordingly, the
mortgage-backed securities we invest in are subject to all the
risks of the underlying mortgage loans, including the risks of
prepayment or non-payment.
In a rising interest rate environment, the value of commercial
mortgage-backed securities may be adversely affected when
repayments on underlying mortgage loans do not occur as
anticipated, resulting in the extension of the security’s
effective maturity and the related increase in interest rate
sensitivity of a longer-term instrument. The value of commercial
mortgage-backed securities also may change due to shifts in the
market’s perception of issuers and regulatory or tax
changes adversely affecting the mortgage securities markets as a
whole. In addition, commercial mortgage-backed securities are
subject to the credit risk associated with the performance of
the underlying mortgage properties.
Commercial mortgage-backed securities are also subject to
several risks created through the securitization process.
Certain subordinate commercial mortgage-backed securities are
paid interest only to the extent that there are funds available
to make payments. To the extent the collateral pool includes a
large percentage of delinquent loans, there is a risk that
interest payment on subordinate commercial mortgage-backed
securities will not be fully paid. Subordinate securities of
commercial mortgage-backed securities are also subject to
greater risk than those commercial mortgage-backed securities
that are more highly rated.
The mortgage instruments in which we may invest may be
impacted by unfavorable real estate market conditions, which
could result in losses to us.
If we make investments in mortgage loans or mortgage-backed
securities, we will be at risk of loss on those investments,
including losses as a result of defaults on mortgage loans.
These losses may be caused by many conditions beyond our
control, including general prevailing local, national and global
economic conditions, economic conditions affecting real estate
values, tenant defaults and lease expirations, interest rate
levels and the other economic and liability risks associated
with real estate described above under the heading
“—Risks Related to Investments in Real Estate,”
as well as, among other things:
•
competition from comparable types of properties;
•
success of tenant businesses;
•
property management decisions;
•
changes in use of property;
•
shift of business processes and functions offshore;
declines in regional or local real estate values, or rental or
occupancy rates; and
•
increases in interest rates, real estate tax rates and other
operating expenses.
If we acquire a property by foreclosure following defaults under
our mortgage loan investments, we will bear a risk of loss of
principal to the extent of any deficiency between the value of
the collateral and the principal and accrued interest of the
mortgage loan, which could have a material adverse effect on our
ability to achieve our investment objectives. We do not know
whether the values of the property securing any of our real
estate securities investments will remain at the levels existing
on the dates we initially make the related investment. If the
values of the underlying properties drop, our risk will increase
and the values of our interests may decrease.
Delays in liquidating defaulted mortgage loan investments
could reduce our investment returns.
If there are defaults under our mortgage loan investments, we
may not be able to foreclose on or obtain a suitable remedy with
respect to such investments. Specifically, we may not be able to
repossess and sell the underlying properties quickly, which
could reduce the value of our investment. For example, an action
to foreclose on a property securing a mortgage loan is regulated
by state statutes and rules and is subject to many of the delays
and expenses of lawsuits if the defendant raises defenses or
counterclaims. Additionally, in the event of default by a
mortgagor, these restrictions, among other things, may impede
our ability to foreclose on or sell the mortgaged property or to
obtain proceeds sufficient to repay all amounts due to us on the
mortgage loan.
The mezzanine loans in which we may invest would involve
greater risks of loss than senior loans secured by
income-producing real properties, which may result in losses to
us.
We may invest in mezzanine loans that take the form of
subordinated loans secured by second mortgages on the underlying
real property or loans secured 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 first-lien mortgage loans 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 mezzanine loan. If a
borrower defaults on our mezzanine loan or debt senior to our
loan, or in the event of a borrower bankruptcy, our mezzanine
loan will be satisfied only after the senior debt. As a result,
we may not recover some or all of our investment. In addition,
mezzanine 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.
Interest rate and related risks may cause the value of our
real estate related assets to be reduced.
Interest rate risk is the risk that fixed income securities such
as preferred and debt securities, and to a lesser extent
dividend paying common stocks, will decline in value because of
changes in market interest rates. Generally, when market
interest rates rise, the fair value of such securities will
decline, and vice versa. Our investment in such securities means
that the net asset value and market price of our shares may tend
to decline if market interest rates rise.
During periods of rising interest rates, the average life of
certain types of securities may be extended because of slower
than expected principal payments. This may lock in a
below-market interest rate, increase the security’s
duration and reduce the value of the security. This is known as
extension risk. During periods of declining interest rates, an
issuer may be able to exercise an option to prepay principal
earlier than scheduled, which is generally known as “call
risk” or “prepayment risk.” If this occurs, we
may be forced to reinvest in lower yielding securities. This is
known as “reinvestment risk.” Preferred and debt
securities frequently have call features that allow the issuer
to repurchase the security prior to its stated maturity. An
issuer may redeem an obligation if the issuer can refinance the
debt at a lower cost due to declining interest rates or an
improvement in the credit standing of the issuer. These risks
may reduce the value of our real estate related securities
investments.
If we liquidate prior to the maturity of our real estate
securities investments, we may be forced to sell those
investments on unfavorable terms or at a loss.
Our board of directors may choose to liquidate our assets,
including our real estate related securities investments. If we
liquidate those investments prior to their maturity, we may be
forced to sell those investments on unfavorable terms or at a
loss. For instance, if we are required to liquidate mortgage
loans at a time when prevailing interest rates are higher than
the interest rates of such mortgage loans, we likely would sell
such loans at a discount to their stated principal values.
Risks
Associated with Debt Financing
Poor credit market conditions could impair our ability to
access debt financing, which could materially affect our ability
to achieve our investment objectives.
We intend to finance a portion of the purchase price of our
commercial real estate properties by borrowing funds. Severe
dislocations and liquidity disruptions in the U.S. credit
markets could significantly harm our ability to access capital.
In the future, we may not be able to access debt capital with
favorable terms in a cost efficient manner, or at all, which
could materially affect our ability to achieve our investment
objectives.
We will incur mortgage indebtedness and other borrowings,
which may increase our business risks, could hinder our ability
to make distributions and could decrease the value of your
investment.
We intend to finance a portion of the purchase price of
properties by borrowing funds. Under our charter, we have a
limitation on borrowing which precludes us from borrowing in
excess of 300% of the value of our net assets. Net assets for
purposes of this calculation are defined to be our total assets
(other than intangibles), valued at cost prior to deducting
depreciation or other non-cash reserves, less total liabilities.
Generally speaking, the preceding calculation is expected to
approximate 75% of the cost of our properties before non-cash
reserves and depreciation. In addition, we may incur mortgage
debt and pledge some or all of our properties as security for
that debt to obtain funds to acquire additional properties or
for working capital. We may also obtain a line of credit to
provide a flexible borrowing source which will allow us borrow
funds to satisfy the REIT tax qualification requirement that we
distribute at least 90% of our annual REIT taxable income to our
stockholders. Furthermore, we may borrow under a line of credit
if we otherwise deem it necessary or advisable to ensure that we
maintain our qualification as a REIT for federal income tax
purposes.
High debt levels will cause us to incur higher interest charges,
which would result in higher debt service payments and could be
accompanied by restrictive covenants. If there is a shortfall
between the cash flow from a property and the cash flow needed
to service mortgage debt on that property, then the amount
available for distributions to stockholders may be reduced. In
addition, incurring mortgage debt increases the risk of loss
since defaults on indebtedness secured by a property may result
in lenders initiating foreclosure actions. In that case, we
could lose the property securing the loan that is in default,
thus reducing the value of your investment. For tax purposes, a
foreclosure on any of our properties will be treated as a sale
of the property for a purchase price equal to the outstanding
balance of the debt secured by the mortgage. If the outstanding
balance of the debt secured by the mortgage exceeds our tax
basis in the property, we will recognize taxable income on
foreclosure, but we would not receive any cash proceeds. We may
give full or partial guarantees to lenders of mortgage debt to
the entities that own our properties. When we give a guaranty on
behalf of an entity that owns one of our properties, we will be
responsible to the lender for satisfaction of the debt if it is
not paid by such entity. If any mortgage contains
cross-collateralization or cross-default provisions, a default
on a single property could affect multiple properties. If any of
our properties are foreclosed upon due to a default, our ability
to pay cash distributions to our stockholders will be adversely
affected.
If we draw on a line of credit to fund redemptions or for
any other reason, our leverage could increase beyond our
target.
In an effort to provide for a ready source of liquidity to fund
redemptions of shares of our common stock, in the event that
redemption requests exceed net proceeds from our continuous
offering, we intend to reserve borrowing capacity under a line
of credit that we currently target at 20% to 40% of our gross
asset value. We
may not be able to obtain a line of credit of such size until
such time as we have a substantial portfolio, or at all. If we
borrow under a line of credit to fund redemptions of shares of
our common stock, our leverage will increase and may exceed our
target leverage. Our leverage may remain at the higher level
until we receive additional net proceeds from our continuous
offering or sell some of our assets to repay outstanding
indebtedness.
Increases in interest rates could increase the amount of
our debt payments and adversely affect our ability to make
distributions to our stockholders.
Interest we pay on our debt obligations will reduce cash
available for distributions. If we incur variable rate debt,
increases in interest rates would increase our interest costs,
which would reduce our cash flows 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.
Lenders may require us to enter into restrictive covenants
relating to our operations, which could limit our ability to
make distributions to our stockholders.
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 or discontinue insurance coverage. In addition,
loan documents may limit our ability to replace the property
manager or terminate certain operating or lease agreements
related to the property. These or other limitations may
adversely affect our flexibility and our ability to achieve our
investment objectives.
If we enter into financing arrangements involving balloon
payment obligations, it may adversely affect our ability to make
distributions to our stockholders.
Some of our financing arrangements may require us to make a
lump-sum or “balloon” payment at maturity. Our ability
to make a balloon payment at maturity is uncertain and may
depend upon our ability to obtain additional financing or our
ability to sell the particular property. At the time the balloon
payment is due, we may or may not be able to refinance the
balloon payment on terms as favorable as the original loan or
sell the particular property at a price sufficient to make the
balloon payment. The effect of a refinancing or sale could
affect the rate of return to stockholders and the projected time
of disposition of our assets.
Failure to hedge effectively against interest rate changes
may materially adversely affect our ability to achieve our
investment objectives.
Subject to any limitations required to maintain qualification as
a REIT, we may seek to manage our exposure to interest rate
volatility by using interest rate hedging arrangements, such as
interest rate cap or collar agreements and interest rate swap
agreements. These agreements involve risks, such as the risk
that counterparties may fail to honor their obligations under
these arrangements and that these arrangements may not be
effective in reducing our exposure to interest rate changes.
These interest rate hedging arrangements may create additional
assets
and/or
liabilities from time to time that may be held or liquidated
separately from the underlying property or loan for which they
were originally established. We have adopted a policy relating
to the use of derivative financial instruments to hedge interest
rate risks related to our borrowings. This policy governs our
use of derivative financial instruments to manage the interest
rates on our variable rate borrowings. See “Investment
Objectives, Strategy and Guidelines—Other Real Estate
Related Policies—Derivative Instruments and Hedging
Activities.” Hedging may reduce the overall returns on our
investments. Failure to hedge effectively against interest rate
changes may materially adversely affect our ability to achieve
our investment objectives.
Risks
Related to Our Corporate Structure
Your interest in us will be diluted if we issue additional
shares.
Our stockholders will not have preemptive rights to any shares
we issue in the future. Our charter authorizes us to issue
1,050,000,000 shares of capital stock, of which
1,000,000,000 shares are designated as
common stock and 50,000,000 shares are designated as
preferred stock. Our board of directors may increase the
aggregate number of authorized shares of capital stock or the
number of authorized shares of capital stock of any class or
series without stockholder approval. After you purchase shares
of our common stock in this offering, our board of directors may
elect, without stockholder approval, to: (1) sell
additional shares in this or future public offerings;
(2) issue equity interests in private offerings;
(3) issue shares upon the exercise of the options we may
grant to our independent directors or future employees;
(4) issue shares to our advisor, its successors or assigns,
in payment of an outstanding fee obligation; or (5) issue
shares to sellers of properties we acquire in connection with an
exchange of limited partnership interests of our operating
partnership. To the extent we issue additional shares after your
purchase in this offering, your percentage ownership interest in
us will be diluted.
Our charter limits the number of shares a person may own,
which may discourage a takeover that could otherwise result in a
premium price to our stockholders.
Our charter, with certain exceptions, authorizes our board of
directors to take such actions as are necessary and desirable to
preserve our qualification as a REIT. Unless exempted by our
board of directors, no person may own more than 9.8% in value of
our outstanding capital stock or more than 9.8% in value or
number of shares, whichever is more restrictive, of our
outstanding common stock. A person that did not acquire more
than 9.8% of our shares may become subject to our charter
restrictions if redemptions by other stockholders cause such
person’s holdings to exceed 9.8% of our outstanding shares.
Our 9.8% ownership limitation 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 for our stockholders.
Our charter permits our board of directors to issue stock
with terms that may subordinate the rights of the holders of our
common stock 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 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 and other distributions,
qualifications and terms or conditions of redemption of any such
stock without stockholder approval. Thus, our board of directors
could authorize the issuance 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 otherwise provide a premium price to holders of our
common stock.
Our rights and the rights of our stockholders to recover
claims against our directors and officers are limited, which
could reduce your and our recovery against them if they
negligently cause us to incur losses.
Maryland law provides that a director will not have any
liability as a director so long as he or she performs his or her
duties in accordance with the applicable standard of conduct. In
addition, subject to any limitations required by the NASAA REIT
Guidelines, Maryland law and our charter provide that no
director or officer shall be liable to us or our stockholders
for monetary damages unless the director or officer
(1) actually received an improper benefit or profit in
money, property or services or (2) was actively and
deliberately dishonest as established by a final judgment.
Moreover, our charter requires us to indemnify our directors and
officers, subject to any limitations required by the NASAA REIT
Guidelines and Maryland law. As a result, you and we may have
more limited rights against our directors or officers than might
otherwise exist under common law, which could reduce your and
our recovery from these persons if they act in a negligent
manner.
Certain provisions of Maryland law could inhibit
transactions or changes of control under circumstances that
could otherwise provide stockholders with the opportunity to
realize a premium.
Certain provisions of the Maryland General Corporation Law
applicable to us prohibit business combinations with:
•
any person who beneficially owns 10% or more of the voting power
of our common stock, which we refer to as an “interested
stockholder;”
•
an affiliate of ours who, at any time within the two-year period
prior to the date in question, was an interested
stockholder; or
•
an affiliate of an interested stockholder.
These prohibitions last for five years after the most recent
date on which the interested stockholder became an interested
stockholder. Thereafter, any business combination with the
interested stockholder or an affiliate of the interested
stockholder must be recommended by our board of directors and
approved by the affirmative vote of at least 80% of the votes
entitled to be cast by holders of outstanding shares of our
common stock, and two-thirds of the votes entitled to be cast by
holders of our shares other than shares held by the interested
stockholder. These requirements could have the effect of
inhibiting a change in control even if a change in control were
in our stockholders’ best interest. These provisions of
Maryland law do not apply, however, to business combinations
that are approved or exempted by our board of directors prior to
the time that someone becomes an interested stockholder.
Our UPREIT structure may result in potential conflicts of
interest with limited partners in our operating partnership
whose interests may not be aligned with those of our
stockholders.
Our directors and officers have duties to our corporation and
our stockholders under Maryland law in connection with their
management of the corporation. At the same time, we, as general
partner will have fiduciary duties under Delaware law to our
operating partnership and to the limited partners in connection
with the management of our operating partnership. Our duties as
general partner of our operating partnership and its partners
may come into conflict with the duties of our directors and
officers to the corporation and our stockholders. Under Delaware
law, a general partner of a Delaware limited partnership owes
its limited partners the duties of good faith and fair dealing.
Other duties, including fiduciary duties, may be modified or
eliminated in the partnership’s partnership agreement. The
partnership agreement of our operating partnership provides
that, for so long as we own a controlling interest in our
operating partnership, any conflict that cannot be resolved in a
manner not adverse to either our stockholders or the limited
partners will be resolved in favor of our stockholders.
Additionally, the partnership agreement expressly limits our
liability by providing that we and our officers, directors,
agents and employees, will not be liable or accountable to our
operating partnership for losses sustained, liabilities incurred
or benefits not derived if we or our officers, directors, agents
or employees acted in good faith. In addition, our operating
partnership is required to indemnify us and our officers,
directors, employees, agents and designees to the extent
permitted by applicable law from and against any and all claims
arising from operations of our operating partnership, unless it
is established that: (1) the act or omission was committed
in bad faith, was fraudulent or was the result of active and
deliberate dishonesty; (2) the indemnified party received
an improper personal benefit in money, property or services; or
(3) in the case of a criminal proceeding, the indemnified
person had reasonable cause to believe that the act or omission
was unlawful.
The provisions of Delaware law that allow the fiduciary duties
of a general partner to be modified by a partnership agreement
have not been tested in a court of law, and we have not obtained
an opinion of counsel covering the provisions set forth in the
partnership agreement that purport to waive or restrict our
fiduciary duties.
Your investment return may be reduced if we are deemed to
be an investment company under the Investment Company
Act.
We do not intend, or expect to be required, to register as an
investment company under the Investment Company Act.
Rule 3a-1
under the Investment Company Act generally provides that an
issuer will not be deemed to be an “investment
company” provided that (i) it does not hold itself out
as being engaged primarily, or propose to engage primarily, in
the business of investing, reinvesting or trading securities and
(ii) no more than 45% of the value of its assets (exclusive
of government securities and cash items) and no more than 45% of
its net income after taxes (for the past four fiscal quarters
combined) is derived from securities other than government
securities, securities issued by employees’ securities
companies, securities issued by certain majority owned
subsidiaries of such company and securities issued by certain
companies that are controlled primarily by such company. If we
were obligated to register as an investment company, we would
have to comply with a variety of substantive requirements under
the Investment Company Act that impose, among other things:
•
limitations on capital structure;
•
restrictions on specified investments;
•
requirements that we add directors who are independent of us,
our advisor and its affiliates;
•
restrictions or prohibitions on retaining earnings;
•
restrictions on leverage or senior securities;
•
restrictions on unsecured borrowings;
•
requirements that our income be derived from certain types of
assets;
•
prohibitions on transactions with affiliates; and
•
compliance with reporting, record keeping, voting, proxy
disclosure and other rules and regulations that would
significantly increase our operating expenses.
If we were required to register as an investment company but
failed to do so, we would be prohibited from engaging in our
business, and criminal and civil actions could be brought
against us. In addition, our contracts would be unenforceable
unless a court required enforcement, and a court could appoint a
receiver to take control of us and liquidate our business.
Registration with the SEC as an investment company would be
costly, would subject our company to a host of complex
regulations, and would divert the attention of management from
the conduct of our business. In addition, the purchase of real
estate that does not fit our investment guidelines and the
purchase or sale of investment securities or other assets to
preserve our status as a company not required to register as an
investment company could materially adversely affect our NAV,
the amount of funds available for investment, and our ability to
pay distributions to our stockholders.
Risks
Related to Our Status as a REIT
Failure to qualify as a REIT would have significant
adverse consequences to us.
We intend to operate in a manner that will allow us to qualify
as a REIT for federal income tax purposes under the Internal
Revenue Code, or the Code. We have not requested and do not plan
to request a ruling from the Internal Revenue Service, or the
IRS, that we qualify as a REIT, and the statements in the
prospectus are not binding on the IRS or any court. If we do not
qualify as a REIT or if we qualify as a REIT and subsequently
lose our REIT qualification, we will face serious tax
consequences that would substantially reduce our cash available
for distribution for each of the years involved because:
•
we would be subject to federal corporate income taxation on our
taxable income, including, possibly, alternative minimum tax,
and could be subject to increased state and local taxes;
•
we would not be allowed a deduction for dividends paid to
stockholders in computing our taxable income; and
if we had previously qualified as a REIT, unless we are entitled
to relief under applicable statutory provisions, we could not
elect to be taxed as a REIT for four taxable years following the
year during which we were disqualified.
The increased taxes would reduce our NAV
and/or cash
available for distribution to stockholders. In addition, if we
fail to qualify as a REIT, we will not be required to make
distributions to stockholders. As a result of all these factors,
our failure to qualify as a REIT also could impair our ability
to expand our business and raise capital.
Even if we qualify as a REIT for federal income tax
purposes, we may be subject to tax liabilities that reduce our
cash flow and our ability to make distributions to you.
Even if we qualify as a REIT for federal income tax purposes, we
may be subject to federal and state taxes on our income or
property, including those described below.
•
In order to qualify as a REIT, we must distribute annually at
least 90% of our REIT taxable income (which is determined
without regard to the dividends-paid deduction or net capital
gain) to our stockholders. If we satisfy the distribution
requirement but distribute less than 100% of our REIT taxable
income, we will be subject to corporate income tax on the
undistributed income.
•
We will be subject to a 4% nondeductible excise tax on the
amount, if any, by which distributions we pay in any calendar
year are less than the sum of 85% of our ordinary income, 95% of
our capital gain net income and 100% of our undistributed income
from prior years.
•
If we have net income from the sale of foreclosure property that
we hold primarily for sale to customers in the ordinary course
of business or other non-qualifying income from foreclosure
property, we must pay a tax on that income at the highest
corporate income tax rate.
•
If we sell a property, other than foreclosure property, that we
hold primarily for sale to customers in the ordinary course of
business, our gain would be subject to the 100% “prohibited
transaction” tax.
Investments outside the U.S. could present additional
complications to our ability to satisfy the REIT qualification
requirements and may subject us to additional taxes.
Operating in functional currencies other than the
U.S. dollar and in environments in which real estate
transactions are customarily structured differently than they
are in the U.S. or are subject to different legal rules may
complicate our ability to structure
non-U.S. investments
in a manner that enables us to satisfy the REIT qualification
requirements. In addition,
non-U.S. investments
may subject us to various
non-U.S. tax
liabilities, including withholding taxes.
To maintain our REIT status, we may be forced to borrow
funds on a short-term basis during unfavorable market
conditions.
To qualify as a REIT, we generally must distribute to our
stockholders at least 90% of our net taxable income each year,
excluding capital gains, and we will be subject to regular
corporate income taxes to the extent that we distribute less
than 100% of our REIT taxable income each year. We will also be
subject to a 4% nondeductible excise tax on the amount, if any,
by which distributions paid by us in any calendar year are less
than the sum of 85% of our ordinary income, 95% of our capital
gain net income and 100% of our undistributed income from prior
years. Payments to stockholders pursuant to our redemption plan
will not be taken into account for purposes of these
distribution requirements. In the event that we do not have
sufficient cash to make distributions necessary to preserve our
REIT status for any year or to avoid taxation, we may need to
borrow funds or sell assets even if the then prevailing market
conditions are not favorable for these borrowings or sales.
Complying with REIT requirements may cause us to forego
otherwise attractive opportunities.
To qualify as a REIT, we must continually satisfy tests
concerning, among other things, the sources of our income, the
nature and diversification of our assets, the amounts we
distribute to our stockholders and the ownership of our stock.
We may be required to make distributions to stockholders at
disadvantageous times or
when we do not have funds readily available for distribution.
Thus, compliance with the REIT requirements may hinder our
ability to operate solely on the basis of maximizing profits.
Complying with REIT requirements may force us to liquidate
otherwise attractive investments.
To qualify as a REIT, we must ensure that at the end of each
calendar quarter, at least 75% of our assets consist of cash,
cash items, government securities and qualified real estate
assets. The remainder of our investments in securities (other
than government securities and qualified real estate assets)
generally cannot include more than 10% of the voting securities
of any one issuer or more than 10% of the value of the
outstanding securities of any one issuer. In addition, no more
than 5% of the value of our assets (other than government
securities and qualified real estate assets) can consist of the
securities of any one issuer, and no more than 25% of the value
our assets may be represented by securities of one or more
taxable REIT subsidiaries. We may be required to liquidate
otherwise attractive investments to satisfy these requirements.
The IRS may take the position that gains from sales of
property are subject to a 100% prohibited transaction
tax.
We may have to sell assets from time to time to fund redemption
requests, to satisfy our REIT distribution requirements, to
satisfy other REIT requirements, or for other purposes. It is
possible that the IRS may take the position that one or more
sales of our properties may be “prohibited
transactions.” If we are deemed to have engaged in a
“prohibited transaction” (i.e., we sell a
property held by us primarily for sale in the ordinary course of
our trade or business), our gain from such sale would be subject
to a 100% tax. The Internal Revenue Code sets forth a safe
harbor for REITs that wish to sell property without risking the
imposition of the 100% tax, but there is no assurance that we
will be able to qualify for the safe harbor. We do not intend to
hold property for sale in the ordinary course of business, but
there is no assurance that the IRS will not challenge our
position, especially if we make frequent sales or sales of
property in which we have short holding periods.
You may have current tax liability on distributions you
elect to reinvest in our common stock.
If you participate in our distribution reinvestment plan, you
will be deemed to have received, and for income tax purposes
will be taxed on, the amount reinvested in shares of our common
stock to the extent the amount reinvested was not a tax-free
return of capital. 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 reinvested dividends.
Ordinary dividends payable by REITs generally do not
qualify for reduced U.S. federal income tax rates.
The maximum U.S. federal income tax rate for
“qualifying dividends” payable by
U.S. corporations to individual U.S. stockholders (as
such term is defined under “Material United States Federal
Income Tax Considerations” below) is 15% through 2010.
Ordinary dividends payable by REITs, however, are generally not
eligible for the reduced rates and generally are taxed at
ordinary income rates (the maximum individual rate being 35%
through 2010).
Possible legislative or other actions affecting REITs
could adversely affect our stockholders and us.
The rules dealing with U.S. federal income taxation are
constantly under review by persons involved in the legislative
process and by the IRS and the U.S. Treasury Department.
Changes to tax laws (which changes may have retroactive
application) could adversely affect our stockholders or us. We
cannot predict whether, when, in what forms, or with what
effective dates, the tax laws applicable to our stockholders or
us will be changed.
The ability of our board of directors to revoke our REIT
election without stockholder approval may cause adverse
consequences to our stockholders.
Our charter provides that our board of directors may revoke or
otherwise terminate our REIT election, without the approval of
our stockholders, if our board of directors determines that it
is not in our best interest to qualify as a REIT. In such a
case, we would become subject to U.S. federal income tax on
our taxable income and we would no longer be required to
distribute most of our net income to our stockholders, which may
reduce the total return to our stockholders.
We may be subject to adverse tax consequences if certain
sale-leaseback transactions are not characterized by the IRS as
“true leases.”
We may purchase investments in commercial real estate properties
and lease them back to the sellers of such properties. In the
event the IRS does not characterize such leases as “true
leases,” we could be subject to certain adverse tax
consequences, including an inability to deduct depreciation
expense and cost recovery relating to such property, and under
certain circumstances, we could fail to qualify as a REIT as a
result.
Risks
Related to Employee Benefit Plans and Individual Retirement
Accounts
In some cases, if you fail to meet the fiduciary and other
standards under ERISA, the Code or common law as a result of an
investment in our stock, you could be subject to criminal and
civil penalties.
There are special considerations that apply to investing in our
shares on behalf of a trust, pension, profit sharing or 401(k)
plans, health or welfare plans, trusts, individual retirement
accounts, IRAs or Keogh plans. If you are investing the assets
of any of the entities identified in the prior sentence in our
common stock, you should satisfy yourself that:
•
your investment is consistent with your fiduciary obligations
under applicable law, including common law, ERISA and the Code;
•
your investment is made in accordance with the documents and
instruments governing the trust, plan or IRA, including a
plan’s investment policy;
•
your investment satisfies the prudence and diversification
requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) of
ERISA and other applicable provisions of ERISA and the Code;
•
your investment will not impair the liquidity of the trust, plan
or IRA;
•
your investment will not produce “unrelated business
taxable income” for the plan or IRA;
•
you will be able to value the assets of the plan annually in
accordance with ERISA requirements and applicable provisions of
the plan or IRA; and
•
your investment will not constitute a prohibited transaction
under Section 406 of ERISA or Section 4975 of the Code.
Failure to satisfy the fiduciary standards of conduct and other
applicable requirements of ERISA, the Code, or other applicable
statutory or common law may result in the imposition of civil
(and criminal, if the violation was willful) penalties, and can
subject the fiduciary to equitable remedies. In addition, if an
investment in our shares constitutes a prohibited transaction
under ERISA or the Code, the fiduciary that authorized or
directed the investment may be subject to the imposition of
excise taxes with respect to the amount invested.
Certain statements contained in or incorporated by reference
into this prospectus, including, without limitation, those
related to our future operations, constitute forward-looking
statements. The words “believe,”“estimate,”“expect,”“anticipate,”“intend,”“plan,”“seek,”“may,” and similar
expressions or statements regarding future periods are intended
to identify forward-looking statements. These forward-looking
statements involve known and unknown risks, uncertainties and
other important factors that could cause our actual results,
performance or achievements, or industry results, to differ
materially from any predictions of future results, performance
or achievements that we express or imply in this prospectus or
in the information incorporated by reference into this
prospectus.
The forward-looking statements included in this prospectus are
based upon our current expectations, plans, estimates,
assumptions and beliefs that involve numerous risks and
uncertainties. Assumptions relating to the foregoing involve
judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately
and many of which are beyond our control. Although we believe
that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, our actual
results and performance could differ materially from those set
forth in the forward-looking statements. Factors which could
have a material adverse effect on our operations and future
prospects include, but are not limited to:
•
our ability to effectively deploy the proceeds raised in this
offering;
•
changes in economic conditions generally and the real estate and
securities markets specifically;
•
legislative or regulatory changes (including changes to the laws
governing the taxation of REITs);
•
the effect of financial leverage, including changes in interest
rates, availability of credit, loss of flexibility due to
negative and affirmative covenants, refinancing risk at maturity
and generally the increased risk of loss if our investments fail
to perform as expected;
•
our ability to access sources of liquidity when we have the need
to fund redemptions of common stock in excess of the proceeds
from the sales of shares of our common stock in our continuous
offering and the consequential risk that we may not have the
resources to satisfy all redemption requests; and
•
changes to GAAP.
Any of the assumptions underlying forward-looking statements
could be inaccurate. You are cautioned not to place undue
reliance on any forward-looking statements included in this
prospectus. All forward-looking statements are made as of the
date of this prospectus and the risk that actual results will
differ materially from the expectations expressed in this
prospectus will increase with the passage of time. Except as
otherwise required by the federal securities laws, we undertake
no obligation to publicly update or revise any forward-looking
statements after the date of this prospectus, whether as a
result of new information, future events, changed circumstances
or any other reason. In light of the significant uncertainties
inherent in the forward-looking statements included in this
prospectus, including, without limitation, the risks described
under “Risk Factors,” the inclusion of such
forward-looking statements should not be regarded as a
representation by us or any other person that the objectives and
plans set forth in this prospectus will be achieved.
We have established a minimum offering of $100,000,000 of shares
of our common stock and a maximum offering of $2,250,000,000 of
shares of our common stock. During the escrow period, we will
offer our shares at a per share purchase price of $10.25.
Thereafter, we will sell shares of our common stock at a price
that will vary from day-to-day and, on any given day, will be
equal to our NAV per share, plus applicable selling commissions.
The following table presents information about how we intend to
use the proceeds raised in this offering. The table sets forth
estimated figures assuming the sale of shares of our common
stock representing (i) the minimum offering amount of
$100,000,000 and no shares issued under our distribution
reinvestment plan and (ii) the maximum offering amount of
$2,000,000,000 and issuance of all of the $250,000,000 of shares
under our distribution reinvestment plan. We may reallocate the
shares of our common stock we are offering between the primary
offering and our distribution reinvestment plan.
The estimated amount of selling commissions was calculated using
$0.25 per share. The actual amount of selling commissions,
however, will vary from the estimated amounts shown, because,
after the escrow period, our shares will be sold at a price that
varies day by day based on our daily NAV per share and actual
selling commissions per share will be a percentage of the actual
NAV per share on the date purchases are made in our primary
offering. In addition, the selling commission may be reduced or
eliminated in connection with certain categories of sales, such
as sales for which a volume discount applies. Any reduction in
selling commissions will be accompanied by a corresponding
reduction in the per share purchase price, but will not affect
the amounts available to us for investments. No selling
commissions will be charged with respect to shares sold pursuant
to our distribution reinvestment plan. Because amounts in this
table are estimates, they may not accurately reflect the actual
receipt or use of the offering proceeds.
Minimum
Maximum
Offering of
Offering of
$100,000,000
Percent
$2,250,000,000
Percent
Amounts
Amounts
Gross Offering
Proceeds(1)
$100,000,000
100
%
$2,250,000,000
100
%
Less:
Selling Commissions
$ 2,439,024
2.44
%
$ 48,780,487
2.2
%
Organization and Offering
Expenses(2)
3,130,000
3.13
%
5,290,000
0.2
%
Net Proceeds
94,430,976
94.43
%
2,195,929,513
97.60
%
(1) We intend effectively to conduct a continuous offering
of an unlimited number of shares of our common stock over an
unlimited time period by filing a new registration statement
prior to the end of the three-year period described in
Rule 415 under the Securities Act; however, in certain
states this offering is subject to annual extensions.
(2) These amounts represent estimated expenses incurred in
connection with the offering, including legal, accounting,
printing, mailing and filing fees and expenses, amounts paid to
reimburse the distributor for amounts it may pay to reimburse
the bona fide due diligence expenses of participating
broker-dealers supported by detailed and itemized invoices,
reimbursements to our advisor for costs in connection with
preparing sales materials, the cost of educational conferences
held by us and attendance fees and costs reimbursement for
employees of our affiliates to attend retail seminars conducted
by participating broker-dealers, if any. We estimate that any
organizational expenses incurred will be de minimis. We will
reimburse our advisor for the offering expenses incurred by our
advisor on our behalf through the escrow period on a ratable
basis over 60 calendar months. We will pay directly or reimburse
our advisor for those expenses that relate specifically to us as
general partner and as such should not be borne by the limited
partners of our operating partnership. Other expenses will be
paid by our operating partnership or reimbursed by it to our
advisor. To the extent we pay expenses directly, the calculation
of our percentage interest in our operating partnership will be
affected (i.e., assuming nothing else changes, our
percentage interest will decline marginally). Insofar as our
operating partnership’s accounts are consolidated with our
financial statements
under GAAP, expenses we bear directly will not be reported
separately from expenses borne by our operating partnership. Our
board of directors will approve a detailed policy for allocating
expenses between us and our operating partnership and will
monitor the application of such policy as part of its oversight
of the determination of our daily NAV per share.
We intend to contribute the net proceeds from this offering,
which are not used to pay the fees and other expenses
attributable to our operations, to our operating partnership.
Our operating partnership will use the net proceeds received
from us: (1) to make investments in accordance with our
investment strategy and policies; (2) to reduce borrowings
and repay indebtedness incurred under various financing
instruments into which we may enter in anticipation of the
acquisition of our initial portfolio of commercial real estate
properties and other real estate related assets; (3) for
working capital purposes, including but not limited to,
administrative costs associated with our investments,
transaction costs related to the acquisition of properties and
other costs associated with our investments and general
operations; and (4) to fund redemptions of shares of our
common stock. See “Our Structure and Formation
Transactions.”
Our sub-advisor will pursue opportunities to purchase various
investments with the objective of providing us with the ability
to acquire an initial portfolio of investments with a degree of
diversification as soon as proceeds from the escrow account are
released to us in this offering so that we may commence
operations. However, we have not to date identified any
potential investments. We may enter into purchase options to
allow us to acquire properties on future dates following the
receipt of sufficient proceeds from this offering to make the
investments. In light of the continuous nature of this offering,
the identification and disclosure of actual property
acquisitions will be an ongoing process. At any given point in
time we will be actively pursuing multiple investment
opportunities, with due diligence and negotiations at different
stages of advancement. See “Risk Factors—Risks Related
to this Offering—This is a blind-pool offering because we
have not identified any assets to be purchased with the net
proceeds of this offering and, therefore, you will not be able
to evaluate such assets prior to our investment therein.”
NorthEnd Income Property Trust Inc. was formed as a
Maryland corporation on August 19, 2008, with NorthEnd
Holding, an affiliate of ML & Co., as our sole
stockholder. Our operating partnership was formed as a Delaware
limited partnership on August 25, 2008.
We intend to own all of our investments through our operating
partnership in order to be organized as an UPREIT. UPREIT stands
for “Umbrella Partnership Real Estate Investment
Trust.” An UPREIT is a REIT that holds all or substantially
all of its assets through a partnership which the REIT controls
as general partner. We have elected to use an UPREIT structure
to facilitate commercial real estate property acquisitions. A
sale of property directly to a REIT is generally a taxable
transaction to the selling property owner. In an UPREIT
structure, a seller of appreciated property who desires to defer
taxable gain on the transfer of such property may transfer the
property to our operating partnership in exchange for limited
partnership interests. Such exchange could be made on a tax-free
basis. Being able to offer a seller the opportunity to defer
taxation of gain until the seller redeems its interests in our
operating partnership for cash may give us a competitive
advantage in acquiring desired properties or investments
relative to buyers who cannot offer this opportunity. In
addition, investing in our operating partnership, rather than in
shares of our common stock, may be more attractive to certain
institutional or other investors due to their business or tax
structure. Following the third anniversary of the initial
offering date, if an institutional investor is interested in
making a substantial investment in our operating partnership, we
may agree to terms for such investment different from the terms
of this offering of common stock. For example, we may be willing
to agree that lower management fees and distribution fees will
be payable by such investor in consideration of the size of its
investment or the investor’s commitment not to request
redemption of such investment for a negotiated period of time.
Our UPREIT structure can accommodate such different terms, while
applicable tax laws generally restrict an entity that qualifies
as a REIT from charging different fee rates among its
stockholders. A chart depicting our ownership structure appears
below.
We are the sole general partner of our operating partnership and
NorthEnd Holding is the initial limited partner. We intend to
hold substantially all of our assets (other than cash and liquid
assets that we may hold directly to fund our expenses and
redemptions of shares of our common stock) and conduct our
operations through our operating partnership. We intend to
contribute the net proceeds from this offering, which are not
used to pay the fees and expenses attributable to our
operations, to our operating partnership. As the sole general
partner of our operating partnership, we have the exclusive
power under the partnership agreement to manage and conduct its
business, subject to certain limited approval and voting rights
of the limited partners described more fully in “Operating
Partnership Agreement.” Pursuant to the terms of our
advisory agreement, we will delegate to our advisor authority to
make decisions related to our and our operating
partnership’s day-to-day business, the acquisition,
management and disposition of assets and the selection of
property managers and other service providers.
to generate an attractive level of current income for
distribution to our stockholders;
•
to provide our stockholders with the potential for long-term
capital appreciation; and
•
to offer an investment option in which the per share price
volatility is correlated to commercial real estate as an asset
class rather than traditional asset classes such as stocks and
bonds.
We may not change our investment objectives without the approval
of holders of a majority of the outstanding shares of our common
stock.
Investment
Strategy
We intend to achieve our investment objectives by investing
primarily in a diversified portfolio of (1) institutional
quality, income-producing real properties in multiple sectors
(such as retail, office, industrial and multi-family residential
properties and other real property types, which may include
hotels, mixed-use properties, manufactured housing and
self-storage facilities), which we collectively refer to in this
prospectus as “commercial real estate properties,”
(2) other real estate related assets, which includes debt
and equity interests backed principally by real estate, such as
common and preferred stock of REITs and other real estate
companies, commercial mortgage-backed securities and mortgage
loans, which we collectively refer to as “real estate
related assets” and (3) cash, cash equivalents and
other short-term investments. We will concentrate our efforts on
institutional quality, commercial real estate properties located
in or near densely populated primary and secondary metropolitan
areas in the U.S. and Canada with positive long-term
economic and demographic growth. This type of commercial real
property has historically been sought for investment by
institutional investors including pension plans, endowments and
other financial institutions with long-term investment
strategies that include an allocation to commercial real estate.
We may make investments alone or together with funds, accounts
and other investors, through holding company structures or joint
ventures, real estate partnerships, REITs or other collective
investment vehicles.
Investment
Guidelines
Our investment guidelines have been adopted by our board of
directors. Our board of directors will formally review at a duly
called meeting our investment guidelines on an annual basis and
our investment portfolio on a quarterly basis or, in each case,
more often as they deem appropriate. Changes to our investment
guidelines must be approved by our board of directors. During
the period until we have reached $300,000,000 in net assets,
which we refer to as our ramp-up period, we will balance the
goal of achieving diversification in our portfolio with the goal
of maintaining moderate leverage. We have adopted
$300 million in net assets as the end of our
ramp-up
period because we believe that is a reasonable proxy for when
the size of our operating partnership’s portfolio of
investments should be sufficient for our advisors to adhere more
closely to our investment guidelines and targeted leverage
policy, although we cannot predict how long our
ramp-up
period will last and we cannot provide assurances that the net
assets of our operating partnership will reach
$300 million. During our
ramp-up
period, our financial leverage as a percentage of our gross
assets may fluctuate as we identify investment opportunities and
make investments with a combination of proceeds from this
offering and proceeds from additional indebtedness. The
guidelines described below relate to the period after we have a
substantial portfolio.
We will seek to have:
•
up to 80% of our assets invested in commercial real estate
properties;
•
up to 20% of our assets invested in real estate related
assets; and
•
up to 10% of our assets invested in cash, cash equivalents and
other short-term investments.
Notwithstanding the above, the actual percentage of our
portfolio that is invested in each investment type may from time
to time rise above the target levels provided above due to
factors such as a large inflow of capital over a short period of
time, a lack of attractive investment opportunities or an
increase in anticipated cash requirements or redemption requests.
Investments
in Commercial Real Estate Properties
We generally will buy direct ownership interests, through equity
interests
and/or joint
ventures, in existing or newly constructed institutional quality
properties in multiple sectors, including retail, office,
industrial, and multi-family residential properties. We may also
invest in other real property types including hotels, mixed-use
properties, manufactured housing and self-storage facilities. We
primarily will invest in commercial real estate properties with
existing rent and expense schedules or newly constructed
properties with predictable cash flows or in which a seller
agrees to provide certain minimum income levels. We will
concentrate our efforts on commercial real estate properties
located in or near densely populated primary and secondary
metropolitan areas in the U.S. and Canada and will seek
geographic diversity of our property portfolio.
Each of our advisor and our sub-advisor will have the authority
to execute on our behalf all commercial real estate property
acquisitions that meet the requirements of the investment
guidelines approved by our board of directors. As a result, our
sub-advisor, under our advisor’s supervision, will have the
ability to acquire properties on our behalf that meet our
investment guidelines without the approval of our board of
directors. Our board of directors will formally review at a duly
called meeting our investment guidelines on an annual basis and
our portfolio on a quarterly basis or, in each case, more often
as it deems appropriate. In pursuing our investment objectives
and making commercial real property investments on our behalf,
our sub-advisor, in consultation with our advisor, will consider
relevant real estate property and financial factors, including
the following:
•
positioning the overall portfolio to achieve diversity by
property type, geography and industry of the tenants;
•
credit quality of in-place tenants and the potential for future
rent increases;
•
income-producing capacity;
•
opportunities for capital appreciation based on product
repositioning, operating expense reductions and other factors;
•
REIT qualification requirements;
•
liquidity and tax considerations; and
•
additional factors considered important to meeting our
investment objectives.
To the extent feasible, our sub-advisor will strive to select a
diversified portfolio of properties in terms of geography, type
of property and industry of the tenants, although the number and
mix of properties acquired will largely depend upon real estate
and market conditions and other circumstances existing at the
time properties are acquired and the amount of proceeds raised
in our continuous offering.
Due
Diligence
Prior to acquiring a property, our sub-advisor, in consultation
with our advisor, will undertake an extensive site review. Our
sub-advisor will typically also undertake a long-term viability
and fair value analysis, including an inspection of the property
and surrounding area by an acquisition specialist and an
assessment of market area demographics. Our sub-advisor also may
take the following steps, depending on the property and terms
agreed to:
•
obtain surveys of the property;
•
obtain evidence of marketable or indefeasible title subject to
such liens and encumbrances as are acceptable to our sub-advisor;
•
obtain audited financial statements covering recent operations
of properties with operating histories to the extent such
statements are required to be filed with the SEC;
•
obtain title and liability insurance policies;
•
obtain an independent engineering report of the property’s
mechanical, electrical and structural integrity;
•
evaluate the existing property leases relating to the property;
•
evaluate both the current and potential alternative uses of the
property; and
•
obtain an independent Phase I environmental site assessment.
Acquisition
of Properties from Affiliates
We may acquire properties or interests in commercial real estate
properties from or in co-ownership arrangements with affiliates
of our advisors. We will not acquire any property from an
affiliate of either of our advisors unless a majority of our
directors not otherwise interested in the transaction and a
majority of our independent directors determine that the
transaction is fair and reasonable to us. The purchase price
that we will pay for any property we acquire from our affiliates
will not exceed the appraised value of the property, provided
that in the case of a development, redevelopment or
refurbishment project that we agree to acquire prior to
completion of the project, the appraised value will be based
upon the completed value of the project as determined at the
time the agreement to purchase the property is entered into. In
addition, the purchase price for any property we acquire from an
affiliate may not exceed the cost of the property to our
affiliate, unless a majority of our directors, including a
majority of our independent directors, approve the purchase as
being fair and reasonable to us.
Joint
Venture Investments
We may enter into joint ventures, general partnerships,
co-tenancies and other participation arrangements with one or
more institutions or individuals, including real estate
developers, operators, owners, investors and others, some of
whom may be affiliates, for the purpose of acquiring,
developing, owning and managing one or more commercial real
estate properties. In determining whether to recommend a
particular joint venture, our sub-advisor will evaluate the real
property that such joint venture owns or is being formed to own
under the same criteria used for the selection of our real
property investments.
We may enter into joint ventures with affiliates of our advisors
for the acquisition of commercial real estate properties, but
only provided that (1) a majority of our directors,
including a majority of the independent directors, approve the
transaction as being fair and reasonable to us and (2) the
investment by us and such affiliate are on substantially the
same terms and conditions as those that would be available to
the other joint venturers.
Real
Property Ownership
Our investment in commercial real estate properties will
generally take the form of holding fee title or a long-term
leasehold estate. We intend to acquire such interests either
(1) directly through our operating partnership or
(2) indirectly through taxable REIT subsidiaries, wholly
owned limited liability companies or through investments in
joint ventures, partnerships, limited liability companies,
co-tenancies or other co-ownership arrangements with the
developers of the real properties, affiliates of our advisors or
other entities. We may also obtain options to acquire commercial
real estate properties. The amount paid for an option, if
any, is normally surrendered if the property is not purchased
and may or may not be credited against the purchase price if the
property is purchased. In addition, we may purchase properties
and lease them back to the sellers of such properties. While we
will use our best efforts to structure any such leaseback
transaction such that the lease will be characterized as a
“true lease” so that we will be treated as the owner
of the property for federal income tax purposes, we cannot
assure you that the IRS will not challenge such
characterization. In the event that any such recharacterization
were successful, deductions for depreciation and cost recovery
relating to such real property would be disallowed, interest and
penalties could be assessed by the IRS and it is possible that
under some circumstances we could fail to qualify as a REIT as a
result.
Tenant
Creditworthiness and Lease Terms
We will seek to lease the rentable square feet at our commercial
real estate properties to creditworthy tenants. When available,
our sub-advisor will utilize national credit rating agencies,
such as Standard & Poor’s, to assist in its
determination of tenant creditworthiness. If public data is not
available, our sub-advisor will rely on its experience, its own
credit analysis and resources provided by its lenders to qualify
a prospective tenant.
We expect that a majority of our leases will be leases
customarily used between landlords and tenants for the specific
type and use of the property in the geographic area where the
property is located. However, the terms and conditions of any
lease that we enter into with our tenants may vary substantially
from those we describe in this prospectus.
Investments
in Real Estate Related Assets
We may invest a portion of our portfolio in real estate related
assets other than commercial real estate properties. These
assets include securities of other companies engaged in real
estate activities, mortgage-backed securities and conventional
mortgage loans. Upon completion of our
ramp-up
period, we expect that up to 20% of our investments could be
invested in real estate related assets. We believe that our
advisors’ ability to acquire real estate related securities
and debt instruments in conjunction with our primary strategy of
acquiring a diverse portfolio of institutional quality,
income-producing properties give us: (1) additional
liquidity and therefore financial flexibility; and
(2) discretion to construct an investment portfolio
designed to achieve our investment objectives.
Securities
of Companies Engaged in Real Estate Activities
Subject to the percentage of ownership limitations and gross
income and asset requirements required for REIT qualification,
we may invest in equity securities of companies engaged in real
estate activities, including for the purpose of exercising
control over such entities. Companies engaged in real estate
activities may include, for example, REITs that either own
properties or make construction or mortgage loans, real estate
developers, entities with substantial real estate holdings such
as limited partnerships, funds and other commingled investment
vehicles, and other companies whose products and services are
related to the real estate industry, such as building supply
manufacturers, mortgage lenders or mortgage servicing companies.
We may acquire all or substantially all of the securities or
assets of companies engaged in real estate activities where such
investment would be consistent with our investment policies and
our status as a REIT. We may also acquire exchange traded funds,
or ETFs, and mutual funds focused on REITs and real estate
companies. In any event, we do not intend that our investments
in securities will require us to register as an investment
company under the Investment Company Act, and we intend to
generally divest appropriate securities before any such
registration would be required.
Mortgage-Backed
Securities
We may invest in credit rated mortgage-backed securities and
other mortgage-related or asset-backed instruments, including
commercial mortgage-backed securities, residential
mortgage-backed securities, mortgage-backed securities issued or
guaranteed by agencies or instrumentalities of the
U.S. government, non-agency mortgage instruments, and
collateralized mortgage obligations that are fully
collateralized by a
portfolio of mortgages or mortgage-related securities to the
extent consistent with the requirements for qualification as a
REIT. Mortgage-backed securities are instruments that directly
or indirectly represent a participation in, or are secured by
and payable from, one or more mortgage loans secured by real
estate. In most cases, mortgage-backed securities distribute
principal and interest payments on the mortgages to investors.
Interest rates on these instruments can be fixed or variable.
Some classes of mortgage-backed securities may be entitled to
receive mortgage prepayments before other classes do. Therefore,
the prepayment risk for a particular instrument may be different
than for other mortgage-related securities. We currently do not
intend to invest in mortgage-backed securities, including
residual interests, that are not credit rated, but we are not
prohibited from making such investments.
Conventional
Mortgage Loans
We may invest in mortgages consistent with the requirements for
qualification as a REIT. We may originate or acquire interests
in mortgage loans, generally on the same types of properties we
might otherwise buy. These mortgage loans may pay fixed or
variable interest rates or have “participating”
features described below. Normally, our mortgage loans will be
secured by properties that have income-producing potential. They
usually will not be insured or guaranteed by the
U.S. government, its agencies or any other person or
entity. They usually will be non-recourse, which means they will
not be the borrower’s personal obligations. Most will be
first mortgage loans on existing income-producing property, with
first priority liens on the property. These loans may provide
for payments of principal and interest or may provide for
interest-only payments, with a balloon payment at maturity.
We may make mortgage loans that permit us to participate in the
revenues from or appreciation of the underlying property
consistent with the rules applicable to qualification as a REIT.
These participations will let us receive additional interest,
usually calculated as a percentage of the gross income the
borrower receives from operating, selling or refinancing the
property above cost. We may also receive an option to buy an
interest in the property securing the participating loan.
Cash,
Cash Equivalents and Other Short-Term Investments
We intend to invest up to 10% of our assets in cash, cash
equivalents and other short-term investments. Our cash, cash
equivalents and other short-term investments may include
investments in the following, to the extent consistent with our
qualification as a REIT:
•
U.S. government or government agency securities;
•
money market instruments, cash and other cash equivalents (such
as high-quality short-term debt instruments, including
commercial paper, certificates of deposit, bankers’
acceptances, repurchase agreements, interest-bearing time
deposits and credit rated corporate debt securities); and
•
credit rated corporate debt or asset-backed securities of
U.S. or foreign entities, or credit rated debt securities
of foreign governments or multi-national organizations.
Leverage
We intend to use a conservative amount of leverage to provide
additional funds to support our investment activities. Our
target leverage after we have acquired a substantial portfolio
of real estate investments is 30% of the gross value of our
assets, which we believe is generally lower than the amount of
borrowings utilized by other available real estate investment
products. During the period when we are acquiring our portfolio,
we may employ greater leverage in order to quickly build a
diversified portfolio of assets. We may leverage our portfolio
by assuming or incurring secured or unsecured asset-level or
operating partnership-level debt. An example of asset-level debt
is a mortgage loan secured by an individual real estate property
or portfolio of real estate properties incurred or assumed in
connection with our acquisition of such property or portfolio of
properties. An example of operating partnership-level debt is
borrowing under a line of credit. Borrowings under a line of
credit may be used to fund acquisitions, to redeem shares or for
any other corporate purpose.
Our actual leverage will be affected by a number of factors,
some of which are outside our control. Significant inflows of
proceeds from the sale of shares of our common stock will
generally cause our leverage to decrease, at least temporarily,
while significant outflows of equity as a result of redemptions
of shares of our common stock will generally cause our leverage
to increase, at least temporarily. Leverage as a percentage of
the gross value of our assets will also increase or decrease
with decreases or increases, respectively, in the value of our
portfolio. In an effort to provide for a ready source of
liquidity to fund redemptions of shares of our common stock in
the event that redemption requests exceed net proceeds from our
continuous offering, we intend to reserve borrowing capacity
under a line of credit. If we borrow under the line of credit to
fund redemptions of shares of our common stock, our leverage
will increase and may exceed our target leverage. Our leverage
may remain at the higher level until we receive additional net
proceeds from our continuous offering or sell some of our assets
to repay outstanding indebtedness.
Our board of directors may from time to time modify our leverage
policy in light of then-current economic conditions, relative
costs of debt and equity capital, fair values of our properties,
general conditions in the market for debt and equity securities,
growth and acquisition opportunities or other factors. Our
actual leverage may be higher or lower than our target leverage
depending on a number of factors, including the availability of
attractive investment and disposition opportunities, inflows and
outflows of capital and increases and decreases in the value of
our portfolio. In particular, large outflows of capital over
short periods of time could cause our leverage to be
substantially higher than our 30% target. In an effort to have
adequate cash available to support our redemption plan, we
intend to reserve borrowing capacity under a line of credit to
fund redemptions. We will consider actual borrowings used to
fund redemptions when determining whether or not we are at our
leverage target, but not unused borrowing capacity, including
any unused portion of the line of credit reserved for
redemptions. If, therefore, we are at our target leverage of 30%
and we borrow additional amounts to fund redemptions, our
leverage could reach or, if the value of our portfolio
decreases, exceed 40% to 60% of the gross value of our assets.
In the event that our leverage exceeds our 30% target,
regardless of the reason, we will thereafter endeavor to manage
our leverage back down to our 30% target.
There is no limitation on the amount we may invest in any single
improved real property. However, under our charter, we are
precluded from borrowing in excess of 300% of the value of our
net assets. Net assets for purposes of this calculation are
defined to be our total assets (other than intangibles), valued
at cost prior to deducting depreciation and amortization,
reserves for bad debts and other non-cash reserves, less total
liabilities. The preceding calculation is generally expected to
approximate 75% of the sum of the cost of our investments before
non-cash reserves and depreciation. However, we may temporarily
borrow in excess of these amounts if such excess is approved by
a majority of the independent directors and disclosed to
stockholders in our next quarterly report, along with an
explanation for such excess. In such event, we will review our
debt levels at that time and take action to reduce any such
excess as soon as practicable.
Our charter restricts us from obtaining loans from any of our
directors, our advisor, our sub-advisor and any of our
affiliates unless such loan is approved by a majority of the
directors (including a majority of the independent directors not
having a conflict of interest in the transaction) as fair,
competitive and commercially reasonable and no less favorable to
us than comparable loans between unaffiliated parties. Our
aggregate borrowings, secured and unsecured, will be reviewed by
the board of directors at least quarterly.
Investments
Outside of the U.S. and Canada
While it is not our current intent, we may invest in commercial
real estate properties and other real estate related assets
located outside of the U.S. and Canada and liquid
investments of foreign governments or foreign private issuers to
the extent consistent with our status as a REIT. While the
percentage will vary, we expect that investments in commercial
real estate properties located outside of the U.S. and
Canada will be no more than 5% of our portfolio, though we may
invest a higher percentage in real estate related assets located
outside of those markets. Depending on investment opportunities,
our foreign investments could at times be concentrated in one or
two countries. We will evaluate the special risks involved in
foreign assets before investing in them.
We may, but do not presently intend to, make investments other
than as previously described. We have authority to offer shares
of our common stock, limited partnership interests in our
operating partnership or other equity or debt securities in
exchange for cash or property and to repurchase or otherwise
re-acquire shares of our common stock, limited partnership
interests in our operating partnership or other equity or debt
securities in exchange for cash or property. We may issue
preferred shares from time to time, in one or more series, as
authorized by our board of directors without the need for
stockholder approval. At all times, we intend to make
investments in such a manner consistent with the REIT
requirements of the Code unless our board of directors
determines that it is no longer in our best interests for us to
qualify as a REIT. Our policies with respect to such activities
may be reviewed and modified from time to time by our board of
directors without notice to or the vote of our stockholders.
Disposition
Policies
We do not intend to buy and sell our commercial real estate
properties for the purpose of realizing short-term profits. We
anticipate that we will hold most of our commercial real estate
properties for seven to ten years. Our sub-advisor may
determine, however, to sell a property before the end of its
anticipated holding period if:
•
there exists an opportunity to enhance overall investment
returns by raising capital through sale of the property and
reinvesting the proceeds in other properties;
•
there exist diversification benefits associated with disposing
of the property and rebalancing our real estate portfolio;
•
there exists a need to generate liquidity to satisfy redemption
requests, to make distributions to our stockholders or for
working capital;
•
in the judgment of our sub-advisor, the value of the property
might decline;
•
an opportunity has arisen to pursue a more attractive real
property investment;
•
the property was acquired as part of a portfolio acquisition and
does not meet our investment guidelines; or
•
in the judgment of our sub-advisor, the sale of the property is
in our best interests.
We intend to reinvest any sale proceeds except to the extent
that we need such funds to pay operating expenses, to make
distributions to our stockholders to maintain our qualification
as a REIT or to satisfy redemption requests.
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
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
transaction 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 a safe harbor available under the Code. 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. See
“Material United States Federal Income Tax
Considerations—Taxation of the Company—Taxation of
REITs in General.”
Other
Real Estate Related Policies
Property
Management and Leasing Services
We intend to hire local management companies to perform the
day-to-day management services for our properties, including
creating business plans for each property, supervising any
on-site
personnel, negotiating maintenance and service contracts and
providing advice on repairs and capital improvements. Each local
manager will also recommend changes in rent schedules and create
marketing and advertising programs to attain and maintain good
occupancy rates by tenants. We may also hire leasing companies
to perform or coordinate leasing and marketing services to fill
any vacancies. The fees paid to the local management company,
along with any leasing commissions and expenses, will reduce our
cash flow from a property. See “Risk Factors—Risks
Related to Investments in Real Estate—We will rely on third
party property managers to operate our properties and leasing
agents to lease vacancies in our properties.”
Insurance
We will try to arrange for, or require proof of, comprehensive
insurance, including liability, fire and extended coverage for
our real property and properties securing mortgage loans. We
intend to purchase insurance for casualty losses for all of the
properties we acquire, including insurance related to losses
that are generally catastrophic in nature, such as losses due to
terrorism, earthquakes and floods. We cannot assure you that our
insurance coverage for these catastrophic losses will be
adequate to cover all losses and some of our policies will be
subject to large deductibles or co-payments and policy limits
which may not be sufficient to cover losses. Our board of
directors will determine whether coverage for such catastrophic
losses is economically feasible. See “Risk
Factors—Risks Related to Investments in Real
Estate—Potential losses or damage to our properties may not
be covered by insurance.”
Derivative
Instruments and Hedging Activities
In the normal course of business, we will be exposed to the
effect of interest rate changes and may seek to limit these
risks by following established risk management policies and
procedures including the use of derivatives. To mitigate
exposure to variability in interest rates, derivatives may be
used primarily to fix the rate on debt based on floating-rate
indices and manage the cost of borrowing obligations.
We may use a variety of commonly used derivative products,
including interest rate swaps, caps, collars and floors. We have
a policy of entering into contracts with only major financial
institutions based upon minimum credit ratings and other
factors. We will periodically review the effectiveness of each
hedging transaction. We will attempt to conduct our hedging
activities in a manner consistent with the REIT qualification
requirements. See “Risk Factors—Risks Associated with
Debt Financing—Failure to hedge effectively against
interest rate changes may materially adversely affect our
ability to achieve our investment objectives” and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Quantitative and
Qualitative Disclosures about Market Risk.”
Investment
Company Act
We intend to operate so that we do not have to register as an
“investment company” under the Investment Company Act.
Generally, a company is an “investment company” and
required to register under the Investment Company Act if, among
other things, it holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing,
reinvesting or trading in securities, or it 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 such company’s total assets (exclusive of
government securities and cash items) on an unconsolidated basis.
However
Rule 3a-1
under the Investment Company Act generally provides that an
issuer will not be deemed to be an “investment
company” provided that (i) it does not hold itself out
as being engaged primarily, or propose to engage primarily, in
the business of investing, reinvesting or trading securities and
(ii) no more than 45% of the value of its assets (exclusive
of government securities and cash items) and no more than 45% of
its net income after taxes (for the past four fiscal quarters
combined) is derived from securities other than government
securities, securities issued by employees’ securities
companies, securities issued by certain majority owned
subsidiaries of such company and securities issued by certain
companies that are controlled primarily by such company. We
believe that we satisfy this exclusion and thus are not required
to register under the Investment Company Act and we intend to
continue to conduct our operation so as not to have to do so.
To maintain compliance with the exemptions from the Investment
Company Act, we may be unable to sell assets we would otherwise
want to sell and may be unable to purchase securities we would
otherwise want to purchase. See “Risk Factors—Risks
Related to our Corporate Structure—Your investment return
may be reduced if we are deemed to be an investment company
under the Investment Company Act.”
Investment
Limitations
Our charter places numerous limitations on us with respect to
the manner in which we may invest our funds prior to a listing
of our common stock. We will not seek stockholder approval to
amend our charter to remove these investment limitations at any
time during which we are engaged in our continuous public
offering of shares. During the continuous offering, we will not:
•
make investments in unimproved real property or indebtedness
secured by a deed of trust or mortgage loans on unimproved real
property in excess of 10% of our total assets. Unimproved real
property means a property in which we have an equity interest
that was not acquired for the purpose of producing rental or
other income, that has no development or construction in process
and for which no development or construction is planned, in good
faith, to commence within one year;
•
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
property;
•
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;
•
make or invest in individual mortgage loans (excluding any
investments in mortgage pools, commercial mortgage-backed
securities or residential mortgage-backed securities) unless an
appraisal is obtained concerning the underlying property except
for those mortgage loans insured or guaranteed by a government
or government agency. In cases where a majority of our
independent directors determines, and in all cases in which the
transaction is with any of our directors or our advisor and its
affiliates, such appraisal shall be obtained from an independent
appraiser. We will maintain such appraisal in our records for at
least five years and it will be available for your inspection
and duplication. We will also obtain a mortgagee’s or
owner’s title insurance policy as to the priority of the
mortgage;
•
make or invest in mortgage loans that are subordinate to any
lien or other indebtedness of any of our directors, our advisor
or its affiliates;
•
issue (1) equity securities redeemable solely at the option
of the holder (except that stockholders may offer their shares
of our common stock to us pursuant to our redemption plan),
(2) debt securities unless the historical debt service
coverage (in the most recently completed fiscal year) as
adjusted for known changes is anticipated to be sufficient to
properly service that higher level of debt or (3) options
or warrants to the directors, our advisor, or any of their
affiliates, except on the same terms as such options or warrants
are sold to the general public; options or warrants may be
issued to persons other than the directors, our advisor, or any
of their affiliates, but not at exercise prices less than the
fair value of the underlying securities on the date of grant and
not for consideration (which may include services) that in the
judgment of the independent directors has a fair value less than
the value of such option or warrant on the date of grant;
make any investment that is inconsistent with our objectives of
qualifying and remaining qualified as a REIT unless and until
our board of directors determines that REIT qualification is not
in our best interests;
•
make or invest in mortgage loans, including construction loans
but excluding any investment in commercial mortgage-backed
securities or residential mortgage-backed securities, on any one
real property if the aggregate amount of all mortgage loans on
such real property would exceed an amount equal to 85% of the
appraised value of such real property as determined by appraisal
unless substantial justification exists because of the presence
of other underwriting criteria; or
•
issue equity securities on a deferred payment basis or other
similar arrangement.
Our board of directors, including a majority of our independent
directors, will adopt rigorous valuation guidelines that contain
a comprehensive set of methodologies to be used by our advisors,
our independent valuation expert and our independent appraisers,
as applicable, when valuing our operating partnership’s
commercial real estate properties and other real estate related
assets and its liabilities in connection with the calculation of
our NAV. The overarching principle of these guidelines is to
produce a valuation that represents a fair and accurate estimate
of the fair value of our investments or the price that would be
received for our investments in an orderly transaction between
market participants. These valuation methodologies are largely
based upon standard industry practices used by private,
open-ended real estate funds. One fundamental element of the
valuation process, the valuation of our commercial real estate
properties, will be managed and validated by our independent
valuation expert, a leading commercial real estate valuation
management firm that reports directly to our board of directors.
While the methodologies contained in the valuation guidelines
have been designed to operate reliably within a wide variety of
circumstances, it is possible that in certain unanticipated
situations or after the occurrence of certain extraordinary
events (such as a terrorist attack or an act of nature) a more
accurate valuation could be obtained by using different
assumptions. In these unusual circumstances, our advisors may
propose that a different methodology be used to value our
investments and such methodology will be used if approved by our
independent valuation expert. The use of any such alternative
methodology will be reported to our board of directors.
NAV
and NAV Per Share Calculation
In accordance with the valuation guidelines, our accounting
agent, under the supervision of our advisor and our sub-advisor,
will calculate our NAV after the end of each business day
following the escrow period by subtracting our liabilities,
including the accrued estimated management fee, the distribution
fee and other expenses attributable to our public offering and
our operations, from our assets, which will consist almost
entirely of the value of our interest in our operating
partnership. The fair value of our interest in our operating
partnership will be equal to the excess of the value of our
operating partnership over the portion thereof that would be
distributed to the limited partners if our operating partnership
were liquidated. The value of our operating partnership is the
excess of the fair value of our operating partnership’s
assets (including its commercial real estate properties, real
estate related assets and other investments) over the fair value
of its liabilities (including its debt, any declared and accrued
unpaid distributions and the expenses attributable to its
operations). Our accounting agent will calculate the fair value
of our operating partnership based upon valuation information
received from various sources, including third party pricing
vendors, our sub-advisor and our valuation expert, as directed
by our valuation guidelines. The material accounting principles
used in the compilation of our NAV will be disclosed to our
stockholders and the public in our quarterly reports on
Form 10-Q
and our annual reports on
Form 10-K,
both of which are filed with the SEC.
Our NAV will represent the fair value of all of our accrued
assets and liabilities. This includes the daily accrual of our
estimated income and expenses, including the accrual of
liabilities for the estimated amount of the management fees
payable to our advisor and the estimated amount of distribution
fees payable to our distributor. Such daily accrual will be done
on the basis of data extracted from (1) quarterly operating
budgets with respect to each of our commercial real estate
properties, as well as the various portfolios of real estate
related assets; (2) estimates of management fees payable to
our advisor (both the fixed component and the performance-based
component) and the distribution fees payable to our distributor;
(3) quarterly budgets for all other expenses payable by us;
and (4) year-to-date actual performance data. As of the end
of each month, we will update our budgets and adjust our
accruals to reflect actual operating results and to
appropriately reflect the outstanding receivable, payable and
other account balances resulting from the accumulation of daily
accruals through the end of the most recently completed month
for which financial information is available. At the close of
business on the date that is five business days before each
record date for any declared
distribution, our NAV will be reduced to reflect the accrual of
our liability to pay such distribution to our stockholders of
record as of such date.
The fair value of our long-term assets and liabilities (such as
real estate properties or marketable securities held for
investment) shall be based on their fair value. Most notably,
for our real estate properties, this value shall be based on the
fair value validated by our independent valuation expert. For
exchange traded securities, their fair value shall be based on
their most recent market closing price. Our short-term assets
and liabilities will be valued on their face or carrying
balance. On a daily basis, our sub-advisor will communicate the
fair value of the assets and liabilities held by our operating
partnership to the accounting agent. The accounting agent will
base its calculation of NAV on this information as well as the
accrual of the management fees payable to our advisor, the
distribution fees payable to our distributor and values of any
of our assets or liabilities held outside of our operating
partnership.
Our NAV per share as of the end of any business day will be
determined by dividing our NAV by the number of shares of our
common stock outstanding as of the end of business on such day
prior to giving effect to any share purchases or redemptions to
be effected on such day.
Valuation
of Commercial Real Estate Properties
Wholly Owned Commercial Real Estate
Properties. The valuation of our wholly owned
commercial real estate properties will be managed by our
independent valuation expert. Our independent valuation expert
will be a leading firm that is engaged to a substantial degree
in the business of rendering opinions regarding the value of
commercial real estate properties. Our independent valuation
expert will not be affiliated with us or our advisors. Our board
of directors may replace our independent valuation expert at any
time.
Wholly owned commercial real estate properties will initially be
valued at cost (purchase price plus all related acquisition
costs and expenses, such as legal fees and closing costs).
Acquisition costs and expenses incurred in connection with the
acquisition of multiple wholly owned commercial real estate
properties that are not directly related to any single wholly
owned commercial real estate property generally will be
allocated among the applicable wholly owned commercial real
estate properties pro rata based on relative values.
At the beginning of each calendar year, our sub-advisor will
develop a staggered valuation plan with the objective of having
approximately 25% of all of our wholly owned commercial real
estate properties, by value, valued each quarter by independent
appraisers. The valuation plan will be updated quarterly as
necessary such that each wholly owned commercial real estate
property will be valued by an independent appraiser at least
once during every calendar year in accordance with the Uniform
Standards of Professional Appraisal Practice. The sub-advisor
will select an independent appraiser for each property from a
list of appraisers approved by our board of directors. Our
valuation expert will monitor the valuation plan to ensure that
it complies with our valuation guidelines and report such
compliance to our board on a quarterly basis.
The valuation reports prepared by the independent appraisers
will be reviewed by our sub-advisor and our independent
valuation expert for compliance with the valuation guidelines
and the reasonableness of the valuation conclusions. Our NAV
will not incorporate any independent valuation until our
independent valuation expert has reviewed the value and
concluded that it is reasonable.
Every quarter, our sub-advisor will value all of our wholly
owned commercial real estate properties that are not being
valued by independent appraisers during such quarter pursuant to
the staggered valuation plan. In undertaking these valuations,
our sub-advisor will use one or a combination of valuation
methodologies consistent with industry practice, and will take
into consideration the specific criteria and parameters applied
in the most recent independent valuation conducted by an
independent appraiser. The primary methodology used by our
sub-advisor to value commercial real estate properties is
expected to be the income approach, whereby value is derived by
determining the present value of an asset’s stream of
future cash flows (i.e., discounted cash flow analysis).
Consistent with industry practices, the income approach
incorporates subjective judgments regarding comparable rental
and operating expense data, the capitalization
and/or
discount rate, and projections of future rent and expenses based
on appropriate evidence. Other methodologies that may also be
used by our sub-advisor to value commercial real estate
properties include sales comparisons and replacement
cost approaches. The methodology or combination of
methodologies utilized to value a particular commercial real
estate property will be selected by our sub-advisor based on a
determination of which approach or approaches best meets the
valuation assignment and provides the strongest evidence and
support for the fair value of the property. Our independent
valuation expert will review the valuations established by our
sub-advisor during each month, taking into consideration the
valuation methodology or combination of methodologies applied.
Our NAV will not incorporate any interim valuation performed by
our sub-advisor until our independent valuation expert has
reviewed the value and concluded that it is reasonable.
At any time, our independent valuation expert may require an
additional appraisal should it conclude that a value from an
independent appraiser or the sub-advisor is not reasonable. Any
dispute between our sub-advisor and our independent valuation
expert regarding the valuation of a specific asset will be
promptly submitted to and resolved by our board of directors.
Our sub-advisor and our independent valuation expert will
provide our advisor and our board of directors with periodic
valuation reports on a quarterly basis in connection with
regularly scheduled board meetings. In its discretion, our board
of directors will have the right to engage additional
independent valuation experts to confirm the valuation of our
investments.
Commercial Real Estate Properties Held Through Joint
Ventures. Investments in joint ventures that hold
commercial real estate properties will be valued by our advisor,
our sub-advisor and our independent valuation expert in a manner
which is consistent with the guidelines described above for
wholly owned commercial real estate properties. Once the value
of a property held by the joint venture is determined pursuant
to such guidelines, the value of our interest in the joint
venture would then be determined by applying the distribution
provisions of the applicable joint venture agreements to the
value of the underlying property held by the joint venture.
Off-Cycle Valuations. Wholly owned commercial
real estate properties and joint ventures may be valued more
frequently than quarterly if our advisor or our sub-advisor
believes that the value of a wholly owned commercial real estate
property or joint venture has changed materially since the most
recent quarterly valuation. For example, an unexpected
termination or renewal of a material lease, a material change in
vacancies or an unanticipated structural or environmental event
at a property may cause the value of a wholly owned commercial
real estate property to change materially. In general, we expect
that an off-cycle valuation will be performed as soon as
possible after a determination by our advisor or our sub-advisor
that a material change has occurred and the financial effects of
such change are quantifiable.
Valuation
of Real Estate Related Assets
Real estate related assets include debt and equity interests
backed principally by real estate, such as common and preferred
stock of REITs and other real estate companies, commercial
mortgage-backed securities and mortgage loans. Real estate
related assets will be valued by our advisor and our sub-advisor
upon acquisition or issuance and then quarterly, or in the case
of liquid securities, daily, as applicable, thereafter.
Off-cycle valuations of real estate related assets that
generally are valued quarterly may be conducted if our advisor
and our sub-advisor believe the value of the applicable asset
has changed materially since the most recent valuation. In
addition, our board of directors may, from time to time, retain
additional independent valuation experts to assist with the
valuation of real estate related assets.
Publicly Traded Real Estate Related
Securities. Publicly traded debt and equity real
estate related securities (such as shares in public REITs) that
are not restricted as to salability or transferability will be
valued on the basis of information provided by third party
pricing vendors. Generally, such securities will be valued at
the price of the last trade executed at or prior to closing on
the valuation day or, in the absence of such trade, the last
“bid” price. The value of publicly traded equity and
debt real estate related securities that are restricted as to
salability or transferability may be adjusted for a liquidity
discount. In determining the amount of such discount,
consideration will be given to the nature and length of such
restriction and the relative volatility of the market price of
the security.
Private Real Estate Related
Securities. Investments in privately placed,
illiquid securities of real estate related operating businesses
(other than joint ventures), such as real estate development or
management companies, will initially be valued at cost (purchase
price plus all related acquisition costs and expenses, such as
legal fees and closing costs) and thereafter will be valued
quarterly on a staggered basis at fair value as determined in
good faith. In evaluating the fair value of our interests in
certain commingled investment vehicles (such as private real
estate funds), values periodically assigned to such interests by
the respective issuers or broker-dealers may be relied upon.
Private Mortgage Loans. Mortgages will
initially be valued at our acquisition cost and will be
marked-to-market quarterly on a staggered basis. For example,
fixed rate mortgages will be valued at our acquisition cost and
thereafter marked-to-market on a quarterly basis, with principal
and interest payments discounted to their present value using a
discount rate based on current market rates. In addition,
variable interest rate debt may be marked-to-market in the event
that the market interest rate spreads change for comparable
indebtedness. Furthermore, the quarterly valuations of
participating mortgages will reflect the changes in value of the
underlying real estate, with anticipated sale proceeds
(estimated cash flows) discounted to their present value using a
discount rate based on current market rates.
Valuation of Liquid Non-Real Estate Related
Assets. Liquid non-real estate related assets
include credit rated government and corporate debt securities,
publicly traded equity securities and cash and cash equivalents.
Liquid non-real estate related assets will be valued daily based
on information provided by third party pricing vendors.
Valuation
of Our Liabilities
As part of our NAV calculation, our advisor and our sub-advisor
will estimate the value of our liabilities on a fair value basis
using widely accepted methodologies specific to each type of
liability. We expect that our liabilities will include the
management fee payable to our advisor, debt, accounts payable,
accrued operating expenses and other liabilities. Long-term
liabilities (such as mortgage loans) will be valued at fair
value. Short-term liabilities will be valued at face or carrying
balance. For each liability type, the methodology to use to
estimate fair value will be based on, among other things,
anticipated settlement date, underlying security, collateral,
credit risk and the difference between contractual and current
market terms.
We will assume that cost is an appropriate estimate of fair
value for short-term (less than one year) third party borrowings
bearing interest at variable rates, as well as short-term
accounts payable and operating expenses, including the
management fee. We believe that the substantial remainder of our
liabilities will be comprised of other third party borrowings,
and we intend to use an income-based approach to estimate the
fair value of such liabilities. Specifically, we will estimate
the fair value of all other third party borrowings based on
estimated future cash flows discounted over the remaining term
to maturity. The respective discount rates will be estimated
based on current market rates of interest for loans, mortgage
instrument or commercial mortgage-backed securities with similar
characteristics.
Review
of and Changes to Our Valuation Guidelines
Our independent valuation expert and our sub-advisor will review
our valuation guidelines and methodologies with our advisor and
our board of directors at least annually. Any changes to our
valuation guidelines require the approval of our board of
directors and, to the extent they affect the valuation of
commercial real estate properties, of our independent valuation
expert.
Redemption Plan
General
In an effort to provide our stockholders with liquidity in
respect of their investment in shares of our common stock, we
have adopted a redemption plan, whereby on a daily basis,
stockholders may request that we redeem all or any portion of
their shares.
Under our redemption plan, on each day the New York Stock
Exchange is open for trading (a business day), stockholders may
request that we redeem all or any portion of their shares.
Redemption requests received by our transfer agent before
4:00 p.m. Eastern time will be effected at a
redemption price equal to our NAV per share calculated after the
close of business on that day. Redemption requests received by
our transfer agent after 4:00 p.m. Eastern time on any
business day, or received on a day other than a business day,
will be effected at our NAV per share calculated after the close
of business on the next business day. The redemption price per
share on any business day will be our NAV per share, without
giving effect to any share purchases or redemptions to be
effected on such day, less any applicable short-term trading
discounts.
Automatic
Redemptions
In the event that any stockholder fails to maintain the minimum
balance of $5,000 of shares of our common stock, we may redeem
all of the shares held by that stockholder at the redemption
price for the date we determine that the stockholder has failed
to meet the minimum balance, less any applicable short-term
trading discounts. Automatic redemption will not apply in the
event that the failure to meet the minimum balance is caused
solely by a decline in our NAV.
Funding
Redemptions
We may, in our advisor’s discretion, after taking the
interests of our company as a whole and the interests of our
remaining stockholders into consideration, use proceeds from any
available sources at our disposal to satisfy redemption
requests, including, but not limited to, available cash,
proceeds from sales of additional shares, excess cash flow from
operations, sales of our liquid investments, incurrence of
indebtedness and, if necessary, proceeds from the disposition of
commercial real estate properties or real estate related assets.
In an effort to have adequate cash available to support our
redemption plan, we intend to reserve borrowing capacity under a
line of credit. We expect to borrow against this line of credit
in part to repurchase shares presented for redemption during
periods when we do not have sufficient proceeds from the sale of
shares in this continuous offering to fund all redemption
requests. Our objective is for our line of credit to afford us
borrowing availability of between 20% and 40% of our gross asset
value to fund redemptions. As our assets increase, however, it
may not be commercially feasible or we may not be able to secure
a line of credit of that size. Moreover, actual availability may
be reduced at any given time if we use borrowings under the line
of credit to fund redemptions or for other corporate purposes.
Payment
of Redemption Proceeds
Generally, we will pay redemption proceeds, less any applicable
short-term trading discounts and any applicable tax or other
withholding required by law, by the fifth business day following
a redemption request. Once a stockholder makes a redemption
request, the redemption price that the stockholder will receive
will be equal to our NAV per share as of the date that the
redemption request is effective less any applicable short-term
trading discounts. See
“—Redemption Limitations” below. Although a
stockholder will not know at the time he or she requests the
redemption of shares the exact price at which such redemption
request will be processed, the stockholder will be contractually
bound to redemption of the shares and will not be permitted to
cancel the request prior to the payment of redemption proceeds.
Because our NAV per share will be calculated at the close of
each business day, the redemption price may fluctuate between
the date we receive the redemption request and the date on which
redemption proceeds are paid. As a result, the redemption price
that a stockholder will receive may be different from the
redemption price on the day the redemption proceeds are paid. If
a stockholder redeems shares after a distribution record date
but prior to the date on which the declared distribution is
paid, the stockholder will be entitled to receive such
distribution with respect to the redeemed shares of our common
stock held on the record date.
Redemption Limitations
We do not intend to maintain any pre-set limitations on the
number of shares of our common stock that may be redeemed at any
particular time. We may not, however, have a sufficient amount
of liquid assets to satisfy all redemption requests.
If the full amount of all shares of our common stock requested
to be redeemed as of any given date are not redeemed, we may,
but will not be obligated to, reduce the number of shares to be
redeemed in respect of redemption requests on a pro rata basis.
Notwithstanding the foregoing, we reserve the right to redeem
shares that are the subject of outstanding redemption requests
in any order or priority and to reduce the number of shares to
be redeemed on any pro rata basis (or any non pro rata basis if
necessary to ensure our continued qualification as a REIT for
federal income tax purposes). All unsatisfied redemption
requests will continue to be automatically considered for
redemption as provided above, unless we receive notification
from the applicable stockholder before the close of business on
the next business day that the redemption request is being
withdrawn.
Our board of directors may terminate the redemption plan at any
time following the first anniversary of the initial offering
date. In addition, our board of directors may determine to
delay, modify or suspend, without limitation, share redemptions
at any time if it determines that such action is in our and our
remaining stockholders’ best interests, or is necessary or
advisable to protect non-redeeming stockholders, to ensure our
continued qualification as a REIT for federal income tax
purposes, to avoid any change in our tax or regulatory status or
to avoid any violation of applicable law, rules or regulations.
This may include modification of the redemption plan from a
daily to a non-daily redemption plan or to reduce the redemption
price to an amount that reflects a discount to our NAV per share.
We may defer redemption requests in process where the redemption
proceeds have not been paid during the relevant period of one of
the above described events until such time as our board of
directors convenes its special session and renders its decision.
Accordingly, stockholders cannot be assured that all of the
shares in their redemption requests will be redeemed. Any
termination or suspension of, or material modification to, the
redemption plan will be disclosed to stockholders. If we cannot
satisfy a stockholder’s redemption request because of a
delay, suspension or modification of our redemption plan or
because of a pro rata reduction in the number of redemption
requests as described above, we will treat the redemption
request as a request for redemption on the first day that
redemptions resume unless the stockholder withdraws its request
in accordance with instructions provided to stockholders with
the notice of delay, suspension or modification of the
redemption plan. Unless our board of directors provides
otherwise, each such redemption will be effected at a redemption
price that is equal to the NAV per share calculated after the
close of business on the day that we resume redemptions rather
than the NAV per share calculated after the close of business on
the day when the original request for redemption was received.
To avoid certain issues related to our ability to comply with
the REIT distribution requirements and utilize the deficiency
dividend procedure (see “Material United States Federal
Income Tax Considerations—Taxation of the
Company—Annual Distribution Requirements” below), we
have implemented procedures designed to track our
stockholders’ percentage interests in our common stock in
order to identify any such dividend equivalent redemptions and
will decline to effect a redemption to the extent that we
believe that it would constitute a dividend equivalent
redemption. See “Material United States Federal Income Tax
Considerations—Taxation of Stockholders—Redemptions of
Our Common Stock.”
Short-term
Trading Discounts
There is no minimum holding period for shares of our common
stock and stockholders can redeem their shares at any time.
However, subject to limited exceptions, shares redeemed within
365 days of the date of purchase will be redeemed at NAV
per share less a short-term trading discount equal to 2% of the
aggregate NAV per share of such shares redeemed. This short-term
trading discount will also apply to automatic redemptions that
occur during the
365-day
period following the purchase of the shares. The short-term
trading discount will inure indirectly to the benefit of our
remaining stockholders and is intended to offset the trading
costs, market impact and other costs associated with short-term
trading in our common stock. The short-term trading discount
will not apply in the following circumstances:
•
redemptions resulting from death, disability or divorce decree;
•
redemptions of shares acquired through our distribution
reinvestment plan;
redemptions of shares held in certain omnibus accounts,
including retirement plans qualified under Sections 401(a)
or 401(k) of the Internal Revenue Code, or plans administered as
college savings plans under Section 529 of the Internal
Revenue Code; and
•
redemptions by stockholders executing rollovers of current
investments in our shares through qualified employee benefit
plans.
Shares of our common stock may be sold to certain 401(k) plans,
403(b) plans, bank or trust company accounts and accounts of
certain financial institutions or intermediaries that do not
apply the redemption discount to underlying stockholders, often
because of administrative or systems limitations. These shares
will be redeemed, and any short-term trading discount will be
applied, on a first in-first out basis unless otherwise
specified by the stockholder or the stockholder’s
representative. For this purpose, shares held for the longest
period of time will be treated as being redeemed first and
shares held for the shortest period of time as being redeemed
last.
Other
When you make a request to have shares redeemed, you should note
the following:
•
If you are requesting that some but not all of your shares be
redeemed, keep your balance above $5,000 to avoid automatic
redemption;
•
You will not receive interest on amounts represented by uncashed
redemption checks; and
•
Under applicable anti-money laundering regulations and other
federal regulations, redemption requests may be suspended,
restricted, or canceled and the proceeds may be withheld.
We operate under the direction of our board of directors. Our
board of directors is responsible for the management and control
of our affairs. Our board of directors has retained our advisor
to manage our day-to-day affairs and the allocation of our
portfolio of investments. Our directors have a fiduciary duty to
us and our stockholders, including a duty to supervise our
relationship with our advisor.
Prior to effectiveness of the registration statement of which
this prospectus forms a part, we will have a seven-member board.
Our board of directors may change the size of the board, but not
to fewer than three board seats. Our charter provides that a
majority of our directors must be “independent
directors,” which is defined in our charter as a person who
is not one of our officers or employees or an officer or
employee of our advisors, or any of their respective affiliates,
and has not been so for the previous two years. Our charter will
be ratified by our board of directors, including a majority of
our independent directors, at the first meeting in which a
majority of our directors are independent prior the commencement
of this offering.
Each director will serve until the next annual meeting of
stockholders and until his or her successor has been duly
elected and qualified. Although the number of directors may be
increased or decreased, a decrease may not shorten 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 at a meeting called for the purpose of the
proposed removal. The notice of the meeting must indicate that
the purpose, or one of the purposes, of the meeting is to
determine if the director shall be removed.
Any 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 by a vote of a
majority of the remaining directors. As provided in our charter,
nominations of individuals to fill the vacancy of a board seat
previously filled by an independent director will be made by the
remaining independent directors.
Our directors and officers are not required to devote all of
their time to our business and are only required to devote the
time to our affairs as their duties may require. In addition to
meetings of the audit committee of our board of directors, which
we describe below, we expect to hold four regular board meetings
each year. Our board is empowered to fix the compensation of all
officers that it selects and may pay compensation to directors
for services rendered to us in any other capacity.
Our investment guidelines and borrowing policies are set forth
in this prospectus. We will follow the policies on investments
and borrowings set forth in this prospectus unless they are
modified by our directors. Our board of directors may establish
further written policies on investments and borrowings and shall
monitor our administrative procedures, investment operations and
performance to ensure that the policies are fulfilled and are in
the best interest of our stockholders.
Committees
of our Board
Our board of directors may form committees from time to time as
deemed appropriate by our board of directors, provided the
majority of the members of each committee are independent
directors.
Our board of directors has established an audit committee
consisting
of
,
and
, each of whom is an independent
director.
is the chairperson of the audit committee.
All audit committee members are able to read and understand
fundamental financial statements, including a balance sheet,
income statement, cash flow statement and footnotes. The audit
committee has direct responsibility for the appointment,
compensation and oversight of the work of the independent
auditors we employ. The committee assists our directors in
overseeing and monitoring: (1) the systems of our internal
accounting and financial controls; (2) our financial
reporting processes; (3) the independence, objectivity and
qualification of the independent auditors; (4) the annual
audit of our financial statements; and (5) our accounting
policies and disclosures. The committee considers and acts upon
(a) the provision by any
independent auditor of any non-audit services and (b) the
provision by any independent auditor of certain non-audit
services to our advisor and its affiliates to the extent that
such approval is required under applicable regulations of the
SEC. The committee has sole authority to hire and fire any
independent auditor and is responsible for approving all audit
engagement fees and terms, resolving disagreements between us
and the independent auditor regarding financial reporting. Our
independent auditors report directly to the committee. The
committee normally meets quarterly or more frequently as called
by the chairperson. The committee meets separately at least four
times a year with personnel responsible for the internal audit
function and with the independent auditors. The committee also
plays an oversight role in respect of our compliance with our
code of ethics. Our board of directors has determined
that
is an “audit committee financial expert,” as defined
by the SEC.
Board
Compensation
We will pay each of our independent directors an annual retainer
of $
and we will pay our audit committee chairman an additional
$10,000 annual retainer. Each director will receive
$
per board meeting attended in person or by telephone and
$
for each committee meeting attended in person or by telephone.
All directors will be reimbursed for reasonable out-of-pocket
expenses incurred in connection with attendance at board
meetings. If a director is also one of our officers, we will not
pay separate compensation for services rendered as a director.
Board of
Directors and Executive Officers
We have provided below certain information about our directors
and executive officers:
Name
Age
Position
Mark R. Patterson
48
Chairman of the Board
Douglas W. Sesler
47
Chief Executive Officer and Director
Paul F. Morton III
44
President and Director
James E. Hillman
51
Chief Financial Officer
Kevin A. Porter
43
Chief Investment Officer
Keith A. Jones
26
Secretary
Independent Director
Independent Director
Independent Director
Independent Director
Mark R. Patterson is the Chairman of our board of directors.
Since 2006, he has also held the position of the head of the
Global Commercial Real Estate Group of ML & Co., which
is an affiliate of our advisor. From 2005 to 2006,
Mr. Patterson was the Global Head of the Investment
Banking – Real Estate Group of ML & Co.
From 1986 to 2005, he was the Global Head of the Investment
Banking – Real Estate Group of Citigroup Inc.
Mr. Patterson has a Bachelor of Business Administration
degree from the College of William and Mary and a Master of
Business Administration from the Colgate Darden Graduate School
of Business, University of Virginia. He is a member of the Real
Estate Roundtable, the Urban Land Institute, the Board of
Governors of the National Association of Real Estate Investment
Trusts and the American Institute of Certified Public
Accountants. Mr. Patterson is also a Certified Public
Accountant.
Douglas W. Sesler is our Chief Executive Officer and a member of
our board of directors. Since 2005, he has also held the
position of the Managing Director of the Global Commercial Real
Estate Group (Investment Banking and Principal Investing) of
ML & Co., which is an affiliate of our advisor. From
1995 to 2005, Mr. Sesler was both a senior real estate
investment banker and Managing Director (since 1998) of the
Real Estate Investment Banking Group of Citigroup Inc.
Mr. Sesler has a Bachelor of Arts degree from Cornell
University and is a member of the Urban Land Institute, the
National Association of Real Estate Investment Trusts and the
International Council of Shopping Centers.
Paul F. Morton III is our President and a member of our
board of directors. Since 2008, he has also held the position of
the Chief Executive Officer of the Alternative Investment Group
of ML & Co., which is an affiliate of our advisor.
Furthermore, since 1996, Mr. Morton has held the position
of Managing Director and Chief Operating Officer of the Global
Investment and Insurance Solutions Group of ML & Co.
Mr. Morton has a Bachelor of Science degree from the United
States Military Academy (West Point) and a Master of Business
Administration from the Wharton School of the University of
Pennsylvania.
James E. Hillman is our Chief Financial Officer. Since 2007,
Mr. Hillman has been the Treasurer of IQ Investment
Advisors LLC and a Director in the Structured and Alternative
Solutions Group of ML & Co. Since November 2006, he
has held the position of Vice President and Treasurer of Managed
Account Advisors LLC. From September 2006 through 2007,
Mr. Hillman was a Director in the Global Wealth Management
Market and Investments & Origination Group of our
distributor. In 2006, he was a Director of Citigroup’s
Alternative Investments Tax Advantaged Short Term Fund and the
Korea Equity Inc. Fund. From January to September 2006,
Mr. Hillman was an independent consultant. From 1999 to
2006, he was a Managing Director of The Bank of New York, Inc.
Mr. Hillman has a Bachelor of Science degree from Fordham
University and is a member of the American Institute of
Certified Public Accountants. He is also a Certified Public
Accountant.
Kevin A. Porter is our Chief Investment Officer. Since 2005, he
has also held the position of Director in the Global Commercial
Real Estate Group of ML & Co., which is an affiliate
of our advisor, working in both the principal investment and
financing activities of ML & Co. Mr. Porter has
nearly 20 years of experience in commercial real estate
investment and capital markets. From 2002 to 2005, he was a
Director in the Real Estate Finance Group of
Standard & Poor’s based in Boston where
Mr. Porter provided risk management, investment advisory
and quantitative analytical services on a global basis to
institutional commercial real estate investors. Previously, he
has served as the Vice President for Acquisitions and Finance
for a Philadelphia-based regional commercial real estate
investment firm, as Senior Manager with KPMG Peat Marwick based
in New York advising institutional clients on real estate
investment management and capital markets issues, and as an
Investment Officer with Morgan Stanley Mortgage Capital in New
York. Mr. Porter has a Bachelor of Arts degree from the
University of Pennsylvania and a Master of Business
Administration from the University of Texas. He has been a
panelist and speaker at numerous professional association
conferences and has authored professional articles for
Journal of Real Estate Finance, Capital Sources for
Real Estate and Midwest Real Estate News.
Keith A. Jones is our Secretary. Since 2007, he has also held
the position of Vice President of Strategic Initiatives, Real
Estate, in the Global Investment and Insurance Solutions Group
of ML & Co., which is an affiliate of our advisor,
where he is responsible for developing real estate related
investment products and services for use by financial advisors.
From 2005 to 2007, Mr. Jones held the position of Analyst
within the Financial Products Group of ML & Co.
Mr. Jones has a Bachelor of Business Administration degree
from the University of Colorado.
Executive
Officer Compensation
We will not pay any compensation to our executive officers. Each
of our executive officers is also an officer of our advisor and
receives compensation pursuant to employment arrangements with
our advisor.
Limited
Liability and Indemnification
Our organizational documents limit the personal liability of our
stockholders, directors and officers for monetary damages. The
Maryland General Corporation Law permits a corporation to
include in its charter a provision limiting the liability of its
directors and officers to the corporation and its stockholders
for money damages, except for liability resulting from
(1) actual receipt of an improper benefit or profit in
money, property or services or (2) active and deliberate
dishonesty established by a final judgment and which is material
to the cause of action. We also maintain a directors and
officers liability insurance policy. The
Maryland General Corporation Law also allows directors and
officers to be indemnified against judgments, penalties, fines,
settlements and reasonable expenses actually incurred in
connection with a proceeding unless the following can be
established:
•
an 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.
In spite of the above provisions of the Maryland General
Corporation Law, our charter provides that our directors, our
advisor and its affiliates will be indemnified by us for any
loss or liability suffered by them, and will be held harmless
for any loss or liability suffered by us, only if all of the
following conditions are met:
•
the indemnitee determined, in good faith, that the course of
conduct which caused the loss, liability or expense was in our
best interests;
•
the indemnitee was acting on our behalf or performing services
for us;
•
in the case of affiliated directors, our advisor or its
affiliates, the liability or loss was not the result of
negligence or misconduct by the party seeking
indemnification; and
•
in the case of independent directors, the liability or loss was
not the result of gross negligence or willful misconduct by the
party seeking indemnification.
In addition, any indemnification or any agreement to hold
harmless is recoverable only out of our assets and not from our
stockholders.
We have agreed to indemnify and hold harmless our advisor and
its affiliates performing services for us from specific claims
and liabilities arising out of the performance of their
obligations under the advisory agreement. As a result, we and
our stockholders may be entitled to a more limited right of
action than we would otherwise have if these indemnification
rights were not included in the advisory agreement.
Notwithstanding the forgoing, any provision of Maryland law or
our organizational documents, we may not indemnify or hold
harmless our directors and officers or the advisor, its
affiliates or any of their respective officers, directors,
partners or employees in any manner that would be inconsistent
with the NASAA REIT Guidelines.
The general effect to investors of any arrangement under which
any of our controlling persons, directors or officers are
insured or indemnified against liability is a potential
reduction in distributions resulting from our payment of
premiums, deductibles and other costs associated with such
insurance or, to the extent any such loss is not covered by
insurance, our payment of indemnified losses. In addition,
indemnification could reduce the legal remedies available to us
and our stockholders against the indemnified individuals;
however, these provisions do not reduce the exposure of our
directors and officers to liability under federal or state
securities laws, nor do they limit our stockholders’
ability to obtain injunctive relief or other equitable remedies
for a violation of a director’s or an officer’s duties
to us or our stockholders, although the equitable remedies may
not be an effective remedy in some circumstances.
The SEC and some state securities regulators take the position
that indemnification against liabilities arising under the
Securities Act is against public policy and unenforceable.
Indemnification of our directors, our advisor or its affiliates,
will not be allowed 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:
•
there has been a successful adjudication on the merits of each
count involving alleged securities law violations;
•
such claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction; or
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 the state in
which our securities were offered as to indemnification for
violations of securities laws.
Our operating partnership must also indemnify us and our
directors, officers and other persons we may designate against
damages and other liabilities in our capacity as general
partner. See “Operating Partnership Agreement.”
Our
Advisor
We are externally managed and advised by NorthEnd Realty
Advisors LLC, an affiliate of ML & Co. that was formed
as a Delaware limited liability company on August 25, 2008.
Pursuant to an advisory agreement, our advisor will be
responsible, subject to oversight by our board of directors, for
sourcing our investment opportunities and for making decisions
related to the acquisition, management and disposition of our
assets and the selection and supervision of our sub-advisor, in
accordance with our investment objectives, guidelines, policies
and limitations. Our advisor has engaged our sub-advisor to
perform substantially all of these functions. In performing its
supervisory duties and other services for us, our advisor will
rely upon the personnel of ML & Co., one of the
world’s leading financial management, capital markets and
advisory companies, with more than 56,000 employees
worldwide in 37 countries, and with approximately $1.5 trillion
in client assets as of September 26, 2008. ML &
Co. is also the indirect parent company of NorthEnd Holding. On
September 15, 2008, ML & Co. entered into an
Agreement and Plan of Merger (as amended by Amendment No. 1
dated as of October 21, 2008) with Bank of America
Corporation. Pursuant to the Agreement and Plan of Merger, on
January 1, 2009, a wholly owned subsidiary of Bank of
America Corporation merged with and into ML & Co.,
with ML & Co. continuing as the surviving corporation
and a subsidiary of Bank of America Corporation.
NorthEnd Advisor will be managed by members of ML &
Co.’s Global Principal Investments Group, or GPI. GPI has a
highly experienced team in investments in commercial real estate
properties and real estate related assets throughout the world
and has been successfully investing proprietary capital of
affiliates of ML & Co. for over ten years. As the
principal real estate investment arm of ML & Co., GPI
has a long history of investing the firm’s proprietary
capital in commercial real estate properties and real estate
related assets throughout the world. The GPI team has strong
knowledge of, and networks in, local real estate markets
throughout the U.S. and Canada. GPI has made investments in
commercial real estate properties and real estate related assets
in 15 countries over the course of the last ten years.
All of our day-to-day operations will be managed by our advisor
and substantially all of such management services will be
performed by our sub-advisor. We will have no employees, and
each of our executive officers is also an executive officer of
our advisor. The executive offices of our advisor are located at
4 World Financial Center, New York, NY10080.
The following sets forth certain information with respect to the
executive officers and key personnel of our advisor.
Name
Age
Position
Douglas W. Sesler
47
Chief Executive Officer and Director
Paul F. Morton III
44
President and Director
James E. Hillman
51
Chief Financial Officer
Kevin A. Porter
43
Chief Investment Officer
Keith A. Jones
26
Secretary
The
Advisory Agreement
Our board of directors will at all times have ultimate oversight
and policy-making authority, including responsibility for
governance, financial controls, compliance and disclosure with
respect to the company and
our operating partnership. Pursuant to an advisory agreement,
which will be effective as of the initial offering date,
however, we will delegate to our advisor authority to manage our
day-to-day business in accordance with our investment
objectives, strategy, guidelines, policies and limitations. Our
advisor will have a fiduciary responsibility to act on our and
our stockholders’ behalf. We have agreed to indemnify and
hold harmless our advisor and its affiliates performing services
for us from specific claims and liabilities arising out of the
performance of their obligations under the advisory agreement.
Services
Pursuant to the terms of the advisory agreement, our advisor
will have responsibility to, among other things:
•
participate in formulating our financial, valuation and other
policies, consistent with achieving our investment objectives;
•
serve as our investment and financial advisor and provide
research and economic and statistical data in connection with
our assets and investment policies;
•
determine the proper allocation of our investments between
commercial real estate properties, real estate related assets
and cash, cash equivalents and other short-term investments;
•
select our sub-advisor and joint venture and strategic partners
and structure corresponding agreements;
•
locate, analyze and select potential investments, structure the
terms of such investments and arrange for financing or
refinancing in connection with investments;
•
select our independent appraisers;
•
monitor and manage our investments and provide periodic reports
to our board of directors on their performance; and
•
determine when we should sell our investments and reinvest the
proceeds.
The above summary is provided to illustrate the material
functions which our advisor will perform for us as our advisor
and it is not intended to include all of the services which may
be provided to us by our advisor or third parties. The advisory
agreement provides that an advisor may engage one or more
sub-advisors to assist our advisor in providing these services.
Term
and Termination Rights
The initial term of the advisory agreement will be for one year
from the initial offering date, with one year renewals at the
end of each year thereafter, subject to approval of our board of
directors. The advisory agreement may be terminated:
•
immediately by us for “cause;”
•
upon 60 days’ written notice by us without cause or
penalty upon the vote of a majority of our independent
directors; or
•
upon 60 days’ written notice by our advisor.
“Cause” is defined in the advisory agreement to mean
fraud, criminal conduct, willful misconduct or willful or
negligent breach of fiduciary duty by our advisor in connection
with performing its duties under the advisory agreement.
In the event the advisory agreement is terminated, our advisor
will be entitled to receive its prorated management fee through
the date of termination.
As compensation for its services provided pursuant to the
advisory agreement, we will pay our advisor a management fee
comprised of two separate components:
(1)
a fixed rate component of 1.25% per annum of our average daily
NAV, payable quarterly in arrears; and
(2)
a performance-based component calculated based on our total
return to stockholders (defined as increases in NAV plus
distributions), payable annually in arrears.
We will accrue both components of the management fee on a daily
basis. The performance-based component will be calculated such
that for any calendar year in which the total return to our
stockholders as a percentage of their invested capital exceeds
7%, which we refer to as the 7% priority return, our advisor
will receive one-half of the excess total return above the 7%
priority return, but in no event will we pay our advisor more
than 10% of the aggregate total return for such year. Therefore,
payment of the performance-based component of the management fee
(i) is contingent upon our actual annual total return
exceeding the 7% priority return, (ii) will vary in amount
based on our actual performance and total weighted average
invested stockholder capital during each year and
(iii) cannot cause our total return as a percentage of
stockholders’ invested capital for the year to be reduced
below 7%.
Our advisor will calculate our total return as the sum of
capital appreciation, measured by increases in NAV, and
cumulative distributions declared. The 7% priority return
calculation will reflect fluctuations in the actual number of
shares outstanding during the year, such that for shares
outstanding for less than 12 months (because of new share
issuances
and/or share
redemptions) a prorated 7% annual total return will be
determined for the partial period those shares were outstanding
based on the NAV per share associated with them. In order to
establish our total return and the accrual of the
performance-based component of the management fee, on a daily
basis advisor will utilize the annualized internal rate of
return on stockholders’ invested capital starting from the
last calendar day of the prior calendar year, which we refer to
as Day 1, and ending on the then current day, which we refer to
as Day N. For such internal rate of return calculation,
(i) the beginning investment value shall be equal to our
NAV at the end of Day 1 (after accrual of all fees and expenses
attributable to that year), (ii) the ending investment
value shall be our NAV after all expenses, but prior to any
subscriptions, redemptions and distributions, on Day N, and
(iii) for each day between Day 1 and Day N net daily
investment inflows or outflows, as applicable, will be factored
in, specifically the combined total of all share redemptions and
distributions less the total of the gross proceeds we receive
from the sale of shares in our continuous public offering on
such day.
On a daily basis, our advisor will accrue a liability reserve
account equal to the amount due for both the fixed component and
the performance-based component of the management fee, and this
accrual will be reflected daily in our NAV per share
calculation. On each day our advisor will calculate our
year-to-date total return and, based on that return, adjust the
balance of the management fee reserve accrual to reflect the
estimated amount due on account of the performance-based
component. We will calculate and pay the performance-based
component of the management fee to our advisor after the end of
each calendar year. For our first year of operations the
performance-based component will be calculated for the period
from the initial offering date through the end of the calendar
year on the basis of a prorated 7% priority return and our
actual total return for such partial calendar year. In the event
the advisory agreement is terminated on a day other than the
last business day of a calendar year, the fee will be calculated
on the basis of a prorated 7% priority return and our actual
total return to stockholders through the date of termination,
and will be paid to our advisor promptly following completion of
the necessary calculations. If our total return is less than the
7% priority return in any given calendar year, our advisor will
not be entitled to receive any performance-based fee for that
year. If our total return exceeds the 7% priority return in a
particular calendar year, a performance-based fee is payable to
our advisor even if total return to stockholders (or any
particular stockholder) on a cumulative basis over any longer or
shorter period has been less than 7% per annum. The advisor will
not be obligated to return any portion of management fees paid
based on our subsequent performance.
Subject to certain limitations, we will reimburse our advisor
for costs and expenses it incurs in connection with the services
it provides to us, including, but not limited to:
(1) organization and offering expenses, which include,
legal, accounting and printing fees and expenses attributable to
our organization, preparation of the registration statement,
qualification of our common stock for sale in the various states
and filing fees incurred by our advisor; (2) the annual
cost of goods and services used by us and obtained from third
parties, including brokerage fees paid in connection with the
purchase and sale of securities; (3) expenses of managing
and operating our properties, whether payable to an affiliate or
a non-affiliated person; and (4) acquisition expenses
related to the selection and acquisition of assets, whether or
not a property is actually acquired. Our advisor has agreed to
defer reimbursement of the organization and offering expenses it
incurred on our behalf through the initial offering date, which
we will pay to our advisor ratably in 60 equal monthly
installments following the initial offering date. We will also
reimburse our advisor for out-of-pocket expenses in connection
with providing services to us, including reasonable salaries and
wages, benefits and overhead of all employees directly involved
in the performance of services to us, provided that no
reimbursement shall be made for costs of such employees of our
advisor or its affiliates to the extent that such employees
perform services for which our advisor receives a separate fee,
and we will not reimburse our advisor for any portion of the
compensation payable to our executive officers.
Our advisor must reimburse us at least quarterly for
reimbursements paid to our advisor in any four consecutive
fiscal quarters to the extent that such reimbursements cause our
operating expenses to exceed the greater of: (1) 2% of our
average invested assets; and (2) 25% of our net income. For
purposes of these limits, (i) total operating expenses are
our aggregate expenses of every character paid or incurred as
determined under GAAP, including the management fee, but
excluding: (a) 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 tax incurred in connection
with the issuance, distribution, transfer and registration of
our shares; (b) interest payments; (c) taxes;
(d) non-cash expenditures such as depreciation,
amortization and bad debt reserves; and (e) acquisition
fees, acquisition expenses, brokerage fees on resale of
commercial real estate properties and other expenses connected
with the acquisition, disposition, management 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);
(ii) invested assets are our total assets (other than
intangibles) invested, directly or indirectly, in real estate
and other real estate related assets, calculated at cost before
deducting depreciation, bad debts and similar non-cash reserves,
less our total liabilities, calculated quarterly on a basis
consistently applied; and (iii) net income is our total
revenues less our total expenses excluding reserves for
depreciation, bad debts and other similar non-cash reserves.
Notwithstanding the foregoing, to the extent that operating
expenses payable or reimbursable by us exceed these limits and
the independent directors determine that the excess expenses
were justified based on unusual and nonrecurring factors which
they deem sufficient, our advisor may be reimbursed in future
periods for the full amount of the excess expenses, or any
portion thereof. Within 60 days after the end of any fiscal
quarters for which our total operating expenses for the four
consecutive fiscal quarters then ended exceed these limits, we
will send our stockholders a written disclosure of such fact,
together with an explanation of the factors our independent
directors considered in arriving at the conclusion that such
excess expenses were justified. Our independent directors will
review the total fees and reimbursements for operating expenses
paid to our advisor to determine if they are reasonable in light
of our performance, our net assets and our net income and the
fees and expenses of other comparable unaffiliated REITs.
Our independent directors will evaluate at least annually
whether the compensation that we contract to pay to our advisor
is reasonable in relation to the nature and quality of services
performed and that such compensation is within the limits
prescribed by our charter. The independent directors will
supervise the performance of our advisor and the compensation we
pay to it to determine that the provisions of the advisory
agreement are being carried out. This evaluation will be based
on the factors set forth below, as well as any other factors
deemed relevant by the independent directors:
•
the amount of fees paid to our advisor in relation to the size,
composition and performance of our investments;
the success of our advisor in generating investments that meet
our investment objectives;
•
rates charged to other externally advised REITs and other
similar investment entities by advisors performing similar
services;
•
additional revenues realized by our advisor and its affiliates
through their relationship with us;
•
the quality and extent of the services and advice furnished by
our advisor;
•
our advisor’s performance in selecting, overseeing and
managing our sub-advisor; and
•
the performance of the assets, including income, conservation or
appreciation of capital, frequency of problem investments and
competence in dealing with distress situations.
Our
Sub-Advisor
Our advisor has engaged BlackRock Realty Advisors Inc., a
subsidiary of BlackRock, Inc., to serve as our sub-advisor and
perform the functions related to selecting and managing our
investments and carrying out our investment strategy. BlackRock
Realty is a full service U.S. real estate equity investment
manager and asset manager, managing approximately
$23.3 billion in assets nationwide as of September 30,2008, in all major property types on behalf of investors in
commingled funds and separate account relationships. Through its
predecessors, BlackRock Realty has been providing real estate
advisory services in the U.S. since 1972. As of
September 30, 2008, BlackRock Realty had more than 250 real
estate professionals engaged in investing and managing these
private market assets, including portfolio management,
acquisitions, asset management, dispositions, finance, research,
valuation, legal and accounting. BlackRock Realty is
headquartered in New Jersey, with corporate offices in Boston,
San Francisco, Chicago, and Newport Beach, California.
The parent company of BlackRock Realty, BlackRock, Inc., is a
leading provider of global investment management, risk
management, and advisory services. As of September 30,2008, the firm managed approximately $1.26 trillion across
equity, fixed income, real estate, liquidity and alternative
strategies. Clients include corporate, public and union pension
plans, insurance companies, mutual funds, endowments,
foundations, charities, corporations, official institutions and
individuals worldwide. Additionally, BlackRock, Inc. provides
risk management and advisory services that combine capital
markets expertise with proprietarily-developed systems and
technology for $7 trillion in assets. As of September 30,2008, ML & Co. owned approximately 48.5% of the
capital stock of BlackRock, Inc.
BlackRock Realty’s investment management history includes
the management of multiple commingled fund offerings in addition
to separate accounts. Since the beginning of 2004 through
September 30, 2008, BlackRock Realty has executed nearly
685 commercial realty property transactions totaling over
$26 billion of property value. BlackRock Realty currently
manages two U.S. multi-sector open-end commingled property
funds which employ an investment strategy similar to ours,
BlackRock Granite Property Fund, Inc. and BlackRock Diamond
Property Fund, Inc.
BlackRock Granite Fund is a privately held REIT that
maintains a U.S. property strategy seeking real estate
returns and liquidity appropriate to a fund with substantial
holdings in stabilized apartment, industrial, office and retail
properties. As of September 30, 2008, BlackRock Granite
Fund had a total net asset value of $3.2 billion. Since the
beginning of 2004 through September 30, 2008, BlackRock
Granite Fund has executed 140 acquisitions and 87 dispositions
of direct property investments. As of September 30, 2008,
its portfolio consisted of 21 office properties, 29
multi-housing properties, 27 retail properties and 28 industrial
properties.
BlackRock Granite Fund’s investment objective is to provide
current income with the potential for long-term capital
appreciation and periodic liquidity. It seeks to invest largely
in investment-grade properties, generally ranging from
$25 million to $100 million in value, that are
substantially leased and diversified by property type in
metropolitan areas that have been targeted as having the
potential for generating above-average, risk-adjusted returns,
In addition, BlackRock Granite Fund seeks to create additional
positive total return by selectively pursuing properties in
submarkets and locations where value can be added through
additional leasing, operating improvements, renovations and
selective forward commitments and development.
BlackRock Granite Fund seeks diversification by property type,
life cycle, geographic region and economic base across all
sectors in U.S. property. BlackRock Granite Fund is
currently focused on prime locations in major metropolitan areas
and regional business growth markets that have high average job
and demographic growth.
As of September 30, 2008, BlackRock Granite Fund generated
annualized holding period returns, net of fees, of 2.6% for one
year, 12.6% for three years and 11.4% for five years. For
periods before the fourth quarter of 2006, the information
presented includes the performance of Tower Fund, a commingled
insurance company real estate separate account with a core
investment strategy. On September 30, 2006, substantially
all of the unit holders of Tower Fund received shares of
BlackRock Granite Fund. BlackRock Realty or a predecessor also
managed Tower Fund from January 1, 1994, and the investment
professionals with primary responsibilities for the management
of Tower Fund prior to January 1, 1994, became employed by
the predecessor of BlackRock Realty on such date.
BlackRock Diamond Fund is a privately held REIT that
seeks to invest directly or indirectly in real estate and real
estate related assets across all property types in which
possibilities for short-term capital appreciation exist.
BlackRock Diamond Fund began operations on March 31, 2005.
As of September 30, 2008, BlackRock Diamond Fund had a
total net asset value of $1.1 billion. Since its inception,
BlackRock Diamond Fund has executed 45 acquisitions and 3
dispositions of direct property investments. As of
September 30, 2008, its portfolio consisted of 13 office
properties, 16 apartment properties, 3 retail properties and 8
industrial properties and 2 parcels of land.
BlackRock Diamond Fund’s investment objective is to provide
investors with a long-term investment portfolio constructed to
produce strong growth and periodic liquidity. It seeks to
achieve its investment objective through the investment in
high-quality properties in top-tier and high-growth markets
while weighted to traditional value-add strategies at most
points in the cycle, including leasing, renovations,
repositioning, expansions, forward commitments and developments.
BlackRock Diamond Fund seeks diversification by property type,
geographic region and economic base across all sectors in
U.S. commercial real estate while actively managing each
asset’s value-add life cycle. BlackRock Diamond Fund is
currently focused on prime locations in major metropolitan areas
and regional business growth markets that have high average job
and demographic growth.
As of September 30, 2008, BlackRock Diamond Fund generated
annualized holding period returns, net of fees, of −1.2%
for one year, 11.8% for three years and 13.9% since its
inception date of March 31, 2005.
The following sets forth certain information with respect to the
key personnel of our sub-advisor who will be primarily
responsible for the performance of services to us. In addition
to the individuals listed below, BlackRock Realty’s
portfolio management team is supported by of approximately 180
individuals throughout its Asset Management, Transactions,
Account Manager, Portfolio Strategy and Risk Analytics, and
Legal and Operations Groups with an average of approximately
24 years of senior professional experience.
Name
Age
Position
Jay K. Alexander
43
Managing Director
Kathy Malitz
46
Managing Director
Jay K. Alexander is a Managing Director and the Chief Investment
Officer for BlackRock Realty, and the Senior Portfolio Manager
for the BlackRock Granite Property Fund, BlackRock Realty’s
institutional open-ended, real estate equity fund. As CIO, he
oversees U.S. based investment strategies to minimize risk
and maximize returns. He is a member of the BlackRock Realty
Management Committee and Chairman of the Americas Investment
Committee. From 1995 to 2003, Mr. Alexander was the
Managing Director and Portfolio Manager for the Principal Real
Estate Separate Account (RESA) of the Principal Financial Group.
From 1993 to 1995, he was the Area Asset Manager of the
Principal Financial Group. Mr. Alexander has a Bachelor of
Arts degree from DePauw University and a Master of Business
Administration from Indiana University. He is a member of the
National Council of Real Estate Investment Fiduciaries, Pension
Real Estate Association and the Urban Land Institute.
Kathy Malitz, CFA and MAI, is a Managing Director of our
sub-advisor. Prior to her current position, she was Acquisitions
Director of our sub-advisor for the Northeast region. She is a
member of the BlackRock Realty Management Committee and Americas
Investment Committee. During Ms. Malitz’s
23 years of real estate experience, she has been
responsible for originating, analyzing and negotiating
acquisitions, sales, debt and lease transactions for all
property types. Prior to joining a predecessor of BlackRock
Realty in 1994, Ms. Malitz was an assistant vice president
with the Chemical Banking Corporation. Previously,
Ms. Malitz was a vice president with Metmor Financial, Inc.
She also held the position of commercial real estate investment
advisor with both Huberth & Peters, Inc. and Abramson
Brothers Realty Investments.
In 1981, Ms. Malitz received her Bachelor of Business
Administration degree from Iona College and a Master of Business
Administration from Hagan Graduate School of Business, Iona
College. Ms. Malitz is a licensed real estate broker in New
York State and is a Certified General Real Estate Appraiser.
The
Sub-Advisory Agreement
Our advisor will enter into a sub-advisory agreement with our
sub-advisor, pursuant to which our sub-advisor will provide
advisory services relating to real estate acquisitions and
dispositions, property management and communications with
investors. Our sub-advisor will provide services related to the
acquisition, management and disposition of assets and the
selection of property managers and other service providers, in
accordance with our investment objectives, strategy, guidelines,
policies and limitations. In addition, our sub-advisor is
primarily responsible for, among other things, valuing our
commercial real estate properties and real estate related assets
in accordance with valuation guidelines approved by our board of
directors. Our sub-advisor also provides marketing, investor
relations and other administrative services. The term of the
sub-advisory agreement will continue for a one-year period with
automatic renewals for additional one-year terms unless
otherwise terminated by the parties. The sub-advisory agreement
may be terminated (1) immediately by our advisor in the
event NorthEnd Advisor’s advisory agreement is terminated,
(2) on 60 days’ written notice by either party
for “cause,” (3) upon one-year written notice by
our sub-advisor or (4) upon 90 days prior written
notice by our advisor at any time following the third
anniversary of the commencement of this offering. The fees paid
to our sub-advisor will not be paid by us, but will instead be
paid by our advisor out of the management fee that we will pay
to our advisor. The management fee our sub-advisor receives from
our advisor will include both a fixed rate component and
performance-based component, and will vary based upon our NAV.
Assuming we sell the maximum offering, we expect our
sub-advisor’s management fee will be, in the aggregate over
time, approximately 50% of the management fee that our advisor
receives from us. The sub-advisor will also be reimbursed for
expenses incurred on our behalf. In the event the sub-advisory
agreement is terminated, the sub-advisor will be paid all
accrued and unpaid fees and expense reimbursements. The expense
reimbursements that we will pay to our advisor include expenses
incurred by our sub-advisor on our behalf that our advisor is
required to reimburse to our sub-advisor under the sub-advisory
agreement. Notwithstanding the terms of our advisor’s
engagement of our sub-advisor, our advisor will be ultimately
responsible to us for the performance of all of the matters
entrusted to it pursuant to the advisory agreement.
Our
Distributor
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
which we refer to as our distributor, is distributing shares of
our common stock in this offering on a best efforts basis. Our
distributor is a wholly owned subsidiary of ML & Co.
and is a registered broker-dealer and a member of FINRA. Our
distributor will advise us regarding this offering, manage our
relationships with participating broker-dealers and financial
advisors and provide assistance in connection with compliance
matters relating to the offering, including compliance regarding
any sales literature that we may prepare.
We will pay our distributor an asset-based distribution fee at
the end of each month equal to (1) the number of
outstanding shares of our common stock purchased in our primary
offering at least 13 months prior to such month end,
multiplied by (2) 1/12th of 0.35% of our average NAV
per share during each month. The distribution fee will be
calculated as of the last day of each month and payable in
arrears beginning the 13th month following the initial
purchase of shares of our common stock in our primary offering.
The
distribution fee will not be paid with respect to shares issued
under our distribution reinvestment plan. Our distributor may
reallow up to 100% of this distribution fee to participating
broker-dealers based on such factors as the level of services
that such parties perform in connection with the distribution of
shares, including ministerial, record-keeping, sub-accounting,
stockholder services and other administrative services. We will
cease paying the distribution fee at the earlier of
(a) 30 years from the effective date of the
registration statement of which this prospectus forms a part or
(b) the date at which the aggregate asset-based
distribution fees and other items of underwriting compensation
that we have paid equal or exceed 10% of the gross proceeds from
our primary offering (i.e., excluding proceeds from sales
pursuant to our distribution reinvestment plan), calculated as
of the same date that we calculate the aggregate distribution
fees.
Moreover, we may pay additional amounts to our distributor, its
employees and to participating broker-dealers for certain costs
and expenses related to this offering, which may include, but
are not limited to: (1) legal counsel to our distributor,
including fees and expenses incurred prior to the date of this
prospectus; (2) customary travel, lodging, meals and
reasonable entertainment expenses incurred in connection with
this offering; (3) attendance at broker-dealer sponsored
conferences, educational conferences sponsored by us, industry
sponsored conferences and informational seminars; and
(4) customary promotional items. Such costs and expenses
will be considered underwriting compensation under applicable
FINRA rules, and therefore included in the calculation of when
we must cease paying distribution fees as described above. We
will also reimburse our distributor for reimbursements it may
make to participating broker-dealers for bona fide due
diligence expenses, but only if the requests for reimbursements
are supported by a detailed and itemized invoice.
Legal
Proceedings
ML &
Co.
ML & Co. and certain of its subsidiaries, including
our distributor, which we refer to collectively as Merrill
Lynch, have been named as parties in various legal actions,
including arbitrations, class actions and other litigation
arising in connection with its activities as a global
diversified financial services institution. Some of the legal
actions include claims for substantial compensatory
and/or
punitive damages or claims for indeterminate amounts of damages.
Merrill Lynch is also involved in investigations and proceedings
by governmental and self-regulatory agencies. Below is a list of
certain cases involving Merrill Lynch that may be relevant to
your evaluation of a potential investment in our shares.
•
Beginning in 1998, Merrill Lynch was named among 24 defendants
in a purported class action alleging that underwriters conspired
to fix the “fee” paid to purchase certain initial
public offering securities at 7% in violation of antitrust laws.
•
Beginning in 2001, Merrill Lynch was named as one of the
defendants in approximately 110 securities class action
complaints alleging that dozens of underwriter defendants
artificially inflated and maintained the stock prices of
securities by creating an artificially high post-initial public
offering demand for shares.
•
Beginning in 2006, a purported class action was filed against 11
financial services firms, including Merrill Lynch, alleging that
the defendants violated federal antitrust laws by charging
unearned fees on short sales by their clients even when they
failed to borrow
and/or
deliver stock in support of those short sales.
•
Beginning in 2006, 37 purchasers of securities of NovaStar
Financial filed an action against 11 financial services firms,
including Merrill Lynch, alleging that the defendants improperly
depressed the price of NovaStar Financial shares by facilitating
short sales that did not comply with regulatory requirements.
•
Beginning in 2007, Overstock.com brought an action against 12
investment banks, including Merrill Lynch, alleging that they
violated state law by improperly facilitating short sales of
Overstock.com which artificially depressed the price of its
shares.
Beginning in 2007, purported class actions were filed against
Merrill Lynch on behalf of persons who acquired Merrill Lynch
securities. On May 21, 2008, plaintiffs in the securities
class actions filed a consolidated amended complaint on behalf
of persons who acquired Merrill Lynch common stock and certain
preferred stock between October 17, 2006 and
January 16, 2008. The complaint alleges that the
defendants, including Merrill Lynch and certain present and
former officers, misrepresented and omitted facts related to
Merrill Lynch’s exposure to subprime collateralized debt
obligations in violation of the federal securities laws. The
complaint seeks damages in an unspecified amount related to the
drop in value of Merrill Lynch shares. On July 21, 2008,
Merrill Lynch and other defendants filed motions to dismiss.
•
Beginning in 2007, purported shareholder derivative actions were
brought against certain present or former officers and directors
of Merrill Lynch in which Merrill Lynch is named as a nominal
defendant. On May 21, 2008, plaintiffs in the shareholder
derivative actions filed a consolidated amended complaint for
alleged breaches of fiduciary duty and other alleged violations
of state law in connection with Merrill Lynch’s exposure to
subprime collateralized debt obligations and compensation
provided to its former CEO. The complaint seeks damages in an
unspecified amount and certain corporate governance reforms. On
July 21, 2008, Merrill Lynch and other defendants filed
motions to dismiss the action. On July 24, 2008, N.A.
Lambrecht filed a similar shareholder derivative action,
Lambrecht v. O’Neal, et al., in the U.S. District Court for
the Southern District of New York. Lambrecht alleges that she
made a demand on ML & Co.’s board of directors to
initiate suit on behalf of Merrill Lynch before she filed the
derivative action, and that her demand was rejected. Merrill
Lynch intends to vigorously defend itself in this action.
Merrill Lynch is also cooperating in government investigations
related to its exposure to subprime collateralized debt
obligations.
•
Beginning in 2008, a purported class action was filed against
Merrill Lynch on behalf of persons who purchased and continue to
hold auction rate securities offered for sale by Merrill Lynch.
The complaint alleges that Merrill Lynch failed to disclose
material facts about auction rate securities. Merrill Lynch also
has received requests for information from, and is cooperating
with, various governmental agencies regarding auction rate
securities, including the recent failure of auctions.
•
Beginning in 2008, the City of Cleveland filed a lawsuit against
21 financial services firms, including Merrill Lynch, alleging
that the securitization of sub-prime mortgages created a
“public nuisance” and that defendants are, therefore,
liable for the cost incurred by the City of Cleveland related to
foreclosures.
•
Beginning on November 13, 2007, purported class actions
were filed in the Unites State District Court for the Southern
District of New York against Merrill Lynch and certain of its
present and former officers and directors on behalf of the
Merrill Lynch 401(K) Savings and Investment Plan, Retirement
Accumulation Plan, Employee Stock Ownership Plan and a class of
similarly situated plan participants.
•
On May 21, 2008, plaintiffs in the ERISA class actions
filed a consolidated amended complaint on behalf of the Merrill
Lynch 401(k) Savings and Investment Plan, the Merrill Lynch
Retirement Accumulation Plan, and the Merrill Lynch Employee
Stock Ownership Plan. The complaint alleges that between
September 25, 2006 and May 6, 2008, Merrill Lynch and
individual defendants violated ERISA by permitting employees to
invest plan assets in Merrill Lynch common stock even though
they knew or should have known that such investments were unduly
risky. The complaint seeks an order compelling defendants to
reimburse the plans for losses of an unspecified amount related
to the alleged violations. On July 21, 2008, Merrill Lynch
and the other defendants filed a motion to dismiss the action.
•
On July 31, 2008, the Securities Division of the
Commonwealth of Massachusetts filed an administrative complaint
against Merrill Lynch. The complaint alleges that Merrill Lynch
misrepresented and omitted material facts in connection with the
sale of auction rate securities and seeks relief that includes
an order requiring Merrill Lynch to offer rescission of sales of
auction rate securities at par. Merrill Lynch also is
cooperating in investigations by other regulators who have
expressed an interest in obtaining relief for investors who have
not been able to sell their auction rate securities.
Given the number of actions against Merrill Lynch, some are
likely to result in adverse judgments, penalties, injunctions,
fines, or other relief. In view of the inherent difficulty of
predicting the outcome of such matters, particularly in cases in
which claimants seek substantial or indeterminate damages, we
cannot predict what the eventual loss or range of loss related
to such matters will be. However, we do not anticipate that any
loss relating to these matters will have a material adverse
impact on our advisor’s ability to fulfill its obligations
to us pursuant to the advisory agreement or on our
distributor’s ability to perform its services to us
relating to the distribution of shares of our common stock in
this offering.
BlackRock,
Inc.
BlackRock, Inc. has received subpoenas from various
U.S. federal and state governmental and regulatory
authorities and various information requests from the SEC in
connection with industry-wide investigations of U.S. mutual
fund matters. From time to time, BlackRock, Inc. is also subject
to other regulatory inquiries and proceedings.
BlackRock, Inc. and certain of its subsidiaries have been named
as defendants in various legal actions, including arbitrations,
class actions, and other litigation and regulatory proceedings
arising in connection with BlackRock, Inc.’s activities.
Entities that BlackRock, Inc. now owns may be named as
defendants in legal and regulatory proceedings related to a 2006
transaction in which ML & Co. contributed its
investment management business, Merrill Lynch Investment
Managers, or MLIM, to BlackRock, Inc. in exchange for an
aggregate of 65 million shares of BlackRock, Inc. common
and non-voting participating preferred stock (the “MLIM
Transaction”). ML & Co. has agreed to indemnify
BlackRock, Inc. for certain pre-closing liabilities related to
legal and regulatory proceedings acquired by BlackRock, Inc. in
the MLIM Transaction. In the event that BlackRock, Inc.-owned
entities are named as defendants in legal or regulatory
proceedings related to the MLIM Transaction, BlackRock,
Inc.’s reputation may be negatively impacted. Additionally,
certain of the investment funds that BlackRock, Inc. manages are
subject to lawsuits, any of which could potentially harm the
investment returns of the applicable fund, result in BlackRock,
Inc. being liable to the funds for any resulting damages or
negatively impact BlackRock, Inc.’s reputation.
We will pay our advisor and our distributor the fees and
reimbursements described below in connection with performing
services for us. We will not pay acquisition or disposition fees
to our advisor or its affiliates in connection with the purchase
or sale of our investments.
Type of Compensation –
Recipient
Method of Compensation
Estimated Amount
Selling
Commission(1) –
Our Distributor; Your
Financial Advisor
You will pay selling commissions of up to 2.5% of the NAV per
share of the shares you purchase in the primary offering as of
the date of purchase. Our distributor may, in its discretion,
reallow to participating broker-dealers, if any, up to 100% of
the selling commission.
Selling commissions will not be paid for shares purchased in
fee-based accounts or for shares purchased in our distribution
reinvestment plan, and are subject to reduction for volume
purchases.
The actual amount will depend on the number of shares sold, the
NAV per share and the type of accounts that purchase shares.
Aggregate selling commissions will equal $2,439,024 if we sell
the minimum offering and $48,780,487 if we sell the maximum
offering, assuming that the full selling commission of 2.5% is
paid for each primary offering share, that our NAV per share
remains $10, that no volume discounts apply and no reallocation
of shares between our primary offering and our distribution
reinvestment plan.
Distribution
Fee(2) –
Our Distributor; Your
Financial Advisor
We will pay our distributor an asset-based distribution fee
following the end of each month equal to (a) the number of
outstanding shares of our common stock purchased in our primary
offering at least 13 months prior to such month end,
multiplied by (b)
1/12th of
0.35% of our average NAV per share during each month. The
distribution fee will be calculated as of the last day of each
month and payable in arrears beginning the
13th
month following the initial purchase of shares of our common
stock in our primary offering. The distribution fee will not be
paid with respect to shares issued under our distribution
reinvestment plan. Our distributor may, in its discretion,
reallow to participating broker-dealers, if any, up to 100% of
the distribution fee for services that such broker-dealers
perform in connection with the distribution of the shares of our
common stock.
Actual amounts depend upon our daily NAV and, therefore, cannot
be determined at this time. After 13 months following the
initial purchase of shares in our primary offering, the monthly
distribution fee will equal approximately $29,166 if we sell the
minimum offering and approximately $583,333 if we sell the
maximum offering, assuming that our NAV per share remains $10.
Organization and
Offering Expense
Reimbursement(3) –
Our Advisor
We will reimburse our advisor for organization and offering
expenses that it incurs on our behalf (other than selling
commissions and the distribution fee).
We estimate our organization and offering expenses to be between
approximately $3,130,000 and $5,290,000, depending on the size
of this offering.
We will not pay our advisor any acquisition, financing or other
similar fees in connection with making investments. We will
reimburse our advisor for out-of-pocket expenses in connection
with the acquisition of commercial real estate properties, real
estate related assets and other investments.
The actual amount will depend upon actual expenses incurred, and
therefore cannot be determined at this time.
Operating Expense
Reimbursement(5) –
Our Advisor
We will reimburse our advisor for out-of-pocket expenses in
connection with providing services to us, including reasonable
salaries and wages, benefits and overhead of all employees
directly involved in the performance of services to us other
than our executive officers, provided that no reimbursement
shall be made for costs of such employees of our advisor or its
affiliates to the extent that such employees perform services
for which our advisor receives a separate fee. The expense
reimbursements that we will pay to our advisor include expenses
incurred by our sub-advisor on our behalf.
Actual amounts are dependent upon actual expenses incurred, and
therefore cannot be determined at this time.
Management Fee – Our Advisor
We will pay our advisor a management fee equal to (i) a fixed
rate component of 1.25% per annum of our average daily NAV,
payable quarterly in arrears, plus (ii) a performance-based
component calculated on the basis of our total return to
stockholders, payable annually in arrears, such that for any
year in which our total return on stockholders’ capital
exceeds 7% per annum, our advisor will share in the excess total
return until it has received 10% of the aggregate total return
for such year. The management fee will be accrued daily for
purposes of determining our NAV per share. See
“Management—The Advisory Agreement—Management Fee
and Expense Reimbursements.”
Actual amounts depend upon our daily NAV and future performance
and, therefore, cannot be calculated at this time.
(1) Selling
commissions may be reduced or waived in connection with certain
categories of sales, such as sales for which a volume discount
applies, sales through investment advisors or banks acting as
trustees of fiduciaries, sales into fee-based accounts and sales
under our distribution reinvestment plan.
(2) We
will cease paying distribution fees at the earlier of
(1) 30 years from the effective date of the
registration statement of which this prospectus forms a part or
(2) the date at which the aggregate asset-based
distribution fees and other items of underwriting compensation
that we have paid equal or exceed 10% of the gross proceeds from
our primary offering (i.e., excluding proceeds from sales
pursuant to our distribution reinvestment plan), calculated as
of the same date that we calculate the aggregate distribution
fees.
(3) These
amounts represent estimated expenses incurred in connection with
the offering, including legal, accounting, printing, mailing and
filing fees and expenses, amounts paid to reimburse the
distributor for amounts it may pay to reimburse the bona fide
due diligence expenses of participating broker-dealers
supported by detailed and itemized invoices, reimbursements to
our advisor for costs in connection with preparing sales
materials, the cost of educational conferences held by us and
attendance fees and costs reimbursement for employees of our
affiliates to attend retail seminars conducted by participating
broker-dealers if any. We estimate that any organizational
expenses incurred will be de minimis. We will reimburse our
advisor for the organization and offering expenses incurred by
our advisor on our behalf through the escrow period on a ratable
basis over 60 calendar months. We will pay directly or reimburse
our advisor for those expenses that relate specifically to us as
general partner and as such should not be borne by the limited
partners of our operating partnership. Other expenses will be
paid by our operating partnership or reimbursed by it to our
advisor. Insofar as our operating partnership’s accounts
are consolidated with our financial statements under GAAP,
expenses we bear directly will not be reported separately from
expenses borne by our operating partnership. Our board of
directors will approve a detailed policy for allocating expenses
between us and our operating partnership and will monitor the
application of such policy as part of its oversight of the
determination of NAV per share. Under no circumstances may our
total organization and offering expenses (including selling
commissions, bona fide due diligence expenses and
distribution fees) exceed 15% of the gross proceeds from the
primary offering (i.e., excluding proceeds from sales pursuant
to our distribution reinvestment plan).
(4) Our
operating partnership will pay all expenses incurred in
connection with the acquisition of our investments, including
legal and accounting fees and expenses, brokerage commissions
payable to unaffiliated third parties, travel expenses, costs of
appraisals (including independent third party appraisals),
nonrefundable option payments on property not acquired,
engineering, due diligence, title insurance and other expenses
related to the selection and acquisition of investments, whether
or not acquired. While most of the acquisition expenses are
expected to be paid to third parties, a portion of the
out-of-pocket acquisition expenses, such as travel or due
diligence expenses, may be reimbursed to our advisor or its
affiliates. Acquisition expenses, together with any acquisition
fees paid to third parties for a particular real estate related
asset, will in no event exceed 6% of the gross purchase price.
In addition, the expenses we pay to our advisor include expenses
incurred by our sub-advisor on our behalf that our advisor is
required to reimburse to our sub-advisor under the sub-advisory
agreement.
(5) Our
advisor must reimburse us at least annually for reimbursements
paid to the advisor in any year to the extent that such
reimbursements to the advisor cause our operating expenses to
exceed the greater of (1) 2% of our average invested
assets, which generally consists of the average book value of
our real properties before reserved for depreciation or bad
debts and the average book value of securities or (2) 25%
of our net income, which is defined as our total revenues less
total expenses for any given period excluding reserves for
depreciation and bad debt, unless the independent directors have
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
invested directly or indirectly in equity interests and loans
secured by real estate 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
management fees, but excluding: (a) the expenses of raising
capital such as organizational and offering expenses, legal,
audit, accounting, underwriting, brokerage, registration and
other fees, printing and other such expenses and taxes incurred
in connection with the issuance, distribution, transfer and
registration of shares of our common stock; (b) interest
payments; (c) taxes; (d) non-cash expenditures such as
depreciation, amortization and bad debt reserves;
(e) reasonable incentive fees based on the gain in the sale
of our assets; and (f) acquisition fees, acquisition
expenses (including expenses relating to potential acquisitions
that we do not close), real estate commissions on the resale of
real property and other expenses connected with the acquisition,
disposition, management and ownership of real estate interests,
mortgage loans or other real property (including the costs of
foreclosure, insurance premiums, legal services, maintenance,
repair and improvement of real property).
We are subject to various conflicts of interest arising out of
our relationship with our advisor and its affiliates. Our
independent directors have an obligation to function on our
behalf in all conflicts of interest situations and have a
fiduciary obligation to act on behalf of the stockholders. In an
effort to eliminate certain conflicts of interest, our charter
contains provisions that are designed to eliminate or mitigate
many of the various conflicts of interest.
Interests
in Other Real Estate Programs
Our advisor will rely on our sub-advisor to source potential
investments in commercial real estate properties, real estate
related assets and other investments in which we may be
interested. In addition to the services that our sub-advisor
will provide to our advisor, our sub-advisor will advise other
investment programs that invest in commercial real estate
properties, real estate related assets and other investments in
which we may be interested. Our sub-advisor could face conflicts
of interest in determining which programs will have the
opportunity to acquire and participate in such investments as
they become available. As a result, other investment programs
advised by our sub-advisor may compete with us with respect to
certain investments that we may want to acquire. Our sub-advisor
has adopted an allocation policy designed to address this
potential conflict of interest. See “—Conflict
Resolution Procedures—Allocations of Investment
Opportunities” below.
Allocation
of Our Advisor’s and Sub-Advisor’s Time
We will rely on the personnel of our advisors and their
affiliates to manage our assets and daily operations. Our
officers and our non-independent directors are also officers of
our advisor and therefore will have conflicts of interest in
allocating their time, services and functions among us and other
real estate programs or business ventures that our advisor or
its affiliates organize or serve. Our advisor has informed us
that it and its affiliates will employ sufficient staff to be
fully capable of discharging their responsibilities to us in
light of the other real estate programs that from time to time
will be advised or managed by our advisor or its affiliates.
Similarly, our sub-advisor has informed us that it will employ
sufficient staff to be fully capable of discharging its
responsibilities to us in addition to its other commitments.
Fees and
Other Compensation to Our Advisors and Our Distributor
The agreements that provide for fees and other compensation to
our advisor and our distributor are not the result of
arm’s-length negotiations. These agreements, including our
advisory agreement and our distribution agreement, require
approval by a majority of our board of directors, including a
majority of the independent directors not otherwise interested
in such transactions, as being fair and reasonable to us and on
terms and conditions no less favorable than those which could be
obtained from unaffiliated entities. The timing and nature of
fees and compensation to the advisor and our distributor could
create a conflict between the interests of the advisor or our
distributor and those of our stockholders.
Our advisor will receive substantial fees from us. These
compensation arrangements could influence our advisor’s
advice to us, as well as the judgment of the personnel of our
advisor who serve as our officers or directors. Specifically,
our advisor is responsible for supervising our accounting agent
in the calculation of our NAV, and the management fee we pay our
advisor is based on our NAV. Although our advisor has engaged
our sub-advisor to perform services on its behalf for us,
including the valuation of assets that contribute to the
calculation of our NAV, our sub-advisor’s compensation from
our advisor is also based on our NAV. Among other matters, the
compensation arrangements could affect the judgment of our
advisors’ personnel with respect to:
•
the continuation, renewal or enforcement of our agreements with
our advisor and its affiliates, including the advisory
agreement, the distribution agreement and the sub-advisory
agreement with our sub-advisor;
•
the decision to adjust the value of our commercial real estate
portfolio or the value of certain portions of our portfolio of
other real estate related assets, or the calculation of our NAV;
public offerings of equity by us, which entitle our advisor to
increased management fees; and
•
property acquisitions from affiliated programs, which might
entitle affiliates of our advisors to real estate commissions
and possible success-based sale fees in connection with services
provided to the seller.
We will pay management fees to our advisor regardless of the
quality of the services it provides during the term of the
advisory agreement. Our advisor, however, has a fiduciary duty
to us. If our advisor fails to act in our best interests, then
it will have violated this duty. The advisory agreement may be
terminated by us or our advisor on 60 days’ notice.
Each transaction we enter into with our advisors or their
affiliates is subject to an inherent conflict of interest. Our
board of directors may encounter conflicts of interest in
enforcing our rights against any affiliate in the event of a
default by or disagreement with an affiliate or in invoking
powers, rights or options pursuant to any agreement between us
and any affiliate. The independent directors who are also
otherwise disinterested in the transaction must approve each
transaction between us and our advisors or any of their
affiliates as being fair and reasonable to us and on terms and
conditions no less favorable to us than those available from
unaffiliated third parties.
Affiliated
Distributor
Our distributor, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, is one of our affiliates and this relationship may
create conflicts of interest in connection with its performance
of due diligence. Although our distributor will examine the
information in the prospectus for accuracy and completeness, our
distributor will not make an independent due diligence review
and investigation of our company or this offering of the type
normally performed by an unaffiliated underwriter in connection
with the offering of securities. Accordingly, you do not have
the benefit of an independent due diligence review and
investigation.
Our distributor is not prohibited from acting in any capacity in
connection with the offer and sale of securities of other
affiliated programs that may have investment objectives similar
to ours.
Lack of
Separate Representation
Alston & Bird LLP and Goodwin Procter LLP have acted
as counsel to us in connection with this offering and are also
counsel to our operating partnership, our advisor and the
distributor in connection with this offering and may in the
future act as counsel for each such entity. Alston &
Bird LLP and Goodwin Procter LLP also serve as counsel to
certain affiliated entities in matters unrelated to this
offering. There is a possibility that in the future the
interests of the various parties may become adverse. In the
event that a dispute were to arise between us, our operating
partnership, either of our advisors, or any of their respective
affiliates, separate counsel for such parties would be retained
as and when appropriate.
Valuation
Conflicts
Our advisor and our sub-advisor will be paid a fee for their
services based on our NAV, which will be calculated by our
accounting agent under the supervision of our advisor and our
sub-advisor in accordance with our valuation guidelines.
Appraisals of our commercial real estate properties and
valuations of our investments in other real estate related
assets, which are two components used to calculate our NAV, will
be only estimates of fair value and may not correspond to
realizable value upon a sale of those assets. Because our
sub-advisor, under the supervision of our advisor, will value
our commercial real estate properties, our advisors could be
motivated to value our commercial real estate properties at
amounts exceeding realizable value due to the impact of higher
valuations on the compensation to be received by our advisors.
Fiduciary
Duty Conflicts
Our directors and officers have duties to our corporation and
our stockholders under Maryland law in connection with their
management of the corporation. At the same time, we, as general
partner, have fiduciary duties under Delaware law to our
operating partnership and to the limited partners in connection
with the management of our operating partnership. Our duties as
general partner to our operating partnership and its partners
may come into conflict with the duties of our directors and
officers to the corporation and our
stockholders. Under Delaware law, a general partner of a
Delaware limited partnership owes its limited partners the
duties of good faith and fair dealing. Other duties, including
fiduciary duties may be modified or eliminated in the
partnership’s partnership agreement. The partnership
agreement of our operating partnership provides that for so long
as we own a controlling interest in our operating partnership,
any conflict that cannot be resolved in a manner not adverse to
either our stockholders or the limited partners will be resolved
in favor of our stockholders.
Additionally, the partnership agreement expressly limits our
liability by providing that we and our officers, directors,
agents and employees, will not be liable or accountable to our
operating partnership for losses sustained, liabilities incurred
or benefits not derived if we or our officers, directors, agents
or employees acted in good faith. In addition, our operating
partnership is required to indemnify us and our officers,
directors, employees, agents and designees to the extent
permitted by applicable law from and against any and all claims
arising from operations of our operating partnership, unless it
is established that: (1) the act or omission was committed
in bad faith, was fraudulent or was the result of active and
deliberate dishonesty; (2) the indemnified party received
an improper personal benefit in money, property or services; or
(3) in the case of a criminal proceeding, the indemnified
person had reasonable cause to believe that the act or omission
was unlawful.
The provisions of Delaware law that allow the fiduciary duties
of a general partner to be modified by a partnership agreement
have not been tested in a court of law, and we have not obtained
an opinion of counsel covering the provisions set forth in the
partnership agreement that purport to waive or restrict our
fiduciary duties. See “Risk Factors—Risks Related to
Our Corporate Structure—Our UPREIT structure may result in
potential conflicts of interest with limited partners in our
operating partnership whose interests may not be aligned with
those of our stockholders.”
Conflict
Resolution Procedures
Independent
Directors
In order to reduce or eliminate potential conflicts of interest,
our independent directors, as a group, will resolve potential
conflicts of interest whenever they determine that the exercise
of independent judgment by the board or the advisor and its
affiliates could reasonably be compromised. However, the
independent directors may not take any action which under
Maryland law must be taken by the entire board of directors or
which is not otherwise within their authority. The independent
directors, as a group, are authorized to retain their own legal
and financial advisors. Among the matters we expect the
independent directors to review and act upon are the
continuation, renewal or enforcement of our agreements with the
advisor and its affiliates, including the advisory agreement and
the agreement with the distributor, the sub-advisory agreement
and any transactions with affiliates, including our directors
and officers.
Our charter and certain policies adopted by us and our advisor
contain a number of specific requirements for action by our
independent directors and investment restrictions relating to
conflict of interest situations, including those described below.
•
We will not purchase or lease properties in which our officers,
our directors, either of our advisors, ML & Co. or any
of their respective affiliates has an interest without a
determination by a majority of our directors not otherwise
interested in the transaction (including a majority of the
independent directors) that such transaction is fair and
reasonable to us and at a price no greater than the cost of the
property to such officer or director, our advisor, our
sub-advisor, ML & Co. or such affiliate, as
applicable, 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. We
will not sell or lease properties to our officers, our
directors, either of our advisors, ML & Co. or any of
their respective affiliates unless a majority of our directors
not otherwise interested in the transaction (including a
majority of the independent directors) determines the
transaction is fair and reasonable to us.
We will not make any loans to our officers, our directors, our
advisors, ML & Co. or any of their respective
affiliates. In addition, our officers, our directors, our
advisors, ML & Co. and their respective affiliates
will not make loans to us or to joint ventures in which we are a
venture partner for the purpose of acquiring properties, unless
a majority of our directors not otherwise interested in the
transaction (including a majority of the independent directors)
approve the transaction as being fair, competitive and
commercially reasonable and no less favorable to us than loans
between unaffiliated parties under the same circumstances. Our
advisors, and their respective affiliates, will be entitled to
reimbursement for operating expenses incurred by them on our
behalf, subject to the limitation on reimbursement of total fees
and operating expenses described in “Management—The
Advisory Agreement—Management Fee and Expense
Reimbursements.”
•
We will not invest in joint ventures with our officers, our
directors, our advisors, ML & Co. or any of their
respective affiliates unless a majority of our directors not
otherwise interested in the transaction (including a majority of
our independent directors) approve the transaction as being fair
and reasonable to us and on substantially the same terms and
conditions as those received by the other joint venture partners.
•
All other transactions between us and our officers, our
directors, our advisors, ML & Co. or any of their
respective affiliates require approval by a majority of our
directors not otherwise interested in the transaction (including
a majority of our independent directors) as being fair and
reasonable to us an on terms and conditions not less favorable
to us that those available from unaffiliated third parties.
•
Our board of directors shall determine (not less often than
annually) whether the method for the allocation of the
acquisition of commercial real estate properties and other real
estate related assets between us and other programs affiliated
with the advisors is fairly applied to us.
•
The purchase price for any real property we acquire from our
officers, our directors, our advisors, ML & Co. or any
of their respective affiliates will be based on the fair value
of such property, as determined by an independent expert
selected by our independent directors.
Allocation
of Investment Opportunities
Pursuant to a sub-advisory agreement, our advisor has engaged
our sub-advisor to provide advisory services relating to
acquisitions and dispositions of commercial real estate
properties and other real estate related assets and, therefore,
will be performing its services to us on behalf of our advisor.
Investment opportunities that fit our objectives and those of
other accounts, real estate programs and investment vehicles
advised by our sub-advisor (referred to as clients of our
sub-advisor) will be allocated among us and such other programs
in accordance with its allocation policy. Our sub-advisor’s
allocation policy, which is subject to revision from time to
time, provides for the allocation of such investment
opportunities to the client whose name appears highest on our
sub-advisor’s client priority list, the initial order of
which is determined by the length of time funds for such client
have been available for investment by our sub-advisor or any of
its affiliates. After accepting an investment opportunity in
this context, a client’s name is moved to the bottom of the
list for future investment opportunities. It is not anticipated
that this allocation process will materially adversely affect
our ability to otherwise participate in a sufficient quantity of
desirable investments. Our board of directors shall determine
(not less often than annually) whether the method for the
allocation of the acquisition of commercial real estate
properties and other real estate related assets between us and
other programs affiliated with our sub-advisor is fairly applied
to us.
The information presented in this section presents the
historical experience of real estate investment programs
sponsored in the last ten years by (1) ML & Co.
and its affiliates and (2) BlackRock Realty and its
affiliates. Our structure and investment strategy are different
from the structure and strategy of these prior programs and our
performance will depend on factors that may not be applicable to
or affect the performance of these other programs. Investors
should not assume that they will experience returns, if any,
that are comparable to those experienced by investors in such
prior programs. The Prior Performance Tables included in this
prospectus, beginning on
page A-1,
include further information regarding these prior programs.
ML &
Co. Prior Programs
ML & Co. has sponsored the following three private
real estate investment programs in the last ten years:
•
Merrill Lynch Bosphorus Real Estate Fund I, L.P. (the
“Bosphorus Fund”);
•
Merrill Lynch Asian Real Estate Opportunity Fund (the
“Asian Fund”); and
•
Merrill Lynch European Real Estate Opportunity Fund (the
“European Fund”).
These private funds are conducted through privately held
entities and are not subject to the up-front commissions that
you may pay in connection with investing in shares of our common
stock. In addition, these private programs are not subject to
many of the laws and regulations that will apply to us as a
publicly offered REIT.
Each of these prior programs has investment objectives that are
similar to ours, but employ an investment strategy that is
different from ours. Unlike our focus on income-producing
commercial real estate properties, the Bosphorus Fund seeks to
invest primarily in development projects while the Asian Fund
and the European Fund seek value-added investments. Value-added
is defined broadly to include assets that are undervalued or
where the fund’s management can increase value through
asset repositioning,
lease-up,
tenant repositioning, rent increases, and property renovation
and redevelopment.
Each of these private programs, like us, benefits from the
expertise and network of investment sourcing relationships of
ML & Co.’s Global Principal Investments Group, or
GPI. GPI has investment, asset management and finance
professionals located in and a strong knowledge of markets
throughout the U.S. and internationally.
Bosphorus
Fund
The Bosphorus Fund was formed in 2006 as a closed-end, Jersey
registered limited partnership to invest in real estate assets
in the Republic of Turkey, with the objective of providing
capital appreciation and, to a lesser extent, ordinary income to
its partners. It seeks to invest primarily in development
projects in the retail and residential sectors, with a secondary
focus on existing income-generating properties and other real
estate projects, including properties in the office and lodging
sectors. The Bosphorus Fund is managed by a joint venture that
is owned 50% by an affiliate of ML & Co. and 50% by a
Turkish real estate company. The fund will benefit from the
international expertise and relationships of GPI.
As of March 31, 2008, the Bosphorus Fund has received
equity commitments from investors of $300 million,
including a $73.5 million commitment from affiliates of
ML & Co. The Bosphorus Fund closed its equity offering
on July 13, 2007.
Asian
Fund
The Asian Fund was formed in 2007 as a closed-end limited
partnership to make opportunistic investments in real estate and
other real estate related assets throughout Asia. The fund seeks
investments with the potential to generate superior returns,
including the acquisition of ownership interests in real estate
assets, real estate operating companies, distressed or
undervalued credits and high-yield structured credits. The Asian
Fund will primarily seek value-added investments. Markets in
which the fund is primarily focused are Japan,
China, India and South Korea. The fund is managed by members of
GPI, which has a highly-experienced team in the region.
The Asian Fund’s equity offering closed in September 2008
with equity commitments from investors of approximately
$2.6 billion, including an $800 million commitment
from affiliates of ML & Co.
European
Fund
The European Fund was formed in 2007 as a closed-end limited
partnership to make opportunistic investments in real estate and
other real estate related assets throughout Europe, with
principal focus on Germany and Central and Eastern Europe. It
seeks investments in real estate, real estate operating
companies, distressed or undervalued credits and high-yield
structured credits. The European Fund will seek primarily
value-added investments. The fund is managed by members of GPI,
which has a highly-experienced team in the region and has been
investing capital in Europe for over ten years. The fund seeks
equity commitments of up to $1.1 billion, and affiliates of
ML & Co. will provide 60% of the fund’s total
equity commitments, up to a maximum of $662 million.
The European Fund’s equity offering closed in September
2008 with equity commitments from investors of approximately
$372 million, including a $223 million commitment from
affiliates of ML & Co.
ML &
Co. Summary Information
Through March 31, 2008, the three prior programs have
raised an aggregate of $2.0 billion from 72 investors,
excluding investments made by affiliates of ML & Co.
As of December 31, 2007, the Bosphorus Fund had acquired
six properties in Turkey with aggregate acquisition and
development costs of $1.12 billion. Of the aggregate
amount, 56% was invested in residential properties and 44% was
invested in retail properties. As of December 31, 2007, the
Asian Fund and the European Fund had not acquired any properties.
Following is a table showing a breakdown by percentage of the
aggregate amount of the acquisition and development costs of the
properties purchased by the Bosphorus Fund as of
December 31, 2007:
Type of Property
Existing
Construction
Retail
9.4
%
34.6
%
Residential
—
56.0
%
The table below provides further information about these
properties by region.
Percentage of
Number of
Aggregate
Location
Properties
Purchase Price
Turkey
6
100
%
The table below provides further information about the method of
financing for these properties.
As of December 31, 2007, BlackRock Realty had sponsored the
following nine private real estate investment programs in the
last ten years:
•
BlackRock Granite Property Fund (the “Granite Fund”);
•
BlackRock Diamond Property Fund (the “Diamond Fund”);
•
BlackRock Apartment Value Fund series, consisting of three
separate closed end funds formed in 1996, 2001 and 2004,
respectively (the “AVF Funds”);
•
BlackRock Strategic Apartment Fund (the “Strategic
Apartment Fund”);
•
BlackRock Retail Opportunity Fund (the “Retail Opportunity
Fund”);
•
Peter Cooper Village Stuyvesant Town Partners (the “PCVST
Fund”); and
•
BlackRock Global Real Estate Opportunity Fund (the “Global
Fund”).
Other than the Global Fund, each of these prior programs has
investment objectives that are similar to ours in that they
focus on investing in commercial real estate properties and
other real estate related assets in the United States. The
Global Fund focuses primarily on investments in Europe and Asia.
The specific strategies employed by the prior programs vary
widely, with some programs’ strategies being more similar
to ours than others. The program most similar to us is the
Granite Fund, which invests in residential, office, retail and
industrial properties and focuses on core, income producing
commercial real estate properties. The Diamond Fund focuses on
value-added investments. Each of the AVF Funds, the Strategic
Apartment Fund and the Retail Opportunity Fund focuses on a
single property sector, covering core, value-added and
opportunistic investments, respectively. The PCVST Fund is a
single property fund which owns a residential complex located in
New York City. The general partner of the PCVST Fund is a 50-50
joint venture between BlackRock Realty and Tishman Speyer.
BlackRock
Realty Summary Information
Through December 31, 2007, these nine prior programs have
raised an aggregate of approximately $5.6 billion from 233
investors, excluding investments made by affiliates of BlackRock
Realty.
As of December 31, 2007, the nine prior programs had
acquired 267 properties in the United States, 11 properties in
Europe, and 2 properties in Asia, with aggregate acquisition
costs of approximately $14.2 billion. Of the aggregate
amount, 62.2% was invested in residential properties, 20.5% was
invested in office properties, 11.6% was invested in retail
properties and 5.6% was invested in industrial properties. In
addition, 0.1% of acquisition costs have been attributable to
land acquisition for resale following entitlement.
Following is a table showing a breakdown by percentage of the
aggregate amount of the acquisition costs of the properties
purchased by the nine prior programs as of December 31,2007:
The table below provides further information about these
properties by region.
Percentage of
Number of
Aggregate
Location
Properties
Purchase Price
United States
%
Arizona
9
1.8
California
70
18.4
Colorado
5
0.7
Connecticut
5
0.6
District of Columbia
4
0.8
Florida
34
5.4
Georgia
4
0.5
Illinois
22
3.8
Massachusetts
17
3.1
Maryland
5
1.5
Michigan
3
0.7
Minnesota
3
0.5
New Jersey
11
1.9
Nevada
2
0.4
New York
21
48.6
Oregon
1
0.0
Pennsylvania
4
0.2
Tennessee
1
0.2
Texas
14
3.1
Utah
4
0.6
Virginia
9
2.6
Washington
15
2.9
Mezzanine debt investments
4
1.1
Europe
11
0.3
Asia
2
0.3
Total
280
100
%
The table below provides further information about the method of
financing for these properties.
Method of Financing
All cash
$
4,685M
All debt
N/A
Combination of cash and debt
$
9,463M
Total
$
14,148M
Through December 31, 2007, these nine prior programs have
sold an aggregate of 108 properties over the past ten years at
an aggregate disposition price of approximately
$3.0 billion.
From December 31, 2004 through December 31, 2007,
BlackRock Realty-sponsored commingled fund investment programs
acquired 189 commercial properties. The total acquisition cost
of these properties was approximately $12.1 billion, of
which approximately $6.8 billion, or 56%, was financed with
mortgage financing. The locations of these properties, and the
number of properties in each location, are as follows:
Number of
Location
Properties
Arizona
5
California
48
Colorado
4
Connecticut
1
District of Columbia
2
Florida
28
Georgia
4
Illinois
11
Massachusetts
9
Maryland
2
Michigan
1
Minnesota
2
New Jersey
9
Nevada
2
New York
15
Oregon
1
Pennsylvania
4
Texas
13
Utah
4
Virginia
5
Washington
15
Mezzanine debt investments
4
Total
189
See Table VI in Part II of the registration statement of
which this prospectus is a part for more detailed information as
to the acquisition of properties during the three years ended
December 31, 2007. Upon request, we will furnish a copy of
this table to you without charge.
The discussion in this section contains forward-looking
statements that involve risks and uncertainties. See “Risk
Factors” included elsewhere in this prospectus for a
discussion of important factors that could cause actual results
to differ materially from those described or implied by the
forward-looking statements contained herein.
Overview
We are a Maryland corporation formed on August 19, 2008 to
invest in a diversified portfolio of institutional quality,
income-producing commercial real estate properties and other
real estate related assets. We were formed as an externally
advised, open-ended REIT to pursue the investment objectives and
strategies described elsewhere in this prospectus. Our structure
as an open-ended REIT is unique. There are currently no other
open-ended REITs with features similar to ours available for
investment in the public markets. We intend to qualify as a REIT
for federal income tax purposes. We are not a mutual fund and do
not intend to qualify as an investment company under the
Investment Company Act of 1940, as amended. We intend to hold
our commercial real estate properties, real estate related
assets and other investments through our operating partnership,
of which we are the sole general partner.
Our board of directors will at all times have ultimate oversight
and policy-making authority over us, including responsibility
for governance, financial controls, compliance and disclosure.
Pursuant to an advisory agreement, however, we will delegate to
our advisor authority to manage our day-to-day business, in
accordance with our investment objectives, strategy, guidelines,
policies and limitations. Pursuant to a sub-advisory agreement,
our advisor has engaged our sub-advisor to perform substantially
all of these management services, under the supervision and
direction of our advisor.
We have neither engaged in any operations nor generated any
revenues to date. Our entire activity since inception has been
to prepare for our proposed fundraising through our initial
public offering of our common stock.
After we have received purchase orders for at least $100,000,000
in shares of our common stock, and our board of directors has
authorized the release of such funds to us from escrow within
180 days following the initial offering date, we intend to
contribute the net proceeds from this offering, which are not
used or retained to pay the fees and expenses attributable to
our operations, to our operating partnership in respect of our
general partnership interest. Our operating partnership will use
the net proceeds received from us: (1) to make investments
in accordance with our investment guidelines; (2) to reduce
borrowings and repay indebtedness incurred under various
financing instruments into which we may enter in anticipation of
the acquisition of our initial portfolio of commercial real
estate properties; (3) for working capital purposes; and
(4) to fund redemptions of our common stock. See “Use
of Proceeds.”
We have not entered into any arrangements to acquire any
commercial real estate properties, real estate related assets or
other assets with the net proceeds from this offering. The
number and type of commercial real estate properties, real
estate related assets and other assets that we acquire will
depend upon commercial real estate market conditions, the amount
of proceeds we raise in this offering and other circumstances
existing at the time we are acquiring commercial real estate
properties, other real estate related assets and liquid
investments.
We are not aware of any material trends or uncertainties,
favorable or unfavorable, other than national economic
conditions affecting real estate generally, that may be
reasonably anticipated to have a material impact on either
capital resources or the revenues or income to be derived from
acquiring commercial real estate properties, other real estate
related assets and liquid investments, other than those referred
to in this prospectus.
Below is a discussion of the accounting policies that management
believes will be critical once we commence operations. We
consider these policies critical because they involve
significant judgments and assumptions, require estimates about
matters that are inherently uncertain and because they are
important for understanding and evaluating our reported
financial results. Our accounting policies have been established
to conform with accounting principles generally accepted in the
United States of America, or GAAP. The preparation of the
financial statements in accordance with GAAP requires management
to use judgments in the application of such policies. 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 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.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (“SFAS 157”).
SFAS 157 defines fair value, establishes a framework for
measuring fair value under GAAP and expands disclosures about
fair value measurements. The statement does not require new fair
value measurements, but is applied to the extent other
accounting pronouncements require or permit fair value
measurements. The statement emphasizes fair value as a
market-based measurement which should be determined based on
assumptions market participants would use in pricing an asset or
liability. We will be required to disclose the methodology used
to determine fair value, the extent to which fair value is used
to measure assets and liabilities, the inputs used to develop
the measurements, and the effect of certain of the measurements
on earnings (or changes in net assets) for the period.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007.
In February 2008, the FASB staff issued Staff Position
No. 157-2,
Effective Date of FASB Statement No. 157
(“SFAS 157-2”).
FSP
SFAS 157-2
delayed the effective date of SFAS No. 157 for
non-financial assets and non-financial liabilities, except for
items that are recognized or disclosed at fair value in the
consolidated financial statements on a recurring basis (at least
annually). The provisions of
SFAS 157-2
are effective for our fiscal year beginning January 1,2009. We are currently assessing the effect
SFAS 157-2
may have on our consolidated results of operations and financial
position.
In October 2008, the FASB staff issued Staff Position
No. 157-3 (“SFAS 157-3”) determining the fair
value of a financial asset when the market for that asset is not
active. SFAS 157-3, effective immediately, clarifies the
application of SFAS 157 in a market that is not active and
provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market
for that financial asset is not active.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS 159”), effective for financial
statements issued for fiscal years beginning after
November 15, 2007. This statement permits entities to
choose to measure many financial instruments and other items at
fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge
accounting provisions. SFAS 159 permits all entities to
choose to measure eligible items at fair value at specified
election dates. A business entity will report unrealized gains
and losses on items for which the fair value option has been
elected in earnings (or another performance indicator if the
business entity does not report earnings) at each subsequent
reporting date.
In December 2007, the FASB issued Statement No. 141R,
Business Combinations (“SFAS 141R”).
SFAS 141R broadens the guidance of Statement of Financial
Accounting Standards No. 141, “Business
Combinations”
(“SFAS 141”), extending its applicability to all
transactions and other events in which one entity obtains
control over one or more other businesses. SFAS 141R also
broadens the fair value measurement and recognition of assets
acquired, liabilities assumed, and interests transferred as a
result of
business combinations, and stipulates that acquisition related
costs, including: (1) expensing acquisition related costs
as incurred; (2) valuing noncontrolling interests at fair
value at the acquisition date; and (3) expensing
restructuring costs associated with an acquired business, be
expensed rather than included as part of the basis of the
acquisition. SFAS 141R expands required disclosures to
improve the ability to evaluate the nature and financial effects
of business combinations. The objective of SFAS 141R is to
improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity
provides in its financial reports about a business combination
and its effects. To accomplish that, this statement establishes
principles and requirements for how the acquirer:
(i) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree; (ii) recognizes
and measures the goodwill acquired in the business combination
or a gain from a bargain purchase; and (iii) determines
what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. SFAS 141R is effective for all
transactions entered into on or after January 1, 2009. The
adoption of this standard on January 1, 2009 could
materially impact our future financial results to the extent
that we acquire significant amounts of real estate, as related
acquisition costs will be expensed as incurred compared to the
current practice of capitalizing such costs and amortizing them
over the estimated useful life of the assets acquired.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements—An amendment of ARB No. 51
(“SFAS 160”). This statement amends Accounting
Research Bulletin No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. Among other
requirements, this Statement requires consolidated net income to
be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest.
This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after
December 15, 2008. This Statement shall be applied
prospectively as of the beginning of the fiscal year in which
this Statement is initially applied, except for the presentation
and disclosure requirements. The presentation and disclosure
requirements shall be applied retrospectively for all periods
presented. We are currently evaluating the impact of adopting
SFAS 160 on our consolidated balance sheet.
In March 2008, the FASB issued Statement No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(“SFAS 161”). SFAS 161 requires entities
to provide greater transparency about how and why the entity
uses derivative instruments, how the instruments and related
hedged items are accounted for under FASB Statement
No. 133, Accounting for Derivative Instruments and
Hedging Activities (“SFAS 133”), and how the
instruments and related hedged items affect the financial
position, results of operations, and cash flows of the entity.
SFAS 161 is effective for fiscal years beginning after
November 15, 2008. The principal impact to us will be to
expand our disclosures regarding derivative instruments.
Principles
of Consolidation and Basis of Presentation
Our consolidated financial statements will include our accounts,
the accounts of variable interest entities, or VIEs, in which we
are the primary beneficiary and the accounts of other
subsidiaries over which we will have control. All inter-company
transactions, balances and profits will be eliminated in
consolidation. Interests in entities acquired will be evaluated
for consolidation based on Financial Accounting Standards Board
Interpretation 46R, or FIN 46R, which requires the
consolidation of VIEs in which we are deemed to be the primary
beneficiary. If the interest in the entity is determined to not
be a VIE under FIN 46R, then the entity will be evaluated
for consolidation under the American Institute of Certified
Public Accountants’ Statement of Position
78-9,
“Accounting for Investments in Real Estate Ventures,”
as amended by Emerging Issues Task Force
04-5,
“Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights.”
There are judgments and estimates involved in determining if an
entity in which we will make an investment will be a VIE and if
so, if we will be the primary beneficiary. The entity will be
evaluated to determine if it is a VIE by, among other things,
calculating the percentage of equity being risked compared to
the total equity of the entity. FIN 46R provides some
guidelines as to what the minimum equity at risk should be, but
the percentage can vary depending upon the industry or the type
of operations of the entity and it will be up to our advisor to
determine that minimum percentage as it relates to our business
and the facts surrounding each of our acquisitions. In addition,
even if the entity’s equity at risk is a very low
percentage, our advisor will be required by FIN 46R to
evaluate the equity at risk compared to the entity’s
expected future losses to determine if there could still in fact
be sufficient equity at the entity. Determining expected future
losses involves assumptions of various possibilities of the
results of future operations of the entity, assigning a
probability to each possibility and using a discount rate to
determine the net present value of those future losses. A change
in the judgments, assumptions and estimates outlined above could
result in consolidating an entity that had not been previously
consolidated or accounting for an investment on the equity
method that had been previously consolidated, the effects of
which could be material to our results of operations and
financial condition.
Real
Estate
Purchase
Price Allocation
Upon the acquisition of commercial real estate properties, we
will allocate the purchase price of those properties to the
tangible assets acquired, consisting of land, buildings and
tenant improvements, any assumed debt, identified intangible
assets and asset retirement obligations based on their relative
fair values in accordance with SFAS 141 and Statement of
Financial Accounting Standards No. 141, “Business
Combinations” and Statement No. 142, Goodwill and
Other Intangible Assets. Identified intangible assets
consist of the fair value of above-market and below-market
leases, in-place leases, in-place tenant improvements and tenant
relationships. Initial valuations are subject to change until
our information is finalized, which will be no later than
12 months from the acquisition date.
We will determine the fair value of assumed debt by calculating
the net present value of the scheduled mortgage payments using
interest rates for debt with similar terms and remaining
maturities that our advisor believes we could obtain. Any
difference between the fair value and stated value of the
assumed debt will be recorded as a discount or premium and
amortized over the remaining life of the loan.
The fair value of the tangible assets acquired, consisting of
land, buildings and tenant improvements will be determined by
valuing the property as if it were vacant, and the
“as-if-vacant” value will then be allocated to land,
buildings and tenant improvements. Land values will be derived
from appraisals, and building values will be calculated as
replacement cost less depreciation or our advisor’s
estimates of the relative fair value of these assets using
discounted cash flow analyses or similar methods. The value of
the building will be depreciated and amortized, respectively
over the estimated useful life of the asset using the
straight-line method.
We will determine the value of above-market and below-market
in-place leases 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 (1) the
contractual amounts to be paid pursuant to the in-place leases
and (2) our sub-advisor’s estimate of current market
lease rates for the corresponding in-place leases, measured over
a period equal to the remaining non-cancelable terms of the
respective leases. We will record the fair value of above-market
and below-market leases as intangible assets or intangible
liabilities, respectively, and amortize them as an adjustment to
rental income over the remaining non-cancelable terms of the
respective leases.
The total value of identified real estate intangible assets
acquired will be further allocated to in-place lease values,
in-place tenant improvements, in-place leasing commissions and
tenant relationships based on our evaluation of the specific
characteristics of each tenant’s lease and our overall
relationship with that respective tenant. The aggregate value
for tenant improvements and leasing commissions will be based on
estimates of these costs incurred at inception of the acquired
leases, amortized through the date of acquisition. The aggregate
value of in-place leases acquired and tenant relationships will
be determined by applying a fair value model. The estimates of
fair value of in-place leases will include an estimate of
carrying costs during
the expected
lease-up
periods for the respective spaces considering then current
market conditions. In estimating the carrying costs that would
have otherwise been incurred had the leases not been in place,
we will include such items as real estate taxes, insurance and
other operating expenses as well as lost rental revenue during
the expected
lease-up
period based on then current market conditions. The estimates of
the fair value of tenant relationships will also include costs
to execute similar leases including leasing commissions, legal
and tenant improvements as well as an estimate of the likelihood
of renewal as determined by our advisor on a
tenant-by-tenant
basis.
We will amortize the value of in-place leases and in-place
tenant improvements over the initial term of the respective
leases. The value of tenant relationship intangibles will be
amortized over the initial term and any anticipated renewal
periods, but in no event exceeding the remaining depreciable
life of the building. If a tenant terminates its lease prior to
expiration of the initial terms, the unamortized portion of the
in-place lease value and tenant relationship intangibles will be
charged to expense.
In allocating the purchase price of each of our properties, our
sub-advisor will make assumptions and use various estimates,
including, but not limited to, the estimated useful lives of the
assets, the cost of replacing certain assets, discount rates
used to determine present values, market rental rates per square
foot and the period required to lease the property up to its
occupancy at acquisition if it were vacant. Many of these
estimates will be obtained from independent third party
appraisals. However, our sub-advisor will be responsible for the
source and use of these estimates. A change in these estimates
and assumptions could result in the various categories of our
real estate assets or related intangibles being overstated or
understated which could result in an overstatement or
understatement of depreciation or amortization expense. These
variances could be material to our results of operations and
financial condition.
Real
Estate Investments
Commercial real estate properties will be stated at cost.
Construction and improvement costs incurred in connection with
the development of new commercial real estate properties or the
redevelopment of existing properties will be capitalized to the
extent the total carrying value of the property does not exceed
the estimated fair value of the completed property. Real estate
taxes and interest costs incurred during construction periods
will be capitalized. Capitalized interest costs will be based on
qualified expenditures and interest rates in place during the
construction period. Capitalized real estate taxes and interest
costs will be amortized over lives which will be consistent with
the constructed assets.
Pre-development costs, which generally include legal and
professional fees and other directly-related third party costs,
will be capitalized as part of the property being developed. In
the event a development is no longer deemed to be probable, the
costs previously capitalized will be expensed.
Tenant improvements, either paid directly or in the form of
construction allowances paid to tenants, will be capitalized and
depreciated over the average lease term. Maintenance and repairs
will be charged to expense when incurred. Expenditures for
significant betterments and improvements will be capitalized.
Depreciation or amortization expense will be computed using the
straight-line method based upon the estimated useful lives of
the asset.
Revenue
Recognition
We will recognize rental income generated from all leases on
real estate properties that we consolidate on a straight-line
basis over the terms of the respective leases, including the
effect of rent holidays, if any. The cumulative effect of these
straight-line rent adjustments will be reflected as deferred
rental income on the accompanying consolidated balance sheet.
Rental revenue will also include amortization of above- and
below-market leases. Revenues relating to lease termination fees
will be recognized at the time that a tenant’s right to
occupy the leased space is terminated.
We intend to elect to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended
(the “Code”), beginning with our taxable year ending
December 31 of the year in which the escrow period concludes. In
order to maintain our qualification as a REIT, we are required
to, among other things, distribute at least 90% of our REIT
taxable income to our stockholders and meet certain tests
regarding the nature of our income and assets. As a REIT, we
will not be subject to federal income tax with respect to the
portion of our income that meets certain criteria and is
distributed annually to stockholders. We intend to operate, in a
manner that allows us to meet the requirements for taxation as a
REIT. Many of these requirements, however, are highly technical
and complex. If we were to fail to meet these requirements, we
could be subject to federal income tax on our taxable income at
regular corporate rates. We would not be able to deduct
distributions paid to stockholders in any year in which it fails
to qualify as a REIT. We will also be disqualified for the four
taxable years following the year during which qualification was
lost unless we are entitled to relief under specific statutory
provisions.
Derivative
Instruments and Hedging Activities
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities
(“SFAS 133”), as amended and interpreted,
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. As required by
SFAS 133, we record all derivatives on the balance sheet at
fair value. The accounting for changes in the fair value of
derivatives depends on the intended use of the derivative and
the resulting designation. Derivatives used to hedge the
exposure to changes in the fair value of an asset, liability, or
firm commitment attributable to a particular risk, such as
interest rate risk, are considered fair value hedges.
Derivatives used to hedge the exposure to variability in
expected future cash flows, or other types of forecasted
transactions, are considered cash flow hedges.
For derivatives designated as fair value hedges, changes in the
fair value of the derivative and the hedged item related to the
hedged risk are recognized in earnings. For derivatives
designated as cash flow hedges, the effective portion of changes
in the fair value of the derivative is initially reported in
other comprehensive income (outside of earnings) and
subsequently reclassified to earnings when the hedged
transaction affects earnings, and the ineffective portion of
changes in the fair value of the derivative is recognized
directly in earnings. We assess the effectiveness of each
hedging relationship by comparing the changes in fair value or
cash flows of the derivative hedging instrument with the changes
in fair value or cash flows of the designated hedged item or
transaction. For derivatives not designated as hedges, changes
in fair value are recognized in earnings.
Impairment
of Long-Lived Assets
For commercial real estate properties we wholly own, we will
monitor events and changes in circumstances indicating that the
carrying amounts of the properties may not be recoverable. When
such events or changes in circumstances are present, we will
assess potential impairment by comparing estimated future
undiscounted operating cash flows expected to be generated over
the life of the asset and from its eventual disposition, to the
carrying amount of the property. In the event that the carrying
amount exceeds the estimated future undiscounted operating cash
flows, we will recognize an impairment loss to adjust the
carrying amount of the property to estimated fair value.
For real estate we own through an investment in a joint venture
or other similar investment structure, at each reporting date we
will compare the estimated fair value of our investment to the
carrying value. An impairment charge will be recorded to the
extent the fair value of our investment is less than the
carrying amount and the decline in value is determined to be
other than a temporary decline.
In evaluating our investments for impairment, management will
make several estimates and assumptions, including, but not
limited to, the projected date of disposition of the properties,
the estimated future cash flows of the properties during our
ownership and the projected sales price of each of the
properties. A change in
these estimates and assumptions could result in understating or
overstating the book value of our investments which could be
material to our consolidated financial statements.
Liquidity
and Capital Resources
Our primary needs for liquidity and capital resources are to
fund our investments, to repurchase shares of our common stock
presented for redemption, to pay our offering and operating
expenses, to pay interest on our outstanding indebtedness and to
make distributions to our stockholders. We presently anticipate
such fees and expenses will include, among other things, the
management fee that we will pay to our advisor, the distribution
fees we will pay to our distributor, legal and audit expenses,
federal and state filing fees, printing expenses, transfer agent
fees, marketing and distribution expenses and fees related to
appraising and managing our properties. We will not have any
office or personnel expenses as we do not have any employees.
Our advisors will incur certain of these expenses and fees, for
which we will reimburse our advisor, subject to limitations.
We will reimburse our advisor for out-of-pocket expenses in
connection with providing services to us, including reasonable
salaries and wages, benefits and overhead of all employees
directly involved in the performance of services to us, provided
that no reimbursement shall be made for costs of such employees
of our advisor or its affiliates to the extent that such
employees perform services for which our advisor receives a
separate fee. The expense reimbursements that we will pay to our
advisor include expenses incurred by our sub-advisor on our
behalf that our advisor is required to reimburse to our
sub-advisor under the sub-advisory agreement.
Over time, we generally intend to fund our cash needs for items,
other than asset acquisitions, from operations. Our cash needs
for acquisitions will be funded primarily from the sale of
shares of our common stock, including those offered for sale
through our distribution reinvestment plan, and through the
assumption or incurrence of debt.
Although we have not received any commitments from lenders to
fund a line of credit to date, we expect to obtain a line of
credit from an unaffiliated lender to fund acquisitions, to
repurchase shares presented for redemption and for any other
corporate purpose. Our objective is for our line of credit to
afford us borrowing availability of between 20% and 40% of our
gross asset value to fund redemptions. As our assets increase,
however, it may not be commercially feasible or we may not be
able to secure a line of credit of that size. Moreover, actual
availability may be reduced at any given time if we use
borrowings under the line of credit to fund redemptions or for
other corporate purposes.
In addition to availability under a potential line of credit,
potential future sources of capital include proceeds from
additional sales of shares of our common stock, cash flow from
operations, secured or unsecured financings from banks or other
lenders and proceeds from the sale of assets. If necessary, we
may use financings or other sources of capital in the event of
unforeseen significant capital expenditures. We have not
identified any sources for these types of financings.
Results
of Operations
As of the date of this prospectus, we are in our organizational
period and have not commenced significant operations.
Inflation
The commercial real estate property sector has not been affected
significantly by inflation in the past several years due to the
relatively low inflation rate. With the exception of leases with
tenants in multi-family properties, we will seek to include
provisions in our tenant leases designed to protect us from the
impact of inflation. These provisions will include reimbursement
billings for operating expense pass-through charges, real estate
tax and insurance reimbursements, or in some cases, annual
reimbursement of operating expenses above a certain allowance.
Due to the generally long-term nature of these leases, annual
rent increases may not be sufficient to cover inflation and rent
may be below market. Leases in multi-family properties generally
turn over on an annual basis and do not typically present the
same issue regarding inflation protection due to their
short-term nature.
REIT
Compliance
In order to qualify as a REIT for tax purposes, we will be
required to distribute at least 90% of our REIT taxable income
to our stockholders. For these purposes, REIT taxable income is
computed without regard to the dividends-paid deduction and
excludes net capital gain. We must also meet certain asset and
gross income tests, as well as other requirements. We will
monitor the business and transactions that may potentially
impact our REIT status. If we fail to qualify as a REIT in any
taxable year and certain relief provisions do not apply, we will
be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular
corporate rates.
Quantitative
and Qualitative Disclosures about Market Risk
Market risk is the adverse effect on the value of a financial
instrument that results from a change in interest rates. We may
be exposed to market risk primarily as a result of the
anticipated incurrence of long-term debt that may be used to
fund our investments, to repurchase shares of our common stock
presented for redemption, to pay our offering and operating
expenses and fees and to make distributions to our stockholders.
The market risk associated with interest-rate contracts is
managed by establishing and monitoring parameters that limit the
types and degree of market risk that may be undertaken. With
regard to variable rate financing, our advisor will assess our
interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely
impact expected future cash flows and by evaluating hedging
opportunities. Our advisor will maintain risk management control
systems to monitor interest rate cash flow risk attributable to
both our outstanding and forecasted debt obligations as well as
our potential offsetting hedge positions. While this hedging
strategy will be designed to minimize the impact on our net
income from changes in interest rates, the overall returns on
your investment may be reduced. To limit the impact of market
risk on earnings and cash flows and to lower our overall
borrowing costs, we may use derivative financial instruments to
hedge exposures to changes in interest rates on loans secured by
our assets, to the extent consistent with the requirement for
qualification as a REIT. See “Risk Factors—Risks
Associated with Debt Financing—Failure to hedge effectively
against interest rate changes may materially adversely affect
our ability to achieve our investment objectives.”
Also, derivative contracts we may enter into will expose us to
credit risk. 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
will owe us, which creates credit risk for us. If the fair value
of a derivative contract is negative, we will owe the
counterparty and, therefore, do not have credit risk. We will
seek to minimize the credit risk in derivative instruments by
entering into transactions with high-quality counterparties. We
have adopted a policy of only entering into contracts with major
financial institutions based upon their credit ratings and other
factors.
The following table sets forth, as of the date of this
prospectus, information regarding the number and percentage of
shares owned by each director, our chief executive officer, each
executive officer, all directors and executive officers as a
group, and any person known to us to be the beneficial owner of
more than 5% of outstanding shares of our common stock. As of
the date of this prospectus, we had one stockholder. Beneficial
ownership is determined in accordance with the rules of the SEC
and includes securities over which a person has the right to
acquire within 60 days. Except as indicated, the person
named in the table has sole voting and investing power with
respect to all shares beneficially owned by it. As used herein,
“voting power” is the power to vote or direct the
voting of shares and “investment power” is the power
to dispose or direct the disposition of shares. The address for
each of the persons named below is in care of our principal
executive offices at 4 World Financial Center, New York, NY10080.
The following summary of the material terms of our capital stock
does not purport to be complete and is subject to and qualified
in its entirety by reference to Maryland law and our charter.
Our charter provides that we may issue up to
1,000,000,000 shares of common stock and
50,000,000 shares of preferred stock. Our charter
authorizes our board of directors to amend our charter to
increase the aggregate number of authorized shares or the number
of authorized shares of any class or series without stockholder
approval. At the commencement of this offering, 100 shares
of our common stock were issued and outstanding, all of which
are owned by NorthEnd Holding, and no shares of preferred stock
were issued and outstanding.
Common
Stock
The holders of shares of our common stock are entitled to one
vote per share on all matters voted on by stockholders,
including the election of our directors. Our charter does not
provide for cumulative voting in the election of directors.
Therefore, the holders of a majority of the outstanding shares
of our common stock can elect our entire board of directors.
Subject to any preferential rights of any outstanding series of
preferred shares, the holders of shares of our common stock are
entitled to such distributions as may be authorized from time to
time by our board of directors out of legally available funds
and declared by us and, upon liquidation, are entitled to
receive all assets available for distribution to stockholders.
All shares of our common stock issued in the offering will be
fully paid and non-assessable shares of common stock. Holders of
shares of our common stock will not have preemptive rights,
which means that you will not have an automatic option to
purchase any new shares of common stock that we issue, or have
appraisal rights, unless our board of directors determines that
appraisal rights apply, with respect to all or any classes or
series of our common stock, to one or more transactions
occurring after the date of such determination in connection
with which stockholders would otherwise be entitled to exercise
such rights. Stockholders are not liable for our acts or
obligations.
We will not issue certificates for shares of our common stock.
Shares of our common stock will be held in
“uncertificated” form which will eliminate the
physical handling and safekeeping responsibilities inherent in
owning transferable share certificates and eliminate the need to
return a duly executed share certificate to effect a
transfer.
acts as our registrar and as the transfer agent for shares of
our common stock. Transfers can be effected simply by mailing a
transfer and assignment form, which we will provide to you at no
charge, to:
Preferred
Stock
Our charter authorizes our board of directors to classify and
reclassify any unissued shares of our common stock and preferred
stock into other cases or series of stock. Prior to issuance of
shares of each class or series, the board of directors is
required by the Maryland General Corporation Law and by our
charter to set, subject to our charter restrictions on transfer
of our stock, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms or conditions
of redemption for each class or series. Thus, the board of
directors could authorize the issuance of shares of common stock
or preferred stock with terms and conditions which could have
the effect of delaying, deferring or preventing a transaction or
change in control that might involve a premium price for holders
of our common stock or otherwise be in their best interest. Our
board of directors has no present plans to issue preferred
stock, but may do so at any time in the future without
stockholder approval. The issuance of preferred stock must 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.
Meetings,
Special Voting Requirements and Access To Records
An annual meeting of the stockholders will be held each year,
beginning in 2009, on a specific date which will be at least
30 days after delivery of our annual report. Special
meetings of stockholders may be called only upon the request of
a majority of the directors, a majority of the independent
directors, the chairman, the president or upon the written
request of stockholders entitled to cast at least 10% of the
votes entitled to be cast at the meeting. The presence either in
person or by proxy of stockholders entitled to cast at least a
majority of the votes entitled to be cast at the meeting on any
matter will constitute a quorum. Generally, the affirmative vote
of a majority of all votes cast is necessary to take stockholder
action, except that a majority of the votes represented in
person or by proxy at a meeting at which a quorum is present is
required to elect a director.
Under the Maryland General Corporation Law and our charter,
stockholders are generally entitled to vote at a duly held
meeting at which a quorum is present on (1) the amendment
of our charter, (2) our dissolution or (3) our merger
or consolidation or the sale or other disposition of all or
substantially all of our assets (notwithstanding that Maryland
law may not require stockholder approval). These matters require
the affirmative vote of stockholders entitled to cast at least a
majority of the votes entitled to be cast on the matter.
The advisory agreement and the sub-advisory agreement are
approved annually by our directors including a majority of the
independent directors. While the stockholders do not have the
ability to vote to replace our advisors or to select their
replacements, stockholders do have the ability, by the
affirmative vote of a majority of the shares of our common stock
entitled to vote on such matter, to remove a director from our
board of directors.
Any stockholder will be permitted access to all of our records
at all reasonable times and may inspect and copy any of them for
a reasonable copying charge. Inspection of our records by the
office or agency administering the securities laws of a
jurisdiction will be provided upon reasonable notice and during
normal business hours. An alphabetical list of the names,
addresses and telephone numbers of our stockholders, along with
the number of shares of our common stock held by each of them,
will be maintained as part of our books and records and will be
available for inspection by any stockholder or the
stockholder’s designated agent at our office. The
stockholder list will be updated at least quarterly to reflect
changes in the information contained therein. A copy of the list
will be mailed to any stockholder who requests the list within
10 days of the request. A stockholder may request a copy of
the stockholder list in connection with matters relating to
voting rights and the exercise of stockholder rights under
federal proxy laws. A stockholder requesting a list will be
required to pay reasonable costs of postage and duplication. We
have the right to request that a requesting stockholder
represent to us that the list will not be used to pursue
commercial interests. In addition to the foregoing, stockholders
have rights under
Rule 14a-7
under the Securities Exchange Act of 1934, as amended, or the
Exchange Act, which provides that, upon the request of investors
and the payment of the expenses of the distribution, we are
required to distribute specific materials to stockholders in the
context of the solicitation of proxies for voting on matters
presented to stockholders or, at our option, provide requesting
stockholders with a copy of the list of stockholders so that the
requesting stockholders may make the distribution of proxies
themselves. If a proper request for the stockholder list is not
honored, then the requesting stockholder will be entitled to
recover certain costs incurred in compelling the production of
the list as well as actual damages suffered by reason of the
refusal or failure to produce the list. However, a stockholder
will not have the right to, and we may require a requesting
stockholder to represent that it will not, secure the
stockholder list or other information for the purpose of selling
or using the list for a commercial purpose not related to the
requesting stockholder’s interest in our affairs.
Restriction
On Ownership of Shares of Capital Stock
For us to qualify as a REIT, no more than 50% in value of the
outstanding shares of our stock may be owned, directly or
indirectly through the application of certain attribution rules
under the Internal Revenue Code, or Code, by any five or fewer
individuals, as defined in the Code to include specified
entities, during the last half of any taxable year. In addition,
the outstanding shares of our stock must be owned by 100 or
more persons independent of us and each other during at least
335 days of a
12-month
taxable year or during a proportionate part of a shorter taxable
year. These ownership tests do not apply in our first taxable
year for which we elect to be taxed as a REIT. In addition, we
must meet requirements regarding the nature of our gross income
to qualify as a REIT. One of these requirements is that at least
75% of our gross income for each calendar year must consist of
specified types of income, such as rents from real property and
certain income from other real property investments. The rents
received by our operating partnership from any tenant will not
qualify as rents from real property, which could result in our
loss of REIT status, if we own, actually or constructively
within the meaning of certain provisions of the Code, 10% or
more of the ownership interests in that tenant. To assist us in
preserving our status as a REIT, our charter contains
limitations on the ownership and transfer of shares of common
stock which prohibit: (1) any person or entity from owning
or acquiring, directly or indirectly, more than 9.8% of the
value of our then outstanding capital stock or more than 9.8% of
the value or number of shares, whichever is more restrictive, of
our then outstanding common stock; (2) the beneficial
ownership of the outstanding shares of our capital stock by
fewer than 100 persons; and (3) any transfer of or
other event or transaction with respect to shares of capital
stock that would result in the beneficial ownership of our
outstanding shares of capital stock by fewer than
100 persons. In addition, our charter prohibits any
transfer of, or other event with respect to, shares of our
capital stock that (a) would result in us being
“closely held” within the meaning of
Section 856(h) of the Internal Revenue Code, (b) would
cause us to own, actually or constructively, 9.9% or more of the
ownership interests in a tenant of our real property or the real
property of our operating partnership or any direct or indirect
subsidiary of our operating partnership or (c) would
otherwise cause us to fail to qualify as a REIT.
Our charter provides that the shares of our capital stock that,
if transferred, would: (1) result in a violation of the
9.8% ownership limit; (2) result in us being “closely
held” within the meaning of Section 856(h) of the
Internal Revenue Code; (3) cause us to own 9.9% or more of
the ownership interests in a tenant of our real property or the
real property of our operating partnership or any direct or
indirect subsidiary of our operating partnership; or
(4) otherwise cause us to fail to qualify as a REIT, will
be transferred automatically to a trust effective on the day
before the purported transfer of such shares of our capital
stock. We will designate a trustee of the share trust that will
not be affiliated with us or the purported transferee or record
holder. We will also name a charitable organization as
beneficiary of the share trust. The trustee will receive all
distributions on the shares of our capital stock in the share
trust and will hold such distributions or distributions in trust
for the benefit of the beneficiary. The trustee also will vote
the shares of capital stock in the share trust. The intended
transferee will acquire no rights in such shares of capital
stock, unless, in the case of a transfer that would cause a
violation of the 9.8% ownership limit, the transfer is exempted
by the board of directors from the ownership limit based upon
receipt of information (including certain representations and
undertakings from the intended transferee) that such transfer
would not violate the provisions of the Internal Revenue Code
for our qualification as a REIT. In addition, our charter
provides that any transfer of shares of our capital stock that
would result in shares of our capital stock being owned by fewer
than 100 persons will be null and void and the intended
transferee will acquire no rights in such shares of our capital
stock.
The trustee will transfer the shares of our capital stock to a
person whose ownership of shares of our capital stock will not
violate the ownership limits. The transfer will be made no
earlier than 20 days after the later of our receipt of
notice that shares of our capital stock have been transferred to
the share trust or the date we determine that a purported
transfer of shares of stock has occurred. During this
20-day
period, we will have the option of redeeming such shares of our
capital stock. Upon any such transfer or redemption, the
purported transferee or holder will receive a per share price
equal to the lesser of (1) the price per share in the
transaction that resulted in the transfer of such shares to the,
share trust (or, in the case of a gift or devise, the price per
share on the date of redemption at the time of the gift or
devise) or (2) the price per share on the date of the
redemption, in the case of a purchase by us, or the price
received by the trustee net of any sales commission and
expenses, in the case of a sale by the trustee. The charitable
beneficiary will receive any excess amounts. In the case of a
liquidation, holders of such shares will receive a ratable
amount of our remaining assets available for distribution to
shares of the applicable class or series taking into account all
shares of such class or series. The trustee will distribute to
the purported transferee or holder an amount equal to the lesser
of the amounts received with respect to such shares or the price
per share in the transaction that
resulted in the transfer of such shares to the share trust (or,
in the case of a gift or devise, the price at the time of the
gift or devise) and will distribute any remaining amounts to the
charitable beneficiary.
Any person who acquires or attempts to acquire shares of our
capital stock in violation of the foregoing restrictions or who
owns shares of our capital stock that were transferred to any
such share trust is required to give immediate written notice to
us of such event, and any person who purports to transfer or
receive shares of our capital stock subject to such limitations
is required to give us 15 days written notice prior to such
purported transaction. In both cases, such persons must provide
to us such other information as we may request to determine the
effect, if any, of such event on our status as a REIT. The
foregoing restrictions will continue to apply until the board of
directors determines it is no longer in our best interest to
continue to qualify as a REIT.
The ownership limits do not apply to a person or persons that
the board of directors exempts from the ownership limit upon
appropriate assurances that our qualification as a REIT is not
jeopardized. Any person who owns 5% or more (or such lower
percentage applicable under Treasury Regulations) of the
outstanding shares of our capital stock during any taxable year
will be asked to deliver a statement or affidavit setting forth
the number of shares of our capital stock beneficially owned.
Distributions
We intend to declare and make distributions on a quarterly basis
to stockholders of record as of the last day of each quarter
commencing in the first quarter after the escrow period
concludes. In connection with a distribution to our
stockholders, our board of directors will approve a quarterly
distribution for a certain dollar amount per share of our common
stock. For purposes of calculating our NAV to account for any
declared distribution, after the close of business on the date
that is five business days prior to any record date, our
advisors will accrue as our liability the amount of the declared
distribution. We will then calculate each stockholder’s
specific distribution amount for the quarter using the
applicable record date.
We are required to make distributions sufficient to satisfy the
requirements for qualification as a REIT for federal income tax
purposes. Generally, income distributed will not be taxable to
us under the Internal Revenue Code if we distribute at least 90%
of our taxable income each year (computed without regard to the
distributions paid deduction and our net capital gain).
Distributions will be authorized at the discretion of our board
of directors, in accordance with our earnings, cash flow and
general financial condition. Our board of directors’
discretion will be directed, in substantial part, by its
obligation 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 and may be
made in advance of actual receipt of funds in an attempt to make
distributions relatively uniform. We are authorized to borrow
money, issue new securities or sell assets to make
distributions. There are no restrictions on the ability of our
operating partnership to transfer funds to us.
We are not prohibited from distributing our own securities in
lieu of making cash distributions to stockholders, provided that
the securities distributed to stockholders are readily
marketable. The receipt of marketable securities in lieu of cash
distributions may cause stockholders to incur transaction
expenses in liquidating the securities. We do not have any
current intention to list the shares of our common stock on a
national securities exchange, nor is it expected that a public
market for the shares of common stock will develop.
Although we intend to fund the payment of distributions solely
from cash flow from operations, we may pay distributions from
other sources, including the sale of assets, borrowings or
return of capital.
Distribution
Reinvestment Plan
We have adopted a distribution reinvestment plan, whereby
stockholders will be able to elect to have their cash
distributions automatically reinvested in additional shares of
our common stock. All such distributions will be immediately
reinvested in our shares on behalf of the participants on the
business day such distribution would have been paid to such
stockholder.
The per share purchase price for shares purchased pursuant to
the distribution reinvestment plan will be equal to our NAV per
share on the distribution date, after giving effect to all
distributions. No selling commissions will be payable with
respect to shares purchased pursuant to the distribution
reinvestment plan. Shares acquired under the distribution
reinvestment plan will entitle the participant to the same
rights and be treated in the same manner as those purchased in
this offering.
We reserve the right to amend any aspect of our distribution
reinvestment plan without the consent of our stockholders,
provided that notice of any material amendment is sent to
participants at least ten days prior to the effective date of
that amendment. In addition, we may terminate the distribution
reinvestment plan for any reason at any time upon ten days’
prior written notice to participants. A stockholder’s
participation in the plan will be terminated to the extent that
a reinvestment of such stockholder’s distributions in our
shares would cause the percentage ownership or other limitations
contained in our charter to be violated. Participants may
terminate their participation in the distribution reinvestment
plan with ten days’ prior written notice to us.
Account
Statements
Within 90 days after the end of each fiscal year, we will
mail to each participant a statement of account describing, as
to such participant: (1) the distributions reinvested
during the year; (2) the number of shares purchased during
the year; (3) the per share purchase price for such shares;
and (4) the total number of shares purchased on behalf of
the participant under the plan. In addition, tax information
with respect to income earned on shares under the plan for the
calendar year will be sent to each applicable participant.
Tax
Consequences of Participation
If a stockholder elects to participate in the distribution
reinvestment plan and is subject to federal income taxation, the
stockholder will be treated as if he or she has received the
distribution from us in cash and then applied such distribution
to the purchase of additional shares. The stockholder 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 which event
the distribution will be treated as long-term capital gain. See
“Material United States Federal Income Tax
Considerations.”
We have summarized the material terms and provisions of the
Limited Partnership Agreement of NorthEnd Operating Partnership
LP, which we refer to as the “partnership agreement.”
This summary is not complete. For more detail, you should refer
to the partnership agreement itself, which is filed as an
exhibit to the registration statement of which this prospectus
is part. For purposes of this section, references to
“we,”“our,”“us” and “the
company” refer to NorthEnd Income Property
Trust Inc.
Management
of Our Operating Partnership
NorthEnd Operating Partnership LP, our operating partnership,
was formed on August 25, 2008 to acquire and hold assets on
our behalf. For purposes of satisfying the asset and gross
income tests for qualification as a REIT for federal income tax
purposes, the company’s proportionate share of the assets
and income of our operating partnership will be deemed to be
assets and income of the company.
We intend to hold substantially all of our assets in our
operating partnership or in subsidiary entities in which our
operating partnership owns an interest.
We will be the sole general partner of our operating
partnership. As the sole general partner of our operating
partnership, we will have the exclusive power to manage and
conduct the business of our operating partnership. A general
partner is accountable to a limited partnership as a fiduciary
and consequently must exercise good faith and integrity in
handling partnership affairs. Neither NorthEnd Holding nor any
other limited partner of our operating partnership may transact
business for our operating partnership, or participate in
management activities or decisions, except as provided in the
partnership agreement and as required by applicable law. We may
not be removed as general partner by the limited partners. Our
board of directors will at all times have ultimate oversight and
policy-making authority, including responsibility for
governance, financial controls, compliance and disclosure with
respect to our operating partnership. Pursuant to an advisory
agreement, which will be effective as of the initial offering
date, however, we will delegate to our advisor authority to make
decisions related to our and our operating partnership’s
day-to-day business, the acquisition, management and disposition
of assets and the selection of property managers and other
service providers, in accordance with our investment objectives,
strategy, guidelines, policies and limitations.
NorthEnd Holding has expressly acknowledged and any future
limited partners of our operating partnership will expressly
acknowledge that we, as general partner, are acting for our
benefit, and the benefit of the limited partners of our
operating partnership and our stockholders collectively. Neither
we nor our board of directors is under any obligation to give
priority to the separate interests of the limited partners of
our operating partnership or our stockholders in deciding
whether to cause our operating partnership to take or decline to
take any actions. If there is a conflict between the interests
of our stockholders on one hand and our operating
partnership’s limited partners on the other, we will
endeavor in good faith to resolve the conflict in a manner not
adverse to either our stockholders or our operating
partnership’s limited partners; provided, however, that for
so long as we own a controlling interest in our operating
partnership, any conflict that cannot be resolved in a manner
not adverse to either our stockholders or our operating
partnership’s limited partners will be resolved in favor of
our stockholders. We are not liable under the partnership
agreement to our operating partnership or to any of its limited
partners for monetary damages for losses sustained, liabilities
incurred, or benefits not derived by such limited partners in
connection with such decisions, provided that we have acted in
good faith.
The partnership agreement requires that our operating
partnership be operated in a manner that will enable us to:
(1) satisfy the requirements for qualification as a REIT
for federal income tax purposes, unless we otherwise cease to
qualify as a REIT; (2) avoid any federal income or excise
tax liability; and (3) ensure that our operating
partnership will not be classified as a “publicly traded
partnership” that is taxable as a corporation. See
“Material United States Federal Income Tax
Considerations.”
We intend to contribute the net proceeds from this offering,
which are not used or retained to pay the fees and expenses
attributable to our operations, to our operating partnership as
capital contributions. These capital contributions will be
reflected in our capital account in our operating partnership.
If our operating partnership requires additional funds at any
time in excess of capital contributions made by us, our
operating partnership may borrow funds from a financial
institution or other lender. In addition, our operating
partnership may admit additional limited partners whose
investments may be subject to different management fees and
redemption limitations if our board of directors concludes in
good faith that such admittance is in our best interest.
The partnership agreement generally provides that our operating
partnership will, except upon the liquidation of our operating
partnership, distribute cash to the partners of our operating
partnership in accordance with their relative percentage
interests, generally on at least a quarterly basis, in amounts
determined by us as general partner. Upon the liquidation of our
operating partnership, after payment of debts and obligations,
any remaining assets of our operating partnership will be
distributed in accordance with the distribution provisions of
the partnership agreement to the extent of each partner’s
positive capital account balance.
Issuance
of Additional Limited Partnership Interests
As sole general partner of our operating partnership, effective
as of the initial offering date, we will have the ability to
cause our operating partnership to issue additional limited
partnership interests. These additional interests may be issued
to institutional and other large investors that may prefer to
make an investment directly in our operating partnership and may
include preferred limited partnership interests. In addition, we
may issue additional shares of our common stock or convertible
securities.
Transferability
of Interests
We may not (1) voluntarily withdraw as the general partner
of our operating partnership, (2) engage in any merger,
consolidation or other business combination or (3) transfer
our general partnership interest in our operating partnership
(except to a wholly owned subsidiary), unless: (A) the
transaction in which such withdrawal, business combination or
transfer occurs results in the limited partners receiving or
having 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
prior to such transaction; or (B) in the case of a merger
or other business combination, the successor entity contributes
substantially all of its assets to our operating partnership in
return for an interest in our operating partnership and agrees
to assume all obligations of the general partner of our
operating partnership.
We may also enter into a business combination or we may transfer
our general partnership interest upon the receipt of the consent
of a
majority-in-interest
of the limited partners of our operating partnership, other than
interests held by us. With certain exceptions, the limited
partners may not transfer their interests in our operating
partnership, in whole or in part, without our written consent,
as general partner.
NorthEnd Holding, our advisor or one or more of our
advisor’s affiliates will maintain an aggregate investment
in us or our operating partnership equal to at least $200,000
for so long as an affiliate of ML & Co. is acting as
our advisor. In the event that an affiliate of ML &
Co. ceases to be our advisor, NorthEnd Holding may require our
operating partnership to redeem its limited partnership interest
for cash.
We, as general partner, will not be liable to our operating
partnership or limited partners for errors in judgment or other
acts or omissions not amounting to willful misconduct or gross
negligence since provision has been made in the partnership
agreement for exculpation of the general partner. Therefore,
purchasers of interests in our operating partnership have a more
limited right of action than they would have absent the
limitation in the partnership agreement.
Indemnification
The partnership agreement provides for the indemnification of
us, as general partner, by our operating partnership for
liabilities we incur in dealings with third parties on behalf of
our operating partnership. To the extent that the
indemnification provisions purport to include indemnification of
liabilities arising under the Securities Act, in the opinion of
the SEC, such indemnification is contrary to public policy and
therefore unenforceable.
Tax
Matters
We are our operating partnership’s tax matters partner and,
as such, have the authority to make tax elections under the Code
on our operating partnership’s behalf.
The following summary of certain provisions of Maryland law
and of our charter and bylaws does not purport to be complete
and is subject to and qualified in its entirety by reference to
Maryland law and our amended and restated charter and bylaws,
forms of which are filed as exhibits to the registration
statement of which this prospectus is a part. See “Where
You Can Find More Information.”
Our Board
of Directors
Our charter and bylaws provide that we will have not less than
three and not more than 15 directors. Prior to
effectiveness of the registration statement of which this
prospectus is a part, our board of directors will be comprised
of seven directors. Our charter provides that a majority of our
directors must be “independent directors,” which is
defined in our charter as a person who is not one of our
officers or employees or an officer, director or employee of
either of our advisors or any of their affiliates and has not
been so or otherwise been directly or indirectly associated with
us or our advisors or any of their affiliates for the previous
two years.
Each director will serve until the next annual meeting of
stockholders and until his or her successor has been duly
elected and qualified. Although the number of directors may be
increased or decreased, a decrease may not shorten 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 at a meeting called for the purpose of the
proposed removal. The notice of the meeting must indicate that
the purpose, or one of the purposes, of the meeting is to
determine if the director shall be removed.
Any 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 by a vote of a
majority of the remaining directors. As provided in our charter,
nominations of individuals to fill the vacancy of a board seat
previously filled by an independent director will be made by the
remaining independent directors.
Removal
of Directors
Our charter provides that a director may be removed with or
without cause by the affirmative vote of a majority of the votes
entitled to be cast in the election of directors.
Business
Combinations
Under the Maryland General Corporation Law, business
combinations between a Maryland corporation and an interested
stockholder or the interested stockholder’s affiliate are
prohibited for five years after the most recent date on which
the stockholder becomes an interested stockholder. For this
purpose, the term “business combinations” includes
mergers, consolidations, share exchanges or, in circumstances
specified in the Maryland General Corporation Law, asset
transfers and issuances or reclassifications of equity
securities. An “interested stockholder” is defined for
this purpose as: (1) any person who beneficially owns 10%
or more of the voting power of the corporation’s shares; or
(2) 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 voting shares of the corporation.
A person is not an interested stockholder under the Maryland
General Corporation Law if the board of directors approved in
advance the transaction by which he otherwise would become an
interested stockholder. However, in approving the 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 of directors.
After the five-year prohibition, any business combination
between the corporation and an interested stockholder generally
must be recommended by the board of directors of the 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 shares of stock
held by the interested stockholder or its affiliate with whom
the business
combination is to be effected, or held by an affiliate or
associate of the interested stockholder, voting together as a
single voting group.
These super majority vote requirements do not apply if the
corporation’s common stockholders receive a minimum price,
as defined under the Maryland General Corporation Law, for their
shares of common stock in the form of cash or other
consideration in the same form as previously paid by the
interested stockholder for its shares of common stock.
None of these provisions of the Maryland General Corporation Law
will apply, however, to business combinations that are approved
or exempted by the board of directors of the corporation prior
to the time that the interested stockholder becomes an
interested stockholder. Pursuant to the business combination
statute, our board of directors has exempted any business
combination involving us and any person. Consequently, the
five-year prohibition and the super majority vote requirements
will not apply to business combinations between us and any
person. As a result, any person may be able to enter into
business combinations with us that may not be in the best
interest of our stockholders, without compliance with the super
majority vote requirements and other provisions of the statute.
Should our board of directors opt into the business combination
statute, it may discourage others from trying to acquire control
of us and increase the difficulty of consummating any offer.
Control
Share Acquisitions
The Maryland General Corporation Law provides that control
shares of a Maryland corporation acquired in a control share
acquisition have no voting rights except to the extent approved
by a vote of two-thirds of the votes entitled to be cast on the
matter. Shares of common stock owned by the acquiror, by
officers or by employees who are directors of the corporation
are not entitled to vote on the matter. “Control
shares” are voting shares of stock which, if aggregated
with all other shares of stock owned by the acquiror or with
respect to which the acquiror has the right to vote or to direct
the voting of, other than solely by virtue of revocable proxy,
would entitle the acquiror to exercise voting power in electing
directors within one of the following ranges of voting powers:
•
one-tenth or more but less than one-third;
•
one-third or more but less than a majority; or
•
a majority or more of all voting power.
Control shares do not include shares of stock the acquiring
person is then entitled to vote as a result of having previously
obtained stockholder approval. Except as otherwise specified in
the statute, a “control share acquisition” means the
acquisition of control shares. Once a person who has made or
proposes to make a control share acquisition has undertaken to
pay expenses and has satisfied other required conditions, the
person may compel the 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 of stock. 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 for the control shares at the meeting or
if the acquiring person does not deliver an “acquiring
person statement” for the control shares as required by the
statute, the corporation may redeem any or all of the control
shares for their fair value, except for control shares for which
voting rights have previously been approved. Fair value is to be
determined for this purpose without regard to the absence of
voting rights for the control shares, and is to be determined as
of the date of the last control share acquisition or of any
meeting of stockholders at which the voting rights for control
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 of stock entitled to vote, all
other stockholders may exercise appraisal rights. The fair value
of the shares of stock as determined for purposes of these
appraisal rights may not be less than the highest price per
share paid in the control share acquisition. Some of the
limitations and restrictions otherwise applicable to the
exercise of dissenters’ rights do not apply in the context
of a control share acquisition.
The control share acquisition statute does not apply to shares
of stock acquired in a merger or consolidation or on a stock
exchange if the corporation is a party to the transaction or to
acquisitions approved or exempted by the charter or bylaws of
the corporation. As permitted by the Maryland General
Corporation Law, we have provided in our bylaws that the control
share provisions of the Maryland General Corporation Law will
not apply to any acquisition by any person of shares of our
stock, but the board of directors retains the discretion to
change this provision in the future.
Unsolicited
Takeover Statutes
Subtitle 8 of Title 3 of the Maryland General Corporation
Law 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, without a
stockholder vote, 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:
•
maintaining a classified board;
•
requiring two-thirds stockholder vote for removing a director;
•
requiring that the number of directors be fixed only by vote of
the board of directors;
•
requiring that a vacancy on the board be filled only by the
remaining directors and for the remainder of the full term of
the class of directors in which the vacancy occurred; and
•
a request by a majority of stockholders for the calling of a
special meeting of stockholders.
Pursuant to Subtitle 8, we have elected to provide that
vacancies on our board of directors 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
vest in the board the exclusive power to fix the number of
directors.
Our charter may be amended by the affirmative vote of the
holders of a majority of shares of our common stock then
outstanding and entitled to vote thereon, without the
concurrence of our board of directors. Our board of directors
may not amend our charter (without the concurrence by our
stockholders) except (1) to enable us to qualify as a REIT
under the Code and for purposes of maintaining such
qualification, (2) to increase the authorized but unissued
shares of our common stock that we may issue and (3) to
change our corporate name or the designation or par value of any
class or series of our shares. Our board of directors has the
exclusive power to adopt, alter or repeal any provision of our
bylaws or to make new bylaws upon the concurrence of the
majority of our stockholders, except for amendments that do not
adversely affect the rights, preferences and privileges of
stockholders and therefore do not require stockholder consent.
Voting
with Respect to Certain Matters
With respect to shares of common stock owned by our advisor, our
directors or any of their respective affiliates, none of our
advisors, our directors, nor any of their respective affiliates
may vote or consent on matters submitted to the stockholders
regarding the removal of our advisor, directors or any of their
respective affiliates or any transaction between us and any of
them. In determining the requisite percentage in interest of
shares of our common stock necessary to approve a matter on
which our advisor, directors or any affiliate may not vote or
consent, any shares owned by any of them will not be included.
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 our
board of directors and the proposal of business to be considered
by stockholders may be made at an annual meeting of stockholders
at which directors are to be elected only (1) pursuant to
our notice of the meeting, (2) by or at the direction of
our board of directors or (3) by a stockholder who was a
stockholder of record both at the time of provision of notice
and at the time of the meeting, is entitled to vote at the
meeting and has complied with the advance notice procedures set
forth in our bylaws.
With respect to special meetings of stockholders, only the
business specified in our notice of meeting may be brought
before the meeting. Nominations of individuals for election to
our board of directors may be made at a special meeting of
stockholders at which directors are to be elected only
(1) pursuant to our notice of the meeting, (2) by or
at the direction of our board of directors or (3) provided
that our board of directors has determined that directors will
be elected at such meeting, by a stockholder who was a
stockholder of record both at the time of provision of notice
and at the time of the meeting, is entitled to vote at the
meeting and has complied with the advance notice provisions set
forth in our bylaws.
Meetings
of Stockholders
Under our bylaws, annual meetings of stockholders will be held
each year, at least 30 days after the delivery of our
annual report, upon reasonable notice for the purpose of
electing directors and for the transaction of such other
business as may come before the meeting. Special meetings of
stockholders may be called by our president, chief executive
officer, a majority of our directors or independent directors.
In addition, special meetings must be called by our Secretary
upon the written request of the holders of not less than 10% of
our common stock entitled to vote at a meeting. Upon receipt of
such a written request, either in person or by mail, stating the
purpose or purposes of the meeting, we will provide all
stockholders, within ten days of receipt of the written request,
written notice, either in person or by mail, of the meeting and
its purpose. Such meeting will be held not less than 15 nor more
than 60 days after distribution of the notice, at the time
and place specified in the request, or if none is specified, at
a time and place convenient to stockholders. Only matters set
forth in the notice of the meeting may be considered and acted
upon at a special meeting.
At any meeting of stockholders, each stockholder is entitled to
one vote per share of common stock owned of record on the
applicable record date. In general, the presence in person or by
proxy of 50% of the common stock then outstanding will
constitute a quorum, and except with respect to the election of
directors or as otherwise provided in the charter, the majority
vote of the common stock entitled to vote will be binding on all
our stockholders.
Anti-Takeover
Effect of Certain Provisions of Maryland Law and of Our Charter
and Bylaws
Our charter and bylaws and Maryland law contain provisions that
may delay, defer or prevent a change of control or other
transaction that might involve a premium price for our common
stock or otherwise be in the best interests of our stockholders,
including the power of our board to issue additional shares of
our common stock, the restrictions on ownership and transfer of
our shares, advance notice requirements for director nominations
and stockholder proposals and the application of the Maryland
business combination provisions. Likewise, if the provision in
the bylaws opting out of the control share acquisition
provisions of the Maryland General Corporation Law were
rescinded, these provisions of the Maryland General Corporation
Law could have similar anti-takeover effects. See “Risk
Factors—Risks Related to Our Corporate Structure—Our
Charter limits the number of shares a person may own, which may
discourage a takeover that could otherwise result in a premium
price to our stockholders” and “Certain provisions of
Maryland law could inhibit transactions or changes of control
under circumstances that could otherwise provide stockholders
with the opportunity to realize a premium.”
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. All of such books of account, together
with all of our other records, including a copy of our charter
and bylaws and any amendments thereto, will at all times be
maintained at our principal office, and will be open to
inspection, examination, and, for a reasonable charge,
duplication upon reasonable notice and during normal business
hours by a stockholder or his or her agent.
As a part of our books and records, we will maintain at our
principal office an alphabetical list of names of stockholders,
along with their addresses and telephone numbers and the number
of shares held by each stockholder. Such list will be updated at
least quarterly and will be available for inspection at our
principal office by a stockholder or his or her agent upon such
stockholder’s request. Such list also will be mailed to any
stockholder requesting the list within ten days of a request.
The copy of the stockholder list will be printed in alphabetical
order, on white paper, and in readily readable type size that is
not smaller than ten-point type. We may impose a reasonable
charge for expenses incurred in reproducing and mailing such
list. The list may not be sold or used for commercial purposes
and we may require the stockholder requesting the stockholder
list to represent that the list is not requested for a
commercial purpose unrelated to the stockholder’s interest
in the company.
Indemnification
and Limitation of Directors’, Officers’ and
Others’ Liability
Our organizational documents limit the personal liability of our
stockholders, directors and officers for monetary damages to the
extent permitted under current provisions of Maryland law in
effect from time to time and the limitations of the NASAA REIT
Guidelines. In addition, our directors and officers are covered
by a liability insurance policy. Maryland law allows directors
and officers to be indemnified against judgments, penalties,
fines, settlements and reasonable expenses actually incurred in
connection with a proceeding unless the following can be
established:
•
an 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.
This provision does not reduce the exposure of directors and
officers to liability under federal or state securities laws,
nor does it limit the stockholder’s ability to obtain
injunctive relief or other equitable remedies for a violation of
a director’s or an officer’s duties to us or our
stockholders, although the equitable remedies may not be an
effective remedy in some circumstances.
Our charter provides, however, that the directors, our advisor
and its affiliates will be indemnified by us for losses arising
from our operation only if all of the following conditions are
met:
•
the directors, our advisor or its affiliates have determined, in
good faith, that the course of conduct which caused the loss or
liability was in our best interests;
•
the directors, our advisor or its affiliates were acting on our
behalf or performing services for us;
•
in the case of affiliated directors, our advisor or its
affiliates, the liability or loss was not the result of
negligence or misconduct by the party seeking
indemnification; and
•
in the case of independent directors, the liability or loss was
not the result of gross negligence or willful misconduct by the
party seeking indemnification.
In addition, any indemnification or agreement to hold harmless
is recoverable only out of our net assets and not from our
stockholders.
The general effect to investors of any arrangement under which
any of our controlling persons, directors or officers are
insured or indemnified against liability is a potential
reduction in distributions resulting from our payment of
premiums associated with insurance or to the extent any such
loss is not covered by insurance, our payment of indemnified
loss.
The SEC takes the position that indemnification against
liabilities arising under the Securities Act is against public
policy and unenforceable. Indemnification of the directors,
officers, our advisor or their
affiliates will not be allowed 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:
•
there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the
particular indemnitee;
•
such claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction as to the particular
indemnitee; or
•
a court of competent jurisdiction approves a settlement of the
claims against a particular 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.
Extraordinary
Transactions
Under Maryland law, a Maryland corporation generally cannot
amend its charter or merge unless such is approved by the
affirmative vote of stockholders entitled to cast at least
two-thirds of the votes entitled to be cast on the matter unless
a lesser percentage (but not less than a majority of all of the
votes entitled to be cast on the matter) is set forth in the
company’s charter. Our charter provides that such actions
must be approved by a majority of all of the votes entitled to
be cast on the matter. Similarly, our charter requires the
affirmative vote of a majority of the votes entitled to be cast
to approve a dissolution or sale of all or substantially all of
our assets. Because operating assets may be held by a
company’s subsidiaries, as in our situation, this may mean
that a subsidiary of a company can transfer all of its assets
without any vote of the company’s stockholders.
REIT
Qualification
Our charter provides that our board of directors may revoke or
otherwise terminate our REIT election, without approval of our
stockholders, if it determines that it is no longer in our best
interests to qualify, or to attempt to qualify, as a REIT.
Restrictions
on Roll-Up
Transactions
In accordance with our charter, in connection with any proposed
transaction considered a
“roll-up
transaction” (as defined below) involving us and the
issuance of securities of an entity that would be created or
would survive after the successful completion of the
roll-up
transaction, an appraisal of all of our assets shall be obtained
from a competent independent appraiser. The assets shall be
appraised on a consistent basis, and the appraisal shall be
based on the evaluation of all relevant information and shall
indicate the value of the assets as of a date immediately prior
to the announcement of the proposed
roll-up
transaction. The appraisal shall assume an orderly liquidation
of the assets over a
12-month
period. The terms of the engagement of the independent appraiser
shall clearly state that the engagement is for our benefit and
the benefit of our stockholders. A summary of the appraisal,
indicating all material assumptions underlying the appraisal,
shall be included in a report to stockholders in connection with
any proposed
roll-up
transaction.
A
“roll-up
transaction” is a transaction involving the acquisition,
merger, conversion or consolidation, directly or indirectly, of
us and the issuance of securities of another entity, or a
roll-up
entity, that would be created or would survive after the
successful completion of such transaction. The term
roll-up
transaction does not include:
•
a transaction involving our securities that have been for at
least 12 months listed on a national securities
exchange; or
•
a transaction involving our conversion to a corporate, company,
or association form if, as a consequence of the transaction,
there will be no significant adverse change in any of the
following:
stockholder voting rights; the term of our existence;
compensation to our advisor; or our investment objectives.
In connection with a proposed
roll-up
transaction, the person sponsoring the
roll-up
transaction must offer to stockholders who vote “no”
on the proposal the choice of:
(1) accepting the securities of a
roll-up
entity offered in the proposed
roll-up
transaction; or
(2) one of the following:
(a)
remaining as holders of shares of our common stock and
preserving their interests therein on the same terms and
conditions as existed previously; or
(b)
receiving cash in an amount equal to the stockholder’s pro
rata share of the appraised value of our net assets.
We are prohibited from participating in any proposed
roll-up
transaction:
•
that would result in the stockholders having democracy rights in
a roll-up
entity 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 our charter, and our dissolution;
•
that includes provisions that would operate to materially impede
or frustrate the accumulation of shares by any purchaser of the
securities of the
roll-up
entity, except to the minimum extent necessary to preserve the
tax status of the
roll-up
entity, or which would limit the ability of an investor to
exercise the voting rights of its securities of the
roll-up
entity on the basis of the number of shares held by that
investor;
•
in which investor’s rights to access of records of the
roll-up
entity will be less than those provided in the section of this
prospectus entitled “Certain Provisions of Maryland Law and
of Our Charter and Bylaws—Inspection of Books and
Records;” or
•
in which any of the costs of the
roll-up
transaction would be borne by us if the
roll-up
transaction is not approved by the stockholders.
The following is a summary of the material United States
federal income tax considerations relating to our qualification
and taxation as a REIT and the acquisition, holding and
disposition of our common stock. For purposes of this section
under the heading “Material United States Federal Income
Tax Considerations,” references to “the company,”“we,”“our” and “us” mean only
NorthEnd Income Property Trust Inc. and not its
subsidiaries or other lower-tier entities, except as otherwise
indicated. You are urged both to review the following discussion
and to consult your tax advisor to determine the effect of
ownership and disposition of our shares on your individual tax
situation, including any state, local or
non-U.S. tax
consequences.
This summary is based upon the Code, the regulations
promulgated by the U.S. Treasury Department, or the
Treasury Regulations, current administrative interpretations and
practices of the IRS (including administrative interpretations
and practices expressed in private letter rulings which are
binding on the IRS only with respect to the particular taxpayers
who requested and received those rulings) and judicial
decisions, all as currently in effect, and all of which are
subject to differing interpretations or to change, possibly with
retroactive effect. No assurance can be given that the IRS would
not assert, or that a court would not sustain, a position
contrary to any of the tax consequences described below. No
advance ruling has been or will be sought from the IRS regarding
any matter discussed in this summary. This summary is for
general information only, and does not purport to discuss all
aspects of U.S. federal income taxation that may be
important to a particular stockholder in light of its investment
or tax circumstances, or to stockholders subject to special tax
rules, such as financial institutions, insurance companies and
broker-dealers.
This summary assumes that stockholders will hold shares of
our common stock as capital assets, which generally means as
property held for investment.
THE U.S. FEDERAL INCOME TAX TREATMENT OF HOLDERS OF OUR
COMMON STOCK DEPENDS IN SOME INSTANCES ON DETERMINATIONS OF FACT
AND INTERPRETATIONS OF COMPLEX PROVISIONS OF U.S. FEDERAL
INCOME TAX LAW FOR WHICH NO CLEAR PRECEDENT OR AUTHORITY MAY BE
AVAILABLE. IN ADDITION, THE TAX CONSEQUENCES OF HOLDING OUR
COMMON STOCK TO ANY PARTICULAR STOCKHOLDER WILL DEPEND ON THE
STOCKHOLDER’S PARTICULAR TAX CIRCUMSTANCES. YOU ARE URGED
TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE U.S. FEDERAL,
STATE, LOCAL AND
NON-U.S. INCOME
AND OTHER TAX CONSEQUENCES TO YOU OF ACQUIRING, HOLDING AND
DISPOSING OF OUR COMMON STOCK.
We intend to elect to be taxed as a REIT under the Code,
beginning with our taxable year ending December 31 of the year
in which the escrow period concludes. We believe that we are
organized and will operate in a manner that will allow us to
qualify for taxation as a REIT under the Code commencing with
our taxable year ending December 31 of the year in which the
escrow period concludes, and we intend to continue to be
organized and to operate in such a manner.
The law firm of Alston & Bird LLP has acted as our
counsel in connection with the offering. We expect to receive
the opinion of Alston & Bird LLP to the effect that,
commencing with our taxable year ending December 31 of the year
in which the escrow period concludes, we will be organized in
conformity with the requirements for qualification and taxation
as a REIT under the Code, and our proposed ownership and
operations, as represented by us, will enable us to meet the
requirements for qualification and taxation as a REIT under the
Code. The opinion of Alston & Bird LLP will be based
on various assumptions and on our representations to them
concerning our organization, our proposed ownership and
operations, and other matters relating to our ability to qualify
as a REIT, and will be expressly conditioned upon the accuracy
of such assumptions and representations, which
Alston & Bird LLP will not verify. The opinion of
Alston & Bird LLP will be based upon current law,
which is subject to change either prospectively or
retroactively. Changes in applicable law could modify the
conclusions expressed in the opinion, and Alston &
Bird LLP will have no obligation to advise us or the holders of
our common stock of any subsequent change in the matters stated,
represented or assumed, or of any subsequent change in the
applicable law. You should be aware that opinions
of counsel are not binding on the IRS, and no assurance can be
given that the IRS will not challenge the conclusions set forth
in such opinions.
Our qualification and taxation as a REIT will depend upon our
ability to meet, on an ongoing basis, the various and complex
REIT qualification tests imposed under the Code, the results of
which will not be reviewed or verified by Alston &
Bird LLP. See “—Requirements for
Qualification—General” below. Accordingly, no
assurance can be given that we will in fact satisfy such
requirements. While we believe that we are organized and intend
to operate so that we will qualify as a REIT, given the highly
complex nature of the rules governing REITs, the ongoing
importance of factual determinations, the possibility of future
changes in our circumstances and circumstances not entirely
within our control, no assurance can be given by
Alston & Bird LLP or us that we will so qualify for
any particular year.
Taxation
of REITs in General
As indicated above, our qualification and taxation as a REIT
depend upon our ability to meet, on a continuing basis, various
qualification requirements imposed upon REITs by the Code. The
material qualification requirements are summarized below under
“—Requirements for Qualification—General”
below. While we intend to operate so that we qualify as a REIT,
no assurance can be given that the IRS will not challenge our
qualification as a REIT or that we will be able to operate in
accordance with the REIT requirements in the future. See
“—Failure to Qualify” below.
Provided that we qualify as a REIT, we generally will be
entitled to a deduction for dividends that we pay and therefore
will not be subject to U.S. federal corporate income tax on
our net income that is currently distributed to our
stockholders. This treatment substantially eliminates the
“double taxation” at the corporate and stockholder
levels that generally results from investment in a corporation.
Rather, income generated by a REIT and distributed to its
stockholders generally is taxed only at the stockholder level.
Net operating losses, foreign tax credits and other tax
attributes of a REIT generally do not pass through to the
stockholders of the REIT, subject to special rules for certain
items such as capital gains recognized by REITs. See
“—Taxation of Stockholders” below.
If we qualify as a REIT, we will nonetheless be subject to
U.S. federal tax in the following circumstances:
•
We will be taxed at regular corporate rates on any undistributed
REIT taxable income, including undistributed net capital gains.
•
We may be subject to the alternative minimum tax.
•
If we have net income from prohibited transactions, such income
will be subject to a 100% tax. “Prohibited
transactions” are, in general, sales or other dispositions
of property held primarily for sale to customers in the ordinary
course of business, rather than for investment, other than
foreclosure property. See “—Prohibited
Transactions” and “—Foreclosure Property”
below.
•
If we have net income from the sale or disposition of
“foreclosure property,” as described below, that is
held primarily for sale in the ordinary course of business or
other non-qualifying income from foreclosure property, we will
be subject to corporate tax on such income at the highest
applicable rate (currently 35%).
•
If we fail to satisfy the 75% gross income test or the 95% gross
income test, as discussed below, but nonetheless maintain our
qualification as a REIT because other requirements are met, we
will be subject to a 100% tax on an amount equal to (a) the
greater of (1) the amount by which we fail the 75% gross
income test or (2) the amount by which we fail the 95%
gross income test, as the case may be, multiplied by (b) a
fraction intended to reflect our profitability.
•
If we fail to satisfy any of the REIT asset tests, as described
below, other than a failure by a de minimis amount of the
5% or 10% asset tests, as described below, but our failure is
due to reasonable cause and not due to willful neglect and we
nonetheless maintain our REIT qualification because of specified
cure
provisions, we will be required to pay a tax equal to the
greater of $50,000 or 35% of the net income generated by the
nonqualifying assets during the period in which we failed to
satisfy the asset tests.
•
If we fail to satisfy any other REIT qualification requirements
(other than a gross income or asset test requirement) and that
violation is due to reasonable cause and not due to willful
neglect, we may retain our REIT qualification, but we will be
required to pay a penalty of $50,000 for each such failure.
•
If we fail to distribute during each calendar year at least the
sum of (a) 85% of our REIT ordinary income for such year,
(b) 95% of our REIT capital gain net income for such year
and (c) any undistributed taxable income from prior
periods, we will be subject to a 4% excise tax on the excess of
such required distribution over the sum of (1) the amounts
actually distributed (taking into account excess distributions
from prior years), plus (2) retained amounts on which
U.S. federal income tax is paid at the corporate level.
•
We may be required to pay monetary penalties to the IRS in
certain circumstances, including if we fail to meet
record-keeping requirements intended to monitor our compliance
with rules relating to the composition of our stockholders, as
described below in “—Requirements for
Qualification—General.”
•
A 100% excise tax may be imposed on some items of income and
expense that are directly or constructively paid between us, our
lessees
and/or a
“taxable REIT subsidiary” (as described below) if and
to the extent that the IRS successfully adjusts the reported
amounts of these items.
•
If we acquire appreciated assets from a C corporation
(i.e., a corporation generally subject to corporate
income tax) in a transaction in which the adjusted tax basis of
the assets in our hands is determined by reference to the
adjusted tax basis of the assets in the hands of the C
corporation, we may be subject to tax on such appreciation at
the highest corporate income tax rate then applicable if we
subsequently recognize gain on a disposition of such assets
during the ten-year period following their acquisition from the
C corporation. The results described in this paragraph assume
that the non-REIT corporation will not elect in lieu of this
treatment to be subject to an immediate tax when the asset is
acquired by us.
•
We may elect to retain and pay income tax on our net long-term
capital gain. In that case, a stockholder would include its
proportionate share of our undistributed long-term capital gain
(to the extent we make a timely designation of such gain to the
stockholder) in its income, would be deemed to have paid the tax
that we paid on such gain, and would be allowed a credit for its
proportionate share of the tax deemed to have been paid, and an
adjustment would be made to increase the stockholder’s
basis in our common stock.
•
We may have subsidiaries or own interests in other lower-tier
entities that are C corporations, such as “taxable REIT
subsidiaries,” the earnings of which would be subject to
U.S. federal corporate income tax.
In addition, we and our subsidiaries may be subject to a variety
of taxes other than U.S. federal income tax, including
payroll taxes and state, local, and
non-U.S. income,
franchise property and other taxes on assets and operations. We
could also be subject to tax in situations and on transactions
not presently contemplated.
Requirements
for Qualification - General
The Code defines a REIT as a corporation, trust or association:
(1)
that is managed by one or more trustees or directors;
(2)
the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3)
that would be taxable as a domestic corporation but for the
special Code provisions applicable to REITs;
that is neither a financial institution nor an insurance company
subject to specific provisions of the Code;
(5)
the beneficial ownership of which is held by 100 or more persons;
(6)
in which, during the last half of each taxable year, not more
than 50% in value of the outstanding shares is owned, directly
or indirectly, by or for five or fewer “individuals”
(as defined in the Code to include specified entities);
(7)
that meets other tests described below, including with respect
to the nature of its income and assets and the amount of its
distributions;
(8)
that makes an election to be a REIT for the current taxable year
or has made such an election for a previous taxable year that
has not been terminated or revoked; and
(9)
that uses the calendar year as its fiscal year.
The Code provides that conditions (1) through (4) must
be met during the entire taxable year, and that condition
(5) must be met during at least 335 days of a taxable
year of 12 months or during a proportionate part of a
shorter taxable year. Conditions (5) and (6) do not
need to be satisfied for the first taxable year for which an
election to become a REIT has been made. Our charter provides
restrictions regarding the ownership and transfer of our shares,
which are intended to assist us in satisfying the share
ownership requirements described in conditions (5) and
(6) above. For purposes of condition (6), an
“individual” generally includes a supplemental
unemployment compensation benefit plan, a private foundation, or
a portion of a trust permanently set aside or used exclusively
for charitable purposes.
To monitor compliance with the share ownership requirements, we
are required to maintain records regarding the actual ownership
of our shares. To do so, we must demand written statements each
year from the record holders of certain percentages of our
shares in which the record holders are to disclose the actual
owners of the shares (i.e., the persons required to
include in gross income the dividends paid by us). A list of
those persons failing or refusing to comply with this demand
must be maintained as part of our records. Failure by us to
comply with these record-keeping requirements could subject us
to monetary penalties. If we satisfy these requirements and have
no reason to know that condition (6) is not satisfied, we
will be deemed to have satisfied such condition. A stockholder
that fails or refuses to comply with the demand is required by
Treasury Regulations to submit a statement with its tax return
disclosing the actual ownership of the shares and other
information.
Our taxable year is the calendar year, satisfying condition (9).
Effect
of Subsidiary Entities
Disregarded Subsidiaries. If a REIT owns a
corporate subsidiary that is a “qualified REIT
subsidiary,” that subsidiary is disregarded for
U.S. federal income tax purposes, and all assets,
liabilities and items of income, deduction and credit of the
subsidiary are treated as assets, liabilities and items of
income, deduction and credit of the REIT, including for purposes
of the gross income and asset tests applicable to REITs as
summarized below. A qualified REIT subsidiary is any entity,
other than a taxable REIT subsidiary (as described below), that
is classified as a corporation for federal income tax purposes
and wholly owned by a REIT, directly or through one or more
other disregarded subsidiaries. Single member limited liability
companies are also generally disregarded subsidiaries for
U.S. federal income tax purposes, including for purposes of
the REIT gross income and asset tests. Disregarded subsidiaries,
along with partnerships in which we hold an equity interest, are
sometimes referred to herein as “pass-through
subsidiaries.”
In the event that a disregarded subsidiary ceases to be wholly
owned by us (e.g., if any equity interest in the
subsidiary is acquired by a person other than us or another of
our disregarded subsidiaries) the subsidiary’s separate
existence would no longer be disregarded for U.S. federal
income tax purposes. Instead, it 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 tests applicable to REITs,
including the requirement that REITs generally may not own,
directly or
indirectly, more than 10% of the value or voting power of the
outstanding securities of another entity. See “—Asset
Tests” and “—Gross Income Tests” below.
Taxable Subsidiaries. A REIT generally may
jointly elect with a subsidiary corporation, whether or not
wholly owned, to treat the subsidiary corporation as a taxable
REIT subsidiary. If one of our taxable REIT subsidiaries owns,
directly or indirectly, more than 35%, by voting power or value,
of the outstanding securities, other than certain straight-debt
securities, of another corporation, such other corporation will
also be treated as our taxable REIT subsidiary. The separate
existence of a taxable REIT subsidiary or other taxable
corporation is not ignored for U.S. federal income tax
purposes. Accordingly, such an entity would generally be subject
to corporate U.S. federal, state, local and income and
franchise tax on its earnings, which may reduce the cash flow
available to us and our ability to make distributions to our
stockholders.
A REIT is not treated as holding the assets of a taxable REIT
subsidiary or other taxable subsidiary corporation or as
receiving any income that the subsidiary earns. Rather, the
stock issued by the subsidiary is an asset in the hands of the
REIT, and the REIT recognizes as income the dividends, if any,
that it receives from the subsidiary. Because we do not include
the assets and income of a taxable REIT subsidiary in
determining our compliance with the REIT income and asset tests,
we may use taxable REIT subsidiaries to undertake indirectly
activities that the REIT rules might otherwise preclude us from
engaging in directly or through pass-through subsidiaries
(e.g., activities that give rise to certain categories of
income such as management fees).
Certain restrictions imposed on taxable REIT subsidiaries are
intended to ensure that such entities will be subject to
appropriate levels of U.S. federal income taxation. First,
if a taxable REIT subsidiary has a debt to equity ratio as of
the close of the taxable year exceeding 1.5 to 1, it may not
deduct interest expense accrued in such year to an affiliated
REIT to the extent that such interest exceeds, generally, 50% of
the taxable REIT subsidiary’s adjusted taxable income for
that year. Disallowed interest may be carried forward and
deducted in a year in which the limitation does not apply. In
addition, if amounts are paid to a REIT or deducted by a taxable
REIT subsidiary due to transactions between a REIT, its lessees
and/or a
taxable REIT subsidiary, that exceed the amount that would be
paid to or deducted by a party in an arm’s-length
transaction, the REIT generally will be subject to an excise tax
equal to 100% of such excess.
Rents we receive that include amounts for services furnished by
a taxable REIT subsidiary to any of our lessees will not be
subject to the excise tax if such amounts qualify for the safe
harbor provisions contained in the Code. Safe harbor provisions
are provided where (1) amounts are excluded from the
definition of impermissible tenant service income as a result of
satisfying a 1% de minimis exception, (2) a taxable
REIT subsidiary renders a significant amount of similar services
to unrelated parties and the charges for such services are
substantially comparable, (3) rents paid to us by lessees
that are not receiving services from the taxable REIT subsidiary
are substantially comparable to the rents paid by our lessees
leasing comparable space that are receiving such services from
the taxable REIT subsidiary and the charge for the services is
separately stated or (4) the taxable REIT subsidiary’s
gross income from the service is not less than 150% of the
taxable REIT subsidiary’s direct cost of furnishing the
service.
Gross
Income Tests
In order to qualify as a REIT, we must satisfy two gross income
tests each year. First, at least 75% of our gross income for
each taxable year, excluding gross income from prohibited
transactions, must be derived from investments relating to real
property or mortgages on real property, including “rents
from real property,” dividends received from other REITs,
interest income derived from mortgage loans secured by real
property (including certain types of mortgage-backed
securities), and gains from the sale of real estate assets, as
well as “qualified temporary investment income,”
described below. Second, at least 95% of our gross income in
each taxable year, excluding gross income from prohibited
transactions, must be derived from sources of income that
qualify under the 75% gross income test and other dividends,
interest, gain from the sale or disposition of stock or
securities, and certain other categories of income.
Rents will qualify as “rents from real property” in
satisfying the gross income tests only if several conditions are
met, including the following:
•
The rent must not be based in whole or in part on the income or
profits of any person. An amount will not be disqualified,
however, solely by being based on a fixed percentage or
percentages of receipts or sales or, if it is based on the net
income or profits of a lessee which derives substantially all of
its income with respect to such property from subleasing of
substantially all of such property, to the extent that the rents
paid by the sublessees would qualify as rents from real
property, if earned directly by us.
•
If rent is partly attributable to personal property leased in
connection with a lease of real property, the portion of the
total rent that is attributable to the personal property will
not qualify as rents from real property if it exceeds 15% of the
total rent received under the lease.
•
For rents received to qualify as rents from real property, we
generally must not operate or manage the property or furnish or
render certain services to the lessees of such property, other
than through an “independent contractor,” as defined
in the Code, who is adequately compensated and from which we
derive or receive no income or through a taxable REIT
subsidiary. We are permitted, however, to perform services that
are “usually or customarily rendered” in connection
with the rental of space for occupancy only and are not
otherwise considered rendered to the occupant of the property.
In addition, we may directly or indirectly provide non-customary
services to lessees of our properties without disqualifying all
of the rents from the property if the gross income from such
services does not exceed 1% of the total gross income from the
property. In such a case, only the amounts for non-customary
services are not treated as rents from real property and the
provision of the services does not disqualify all of the rents
from treatment as rents from real property. For purposes of this
test, the gross income received from such non-customary services
is deemed to be at least 150% of the direct cost of providing
the services. Moreover, we are permitted to provide services to
lessees through a taxable REIT subsidiary without disqualifying
the rental income received from lessees as rents from real
property.
•
Rental income will not qualify as rents from real property if we
directly or indirectly (through application of certain
constructive ownership rules) own (1) in the case of any
lessee which is a corporation, stock possessing 10% or more of
the total combined voting power of all classes of stock entitled
to vote, or 10% or more of the total value of shares of all
classes of stock of such lessee or (2) in the case of any
lessee which is not a corporation, an interest of 10% or more in
the assets or net profits of such lessee. Rental payments from a
taxable REIT subsidiary, however, will qualify as rents from
real property even if we own more than 10% of the total value or
combined voting power of the taxable REIT subsidiary if
(a) at least 90% of the property is leased to unrelated
lessees and the rent paid by the taxable REIT subsidiary is
substantially comparable to the rent paid by the unrelated
lessees for comparable space or (b) the property is a
“qualified lodging facility” or a “qualified
health care facility” and certain additional requirements
are satisfied.
Unless we determine that the resulting nonqualifying income
under any of the following situations, taken together with all
other nonqualifying income earned by us in the taxable year,
will not jeopardize our status as a REIT, we do not intend to:
•
charge rent for any property 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 or percentages of receipts or
sales, as described above;
•
rent any property to a related party lessee, including a taxable
REIT subsidiary, unless the rent from the lease to the taxable
REIT subsidiary would qualify for the special exception from the
related party lessee rule applicable to certain leases with a
taxable REIT subsidiary;
•
derive rental income attributable to personal property other
than personal property leased in connection with the lease of
real property, the amount of which is less than 15% of the total
rent received under the lease; or
directly perform services considered to be noncustomary or
rendered to the occupant of the property unless the amount we
receive or accrue (directly or indirectly) for performing such
services for any taxable year will not exceed 1% of all amounts
we receive or accrue during such year with respect to the
property.
Distributions from our taxable REIT subsidiary or other
corporations that are not REITs or qualified REIT subsidiaries
will be classified as dividend income to the extent of the
earnings and profits of the distributing corporation. Such
distributions will generally constitute qualifying income for
purposes of the 95% gross income test, but not for purposes of
the 75% gross income test. Any dividends received by us from a
REIT, however, will be qualifying income for purposes of both
the 95% and 75% gross income tests.
Interest income constitutes qualifying mortgage interest for
purposes of the 75% gross income test to the extent that the
obligation is secured by a mortgage on real property. If we
receive interest income with respect to a mortgage loan that is
secured by both real property and other property, and the
highest principal amount of the loan outstanding during a
taxable year exceeds the fair value of the real property on the
date that we acquired or originated the mortgage loan, the
interest income will be apportioned between the real property
and the other property, and our income from the loan will
qualify for purposes of the 75% gross income test only to the
extent that the interest is allocable to the real property. Even
if a loan is not secured by real property or is undersecured,
the income that it generates may nonetheless also qualify for
purposes of the 95% gross income test.
Qualified temporary investment income is income that is
attributable to temporary investments in stock and debt
securities of new capital proceeds from stock issuances (other
than pursuant to our distribution reinvestment plan) and public
debt offerings and that is received in the one-year period
beginning on the date we receive new capital. We will attempt to
track investments of new capital so as to be able to confirm the
amount of our qualified temporary investment income.
To the extent that the terms of a loan provide for contingent
interest that is based on the cash proceeds realized upon the
sale of the property securing the loan, income attributable to
the participation feature will be treated as gain from sale of
the underlying property, which generally will be qualifying
income for purposes of both the 75% and 95% gross income tests.
The REIT requirements relating to mortgages make it difficult
for us to invest in certain mezzanine loans secured by a pledge
of equity in an entity holding real estate (as compared to a
mortgage in the underlying real property) and in certain
mortgage-backed securities.
If we fail to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, we may still qualify as a REIT for
the year if we are entitled to relief under applicable
provisions of the Code. These relief provisions will generally
be available if our failure to meet these tests was due to
reasonable cause and not due to willful neglect and, following
the identification of such failure, we set forth a description
of each item of our gross income that satisfies the gross income
tests in a schedule for the taxable year filed in accordance
with regulations prescribed by the Treasury. It is not possible
to state whether we would be entitled to the benefit of these
relief provisions in all circumstances. If these relief
provisions are inapplicable, we will not qualify as a REIT. As
discussed above under “—Taxation of REITs in
General,” even where these relief provisions apply, a tax
would be imposed upon the profit attributable to the amount by
which we fail to satisfy the particular gross income test.
Asset
Tests
At the close of each calendar quarter we must also satisfy a
series of tests relating to the nature of our assets:
•
At least 75% of the value of our total assets must be
represented by “real estate assets,” cash, cash items
and U.S. government securities. For this purpose, real
estate assets include interests in real property, such as land,
buildings, leasehold interests in real property, stock of other
REITs, certain kinds of mortgage-backed securities, and mortgage
loans, and, under some circumstances, stock or debt instruments
purchased with new capital. Assets that do not qualify for
purposes of the 75% test are subject to the additional asset
tests described below.
Not more than 25% of the value of our assets may be represented
by securities that do not satisfy the 75% test.
•
The value of any one issuer’s securities owned by us may
not exceed 5% of the value of our gross assets.
•
We may not own more than 10% of any one issuer’s
outstanding securities, as measured by either voting power or
value.
•
As recently amended in the Housing and Economic Recovery Act of
2008, the aggregate value of all securities of taxable REIT
subsidiaries held by us may not exceed 25% of the value of our
gross assets.
The 5% and 10% asset tests do not apply to securities of taxable
REIT subsidiaries, qualified REIT subsidiaries or securities
that are “real estate assets” for purposes of the 75%
gross asset test described above. The 10% value test does not
apply to certain “straight debt” and certain other
excluded securities, including, but not limited to, any loan to
an individual or estate, any obligation to pay rents from real
property, and any security issued by a REIT. In addition:
(a) a REIT’s interest as a partner in a partnership is
not considered a security for purposes of applying the 10% value
test to securities issued by the partnership; (b) any debt
instrument issued by a partnership (other than straight debt or
another excluded security) will not be considered a security
issued by the partnership if at least 75% of the
partnership’s gross income is derived from sources that
would qualify for the 75% gross income test; and (c) any debt
instrument issued by a partnership (other than straight debt or
another excluded security) will not be considered a security
issued by the partnership to the extent of the REIT’s
interest as a partner in the partnership. In general, straight
debt is defined as a written, unconditional promise to pay on
demand or at a specific date a fixed principal amount, and the
interest rate and payment dates on the debt must not be
contingent on profits or the discretion of the debtor. In
addition, straight debt may not contain a convertibility feature.
After initially meeting the asset tests at the close of any
quarter, we will not lose our qualification as a REIT for
failure to satisfy the asset tests at the end of a later quarter
solely by reason of changes in asset values. If we fail to
satisfy the asset tests because we acquire securities during a
quarter, we can cure this failure by disposing of the
non-qualifying assets within 30 days after the close of
that quarter. If we fail the 5% asset test or the 10% asset test
at the end of any quarter, and such failure is not cured within
30-days
thereafter, we may dispose of sufficient assets or otherwise
satisfy the requirements of such asset tests within six months
after the last day of the quarter in which our identification of
the failure to satisfy those asset tests occurred to cure the
violation, provided that the non-permitted assets do not exceed
the lesser of 1% of the total value of our assets at the end of
the relevant quarter or $10,000,000. If we fail any of the other
asset tests, or our failure of the 5% and 10% asset tests is in
excess of this amount, as long as the failure was due to
reasonable cause and not willful neglect and, following our
identification of the failure, we filed a schedule in accordance
with the Treasury Regulations describing each asset that caused
the failure, we are permitted to avoid disqualification as a
REIT, after the 30 day cure period, by taking steps to
satisfy the requirements of the applicable asset test within six
months after the last day of the quarter in which our
identification of the failure to satisfy the REIT asset test
occurred, including the disposition of sufficient assets to meet
the asset tests and paying a tax equal to the greater of $50,000
or 35% of the net income generated by the nonqualifying assets
during the period in which we failed to satisfy the relevant
asset test.
We believe that our holdings of securities and other assets will
comply with the foregoing REIT asset requirements, and we intend
to monitor compliance with such tests on an ongoing basis. The
values of some of our assets, including the securities of our
taxable REIT subsidiary, however, may not be precisely valued,
and values are subject to change in the future. Furthermore, the
proper classification of an instrument as debt or equity for
U.S. federal income tax purposes may be uncertain in some
circumstances, which could affect the application of the REIT
asset tests. Accordingly, there can be no assurance that the IRS
will not contend that our assets do not meet the requirements of
the REIT asset tests.
For each taxable year, we are required to distribute dividends,
other than capital gain dividends, to our stockholders in an
amount at least equal to:
the sum of (1) 90% of our “REIT taxable income”
(computed without regard to our deduction for dividends paid and
our net capital gains) and (2) 90% of the net income, if
any (after tax), from foreclosure property (as described below);
minus, the sum of specified items of non-cash income that
exceeds a percentage of our income.
In addition to distributions made in the taxable year to which
they relate, certain distributions made in the following year
are taken into account for these purposes. If distributions are
declared in October, November or December of the taxable year,
are payable to stockholders of record on a specified date in any
such month, and are actually paid before the end of January of
the following year, such distributions are treated as both paid
by us and received by our stockholders on December 31 of the
year in which they are declared. In addition, at our election, a
distribution for a taxable year may be declared before we timely
file our tax return for the year provided we pay such
distribution with or before our first regular dividend payment
after such declaration and such payment is made during the
12-month
period following the close of such taxable year. These
distributions are taxable to our stockholders in the year in
which paid, even though the distributions relate to our prior
taxable year for purposes of the 90% distribution requirement.
In certain circumstances, we may be able to rectify a failure to
meet the distribution requirements for a year by paying
“deficiency dividends” to stockholders in a later
year, which may be included in our deduction for dividends paid
for the earlier year. In this case, we may be able to avoid
losing our REIT qualification or being taxed on amounts
distributed as deficiency dividends. However, we will be
required to pay interest and a penalty based on the amount of
any deduction taken for deficiency dividends.
In order for distributions to be counted towards our
distribution requirement and to provide a tax deduction to us,
they must not be “preferential dividends.” A dividend
is not a preferential dividend if it is pro rata among all
outstanding shares within a particular class and is in
accordance with the preferences among our different classes of
shares as set forth in our organizational documents. A
distribution of a preferential dividend may cause other
distributions to be treated as preferential dividends, possibly
preventing us from satisfying the distribution requirement for
REIT qualification.
To the extent that we distribute at least 90%, but less than
100%, of our net taxable income, we will be subject to tax at
ordinary corporate tax rates on the retained portion. In
addition, we may elect to retain, rather than distribute, our
net long-term capital gains and pay tax on such gains. In this
case, we would elect to have our stockholders include their
proportionate share of such undistributed long-term capital
gains in their income and receive a corresponding credit for
their proportionate share of the tax paid by us. Our
stockholders would then increase their adjusted basis in our
shares by the difference between the amount included in their
long-term capital gains and the tax deemed paid with respect to
their shares.
If we fail to distribute during each calendar year at least the
sum of (1) 85% of our REIT ordinary income for such year,
(2) 95% of our REIT capital gain net income for such year
and (3) any undistributed taxable income from prior
periods, we will be subject to a 4% excise tax on the excess of
such amount over the sum of (A) the amounts actually
distributed (taking into account excess distributions from prior
periods) and (B) the amounts of income retained on which we
have paid corporate income tax. We intend to make timely
distributions so that we are not subject to the 4% excise tax.
If distributions are declared in October, November or December
of the taxable year, are payable to stockholders of record on a
specified date in any such month, and are actually paid before
the end of January of the following year, such distributions are
treated as both paid by us and received by our stockholders on
December 31 of the year in which they are declared.
Under certain technical rules governing deficiency dividends, we
could lose our ability to cure an under-distribution in a year
with a subsequent year deficiency dividend if we pay
preferential dividends, potentially including “dividend
equivalent redemptions.” Accordingly, we intend to pay
dividends pro rata within each class, to abide by the rights and
preferences of each class of our shares if there is more than
one, and to avoid
dividend equivalent redemptions. (See “Taxation of
Stockholders—Redemptions of Our Common Stock” below
for a discussion of when redemptions are dividend equivalent and
measures we intend to take to avoid them.) Amounts distributed
in redemptions will not count towards satisfying the 90%
distribution requirement or avoiding the 4% excise tax.
It is possible that we, from time to time, may not have
sufficient cash to meet the REIT distribution requirements
because cash is needed to fund redemptions or due to timing
differences between (1) the actual receipt of cash,
including the receipt of distributions from our pass-through
subsidiaries and (2) the inclusion of items in income by us
for U.S. federal income tax purposes. Additional potential
sources of non-cash taxable income include loans or
mortgage-backed securities held by us as assets that are issued
at a discount and require the accrual of taxable interest income
in advance of our receipt in cash, loans on which the borrower
is permitted to defer cash payments of interest and distressed
loans on which we may be required to accrue taxable interest
income even though the borrower is unable to make current
interest payments in cash. In addition, we may not have
sufficient funds to pay deficiency dividends, in the event we
were required to pay them to preserve our REIT status with
respect to any taxable year. In the event that we do not have
sufficient cash to satisfy our distribution requirements, it
might be necessary to sell assets, arrange for short-term, or
possibly long-term, borrowings, or to pay dividends in the form
of taxable in-kind distributions of property, including
potentially, our shares, in order to satisfy such requirements.
Failure
to Qualify
In the event we violate a provision of the Code that would
result in our failure to qualify as a REIT, specified relief
provisions will be available to us to avoid such
disqualification if (1) the violation is due to reasonable
cause and not due to willful neglect, (2) we pay a penalty
of $50,000 for each failure to satisfy the provision and
(3) the violation does not include a violation under the
gross income or asset tests described above (for which other
specified relief provisions are available) or the failure to
meet the minimum distribution requirements. This cure provision
reduces the instances that could lead to our disqualification as
a REIT for violations due to reasonable cause and not due to
willful neglect.
If we fail to qualify for taxation as a REIT in any taxable
year, and the relief provisions of the Code do not apply, we
will be subject to tax, including any applicable alternative
minimum tax, on our taxable income at regular corporate rates.
Distributions to our stockholders in any year in which we are
not a REIT will not be deductible by us, nor will they be
required to be made. In this situation, to the extent of current
and accumulated earnings and profits, and, subject to
limitations of the Code, distributions to our stockholders
through 2010 will generally be taxable to stockholders who are
individual U.S. stockholders at a maximum rate of 15%, and
dividends received by our corporate U.S. stockholders may
be eligible for the dividends received deduction. Unless we are
entitled to relief under specific statutory provisions, we will
also be disqualified from re-electing to be taxed as a REIT for
the four taxable years following a year during which
qualification was lost. It is not possible to state whether, in
all circumstances, we will be entitled to this statutory relief.
Prohibited
Transactions
Net income derived from prohibited transactions is subject to a
100% tax. The term “prohibited transactions” generally
includes a sale or other disposition of property (other than
foreclosure property) that is held primarily for sale to
customers in the ordinary course of a trade or business. We
intend to hold our properties for investment with a view to
long-term appreciation, to engage in the business of owning and
operating properties and to make sales of properties that are
consistent with our investment objectives. Whether property is
held “primarily for sale to customers in the ordinary
course of a trade or business,” however, depends on the
specific facts and circumstances. No assurance can be given that
any particular property in which we hold a direct or indirect
interest will not be treated as property held for sale to
customers, or that certain safe-harbor provisions of the Code
that prevent such treatment, even as liberalized by the Housing
and Economic Recovery Act of 2008, will apply. The 100% tax will
not apply to gains from the sale of property held through a
taxable REIT subsidiary, although such income will be subject to
tax at regular corporate income tax rates.
Foreclosure property is real property (including interests in
real property) and any personal property incident to such real
property (1) that is acquired by a REIT as a result of the
REIT having bid in the property at foreclosure, or having
otherwise reduced the property to ownership or possession by
agreement or process of law, after there was a default (or
default was imminent) on a lease of the property or a mortgage
loan held by the REIT and secured by the property, (2) for
which the related loan or lease was made, entered into or
acquired by the REIT at a time when default was not imminent or
anticipated and (3) for which such REIT makes an election
to treat the property as foreclosure property. REITs generally
are 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, even if the property is held primarily for sale to
customers in the ordinary course of a trade or business.
Hedging
Transactions
We may enter into hedging transactions with respect to one or
more of our assets or liabilities. Hedging transactions could
take a variety of forms, including interest rate swaps or cap
agreements, options, futures contracts, forward rate agreements
or similar financial instruments. Pursuant to recent changes in
the Housing and Economic Recovery Act of 2008, any income from a
hedging transaction to manage risk of interest rate or price
changes or currency fluctuations with respect to borrowings made
or to be made, or ordinary obligations incurred or to be
incurred by us to acquire or own real estate assets, which is
clearly identified as such before the close of the day on which
it was acquired, originated or entered into, including gain from
the disposition of such a transaction, will be disregarded for
purposes of the 75% and 95% gross income tests. The Housing and
Economic Recovery Act of 2008 also provides rules for
disregarding income for purposes of the 75% and 95% gross income
tests with respect to hedges of certain foreign currency risks.
To the extent we enter into other types of hedging transactions,
the income from those transactions is likely to be treated as
non-qualifying income for purposes of both the 75% and 95% gross
income tests. We intend to structure any hedging transactions in
a manner that does not jeopardize our ability to qualify as a
REIT.
Sale-Leaseback
Transactions
We may enter into sale-leaseback
transactions. It is possible that the IRS could
take the position that specific sale-leaseback transactions we
treat as true leases are not true leases for U.S. federal
income tax purposes but are, instead, financing arrangements or
loans. Successful recharacterization of a sale-leaseback
transaction as a financing arrangement or loan could jeopardize
our REIT status.
Foreign
Investments
To the extent that we hold or acquire any investments and,
accordingly, pay taxes in other countries, taxes paid by us in
non-U.S. jurisdictions
may not be passed through to, or used by, our stockholders as a
foreign tax credit or otherwise. In addition, certain passive
income earned by a
non-U.S. taxable
REIT subsidiary must be taken in account by us currently
(whether or not distributed by the taxable REIT subsidiary) and
may not be qualifying income under the 95% and 75% gross income
tests.
Tax
Aspects of Investments in Partnerships
General
We intend to hold our investments through our operating
partnership, which may hold investments through other entities
that are classified as partnerships for U.S. federal income
tax purposes. In general, partnerships are
“pass-through” entities that are not subject to
U.S. federal income tax. Rather, partners are allocated
their proportionate shares of the items of income, gain, loss,
deduction and credit of a partnership, and are subject to tax on
these items without regard to whether the partners receive a
distribution from the partnership. We will include in our income
our proportionate share of these partnership items in the
computation of our REIT taxable income. Moreover, for purposes
of the REIT income and asset tests, we will include our
proportionate share of income of, assets held by, our operating
partnership and any other subsidiary partnerships, based on our
capital interest in such partnerships (other than for purposes
of the 10% value test, for which the determination of our
interest in partnership assets will be based on our
proportionate interest in any securities issued by the
partnership excluding, for these purposes, certain excluded
securities as described in the Code). Consequently, to the
extent that we hold an equity interest in a partnership, the
partnership’s assets and operations may affect our ability
to qualify as a REIT, even though we may have no control, or
only limited influence, over the partnership.
Entity
Classification
The investment by us in partnerships involves special tax
considerations, including the possibility of a challenge by the
IRS of the status of our operating partnership or a subsidiary
partnership as a partnership, as opposed to an association
taxable as a corporation, for U.S. federal income tax
purposes. Under applicable Treasury Regulations, an
unincorporated domestic entity with at least two members is
classified as a partnership unless it elects to be treated as an
association taxable as a corporation. Our operating partnership
intends to be classified as a partnership for federal income tax
purposes and will not elect to be treated as an association
taxable as a corporation.
Even though our operating partnership will not elect to be
treated as an association for federal income tax purposes, our
operating partnership or a subsidiary partnership may be taxed
as a corporation if it is deemed to be a “publicly traded
partnership.” A publicly traded partnership is a
partnership whose interests are traded on an established
securities market or are readily tradable on a secondary market
or the substantial equivalent thereof. Applicable Treasury
Regulations, which we refer to as the “PTP
Regulations,” provide limited safe harbors from treatment
as a publicly traded partnership. Pursuant to one of those safe
harbors, interests in a partnership will not be treated as
readily tradable on a secondary market or the substantial
equivalent thereof if (1) all interests in the partnership
were issued in a transaction (or transactions) that were not
required to be registered under the Securities Act and
(2) the partnership does not have more than 100 partners at
any time during the partnership’s taxable year. In
determining the number of partners in a partnership, a person
owning an interest in a flow-through entity (including a
partnership, grantor trust or S corporation) that owns an
interest in the partnership is treated as a partner in such
partnership only if (a) substantially all of the value of
the owner’s interest in the flow-through entity is
attributable to the flow-through entity’s direct or
indirect interest in the partnership and (b) a principal
purpose of the use of the flow-through entity is to permit the
partnership to satisfy the 100 partner limitation. Even if our
operating partnership or a subsidiary partnership were
considered a publicly traded partnership under the PTP
Regulations, it would not be treated as a corporation for
federal income tax purposes as long as 90% or more of its gross
income consists of “qualifying income” under
section 7704(d) of the Code. In general, qualifying income
includes interest, dividends, real property rents (as defined
under the REIT rules discussed above) and gain from the sale or
disposition of real property, which generally includes income
that is qualifying income for purposes of the 95% gross income
test applicable to REITs. We intend that our operating
partnership will operate such that it is not taxed as a
corporation under the publicly traded partnership rules.
If our operating partnership or a subsidiary partnership were
treated as an association for U.S. federal income tax
purposes, it would be taxable as a corporation and, therefore,
could be subject to an entity-level tax on its income. In such a
situation, the character of our assets and items of our gross
income would change and could preclude us from satisfying the
REIT asset tests (particularly the tests generally preventing a
REIT from owning more than 10% of the voting securities, or more
than 10% of the value of the securities, of a corporation) or
the gross income tests as discussed in “—Taxation of
the Company—Asset Tests” and “Taxation of the
Company—Gross Income Tests” above, and in turn could
prevent us from qualifying as a REIT. See “—Taxation
of the Company—Failure to Qualify,” above, for a
discussion of the effect of our failure to meet these tests for
a taxable year. In addition, any change in the status of any of
our operating partnership or a subsidiary partnership for tax
purposes might be treated as a taxable event, in which case we
could have taxable income that is subject to the REIT
distribution requirements without receiving any cash.
Tax
Allocations with Respect to Partnership Properties
If the partnership agreements of our operating partnership and
any subsidiary partnerships do not allocate partnership income
or loss in accordance with the requirements of
Section 704(b) of the Code and the Treasury Regulations
thereunder, the item subject to the allocation will be allocated
in accordance with the partners’ interests in the
partnership. This allocation will be determined by taking into
account all of the facts and circumstances relating to the
economic arrangement of the partners with respect to such item.
Under Section 704(c) of the Code and the Treasury
Regulations, income, gain, loss and deduction attributable to
appreciated or depreciated property that is revalued by a
partnership as provided in applicable Treasury Regulations or
contributed to a partnership in exchange for an interest in the
partnership must be allocated for tax purposes in a manner such
that the partners who held interests in the partnership at the
time of a revaluation or the contributing partner, as the case
may be, is charged with, or benefits from, the unrealized gain
or unrealized loss associated with the property at the time of
the revaluation or contribution, as applicable. The amount of
the unrealized gain or unrealized loss is generally equal to the
difference between the fair value of the contributed property
and the adjusted tax basis of such property at the time of the
contribution. Frequent contributions to our operating
partnership of proceeds from our stock offering and
distributions from our operating partnership to fund redemptions
of our shares may require frequent revaluations of our operating
partnership’s property and application of these rules. Such
allocations are solely for U.S. federal income tax purposes
and do not affect partnership capital accounts or other economic
or legal arrangements among the partners.
To the extent that our operating partnership or any of our
subsidiary partnerships acquires appreciated (or depreciated)
properties by way of capital contributions from its partners,
allocations would need to be made in a manner consistent with
these requirements.
Taxation
of Stockholders
Taxation
of Taxable U.S. Stockholders
This section summarizes the taxation of U.S. stockholders
that are not tax-exempt organizations. For these purposes, a
U.S. stockholder is a beneficial owner of our common stock
that for U.S. federal income tax purposes is:
•
a citizen or resident of the United States;
•
a corporation (including an entity treated as a corporation for
U.S. federal income tax purposes) created or organized in
or under the laws of the United States or of a political
subdivision thereof (including the District of Columbia);
•
an estate the income of which is subject to U.S. federal
income taxation regardless of its source; or
•
any trust if (1) a U.S. court is able to exercise
primary supervision over the administration of such trust and
one or more U.S. persons have the authority to control all
substantial decisions of the trust or (2) it has a valid
election in place to be treated as a U.S. person.
If an entity or arrangement treated as a partnership for
U.S. federal income tax purposes holds our shares, the
U.S. federal income tax treatment of a partner generally
will depend upon the status of the partner and the activities of
the partnership. A partner of a partnership holding our common
stock should consult its tax advisor regarding the
U.S. federal income tax consequences to the partner of the
acquisition, ownership and disposition of our shares by the
partnership.
Distributions. Provided that we qualify as a
REIT, distributions made to our taxable U.S. stockholders
out of our current and accumulated earnings and profits, and not
designated as capital gain dividends, will generally be taken
into account by them as ordinary dividend income and will not be
eligible for the dividends received deduction for corporations.
In determining the extent to which a distribution with respect
to our common stock constitutes a dividend for U.S. federal
income tax purposes, our earnings and profits will be allocated
first to distributions with respect to our preferred shares, if
any, and then to our common stock. Dividends received from REITs
are generally not eligible to be taxed at the preferential
qualified dividend
income rates applicable to individual U.S. stockholders who
receive dividends from taxable subchapter C corporations.
For tax years through 2010, U.S. stockholders (as defined
below) who are individuals are generally taxed on corporate
dividends at a maximum rate of 15% (the same as long-term
capital gains). With limited exceptions, however, dividends
received by individual U.S. stockholders from us or from
other entities that are taxed as REITs will continue to be taxed
at rates applicable to ordinary income, which will be as high as
35% through 2010.
Distributions from us that are designated as capital gain
dividends will be taxed to U.S. stockholders as long-term
capital gains, to the extent that they do not exceed our actual
net capital gains for the taxable year, without regard to the
period for which the U.S. stockholder has held its shares.
To the extent that we elect under the applicable provisions of
the Code to retain our net capital gains, U.S. stockholders
will be treated as having received, for U.S. federal income
tax purposes, our undistributed capital gains as well as a
corresponding credit for taxes paid by us on such retained
capital gains. U.S. stockholders will increase their
adjusted tax basis in our common stock by the difference between
their allocable share of such retained capital gain and their
share of the tax paid by us. Corporate U.S. stockholders
may be required to treat up to 20% of some capital gain
dividends as ordinary income. Long-term capital gains are
generally taxable at maximum U.S. federal rates of 15%
(through 2010) in the case of U.S. stockholders who
are individuals, and 35% for corporations. Capital gains
attributable to the sale of depreciable real property held for
more than 12 months are subject to a 25% maximum
U.S. federal income tax rate to the extent of previously
claimed depreciation deductions for U.S. stockholders who
are individuals.
Distributions in excess of our current and accumulated earnings
and profits will not be taxable to a U.S. stockholder to
the extent that they do not exceed the adjusted tax basis of the
U.S. stockholder’s shares in respect of which the
distributions were made, but rather will reduce the adjusted tax
basis of these shares. To the extent that such distributions
exceed the adjusted tax basis of a U.S. stockholder’s
shares, they will be included in income as long-term capital
gain, or short-term capital gain if the shares have been held
for one year or less. Any dividend declared by us in October,
November or December of any year and payable to a
U.S. stockholder of record on a specified date in any such
month will be treated as both paid by us and received by the
U.S. stockholder on December 31 of such year, provided that
the dividend is actually paid by us before the end of January of
the following calendar year.
We may elect to designate a portion of our distributions as
“qualified dividend income.” A portion of a
distribution that is properly designated as qualified dividend
income is taxable to non-corporate U.S. stockholders as net
capital gain, provided that the U.S. stockholder has held
the common stock with respect to which the distribution is made
for more than 60 days during the 121 day period
beginning on the date that is 60 days before the date on
which such common stock became ex-dividend with respect to the
relevant distribution. The maximum amount of our distributions
eligible to be designated as qualified dividend income for a
taxable year is equal to the sum of:
(a)
the qualified dividend income received by us during such taxable
year from C corporations (including any taxable REIT subsidiary);
(b)
the excess of any “undistributed” REIT taxable income
recognized during the immediately preceding year over the
U.S. federal income tax paid by us with respect to such
undistributed REIT taxable income; and
(c)
the excess of any income recognized during the immediately
preceding year attributable to the sale of a
built-in-gain
asset that was acquired in a carry-over basis transaction from a
C corporation over the U.S. federal income tax paid by us
with respect to such built-in gain.
To the extent that we have available net operating losses and
capital losses carried forward from prior tax years, such losses
may reduce the amount of distributions that must be made in
order to comply with the REIT distribution requirements. See
“—Taxation of the Company—Annual Distribution
Requirements” above. Such losses, however, are not passed
through to U.S. stockholders and do not offset income of
U.S. stockholders from other sources, nor do they affect
the character of any distributions that are actually made by us,
which are
generally subject to tax in the hands of U.S. stockholders
to the extent that we have current or accumulated earnings and
profits.
Dispositions of Our Common Stock. In general,
a U.S. stockholder will realize gain or loss upon the sale
or other taxable disposition of our common stock in an amount
equal to the difference between the sum of the fair value of any
property and the amount of cash received in such disposition and
the U.S. stockholder’s adjusted tax basis in the
common stock at the time of the disposition. In general, a
U.S. stockholder’s adjusted tax basis will equal the
U.S. stockholder’s acquisition cost, increased by the
excess of net capital gains deemed distributed to the
U.S. stockholder (discussed above) less tax deemed paid on
it and reduced by returns of capital. In general, capital gains
recognized by individuals and other non-corporate
U.S. stockholders upon the sale or disposition of our
common stock will be subject to a maximum U.S. federal
income tax rate of 15% for taxable years through 2010, if shares
of our common stock are held for more than 12 months, and
will be taxed at ordinary income rates (of up to 35% through
2010) if shares of our common stock are held for
12 months or less. Gains recognized by
U.S. stockholders that are corporations are subject to
U.S. federal income tax at a maximum rate of 35%, whether
or not classified as long-term capital gains. The IRS has the
authority to prescribe, but has not yet prescribed, regulations
that would apply a higher capital gain tax rate of 25% to a
portion of capital gain realized by a non-corporate holder on
the sale of REIT shares that would correspond to the REIT’s
“unrecaptured Section 1250 gain.” Holders are
advised to consult their tax advisors with respect to their
capital gain tax liability. Capital losses recognized by a
U.S. stockholder upon the disposition of shares of our
common stock held for more than one year at the time of
disposition will be considered long-term capital losses, and are
generally available only to offset capital gain income of the
U.S. stockholder (except in the case of individuals, who
may offset up to $3,000 of ordinary income each year). In
addition, any loss upon a sale or exchange of our common stock
by a U.S. stockholder who has held the shares for six
months or less, after applying certain holding period rules,
will be treated as a long-term capital loss to the extent of
distributions received from us that were required to be treated
by the U.S. stockholder as long-term capital gain.
If a U.S. stockholder recognizes a loss upon a subsequent
disposition of our common stock in an amount that exceeds a
prescribed threshold, it is possible that the provisions of
recently adopted Treasury Regulations involving “reportable
transactions” could apply, with a resulting requirement to
separately disclose the loss generating transactions to the IRS.
While these regulations are directed towards “tax
shelters,” they are written quite broadly and apply to
transactions that would not typically be considered tax
shelters. Significant penalties apply for failure to comply with
these requirements. You should consult your tax advisor
concerning any possible disclosure obligation with respect to
the receipt or disposition of our common stock or transactions
that might be undertaken directly or indirectly by us. Moreover,
you should be aware that we and other participants in
transactions involving us (including our advisor) might be
subject to disclosure or other requirements pursuant to these
regulations.
Redemptions
of Our Common Stock
A redemption of our common stock will be treated as a
distribution in exchange for the redeemed shares and taxed in
the same manner as other taxable share sales discussed above,
provided that the redemption satisfies one of the tests enabling
the redemption to be treated as a sale or exchange. A redemption
will be treated as a sale or exchange if it (1) is
“substantially disproportionate” with respect to a
stockholder, (2) results in a “complete
termination” of a stockholder’s interest in our shares
or (3) is “not essentially equivalent to a
dividend” with respect to a stockholder, all within the
meaning of applicable provisions of the Code. In determining
whether any of these tests have been met, shares considered to
be owned by a stockholder by reason of certain constructive
ownership rules, as well as shares actually owned, must
generally be taken into account.
A redemption that does not qualify as an exchange under such
tests will constitute a dividend equivalent redemption that is
treated as a taxable distribution and taxed in the same manner
as regular distributions (i.e., ordinary dividend income
to the extent paid out of earnings and profits unless properly
designated as a capital gain dividend). In addition, although
guidance is sparse, the IRS could take the position that
stockholders who do not participate in any redemption treated as
a dividend should be treated as receiving a constructive share
distribution taxable as a dividend in the amount of their
increased percentage ownership of our shares as a
result of the redemption, even though such stockholder did not
actually receive cash or other property as a result of such
redemption.
To avoid certain issues related to our ability to comply with
the REIT distribution requirements and utilize the deficiency
dividend procedure (see “—Taxation of the
Company—Annual Distribution Requirements” above), we
have implemented procedures designed to track our
stockholders’ percentage interests in our common stock in
order to identify any such dividend equivalent redemptions and
will decline to effect a redemption to the extent that we
believe that it would constitute a dividend equivalent
redemption. We cannot assure you, however, that we will be
successful in preventing all dividend equivalent redemptions.
Passive
Activity Losses and Investment Interest
Limitations
Distributions made by us and gain arising from the sale,
redemption or exchange by a U.S. stockholder of shares of
our common stock will not be treated as passive activity income.
As a result, U.S. stockholders will not be able to apply
any “passive losses” against income or gain relating
to shares of our common stock. Distributions made by us, to the
extent they do not constitute a return of capital, generally
will be treated as investment income for purposes of computing
the investment interest limitation. A U.S. stockholder that
elects to treat capital gain dividends, capital gains from the
disposition of shares or qualified dividend income as investment
income for purposes of the investment interest limitation will
be taxed at ordinary income rates on such amounts.
Taxation
of Tax-Exempt U.S. Stockholders
U.S. tax-exempt entities, including qualified employee
pension and profit sharing trusts and individual retirement
accounts, generally are exempt from U.S. federal income
taxation. They are subject to taxation, however, on their
unrelated business taxable income or UBTI. Provided that
(1) a tax-exempt U.S. stockholder has not held shares
of our common stock as “debt financed property” within
the meaning of the Code (i.e., where the acquisition or
ownership of the property is financed through a borrowing by the
tax-exempt stockholder) and (2) our common stock is not
otherwise used in an unrelated trade or business, distributions
from us and income from the sale or redemption of shares of our
common stock generally should not give rise to UBTI to a
tax-exempt U.S. stockholder.
Tax-exempt U.S. stockholders that are social clubs,
voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services
plans exempt from U.S. federal income taxation under
sections 501(c)(7), (c)(9), (c)(17) and (c)(20) of the
Code, respectively, are subject to different UBTI rules, which
generally will require them to characterize distributions from
us as UBTI.
In certain circumstances, a pension trust that (1) is
described in Section 401(a) of the Code, (2) is
tax-exempt under section 501(a) of the Code and
(3) owns more than 10% of the value of our shares could be
required to treat a percentage of the dividends from us as UBTI
if we are a “pension-held REIT.” We will not be a
pension-held REIT unless (1) either (A) one pension
trust owns more than 25% of the value of our shares or
(B) a group of pension trusts, each individually holding
more than 10% of the value of our shares, collectively owns more
than 50% of the value of such shares and (2) we would not
have qualified as a REIT but for the fact that
Section 856(h)(3) of the Code provides that REIT shares
owned by such trusts will not be treated as individuals for
purposes of the requirement that not more than 50% of the value
of the outstanding shares of a REIT is owned, directly or
indirectly, by five or fewer “individuals” (as defined
in the Code to include certain entities). Certain restrictions
on ownership and transfer of our shares should generally prevent
a tax-exempt entity from owning more than 10% of the value of
our shares and prevent us from becoming a pension-held REIT.
The following is a summary of certain U.S. federal income
tax consequences of the acquisition, ownership and disposition
of our common stock applicable to
non-U.S. stockholders.
For purposes of this summary, a
non-U.S. stockholder
is a beneficial owner of our common stock that is not a
U.S. stockholder. The discussion is based on current law
and is for general information only. It addresses only selective
and not all aspects of U.S. federal income taxation.
Ordinary Dividends. The portion of dividends
received by
non-U.S. stockholders
payable out of our earnings and profits that are not
attributable to gains from sales or exchanges of U.S. real
property interests and which are not effectively connected with
a U.S. trade or business of the
non-U.S. stockholder
generally will be treated as ordinary income and will be subject
to U.S. federal withholding tax at the rate of 30%, unless
reduced or eliminated by an applicable income tax treaty.
In cases where the dividend income from a
non-U.S. stockholder’s
investment in our common stock is, or is treated as, effectively
connected with the
non-U.S. stockholder’s
conduct of a U.S. trade or business, the
non-U.S. stockholder
generally will be subject to U.S. federal income tax at
graduated rates, in the same manner as U.S. stockholders
are taxed with respect to such dividends, and may also be
subject to the 30% branch profits tax (or a lower rate of tax
under the applicable income tax treaty) on the income after the
application of the income tax in the case of a
non-U.S. stockholder
that is a corporation. The balance of this discussion assumes
that dividends that we distribute to
non-U.S. stockholders
and gains
non-U.S. stockholders
recognize with respect to our shares are not effectively
connected with the
non-U.S. stockholder’s
conduct of a U.S. trade or business unless deemed to be
effectively connected under the Foreign Investment in Real
Property Tax Act of 1980, or FIRPTA, rules described below under
“—Dispositions and Redemptions of Our Common
Stock.”
Non-Dividend Distributions. Distributions by
us to
non-U.S. stockholders
which are not attributable to gains from sales or exchanges of
U.S. real property interests and which exceed our earnings
and profits will be a non-taxable return of the
non-U.S. stockholder’s
basis in its shares and, to the extent in excess of the
non-U.S. stockholder’s
basis, gain from the disposition of such shares, the tax
treatment of which is described below. We are required to
withhold tax at a 10% rate from distributions to
non-U.S. stockholders
that are not out of our earnings and profits. If it cannot be
determined at the time at which a distribution is made whether
or not the distribution will exceed current and accumulated
earnings and profits, we will withhold at the rate applicable to
dividends. A
non-U.S. stockholder,
however, may seek a refund from the IRS of any amounts withheld
that exceed the
non-U.S. stockholder’s
substantive U.S. federal income tax liability.
Capital Gain Dividends. Under FIRPTA, a
distribution made by us to a
non-U.S. stockholder,
to the extent attributable to gains from dispositions of USRPIs
held by us directly or through pass-through subsidiaries, must
be reported in U.S. tax returns filed and are treated as
effectively connected with a U.S. trade or business of the
non-U.S. stockholder.
Such gains are subject to U.S. federal income tax at the
rates applicable to U.S. stockholders and, in the case of a
non-U.S. corporate
stockholder a 30% branch profits tax (or a lower rate of tax
under the applicable income tax treaty). We are required to
withhold tax at a 35% rate from distributions that are
attributable to gains from the sale or exchange of
U.S. real property interests. Treasury Regulations
generally treat capital gain dividends as distributions that are
attributable to gains from the sale or exchange of
U.S. real property interests. The Treasury Regulations
recognize that REITs generally make their capital gain dividend
designations after the distributions have been made and,
accordingly, apply the withholding obligation on a
“catch-up”
basis.
If any class of our shares were to become regularly traded on an
established securities market located in the United States,
capital gain dividends distributed to a
non-U.S. stockholder
who did not own more than 5% of such class of shares at any time
during the one-year period ending on the date of the
distribution would be recharacterized as ordinary dividends
subject to the rules discussed above under “—Ordinary
Dividends.”
Non-U.S. stockholders
should be aware that we do not expect our common stock to be
regularly traded on an established securities market at any time.
Capital gain dividends that are not attributable to sales or
exchanges of U.S. real property interests (e.g.,
that are attributable to sales of mortgages), other than shared
appreciation mortgage loans, generally are not subject to
federal income or withholding tax. Such capital gain dividends
would be subject to a 30% tax in the case of nonresident alien
individual who was present in the United States for
183 days or more during the taxable year and has a
“tax home” in the United States.
Dispositions and Redemptions of Our Common
Stock. Unless shares of our common stock
constitute a U.S. real property interest or the
distribution is attributable to gain from our sale of a
U.S. real property interest (as discussed below), a sale of
the shares or a redemption of the shares that is treated as a
sale or exchange by a
non-U.S. stockholder
generally will not be subject to U.S. federal income
taxation under FIRPTA. A redemption that is not treated as an
exchange will be taxed in the same manner as regular
distributions under the rules described above. See
“—Taxation of Stockholders—Redemptions of Our
Common Stock” for a discussion of when a redemption will be
treated as a sale or exchange and related matters.
Our common stock will not constitute a U.S. real property
interest if we are a “domestically controlled qualified
investment entity.” A domestically controlled qualified
investment entity includes a REIT in which, at all times during
a specified testing period, less than 50% in value of its
outstanding shares are held directly or indirectly by
non-U.S. stockholders.
We believe we will be a domestically controlled qualified
investment entity and, therefore, the sale of our common stock
should not be subject to taxation under FIRPTA. Because our
shares may be purchased or redeemed daily, however, no assurance
can be given that we will be, or that if we are, that we will
remain a domestically controlled qualified investment entity.
In the event that we do not constitute a domestically controlled
qualified investment entity, a
non-U.S. stockholder’s
sale of our common stock nonetheless will generally not be
subject to tax under FIRPTA as a sale of a U.S. real
property interest, provided that (1) shares of our common
stock are “regularly traded,” as defined by applicable
Treasury Regulations, on an established securities market and
(2) the selling
non-U.S. stockholder
owned, actually or constructively, 5% or less of our outstanding
common stock at all times during a specified testing period. As
previously noted, however, we do not expect any of our shares to
be regularly traded on an established securities market.
In addition, even if we are a domestically controlled qualified
investment entity, upon disposition of our shares, a
non-U.S. stockholder
may be treated as having gain from the sale or exchange of a
United States real property interest if the
non-U.S. stockholder
(1) disposes of an interest in our shares during the
30-day
period preceding the ex-dividend date of a distribution, any
portion of which, but for the disposition, would have been
treated as gain from sale or exchange of a United States real
property interest and (2) acquires, enters into a contract
or option to acquire, or is deemed to acquire, other shares of
our shares within 30 days after such ex-dividend date. The
foregoing rules do not apply to a transaction if the 5%
regularly traded test described above is satisfied with respect
to the
non-U.S. stockholder.
As previously noted, however, we do not expect shares of our
common stock to be regularly traded on an established securities
market at any time and, therefore, we do not expect the
exception for
non-U.S. stockholders
that satisfy the 5% regularly traded test to apply.
A redemption of shares generally will be taxable under FIRPTA to
the extent the distribution in redemption of the shares is
attributable to gains from our dispositions of U.S. real
property interests. To the extent the distribution is not
attributable to gains from our dispositions of U.S. real
property interests, the excess of the amount of money received
in the redemption over the
non-U.S. stockholder’s
basis in the redeemed shares will be taxable if we are not a
domestically controlled REIT. The IRS has recently confirmed
that redemption payments may be attributable to gains from
dispositions of U.S. real property interests (except when
the 5% publicly traded exception would apply), but has not
provided any guidance to determine when and what portion of a
redemption payment is a distribution that is attributable to
gains from our dispositions of U.S. real property
interests. Due to the uncertainty, we may withhold at the 35%
rate from all or a portion of redemption payments to
non-U.S. stockholders.
To the extent the amount of tax we withhold exceeds the amount
of a
non-U.S. stockholder’s
U.S. federal income tax liability, the
non-U.S. stockholder
may file a U.S. federal income tax return and claim a
refund.
If gain on the sale of shares of our common stock were subject
to taxation under FIRPTA, the
non-U.S. stockholder
would be subject to the same treatment as a
U.S. stockholder with respect to such gain, subject to
applicable alternative minimum tax and a special alternative
minimum tax in the case of non-resident alien individuals, and
the purchaser of the shares could be required to withhold 10% of
the purchase price and remit such amount to the IRS.
Gain from the sale of shares of our common stock that would not
otherwise be subject to FIRPTA will nonetheless be taxable in
the United States to a
non-U.S. stockholder
if the
non-U.S. stockholder
is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has
a “tax home” in the United States, the nonresident
alien individual will be subject to a 30% tax on the
individual’s capital gain.
Backup
Withholding and Information Reporting
We will report to our U.S. stockholders and the IRS the
amount of dividends paid during each calendar year and the
amount of any tax withheld. Under the backup withholding rules,
a U.S. stockholder may be subject to backup withholding at
the current rate of 28% with respect to dividends paid unless
the stockholder is (1) a corporation or comes within other
exempt categories and, when required, demonstrates this fact or
(2) provides a taxpayer identification number or social
security number, certifies under penalties of perjury that such
number is correct and that such holder is not subject to backup
withholding and otherwise complies with applicable requirements
of the backup withholding rules. A U.S. stockholder that
does not provide a correct taxpayer identification number or
social security number may also be subject to penalties imposed
by the IRS. In addition, we may be required to withhold a
portion of capital gain distribution to any
U.S. stockholder who fails to certify its non-foreign
status.
We must report annually to the IRS and to each
non-U.S. stockholder
the amount of dividends paid to such holder and the tax withheld
with respect to such dividends, regardless of whether
withholding was required. Copies of the information returns
reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the
non-U.S. stockholder
resides under the provisions of an applicable income tax treaty.
A
non-U.S. stockholder
may be subject to
back-up
withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of shares of our common stock
within the United States is subject to both backup withholding
and information reporting unless the beneficial owner certifies
under penalties of perjury that it is a
non-U.S. stockholder
(and the payor does not have actual knowledge or reason to know
that the beneficial owner is a United States person) or the
holder otherwise establishes an exemption. Payment of the
proceeds of a sale of shares of our common stock conducted
through certain United States related financial intermediaries
is subject to information reporting (but not backup withholding)
unless the financial intermediary has documentary evidence in
its records that the beneficial owner is a
non-U.S. stockholder
and specified conditions are met or an exemption is otherwise
established.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder’s U.S. federal
income tax liability provided the required information is
furnished to the IRS.
We and our subsidiaries and stockholders may be subject to
state, local and
non-U.S. taxation
in various jurisdictions, including those in which they or we
transact business, own property or reside. We expect to own
interests in properties located in a number of jurisdictions,
and we may be required to file tax returns and pay taxes in
certain of those jurisdictions. The state, local or
non-U.S. tax
treatment of the company and our stockholders may not conform to
the U.S. federal income tax treatment discussed above. Any
non-U.S. taxes
incurred by us would not pass through to stockholders as a
credit against their U.S. federal income tax liability.
Prospective stockholders should consult their tax advisor
regarding the application and effect of state, local and
non-U.S. income
and other tax laws on an investment in shares of our common
stock.
Other Tax
Considerations
Legislative
or Other Actions Affecting REITs
The rules dealing with U.S. federal income taxation are
constantly under review. No assurance can be given as to
whether, when, or in what form, the U.S. federal income tax
laws applicable to us and our stockholders may be changed.
Changes to the federal tax laws and interpretations of federal
tax laws could adversely affect an investment in shares of our
common stock.
The Employee Retirement Income Security Act of 1974, as amended
(“ERISA”), is a broad statutory framework that governs
most U.S. retirement and other U.S. employee benefit
plans. ERISA and the rules and regulations of the Department of
Labor (the “DOL”) under ERISA contain provisions that
should be considered by fiduciaries of employee benefit plans
subject to the provisions of Title I of ERISA (“ERISA
Plans”) and their legal advisors. In particular, a
fiduciary of an ERISA Plan should consider whether an investment
in shares of our common stock (or, in the case of a
participant-directed defined contribution plan (a
“Participant-Directed Plan”), making shares of our
common stock available for investment under the
Participant-Directed Plan) satisfies the requirements set forth
in Part 4 of Title I of ERISA, including the
requirements that (1) the investment satisfy the prudence
and diversification standards of ERISA, (2) the investment
be in the best interests of the participants and beneficiaries
of the ERISA Plan, (3) the investment be permissible under
the terms of the ERISA Plan’s investment policies and
governing instruments and (4) the investment does not give
rise to a non-exempt prohibited transaction under ERISA.
In determining whether an investment in shares of our common
stock (or making our shares available as an investment under a
Participant-Directed Plan) is prudent for ERISA purposes, a
fiduciary of an ERISA Plan should consider all relevant facts
and circumstances including, without limitation, possible
limitations on the transferability of shares of our common
stock, whether the investment provides sufficient liquidity in
light of the foreseeable needs of the ERISA Plan, and whether
the investment is reasonably designed, as part of the ERISA
Plan’s portfolio, to further the ERISA Plan’s
purposes, taking into consideration the risk of loss and the
opportunity for gain (or other return) associated with the
investment. It should be noted that we will invest our assets in
accordance with the investment objectives and guidelines
described herein, and that neither our advisor nor any of its
affiliates, nor our board of directors, has any responsibility
for developing any overall investment strategy for any ERISA
Plan or for advising any ERISA Plan as to the advisability or
prudence of an investment in us. Rather, it is the obligation of
the appropriate fiduciary for each ERISA Plan to consider
whether an investment in shares of our common stock by the ERISA
Plan (or making such shares available for investment under a
Participant-Directed Plan), when judged in light of the overall
portfolio of the ERISA Plan, will meet the prudence,
diversification and other applicable requirements of ERISA.
Section 406 of ERISA and Section 4975 of the Code
prohibit certain transactions involving the assets of an ERISA
Plan, as well as those plans that are not subject to ERISA but
that are subject to Section 4975 of the Code, such as
individual retirement accounts (collectively with ERISA Plans,
“Plans”), and certain persons (referred to as
“parties in interest” for purposes of ERISA or
“disqualified persons” for purposes of the Code)
having certain relationships to Plans, unless a statutory or
administrative exemption is applicable to the transaction. A
party in interest or disqualified person who engages in a
non-exempt prohibited transaction may be subject to
non-deductible excise taxes and other penalties and liabilities
under ERISA and the Code, and the transaction might have to be
rescinded. In addition, a fiduciary who causes an ERISA Plan to
engage in a non-exempt prohibited transaction may be personally
liable for any resultant loss incurred by the ERISA Plan and may
be subject to other potential remedies.
A Plan that proposes to invest in shares of our common stock (or
to make our shares available for investment under a
Participant-Directed Plan) may already maintain a relationship
with our advisor or one or more of its affiliates, as a result
of which our advisor or such affiliate may be a “party in
interest” under ERISA or a “disqualified person”
under the Code, with respect to such Plan (e.g., if our
advisor or such affiliate provides investment management,
investment advisory or other services to that Plan). ERISA (and
the Code) prohibits plan assets from being used for the benefit
of a party in interest (or disqualified person). This
prohibition is not triggered by “incidental” benefits
to a party in interest (or disqualified person) that result from
a transaction involving the Plan that is motivated solely by the
interests of the Plan. ERISA (and the Code) also prohibits a
fiduciary from using its position to cause the Plan to make an
investment from which the fiduciary, its affiliates or certain
parties in which it has an interest would receive a fee or other
consideration. In this circumstance, Plans that propose to
invest in our shares of our common stock should consult with
their counsel to determine if an investment in shares of our
common stock would result in a transaction that is prohibited by
ERISA or the Code.
If our assets were considered to be assets of a Plan or IRA
(referred to herein as “Plan Assets”), our management
might be deemed to be fiduciaries of the investing Plan or IRA.
In this event, the operation of the company could become subject
to the restrictions of the fiduciary responsibility and
prohibited transaction provisions of Title I of ERISA
and/or the
prohibited transaction rules of the Code.
Neither ERISA nor the Code contains a definition of Plan Assets.
The DOL has promulgated a final regulation under ERISA,
29 C.F.R. § 2510.3-101 (the “Plan Assets
Regulation”), that provides guidelines as to whether, and
under what circumstances, the underlying assets of an entity
will be deemed to constitute Plan Assets for purposes of
applying the fiduciary requirements of Title I of ERISA
(including the prohibited transaction rules of Section 406
of ERISA) and the prohibited transaction provisions of Code
Section 4975.
Under the Plan Assets Regulation, the assets of an entity in
which a Plan or IRA makes an equity investment will generally be
deemed to be assets of such Plan or IRA unless the entity
satisfies one of the exceptions to this general rule. Generally,
the exceptions require that the investment in the entity be one
of the following:
•
in securities issued by an investment company registered under
the Investment Company Act;
•
in “publicly offered securities,” defined generally as
interests that are “freely transferable,”“widely
held” and registered with the Securities and Exchange
Commission;
•
in an “operating company” which includes “venture
capital operating companies” and “real estate
operating companies;” or
•
in which equity participation by “benefit plan
investors” is not significant.
The shares we are offering will not be issued by a registered
investment company. In addition, the Plan Asset Regulation
provides that equity participation in an entity by benefit plan
investors is “significant” if at any time 25% or more
of the value of any class of equity interest is held by
“benefit plan investors.” The term “benefit plan
investors” is defined for this purpose under ERISA
Section 3(42), and in calculating the value of a class of
equity interests, the value of any equity interests held by us
or any of our affiliates must be excluded. We anticipate that we
will not qualify for this exception since we expect to have
equity participation by “benefit plan investors” in
excess of 25%, which would be deemed to be significant, as
defined above. As a result, and because we are not a registered
investment company, we do not anticipate that we will qualify
for the exemption for investments in which equity participation
by benefit plan investors is not significant nor for the
exemption for investments in securities issued by a registered
investment company.
As noted above, the Plan Asset Regulation provides an exception
with respect to securities issued by an “operating
company,” which includes a “venture capital operating
company” (a “VCOC”) and a “real estate
operating company” (a “REOC”) Under the Plan
Assets Regulation, an entity will qualify as a VCOC if
(a) on certain specified testing dates, at least 50% of the
entity’s assets, valued at cost, are invested in
“venture capital investments,” with respect to which
the entity has or detains direct contractual rights to
substantially participate in the management of such operating
company and (b) the entity in the ordinary course of its
business actually exercises such management rights. A venture
capital investment is an investment in an operating company,
other than a venture capital operating company. Under the Plan
Assets Regulation, an entity will constitute a REOC if
(i) on certain specified testing dates, at least 50% of the
entity’s assets, valued at cost, are invested in real
estate that is managed or developed and with respect to which
the entity has the right to substantially participate directly
in the management or development of the real estate and
(ii) the entity in the ordinary course of its business is
engaged directly in real estate management or development
activities. A REOC can be a venture capital investment.
We intend to qualify as a VCOC, and our operating partnership
will qualify as a REOC. Consequently, it is intended by our
management that our assets will not constitute “Plan
Assets” under ERISA or be subject to any fiduciary or
investment restrictions under the Code, ERISA or other laws
applicable to Plans.
In addition, as noted above, if a Plan acquires “publicly
offered securities,” the assets of the issuer or the
securities will not be deemed to be Plan Assets under the Plan
Assets Regulation. The definition of publicly
offered securities requires that such securities be “widely
held,”“freely transferable” and satisfy
registration requirements under federal securities laws.
Under the Plan Asset Regulation, a class of securities will meet
the registration requirements under federal securities laws if
they are (i) part of a class of securities registered under
section 12(b) or 12(g) of the Exchange Act or
(ii) part of an offering of securities to the public
pursuant to an effective registration statement under the
Securities Act and the class of securities of which such
security is a part is registered under the Exchange Act within
120 days (or such later time as may be allowed by the
Securities and Exchange Commission) after the end of the fiscal
year of the issuer during which the offering of such securities
to the public occurred. We anticipate that we will meet the
registration requirements under the Plan Asset Regulation. Also
under the Plan Asset Regulation, a class of securities will be
“widely held” if it is held by 100 or more persons
independent of the issuer. We anticipate that this requirement
will be easily met. Although our shares are intended to satisfy
the registration requirements under this definition, and we
expect that our securities will be “widely-held,” the
“freely transferable” requirement must also be
satisfied in order for us to qualify for the “publicly
offered securities” exception.
The Plan Asset Regulation provides that “whether a security
is ‘freely transferable’ is a factual question to be
determined on the basis of all relevant facts and
circumstances.” Our shares are subject to certain
restrictions on transferability typically found in REITs, and
are intended to ensure that we continue to qualify for federal
income tax treatment as a REIT. The Plan Asset Regulation
provides, however, that where the minimum investment in a public
offering of securities is $10,000 or less, the presence of a
restriction on transferability intended to prohibit transfers
that would result in a termination or reclassification of the
entity for state or federal tax purposes will not ordinarily
affect a determination that such securities are “freely
transferable.” The minimum investment in our shares is
$10,000. Thus, the restrictions imposed in order to maintain our
status as a REIT should not prevent the shares from being deemed
“freely transferable.” Therefore, we anticipate that
we will meet the “publicly offered securities”
exception, although there are no assurances that we will qualify
for this exception.
Shares sold by us may be purchased or owned by investors who are
investing assets of their IRAs. Our acceptance of an investment
by an IRA should not be considered to be a determination or
representation by us or any of our respective affiliates that
such an investment is appropriate for an IRA. In consultation
with its advisors, each prospective IRA investor should
carefully consider whether an investment in our company is
appropriate for, and permissible under, the terms of its IRA
governing documents.
Although IRAs are not subject to ERISA, they are subject to the
provisions of Section 4975 of the Code, prohibiting
transactions with “disqualified persons” and
investments and transactions involving fiduciary conflicts. A
prohibited transaction or conflict of interest could arise if
the fiduciary making the decision to invest has a personal
interest in or affiliation with our company or any of its
respective affiliates. In the case of an IRA, a prohibited
transaction or conflict of interest that involves the
beneficiary of the IRA could result in disqualification of the
IRA. A fiduciary for an IRA who has any personal interest in or
affiliation with our company or any of its respective
affiliates, should consult with his or her tax and legal
advisors regarding the impact such interest may have on an
investment in our shares with assets of the IRA.
Governmental plans and most church plans, while not subject to
the fiduciary responsibility provisions of ERISA or the
provisions of Code Section 4975, may nevertheless be
subject to local, state or other federal laws that are
substantially similar to the foregoing provisions of ERISA and
the Code. Fiduciaries of any such plans should consult with
their counsel and advisors before deciding to invest in our
common shares.
Prospective investors that are subject to the provisions of
Title I of ERISA
and/or Code
Section 4975 should consult with their counsel and advisors
as to the provisions of Title I of ERISA
and/or Code
Section 4975 relevant to an investment in shares of our
common stock.
Acceptance of purchase orders of any Plan is in no respect a
representation by us or any other party that such investment
meets the relevant legal requirements with respect to that Plan
or that the investment is appropriate for such Plan.
We are offering up to $2,250,000,000 in shares of our common
stock pursuant to this prospectus through Merrill Lynch, Pierce,
Fenner & Smith Incorporated, our distributor, a
registered broker-dealer affiliated with ML & Co. and
our advisor. For additional information about our distributor,
please see “Management—Our Distributor.” We are
offering to the public a minimum of $100,000,000 and a maximum
of $2,000,000,000 in shares of our common stock in our primary
offering and up to $250,000,000 in shares of our common stock
pursuant to our distribution reinvestment plan. See
“Pricing and Liquidity.” Prior to the conclusion of
this offering, if any of the $250,000,000 in shares of our
common stock initially allocated to the distribution
reinvestment plan remain unsold after meeting anticipated
obligations under the distribution reinvestment plan, we may
decide to sell some or all of such shares of our common stock to
the public in the primary offering. Similarly, prior to the
conclusion of this offering, if the $250,000,000 shares of
our common stock initially allocated to the distribution
reinvestment plan have been purchased and we anticipate
additional demand for shares of our common stock under our
distribution reinvestment plan, we may choose to reallocate some
or all of the $2,000,000,000 in shares of our common stock
allocated to be offered in the primary offering to the
distribution reinvestment plan. If (i) we do not raise the
minimum offering amount of $100,000,000 of our shares
before ,
2009 (180 days after the initial offering date) or
(ii) after we raise the minimum offering amount, our board
of directors does not determine that it is in our best interest
to cause the proceeds raised to be released to us from escrow
prior to the end of such 180 day period so that we may
commence operations, 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. Notwithstanding the foregoing, you may elect to
withdraw your purchase order and request a full refund of your
investment with interest and without deduction for escrow
expenses at any time before the escrowed funds are released to
us.
The number of shares we have registered pursuant to the
registration statement of which this prospectus forms a part is
the number that we reasonably expect to be offered and sold
within two years from the initial effective date of the
registration statement. Pursuant to this prospectus, we are
offering to the public all of the shares that we have
registered. Although we have registered a fixed dollar amount of
our shares, we intend effectively to conduct a continuous
offering of an unlimited number of shares of our common stock
over an unlimited time period by filing a new registration
statement prior to the end of the three-year period described in
Rule 415 under the Securities Act. In certain states,
however, the offering may continue for one year pursuant to
initial clearance by applicable state authorities, after which
we will need to renew the offering period for additional one
year periods (or longer, if permitted by the laws of each
particular state).
All investors must meet the suitability standards discussed in
the section of this prospectus entitled “Suitability
Standards.” During the escrow period, the per share
purchase price will be $10.25. Thereafter, the per share
purchase price for shares of our common stock will vary from
day-to-day and, on any given day, will be equal to our NAV,
divided by the number of shares of our common stock outstanding
as of the end of business on such day prior to giving effect to
any share purchases or redemptions to be effected on such day,
plus, except for certain categories of purchasers, any
applicable selling commissions and distribution fees, as
described below. Shares are being offered pursuant to our
distribution reinvestment plan at NAV per share, calculated as
of the end of business on the reinvestment date.
We reserve the right to terminate this offering at any time and
to extend our offering term to the extent permissible under
applicable law.
Escrow
Arrangement
We will not sell any shares in this offering unless (i) we
receive purchase orders for at least $100,000,000 of shares
of our common stock within the 180 days following the
initial offering date and (ii) our board of directors has
authorized the release to us of funds in the escrow account
prior to the end of such 180 day period. All funds provided
with purchase orders during the escrow period will be placed in
an interest-bearing account
with ,
as escrow agent. If (i) we do not receive purchase orders
for at least
$100,000,000 of shares of our common stock within 180 days
following the initial offering date, (ii) our board of
directors does not determine that it is in our best interest to
cause the proceeds raised in the offering to be released to us
within such 180 day period so that we may commence
operations or (iii) you elect to withdraw your purchase
order during the escrow period, our escrow agent will promptly
refund to you the funds that accompanied your purchase order,
together with any interest, and without deduction of any fees.
If the escrowed offering proceeds are released to us in
accordance with the foregoing escrow condition, all interest
earned on those proceeds will be paid to investors in accordance
with their respective amounts invested and the number of days
that such amounts were on deposit.
Compensation
of Our Distributor and Other Participating
Broker-Dealers
We have not retained an underwriter in connection with this
offering. Shares of our common stock are being offered on a
“best efforts” basis, which means that no underwriter,
broker—dealer or other person will be obligated to purchase
any shares. We have entered into a distribution agreement with
our distributor, a registered broker-dealer affiliated with
ML & Co., pursuant to which our distributor has agreed
to use its best efforts to secure purchasers for the shares
offered by this prospectus. Our distributor does not intend to
engage third party broker-dealers to participate in the
distribution of shares of our common stock at this time, but may
determine to do so in the future. We may terminate the
distribution agreement at any time in our sole discretion.
We will not pay referral or similar fees to any accountants,
attorneys or other persons in connection with the distribution
of our shares.
Selling
Commissions
Subject to the volume and other discounts discussed below, we
will pay our distributor selling commissions of up to 2.5% of
the NAV per share, or approximately 2.44% of the total price per
share, of shares sold to the public in the primary offering, all
which may be reallowed to any participating broker-dealers. We
will not pay selling commissions on shares issued and sold
pursuant to our distribution reinvestment plan. Further, as
described below, selling commissions may be reduced or waived in
connection with volume or other discounts, other fee
arrangements or for sales to certain categories of purchasers.
Asset-Based
Distribution Fee
We will pay our distributor an asset-based distribution fee
following the end of each month equal to (1) the number of
outstanding shares of our common stock purchased in our primary
offering at least 13 months prior to such month end,
multiplied by
(2) 1/12th of
0.35% of our average NAV per share, or approximately 0.34% of
the total price per share, during each month. The distribution
fee will be calculated as of the last day of each month and
payable in arrears beginning the
13th month
following the initial purchase of shares of our common stock in
our primary offering. The distribution fee will not be paid with
respect to shares issued under our distribution reinvestment
plan. Our distributor may reallow up to 100% of this
distribution fee to any participating broker-dealers based on
such factors as the level of services that such broker-dealers
perform in connection with the distribution of shares, including
ministerial, record-keeping, sub-accounting, stockholder
services and other administrative services. We will cease paying
distribution fees at the earlier of (a) 30 years from
the effective date of the registration statement of which this
prospectus forms a part or (b) the date at which the
aggregate asset-based distribution fees and other items of
underwriting compensation that we have paid equal or exceed 10%
of the gross proceeds from our primary offering (i.e.,
excluding proceeds from sales pursuant to our distribution
reinvestment plan), calculated as of the same date that we
calculate the aggregate distribution fees.
Other
Compensation
We may also pay additional amounts to our distributor, its
employees and any participating broker-dealers for expenses
related to this offering which may include, but are not limited
to: (1) salaries, certain other compensation and direct
expenses of employees of our distributor while preparing for the
offering and
marketing of our shares and in connection with their
wholesaling activities, including travel and entertainment
expenses associated with the offering and marketing of our
shares; (2) costs and expenses of conducting educational
conferences and seminars or of attending broker-dealer sponsored
conferences; (3) travel and other expenses of participating
broker-dealers in connection with the offering and marketing of
our shares; and (4) payment or reimbursement of marketing
and similar expenses. Such expenses will be considered
underwriting compensation under applicable FINRA rules. We will
also reimburse our distributor for reimbursement it may make to
participating broker-dealers for bona fide due diligence
expenses supported by detailed and itemized invoices.
FINRA
Rules Limiting Underwriting Compensation
As required by FINRA rules, total underwriting compensation,
which will include selling commissions and the asset-based
distribution fee and also may include certain of the other
compensation that our distributor receives, will not exceed 10%
of the gross proceeds of our primary offering. We will monitor
the distribution fees that we pay, and calculate the aggregate
distribution fees on a monthly basis. We will cease paying
distribution fees at the earlier of (1) 30 years from
the effective date of the registration statement of which this
prospectus forms a part or (2) the date at which the
aggregate distribution fees that we have paid equal or exceed
10% of the gross offering proceeds, calculated as of the same
date that we calculate the aggregate distribution fees. FINRA
rules also limit our total organization and offering expenses
(including selling commissions, bone fide due deligence
expenses and distribution fees) to 15% of our gross offering
proceeds. After the termination of the primary offering and
again after termination of the offering under our distribution
reinvestment plan, our advisor has agreed to reimburse us to the
extent that organization and offering expenses that we incur
exceed 15% of our gross proceeds from the applicable offering.
Indemnification
Expenses
To the extent permitted by law and our charter, we will
indemnify the participating broker-dealers, if any, and our
distributor against some civil liabilities, including certain
liabilities under the Securities Act, and liabilities arising
from breaches of our representations and warranties contained in
the distribution agreement. If we are unable to provide this
indemnification, we may contribute to payments the indemnified
parties may be required to make in respect of those liabilities.
See “Management—Limited Liability and
Indemnification.”
Volume
and Other Discounts
We are offering, and our distributor and any participating
broker-dealers and their registered representatives will be
responsible for implementing, volume discounts to qualifying
purchasers (as defined below) who purchase $150,000 or more in
shares from the same broker-dealer, whether in a single purchase
or as the result of multiple purchases. Any reduction in the
amount of the selling commissions as a result of volume
discounts received may be credited to the qualifying purchasers
in the form of the issuance of additional shares. The net
offering proceeds we receive will not be affected by any
reduction of selling commissions.
Assuming our NAV per share is equal to $10, the following table
illustrates the various discount levels that may be offered to
qualifying purchasers for shares purchased in the primary
offering:
Commissions
on Sales per Incremental Share in Volume Discount
Range
For example, if an investor purchases $800,000 of shares, she
would pay $10.25. As such, the investor would be able to
purchase 78,818 shares as opposed to 78,049 shares,
the amount of shares she could have purchased for $800,000 at
$10.25 per share if there were no volume discounts.
If you qualify for a particular volume discount as the result of
multiple purchases of our shares, you will receive the benefit
of the applicable volume discount for the individual purchase
which qualified you for the volume discount, but you will not be
entitled to the benefit for prior purchases. Additionally, once
you qualify for a volume discount, you will receive the benefit
for subsequent purchases. For this purpose, if you purchase
shares issued and sold in this offering you will receive the
benefit of such share purchases in connection with qualifying
for volume discounts in our subsequent offerings.
As set forth below, purchase orders of several persons may be
combined as one “qualifying purchaser” for the purpose
of qualifying for a volume discount, and for determining
commissions payable to our distributor and participating
broker-dealers. For the purposes of such volume discounts, the
term “qualifying purchaser” includes:
•
an individual, his or her spouse and their children under the
age of 21 who purchase shares of common stock 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 Section 401(a) of the
Code;
•
all commingled trust funds maintained by a given bank; or
•
subscriptions obtained by certain participating broker-dealers,
as discussed below.
Any request to combine purchases of our shares will be subject
to our verification that such purchases were made by a
“qualifying purchaser.”
Requests to combine purchase orders as a part of a combined
order for the purpose of qualifying for discounts or fee waivers
must be made in writing by the broker-dealer, and any resulting
reduction in selling commissions will be prorated among the
separate subscribers. As with discounts provided to other
purchasers, the net proceeds we receive from the sale of shares
will not be affected by discounts provided as a result of a
combined order.
Investors may also agree with the participating broker-dealer
selling them shares (or with the distributor if no participating
broker-dealer is involved in the transaction) to reduce the
amount of the selling commission to zero (1) in the event
the investor has engaged the services of a registered investment
advisor with whom the investor has agreed to pay a fee for
investment advisory services or (2) in the event the
investor is investing in a bank trust account with respect to
which the investor has delegated the decision making authority
for investments made in the account to a bank trust department.
The amount of net proceeds would not be affected by eliminating
commissions payable in connection with sales to investors
purchasing through such registered investment advisors or bank
trust department. All such sales must be made through registered
broker-dealers. Neither the distributor nor its affiliates will
directly or indirectly compensate any person engaged as an
investment advisor or a bank trust department by a potential
investor as an inducement for such investment advisor or bank
trust department to advise favorable for an investment in shares
of our common stock.
Your ability to receive a discount or fee waiver based on
combining orders or otherwise may depend on the financial
advisor or broker-dealer through which you purchase your shares.
An investor qualifying for a discount will receive a higher
percentage return on his or her investment than investors who do
not qualify for such discount. Accordingly, you should consult
with your financial advisor about the ability to receive such
discounts or fee waivers before purchasing shares.
You may buy or redeem shares of our common stock through your
financial advisor, a participating broker-dealer or other
financial intermediary. You may also buy or redeem shares
through ,
our transfer agent. To learn about buying or redeeming shares
through our transfer agent,
call .
Because an investment in our common stock involves many
considerations, your financial advisor or other financial
intermediary may help you with this decision.
Buying
Shares
Until the end of the escrow period, the per share price for
shares of our common stock purchased in this continuous offering
will be $10.25. Thereafter, the per share price for our shares
will vary from day-to-day and, on any given day, will be equal
to our NAV divided by the number of shares of our common stock
outstanding as of the end of business on such day prior to
giving effect to any share purchases or redemptions to be
effected on such day, plus, except for certain categories of
purchasers, applicable selling commissions.
We will generally adhere to the following procedures in
conducting this continuous offering:
•
As soon as practicable after the close of the New York Stock
Exchange (generally, 4:00 p.m. Eastern time),
hereafter, the “close of business,” on each business
day, or trade date, our accounting agent will determine our NAV
per share for that trade date. As promptly as practicable
following the close of business on each trade date, and in any
event no later than the opening of business on the business day
immediately following each trade date, we will (i) post our
NAV per share for such trade date on our website,
www.northendinvestments.com, (ii) make such NAV per
share information available on our toll-free automated
information line, and
(iii) file with the SEC a new pricing supplement to this
prospectus disclosing such NAV per share.
•
On each trade date, we will collect purchase orders until the
close of business, which orders, subject to acceptance as
discussed below, will be executed at a price equal to our NAV
per share determined as soon as practicable after the close of
business on the trade date, plus any applicable selling
commissions. Orders placed after the close of business on the
trade date will be executed at a price equal to our NAV per
share determined after the close of business on the next
business day following the trade date, plus any applicable
selling commissions.
•
A confirmation statement will be sent promptly after the trade
date to each investor whose order was received on the trade date
(except for purchases made through the reinvestment of
distributions pursuant to our distribution reinvestment plan).
The confirmation statement will disclose the price at which the
order will be executed and will include information advising the
investors as to how to obtain the applicable pricing supplement
as well as any other supplements to the prospectus which we have
filed with the SEC and made publicly available on our website,
www.northendinvestments.com.
•
Settlement of share purchases will be on the fifth business day
immediately following the trade date. Investors are entitled to
cancel their orders until the close of business on the
settlement date.
•
Purchase orders placed on a day that is not a business day will
be effected as if they were received prior to the close of
business on the immediately following business day.
You will not know at the time you place an order to purchase
shares of our common stock precisely the price at which your
order will be executed, though you will be allowed to cancel
your order until the close of business on the settlement date.
You will have available through our latest prospectus, including
the most recent pricing supplement, information about the NAV
per share upon which the price for our common stock was based on
the business day immediately preceding the trade date and the
methodology pursuant to which our NAV, and thus the price at
which shares of our common stock will be sold on the current
business day, is determined. You will also have access through
prior filings to information concerning the trend in our
historical NAV since the initial offering date. Though under
normal circumstances we would not anticipate that our NAV will
generally vary significantly from one day to the next, there can
be no assurance that will be the case. At the close of business
on the date that is five business days prior to each record date
for any declared distributions, our NAV will be reduced to
reflect the accrual of our liability to pay the distribution to
our stockholders of record as of such date. Between the trade
date and the settlement date, you will also receive a
confirmation and therefore will know the price at which your
order will be executed on the settlement date, unless you
exercise your right to cancel your order prior to the close of
business on the settlement date. You should be aware that
because our NAV per share is calculated at the close of each
business day, the price per share on the settlement date may be
different from the price per share on the trade date.
Our accounting agent, under the supervision of our advisor and
our sub-advisor, will calculate our NAV after the end of each
business day by subtracting our liabilities, including the
accrued estimated management fee, the accrued estimated
distribution fee and other expenses attributable to the public
offering and our operations, from our assets, which will consist
almost entirely of the value of our interest in our operating
partnership. The value of our interest in our operating
partnership will be equal to our percentage interest as the
general partner of our operating partnership multiplied by the
difference between our operating partnership’s assets
(including its commercial real estate properties, real estate
related assets and other investments) and its liabilities
(including its debt, any accrued and unpaid dividends and the
expenses attributable to our operating partnership’s
operations). The value of our operating partnership’s
assets will be determined in accordance with the procedures
described in “Pricing and Liquidity—Valuation.”
Our percentage interest in our operating partnership will
fluctuate over time depending on: (1) the amount of
proceeds raised from this offering that are contributed to our
operating partnership; (2) the amount of capital that we
may withdraw from our operating partnership to fund redemptions
of shares of our common stock or interests in our operating
partnership or to pay our liabilities or expenses; and
(3) the amount of capital contributed to or withdrawn from
our operating partnership by other investors. See
“Operating Partnership Agreement—Capital Contributions
and Distributions.”
In contrast to securities traded on an exchange or
over-the-counter, where the price often fluctuates as a result
of, among other things, the supply and demand of securities in
the trading market, our NAV per share will be calculated once
daily using our valuation methodologies, and the price at which
we sell new shares and redeem outstanding shares that day will
not change depending on the level of demand by investors or the
volume of requests for redemption. We will generally sell as
many shares as orders are received from investors, subject to
acceptance as discussed below, each day at the same price (NAV
per share, without premium or discount, plus applicable selling
commissions) regardless of when orders are received during the
day. If, however, we become aware of facts or circumstances that
are likely to materially affect our NAV on any particular day,
we may decline to accept orders from investors until we have
disclosed publicly such information.
All purchases of shares of our common stock will be subject to a
selling commission of 2.5% of the NAV per share of the shares
purchased in the primary offering as of the date of purchase,
subject to certain limitations and exceptions. See “Plan of
Distribution” for information regarding available discounts
or waivers of the selling commissions. Shares purchased through
our distribution reinvestment plan will not be subject to any
selling commissions.
If you place an order to buy shares and your payment is not
received and collected, your purchase may be canceled and you
could be liable for any losses or fees we have incurred.
We may reject for any reason, or cancel as permitted or required
by law, any purchase orders. For example, we may reject any
purchase orders from market timers or investors that, in our
opinion, may be disruptive to our operations. We may stop
offering shares completely or may offer shares only on a limited
basis for a period of time or permanently.
Redeeming
Shares
Under our redemption plan, on each business day, stockholders
may request that we redeem all or any portion of their shares.
Redemption requests received by our transfer agent before
4:00 p.m. Eastern time will be effected at a
redemption price equal to the NAV per share calculated after the
close of business on that day. Redemption requests received by
our transfer agent after 4:00 p.m. Eastern time on any
business day, or
received on a day other than a business day, will be effected at
the NAV per share calculated after the close of business on the
next business day. The redemption price per share on any
business day will be our NAV per share, without giving effect to
any share purchases or redemptions to be effected on such day.
Subject to limited exceptions, shares redeemed within
365 days of the date of purchase will be subject a
short-term trading discount equal to 2% of the aggregate NAV per
share of such shares redeemed which will inure indirectly to the
benefit of our remaining stockholders.
Our board may not terminate the redemption plan before
12 months from the initial offering date. Our board of
directors may, however, delay, modify or suspend share
redemptions at any time it determines that such action is in our
or our remaining stockholders’ best interest. In instances
in which the redemption proceeds payable exceed immediately
available cash, proceeds from sales of additional shares of our
common stock and sales of our liquid investments, we may
determine to reduce the number of shares to be redeemed in
respect to redemption requests on a pro rata basis. In addition,
our board of directors may determine to reduce the redemption
price to an amount that reflects a discount to our NAV per share
in order to reduce the volume of redemption requests.
Because of the high cost of maintaining smaller stockholder
accounts, we may automatically redeem all of the shares held by
a stockholder if that stockholder has failed to meet the minimum
balance of $5,000. The 2% short-term trading discount will also
apply to automatic redemptions that occur during the
365-day
period following the purchase of the shares. Automatic
redemption will not apply in the event that the failure to meet
the minimum balance is caused solely by a decline in our NAV.
Generally, we will pay redemption proceeds, less any applicable
short-term trading discounts and any applicable tax or other
withholding required by law, by the fifth business day following
a redemption request. Once a stockholder makes a redemption
request, the redemption price that the stockholder will receive
will be equal to the NAV per share as of the date that the
redemption request is effective less any applicable short-term
trading discounts. Because the NAV per share will be calculated
at the close of each business day, the redemption price may
fluctuate between the date our transfer agent receives the
redemption request and the date on which redemption proceeds are
paid. The redemption price that a stockholder will receive may
be different from the redemption price on the day the redemption
proceeds are paid. Stockholders of record on any distribution
record date whose shares are redeemed, in whole or in part,
prior to the date on which the declared distribution is paid
will be entitled to receive such distribution with respect to
all shares of our common stock held on the record date.
Frequent
Trading Policies
We may reject for any reason, or cancel as permitted or required
by law, any purchase orders for shares of our common stock. For
example, we may reject any purchase orders from market timers or
investors that, in our opinion, may be disruptive to our
operations.
Frequent purchases and sales of our shares can harm stockholders
in various ways, including reducing the returns to long-term
stockholders by increasing our costs, disrupting portfolio
management strategies, and diluting the value of the shares of
long-term stockholders. Accordingly, our board of directors has
adopted policies and procedures designed to discourage excessive
or short-term trading of our shares. See “Pricing and
Liquidity—Redemption Plan.” There is the risk,
however, that our policies and procedures will prove ineffective
in whole or in part to detect or prevent frequent trading. We
may alter these policies at any time without prior notice to
stockholders.
There is no minimum holding period and stockholders can request
that their shares of our common stock be redeemed at any time
subject to a short-term trading discount equal to 2% of the
aggregate NAV per share of such shares redeemed which will inure
indirectly to the benefit of our remaining stockholders. We
request that stockholders comply with our policies regarding
excessive trading by allowing 90 days to pass after each
investment before they redeem their shares. We reserve the
right, but do not have the obligation, to reject any purchase
transaction at any time. In addition, we reserve the right to
impose at any time restrictions on purchases or conditions that
further restrict disruptive, excessive, or short-term trading in
addition to those that are otherwise stated in this prospectus.
Excessive trading activity is measured by the number of
roundtrip transactions in a stockholder’s account. A
roundtrip transaction occurs when a stockholder buys and then
redeems shares of our common stock within 30 days.
Stockholders are limited to one roundtrip transaction within any
rolling
90-day
period. Transactions of $1,000 or less, systematic withdrawal or
contribution programs, mandatory retirement distributions and
transactions initiated by a plan sponsor will not count toward
the roundtrip limits.
Stockholders with two or more roundtrip transactions within a
rolling
90-day
period will be blocked from making additional purchases for
85 days. For repeat offenders, we may, but do not have the
obligation to, impose long-term or permanent blocks on purchase
transactions in any account under the stockholder’s common
control at any time, other than a participant’s account
held through an employer-sponsored retirement plan.
Employer-sponsored retirement plan participants whose activity
triggers a purchase will be permitted one trade every calendar
quarter. In the event of a block, employer and participant
contributions and loan repayments by the participant may still
be invested in our common stock.
Qualified wrap programs will be monitored by matching the
financial advisor’s orders for purchase or sale
transactions in shares of our common stock to determine if the
orders comply with our frequent trading policies. Additions to
and withdrawals from a qualified wrap program by the financial
advisor’s client will not be matched with transactions
initiated by the advisor. Therefore, if the financial advisor
buys shares of our common stock and an individual client
subsequently sells or redeems shares within 30 days, the
client’s transaction is not matched with the financial
advisor’s and does not count as a roundtrip. Client
initiated transactions, however, are subject to our policies on
frequent trading and individual clients will be subject to
restrictions due to their frequent trading in a wrap account.
Excessive trading by a financial advisor will lead to blocks in
purchasing shares of our common stock and the wrap program will
cease to be a qualified wrap program. If the wrap program is
blocked from making additional purchases or exchange purchases
of our common stock because of excessive trading by the
financial advisor, the wrap program will no longer be considered
qualified and any transaction, whether initiated by the
financial advisor or the client, will be matched when counting
roundtrips. Wrap account client purchases and sale transactions
will be monitored under our monitoring policy as though the wrap
clients were our stockholders. A qualified wrap program is:
(1) a program whose financial advisor certifies that it has
investment discretion over $100 million or more in client
assets invested in mutual funds and our company at the time of
the certification; (2) a program in which the financial
advisor directs transactions in the accounts participating in
the program in concert with changes in a model portfolio; and
(3) managed by a financial advisor who agrees to give us
sufficient information to permit us to identify the individual
accounts in the wrap program.
Our excessive trade monitoring policy described above does not
apply to transactions initiated by the director or advisor to a
donor-advised charitable gift fund, qualified fund-of-fund(s) or
other strategy funds, or omnibus accounts. Directors or advisors
of donor advised charitable gift funds must certify to our
satisfaction that they either work from an asset allocation
model or direct transactions in their accounts in concert with
changes in a model portfolio and participants are limited in
their ability to influence investments by the fund. A qualified
fund-of-fund(s) is a mutual fund, qualified tuition program, or
other strategy fund consisting of qualified plan assets that
either applies our policies on frequent trading to stockholders
at the fund-of-fund(s) level, or demonstrates that the
fund-of-fund(s) has policies designed to control frequent
trading and that they are reasonably likely to be effective as
determined by us. The advisor to the fund-of-fund(s) must also
demonstrate to us that its investment strategy will not lead to
excessive trading. Omnibus accounts are maintained by
intermediaries acting on behalf of multiple investors whose
individual trades are not ordinarily disclosed to us. Short-term
trading by these investors is likely to go undetected and may
increase costs and disrupt portfolio management. We will monitor
aggregate trading in qualified fund-of-funds and known omnibus
accounts to attempt to identify disruptive trades, focusing on
transactions in excess of $250,000. There is no assurance that
these policies will be effective, or will successfully detect or
deter market timing.
We may suspend these policies during periods of severe market
turbulence or national emergency.
Restrictions
Imposed by the USA PATRIOT Act and Related Acts
In accordance with the Uniting and Strengthening America by
Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, as amended, the shares offered hereby may
not be offered, sold, transferred or delivered, directly or
indirectly, to any “prohibited person,” which
generally means anyone who is:
•
a “designated national,”“specially designated
national,”“specially designated terrorist,”“specially designated global terrorist,”“foreign
terrorist organization,” or “blocked person”
within the definitions set forth in the Foreign Assets Control
Regulations of the U.S. Treasury Department;
•
acting on behalf of, or an entity owned or controlled by, any
government against whom the U.S. maintains economic
sanctions or embargoes under the Regulations of the
U.S. Treasury Department;
•
within the scope of Executive Order 13224 – Blocking
Property and Prohibiting Transactions with Persons who Commit,
Threaten to Commit, or Support Terrorism, effective
September 24, 2001;
•
subject to additional restrictions imposed by any statutes or
regulations and executive orders issued thereunder, as each such
statute or regulation has been or may be amended from time to
time; or
•
designated or blocked, associated or involved in terrorism, or
subject to restrictions under laws, regulations, or executive
orders as may apply in the future similar to those set forth
above.
If we subsequently determine that a stockholder is a
“prohibited person,” we may take such action as may be
necessary or appropriate under the law, including freezing the
stockholder’s distributions and shares.
In addition to this prospectus, we will use sales materials in
connection with this offering, although only when accompanied by
or preceded by the delivery of this prospectus. This material
may include information relating to this offering, the past
performance of affiliates of our advisors, property brochures
and articles and publications concerning real estate investments
generally. In addition, the sales material may include certain
quotes from various publications without obtaining the consent
of the author or the publication for use of the quoted material
in the sales material.
In some jurisdictions, some or all of the sales material will
not be available. Other than as described herein, we have not
authorized the use of other sales material. This offering is
made only by means of this prospectus. Although the information
contained in the sales material will not conflict with any of
the information contained in this prospectus, the material does
not purport to be complete and should not be considered as a
part of this prospectus or the registration statement of which
this prospectus is a part, or as incorporated in this prospectus
or the registration statement by reference, or as forming the
basis of the offering of the shares of our common stock.
We will provide periodic reports to stockholders regarding our
operations over the course of the year, including quarterly
financial reports. Financial information contained in all
reports to stockholders will be prepared on the accrual basis of
accounting in accordance with GAAP. Tax information will be
mailed to the stockholders by February 15 of each year.
Our charter requires that we prepare an annual report and
deliver it to our stockholders within 120 days after the
end of each fiscal year. Among the matters that must be included
in the annual report are:
•
financial statements that are prepared in accordance with GAAP
and are audited by our independent registered public accounting
firm;
•
the ratio of the costs of raising capital during the year to the
capital raised;
•
the aggregate amount of management fees and the aggregate amount
of any other fees paid to our advisor and any affiliate of our
advisor by us or third parties doing business with us during the
year;
•
our total operating expenses for the year, stated as a
percentage of our average invested assets and as a percentage of
our net income;
•
a report from the independent directors that our policies are in
the best interests of our stockholders and the basis for such
determination; and
•
a separate report containing full disclosure of all material
terms, factors and circumstances surrounding any and all
transactions involving us and either of our advisors, a director
or any affiliate thereof during the year, which report the
independent directors are specifically charged with a duty to
examine and to comment on regarding the fairness of the
transactions.
Subject to availability, you may authorize us to provide
prospectuses, prospectus supplements, annual reports and other
information, which we collectively refer to as stockholder
information, electronically by sending us instructions in
writing in a form acceptable to us. Unless you elect in writing
to receive stockholder information electronically, all documents
will be provided in paper form by mail. You must have internet
access to use electronic delivery. While we impose no additional
charge for this service, there may be potential costs associated
with electronic delivery, such as on-line charges. All
stockholder information will be available on our website. You
may access and print all stockholder information provided
through this service. As stockholder information becomes
available, we will notify you of this by sending you an
e-mail
message that will include instructions on how to retrieve the
stockholder information. If our
e-mail
notification is returned to us as “undeliverable,” we
will contact you to obtain your updated
e-mail
address. If we are unable to obtain a valid
e-mail
address for you, we will resume sending a paper copy by regular
U.S. mail to your address of record. You may revoke your
consent for electronic delivery at any time and we will resume
sending you a paper copy of all stockholder information.
However, in order for us to be properly notified, your
revocation must be given to us a reasonable time before
electronic delivery has commenced. We will provide you with
paper copies at any time upon request. Such request will not
constitute revocation of your consent to receive stockholder
information electronically.
Investors have the right under applicable federal and Maryland
laws to obtain information about us and, at their expense, may
obtain a list of names and addresses of all of the stockholders
under certain conditions. See “Description of Capital
Stock” and “Certain Provisions of Maryland Law and of
Our Charter and Bylaws-Inspection of Books and Records.” In
the event that the SEC promulgates rules or in the event that
the applicable NASAA REIT Guidelines are amended so that, taking
these changes into account, our reporting requirements are
reduced, we may cease preparing and filing some of the
aforementioned reports if our board of directors determines this
action to be in our best interest and if this cessation is in
compliance with the rules and regulations of the SEC and state
securities laws and regulations, both as then amended.
The validity of the shares of our common stock being offered
hereby will be passed upon for us by Alston & Bird
LLP, Atlanta, Georgia. Alston & Bird LLP has also
reviewed the statements relating to certain federal income tax
matters that are likely to be material to U.S. holders of
our common stock under the caption “Material United States
Federal Income Tax Considerations” and will pass upon the
accuracy of those statements as well as our qualification as a
REIT for federal income tax purposes.
The consolidated balance sheet of NorthEnd Income Property
Trust Inc. as of October 24, 2008 included in this
prospectus has been audited by Deloitte & Touche LLP,
an independent registered public accounting firm, as stated in
their report appearing herein. Such consolidated balance sheet
is included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
We have filed a registration statement on
Form S-11
with the SEC with respect to the shares of our common stock to
be issued in this offering. This prospectus is a part of that
registration statement and, as permitted by SEC rules, does not
include all of the information you can find in the registration
statement or the exhibits to the registration statement. For
additional information relating to us, we refer you to the
registration statement and the exhibits to the registration
statement. Statements contained in this prospectus as to the
contents of any contract or document are necessarily summaries
of such contract or document and in each instance, if we have
filed the contract or document as an exhibit to the registration
statement, we refer you to the copy of the contract or document
filed as an exhibit to the registration statement.
After commencement of this offering, we will file annual,
quarterly and special reports, proxy statements and other
information with the SEC. The registration statement is, and any
of these future filings with the SEC will be, available to the
public over the internet at the SEC’s website at
www.sec.gov. You may read and copy any filed document at
the SEC’s public reference room in Washington, D.C. at
100 F. Street, N.E., Room 1580, Washington, D.C.
Please call the SEC at (800) SEC-0330 for further
information about the public reference room.
We have audited the accompanying consolidated balance sheet of
NorthEnd Income Property Trust Inc. and subsidiary (the
“Company”) as of October 24, 2008
(capitalization). This consolidated balance sheet is the
responsibility of the Company’s management. Our
responsibility is to express an opinion on the 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 consolidated balance
sheet is 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, such consolidated balance sheet presents fairly,
in all material respects, the financial position of NorthEnd
Income Property Trust Inc. and subsidiary as of
October 24, 2008 (capitalization), in conformity with
accounting principles generally accepted in the United States of
America.
NorthEnd Income Property Trust Inc. (the
“Company”) was formed on August 19, 2008 as a
Maryland corporation and intends to qualify as a real estate
investment trust (“REIT”). Substantially all of the
Company’s business will be conducted through NorthEnd
Operating Partnership LP, the Company’s operating
partnership (the “Operating Partnership”). The Company
is the sole general partner of the Operating Partnership and has
contributed $1,000 to the Operating Partnership in exchange for
its general partner interest. The initial limited partner of the
Operating Partnership is NorthEnd Holding Company LLC
(“NorthEnd Holding”). As the Company completes the
settlement for the purchase orders for shares of its common
stock in its continuous public offering, it will transfer
substantially all of the net proceeds of the offering to the
Operating Partnership. Neither the Company nor the Operating
Partnership has engaged in any operations to date.
The Company was organized to invest in a diversified portfolio
of institutional quality, income-producing commercial real
estate properties and other real estate related assets. As
discussed in Note 3, the Company sold 100 shares of
its common stock to NorthEnd Holding on October 24, 2008
(capitalization). The Company’s fiscal year end is
December 31.
The Company intends to offer to the public pursuant to a
registration statement to be filed $2,000,000,000 of shares of
its common stock in its primary offering and $250,000,000 of
shares of its common stock pursuant to its distribution
reinvestment plan. The Company may reallocate the shares offered
between the primary offering and the distribution reinvestment
plan. From the first date on which the Company’s shares are
offered for sale to the public (the “Initial Offering
Date”) until (i) the Company has received purchase
orders for at least $100,000,000 of shares of its common stock
(the “Minimum Offering Amount”) and (ii) the
Company’s board of directors has authorized the release of
the escrowed funds to the Company so that it can commence
operations (the “Escrow Period”), the per share
purchase price for shares will be $10.25. Thereafter, the per
share purchase price for shares of the Company’s common
stock in its continuous offering will vary from day-to-day and,
on any given day, will be equal to the sum of the Company’s
net asset value computed on a fair value basis
(“NAV”), divided by the number of shares of its common
stock outstanding as of the end of business on such day prior to
giving effect to any share purchases or redemptions to be
effected on such day, plus any applicable selling commissions.
If (i) the Company does not raise the Minimum Offering
Amount within 180 days following the Initial Offering Date
or (ii) the Company’s board of directors does not
determine that it is in the best interest of the stockholders of
the Company to cause the proceeds raised in the offering to be
released to the Company within such 180 day period so that
it may commence operations, this offering will be terminated and
the Company’s escrow agent will promptly send each
prospective stockholder a full refund of its investment with
interest and without deduction for escrow expenses.
Notwithstanding the foregoing, each prospective stockholder may
elect to withdraw its purchase order and request a full refund
of its investment with interest and without deduction for escrow
expenses at any time during the Escrow Period.
The Company intends to achieve its investment objectives by
investing primarily in a diversified portfolio of
(1) institutional quality, income-producing commercial real
estate properties in multiple sectors (such as retail, office,
industrial and multi-family residential properties and other
real property types, which may include hotels, mixed-use
properties, manufactured housing and self-storage facilities)
(“commercial real estate properties”), (2) other
real estate related assets, which includes debt and equity
interests backed principally by real estate, such as common and
preferred stock of REITs and other real estate companies,
commercial mortgage-backed securities and mortgage loans
(“real estate related assets”) and (3) cash, cash
equivalents and other short-term investments.
The Company’s advisor is NorthEnd Realty Advisors LLC, a
newly formed Delaware limited liability company (the
“Advisor”). The Advisor is an affiliate of a wholly
owned subsidiary of Merrill Lynch & Co.,
Inc. (“ML & Co.”). On September 15,2008, ML & Co. and Bank of America Corporation
announced a strategic business combination in which a subsidiary
of Bank of America Corporation will merge with and into
ML & Co. The merger is subject to stockholder and
regulatory approval and other closing conditions. At special
meetings of ML & Co. stockholders and Bank of America
Corporation stockholders, each to be held on December 5,2008, such stockholders will be asked to vote on the adoption of
the Agreement and Plan of Merger dated as of September 15,2008, as amended by Amendment No. 1 dated as of
October 21, 2008 (the “Merger Agreement”), the
issuance of Bank of America Corporation common stock in the
merger
and/or
certain other matters. In the Merger Agreement, the parties have
agreed to cause the completion of the merger to occur no later
than the fifth business day following the satisfaction or waiver
of the last of the conditions specified in the Merger Agreement,
or on another mutually agreed date. If these conditions are
satisfied or waived during the two weeks immediately prior to
the end of a fiscal quarter of Bank of America Corporation, then
Bank of America Corporation may postpone the closing until the
first full week after the end of that quarter. It currently is
anticipated that the effective time of the merger will occur on
or after December 31, 2008, but we cannot guarantee when or
if the merger will be completed.
The Advisor has engaged BlackRock Realty Advisors Inc. as a
sub-advisor to the Company and the Operating Partnership (the
“Sub-Advisor”). As of September 30, 2008,
ML & Co. owned approximately 48.5% of the capital
stock of the Sub-Advisor. Subject to certain restrictions and
limitations, the Advisor will supervise the Sub-Advisor, which
will be responsible for managing the Company’s portfolio
and for identifying and making acquisitions and investments on
behalf of the Company.
2.
Summary
of Significant Accounting Policies
Principles
of Consolidation and Basis of Presentation
The Company’s consolidated financial statements will
include the Company’s accounts, the accounts of variable
interest entities, or VIEs, in which we are the primary
beneficiary and the accounts of other subsidiaries over which
the Company will have control. All inter-company transactions,
balances and profits will be eliminated in consolidation.
Interests in entities acquired will be evaluated for
consolidation based on Financial Accounting Standards Board
Interpretation 46R, or FIN 46R, which requires the
consolidation of VIEs in which the Company is deemed to be the
primary beneficiary. If the interest in the entity is determined
to not be a VIE under FIN 46R, then the entity will be
evaluated for consolidation under the American Institute of
Certified Public Accountants’ Statement of Position
78-9,
“Accounting for Investments in Real Estate Ventures,”
as amended by Emerging Issues Task Force
04-5,
“Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights.”
There are judgments and estimates involved in determining if an
entity in which the Company will make an investment will be a
VIE and if so, if the Company will be the primary beneficiary.
The entity will be evaluated to determine if it is a VIE by,
among other things, calculating the percentage of equity being
risked compared to the total equity of the entity. FIN 46R
provides some guidelines as to what the minimum equity at risk
should be, but the percentage can vary depending upon the
industry or the type of operations of the entity and it will be
up to the Advisor to determine that minimum percentage as it
relates to our business and the facts surrounding each of the
Company’s acquisitions. In addition, even if the
entity’s equity at risk is a very low percentage, the
Advisor will be required by FIN 46R to evaluate the equity
at risk compared to the entity’s expected future losses to
determine if there could still in fact be sufficient equity at
the entity. Determining expected future losses involves
assumptions of various possibilities of the results of future
operations of the entity, assigning a probability to each
possibility and using a discount rate to determine the net
present value of those future losses. A change in the judgments,
assumptions and estimates outlined above could result in
consolidating an entity that had not been previously
consolidated or accounting for an investment on the equity
method that had been previously consolidated, the effects of
which could be material to the Company’s results of
operations and financial condition.
The preparation of the consolidated balance sheet in conformity
with accounting principles generally accepted in the United
States requires management to make estimates and assumptions
that affect the amounts reported in the consolidated balance
sheet and accompanying notes. Actual results could differ from
those estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments purchased
with original maturities 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 and may consist of investments in money
market accounts. There are no restrictions on the use of the
Company’s cash balances.
Organizational
and Offering Costs
Organizational and offering expenses (other than selling
commissions) generally include costs and expenses incurred by
the Company in connection with the Company’s formation,
preparing for the offering, the qualification and registration
of the offering and the marketing and distribution of the
Company’s shares. Offering costs include, but are not
limited to, accounting and legal fees (including the
distributor’s legal fees), costs to amend the registration
statement and supplement the prospectus, printing, mailing and
distribution costs, filing fees, amounts to reimburse the
Advisor, the Sub-Advisor or their affiliates for the salaries of
employees and other costs in connection with preparing
supplemental sales literature, amounts to reimburse Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the
“Distributor”) for amounts that it may pay to
reimburse the bona fide due diligence expenses of any
participating broker-dealers supported by detailed and itemized
invoices, telecommunication costs, fees of the transfer agent,
registrars, trustees, depositories and experts, the cost of
educational conferences held by the Company (including the
travel, meal and lodging costs of registered representatives of
any participating broker-dealers), attendance fees and cost
reimbursement for employees of affiliates to attend retail
seminars conducted by broker-dealers. Organizational expenses
are expected to be de minimis.
The Advisor has agreed to fund the Company’s offering
expenses incurred through the Escrow Period, at which time, the
Company will reimburse the Advisor any outstanding expense on a
monthly basis over 60 months. Thereafter, the Company will
reimburse the Advisor for any outstanding expenses incurred by
the Advisor on its behalf as and when incurred.
Deferred
Offering Costs
Offering costs incurred by the Company, the Advisor, the
Sub-Advisor or their respective affiliates on behalf of the
Company have been deferred and will be paid from the proceeds of
the continuous public offering.
Income
Taxes
The Company intend to elect to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the “Code”), beginning with the
Company’s taxable year ending December 31 of the year
in which the Escrow Period concludes. In order to maintain the
Company’s qualification as a REIT, the Company is required
to, among other things, distribute at least 90% of the
Company’s REIT taxable income to the Company’s
stockholders and meet certain tests regarding the nature of the
Company’s income and assets. As a REIT, the Company will
not be subject to federal income tax with respect to the portion
of the Company’s income that meets certain criteria and is
distributed annually to stockholders. The Company intends to
operate, in a manner that allows the Company to meet the
requirements for taxation as a REIT. Many of these requirements,
however, are highly technical and complex. If the Company were
to fail to meet these requirements, it could be subject to
federal income tax on the Company’s taxable income at
regular corporate rates. The Company would not be able to deduct
distributions paid to stockholders in any year in which it fails
to qualify as a REIT. The Company will also be disqualified for
the
four taxable years following the year during which qualification
was lost unless the Company is entitled to relief under specific
statutory provisions.
Recent
Accounting Pronouncement
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements—An amendment of ARB No. 51
(“SFAS 160”). This statement amends Accounting
Research Bulletin No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary, which
is sometimes referred to as minority interest, is an ownership
interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. Among other
requirements, this statement requires consolidated net income to
be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated income
statement, of the amounts of consolidated net income
attributable to the parent and to the noncontrolling interest.
This statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after
December 15, 2008. This statement shall be applied
prospectively as of the beginning of the fiscal year in which
this statement is initially applied, except for the presentation
and disclosure requirements. The presentation and disclosure
requirements shall be applied retrospectively for all periods
presented. We are currently evaluating the impact of adopting
SFAS 160 on our consolidated balance sheet.
Concentration
of Credit Risk
At October 24, 2008 (capitalization), the Company had cash
on deposit in the amount of $201,000; however, the Company has
not experienced any losses in such account. The Company limits
cash investments to financial institutions with high credit
standing; therefore, the Company believes it is not exposed to
any significant credit risk in cash and cash equivalents.
3.
Capitalization
Under the Company’s charter, the Company has the authority
to issue 1,000,000,000 shares of its common stock and
50,000,000 shares of preferred stock. All shares of such
stock have a par value of $0.01 per share. On
October 24, 2008 (capitalization), NorthEnd Holding
purchased 100 shares of the Company’s common stock for
total cash consideration of $1,000 to provide the Company’s
initial capitalization. The Company’s board of directors is
authorized to amend its charter, without the approval of the
stockholders, to alter the aggregate number of authorized shares
of capital stock or the number of shares of any class or series
that the Company has authority to issue.
Distribution
Reinvestment Plan
The Company has adopted a distribution reinvestment plan that
will allow stockholders to have cash otherwise distributable
invested in additional shares of its common stock at a price
equal to the Company’s NAV per share on the
distribution date, after giving effect to all distributions.
Stockholders who elect to participate in the distribution
reinvestment plan, and who are subject to United States federal
income taxation laws, will incur a tax liability on an amount
equal to the fair value on the relevant distribution date of the
shares of the Company’s common stock purchased with
reinvested distributions, even though such stockholders have
elected not to receive the distributions used to purchase those
shares of its common stock in cash.
Share
Redemption Plan
In an effort to provide the Company’s stockholders with
liquidity in respect of their investment in shares of the
Company’s common stock, the Company has adopted a
redemption plan whereby on a daily basis, stockholders may
request that the Company redeem all or any portion of their
shares. The Company’s board of directors may terminate its
redemption plan at any time following the first anniversary of
the Initial Offering Date. In addition, the Company’s board
of directors may delay, modify or suspend, without limitation,
share
redemptions or the redemption plan at any time if it determines
that such action is in the Company’s and its
stockholders’ best interests.
4.
Related
Party Arrangements
The Advisor and certain affiliates of the Advisor will receive
fees and compensation in connection with the Company’s
public offering and the management of the Company’s
investments.
Distribution
Agreement
The Company intends to execute a distribution agreement whereby
the Distributor, a wholly owned subsidiary of ML &
Co., will perform the distributor function for the Company. For
these services, the Distributor shall earn selling commissions
of up to 2.5% of the NAV per share of the shares purchased in
the primary offering as of the date of purchase. Pursuant to
separately negotiated agreements, the Distributor will reallow
the selling commissions it receives to broker-dealers
participating in the offering. No selling commissions will be
paid for sales under the distribution reinvestment plan.
In addition, the Company will pay the Distributor an asset-based
distribution fee following the end of each month equal to
(i) the number of outstanding shares of the Company’s
common stock purchased in the Company’s primary offering at
least 13 months prior to such month end, multiplied by
(ii) 1/12th of
0.35% of the Company’s average NAV per share during such
month. The distribution fee will be calculated as of the last
day of each month and payable in arrears beginning the
13th month
following the initial purchase of shares of the Company’s
common stock in the Company’s primary offering. The
distribution fee will not be paid with respect to shares issued
under the Company’s distribution reinvestment plan. The
Distributor may, in its discretion, reallow to any participating
broker-dealers up to 100% of the distribution fee that it
receives, with the actual amount of the reallowance to be
negotiated between the Distributor and such broker-dealers based
on such factors as the level of services that such parties
perform in connection with the distribution of shares, including
ministerial, record-keeping, sub-accounting, stockholder
services and other administrative services.
Advisory
Agreement
The Company will pay the Advisor a management fee for the
services it provides pursuant to the advisory agreement with the
Company and the Operating Partnership. The management fee will
be equal to (1) a fixed rate component of 1.25% per annum
of our average daily NAV, payable quarterly in arrears, plus
(2) a performance-based component calculated on the basis
of the Company’s total return to stockholders, payable
annually in arrears, such that for any year in which the total
return on the Company’s stockholders’ capital exceeds
7% (the “Priority Return Amount”), the Advisor will
share in the excess total return above the Priority Return
Amount, but in no event will the Company pay the Advisor more
than 10% of the aggregate total return for such year. In the
event that the total return to stockholders is less than the
Priority Return Amount in any given calendar year, the Advisor
will not be entitled to receive the performance component of the
management fee with respect to such calendar year.
The estimated management fee will accrue daily for purposes of
the determination of the Company’s NAV per share. The fixed
rate component of the management fee is payable quarterly in
arrears and the performance component of the management fee is
payable annually in arrears (in each case after the close of
business and NAV calculations for such day).
The Company will reimburse the Advisor for all expenses paid or
incurred by the Advisor in connection with the services provided
to the Company, subject to the limitation that the Company will
not reimburse the Advisor for any amount by which its operating
expenses (including the asset management fee) at the end of the
four preceding fiscal quarters exceeds the greater of:
(A) 2% of its average invested assets; or (B) 25% of
its net income determined without reduction for any additions to
reserves for depreciation, bad debts or other similar non-cash
reserves and excluding any gain from the sale of the
Company’s assets for that period. Notwithstanding the
above, the Company may reimburse the 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.
The Advisor will enter into a Sub-Advisory Agreement with the
Sub-Advisor, pursuant to which the
Sub-Advisor
will provide services related to the acquisition, management and
disposition of investments and the selection of property
managers and other service providers, in accordance with the
Company’s investment objectives, strategy, guidelines,
policies and limitations. In addition, the Sub-Advisor is
primarily responsible for, among other things, valuing the
Company’s commercial real estate properties and real estate
related assets in accordance with valuation guidelines approved
by the Company’s board of directors. The Sub-Advisor also
provides marketing, investor relations and other administrative
services. The term of the Sub-Advisory Agreement will continue
for a one-year period subject to automatic renewals of one-year
unless otherwise terminated by the parties. The Sub-Advisory
Agreement may be terminated (1) immediately by the Advisor
in the event the Advisory Agreement with NorthEnd Advisor is
terminated, (2) on 60 days’ written notice by
either party for “cause,” (3) upon one-year
written notice by the Advisor or (4) upon 90 days
prior written notice by our advisor at any time following the
third anniversary of the commencement of this offering. The fees
paid to the Company’s Sub-Advisor will not be paid by the
Company, but will instead be paid by the Advisor out of the
management fee that the Company will pay to the Advisor. The
management fee the Sub-Advisor receives will be a portion of the
management fee the Advisor receives from the Company. The
Sub-Advisor
will also be reimbursed for expenses incurred on the
Company’s behalf. In the event the
Sub-Advisory
Agreement is terminated, the Sub-Advisor will be paid all
accrued and unpaid fees and expense reimbursements. The expense
reimbursements that the Company will pay to the Advisor include
expenses incurred by the Sub-Advisor on the Company’s
behalf that the Advisor is required to reimburse to the
Sub-Advisor
under the Sub-Advisory Agreement. Notwithstanding the terms of
the Advisor’s engagement of the Sub-Advisor, the Advisor
will be ultimately responsible to the Company for the
performance of all of the matters entrusted to it pursuant to
the Advisory Agreement.
5.
Minority
Interest
On October 24, 2008, the Operating Partnership issued
limited partnership interests to NorthEnd Holding in exchange
for an initial capital contribution of $200,000.
The Operating Partnership’s limited partnership agreement
generally provides that the Operating Partnership will
distribute cash flow from operations and net sales proceeds from
disposition of assets to the partners of the Operating
Partnership in accordance with their relative percentage
interests, on at least a quarterly basis, in amounts determined
by the Company, as the general partner.
6.
Commitments
and Contingencies
The Company is not subject to any material litigation nor, to
management’s knowledge, is any material litigation
threatened against the Company.
7.
Economic
Dependency
The Company will be dependent on the Advisor, the Sub-Advisor,
or their respective affiliates, for certain services that are
essential to the Company, including the sale of the
Company’s shares of common stock, asset acquisition and
disposition decisions and other general and administrative
responsibilities. In the event that the Advisor, the
Sub-Advisor, and their respective affiliates are unable to
provide such services, the Company would be required to find
alternative service providers.
8.
Subsequent
Event
On January 1, 2009, pursuant to the Merger Agreement, a
wholly owned subsidiary of Bank of America Corporation merged
with and into ML & Co., with ML & Co.
continuing as the surviving corporation and a subsidiary of Bank
of America Corporation.
The following prior performance tables provide information as of
December 31, 2007 relating to the real estate investment
programs sponsored by Merrill Lynch & Co., Inc.
(“ML & Co.”) and its affiliates (the
“Prior Programs”). The Prior Programs are dissimilar
to NorthEnd Income Property Trust Inc. in both their
business structure and investment strategy.
Each of the Prior Programs is structured as a private limited
partnership with a finite life ranging from approximately seven
to ten years. This differs from NorthEnd Income Property
Trust Inc. which is structured as an open-ended real estate
investment trust with no time limit on the period during which
it can accept additional investors and continue operations. The
structure of NorthEnd Income Property Trust Inc. as an
open-ended
REIT is unique. These are currently no other
open-ended
REITs with features similar to NorthEnd Income Property Trust
Inc. available for investment in the public markets. The Prior
Programs have an investment strategy dissimilar to NorthEnd
Income Property Trust Inc. because they seek returns driven
by a value added strategy focused on potential increases in the
value of real estate investments made outside of the United
States. Conversely, NorthEnd Income Property Trust Inc.
seeks to generate returns through an investment strategy that
focuses on investing primarily in core commercial real estate
properties and real estate related assets generally located
within the United States. The Prior Programs may also employ
higher amounts of leverage than NorthEnd Income Property
Trust Inc. expects to employ. In addition, the Prior
Programs were managed by an affiliate of ML & Co. as a
general partner, in contrast to NorthEnd Income Property
Trust Inc. in which our advisor will rely upon our
sub-advisor for the selection, acquisition, operation and
maintenance of our investment portfolio.
This information should be read together with the summary
narrative information included in the “Prior
Performance—ML & Co. Prior Programs” section
of this prospectus.
Investors should not construe inclusion of the following
tables as implying, in any manner, that NorthEnd Income Property
Trust Inc. will have results comparable to those reflected
in such tables. Distributable cash flow, federal income tax
deductions or other factors could be substantially different.
Investors should note that, by acquiring shares of NorthEnd
Income Property Trust Inc., they will not be acquiring any
interest in any Prior Program.
Description
of the Tables
The following tables are included herein:
Table I Experience in Raising and Investing Funds (As
a Percentage of Investment)
Table II Compensation to Sponsor
Table III Operating Results of Prior Programs
Table IV (Results of Completed Programs) is not included as
none of the Prior Programs are completed programs. Table V
(Sales or Disposals of Properties) is not included as none of
the Prior Programs have made any sales or dispositions of
property.
Additional information relating to the acquisition of properties
by Prior Programs is contained in Table VI (Acquisitions of
Properties by Programs), which is included in Part II of
the registration statement which NorthEnd Income Property
Trust Inc. has filed with the Securities and Exchange
Commission of which this prospectus is a part. Copies of Table
VI will be provided to prospective investors at no charge upon
request.
The information presented in each of the following tables
relates to Merrill Lynch Bosphorus Real Estate Fund I, L.P.
(the “Bosphorus Fund”), which is the only Prior
Program that has closed its offering and commenced operations as
of December 31, 2007. The Bosphorus Fund’s investment
strategy is focused on real property investments in the Republic
of Turkey, and as a result, the fund operates and calculates its
performance in Euros rather than U.S. Dollars. For the
purposes of the following tables, however, we have converted the
information from Euros to Dollars as of December 31, 2007,
when the exchange rate from Euros to Dollars was 1.46 (1 Euro =
1.46 Dollars).
TABLE
I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(UNAUDITED)
Table I presents information showing the experience of
ML & Co. and its affiliates in raising and investing
funds for Prior Programs, the offering of which closed in the
three year period ending December 31, 2007. Information is
included for the Bosphorus Fund, a Prior Program that has
conducted an offering which closed in July 2007. Information is
provided as to the manner in which the proceeds of the offering
have been applied. Also set forth is the timing and length of
the offering and information pertaining to the time period over
which the proceeds have been invested.
Bosphorus Fund
Dollar Amount Offered
$
299,880,000
Percentage Amount Raised
100%
Less Offering Expenses:
Selling Commissions
$
2,491,650
(0.8%)
Organizational Expenses
$
1,205,400
(0.4%)
Reserves:
Percent available for
investment(1)
0%
Acquisition Costs:
Prepaid items and fees related to purchase of property
$
955,500
(0.3%)
Cash Down Payment and Mortgage Loan
$
126,015,750
(42%)
Acquisition Fees
0
Total Acquisition Cost
$
126,971,250
(42%)
Percent leverage (mortgage financing divided by total
acquisition cost)
64%
Date Offering Began
July 2006
Length of Offering
12 months
Months to invest 90 percent of amount available for
investment (measured from the beginning of
offering)(1)
24 to 36 months
(1)
The Bosphorus Fund has an investment period of three years from
the date that the offering closed. The Bosphorus Fund has called
capital in an amount equal to 37% of investor commitments
totaling $111,000,000 as of May 31, 2008.
Table II provides a summary of the amount and type of
compensation paid to ML & Co. and its affiliates as of
December 31, 2007 related to the Bosphorus Fund, a Prior
Program that conducted an offering which has closed since
December 31, 2004.
Bosphorus Fund
Date Offering Commenced
July 2006
Dollar Amount Raised
$
299,880,000
Amount Paid to Sponsor from Proceeds of Offering:
Placement Fees
$
2,491,650
Acquisition Fees:
Real Estate Commissions
0
Advisory Fees
0
Dollar Amount of Cash Generated from Operations before Deducting
Payments to Sponsor
0
Amount Paid to Sponsor from Operations:
Property Management Fees
0
Partnership Management Fees
0
Reimbursements
0
Leasing Commissions
0
Dollar Amount of Property Sales and Refinancing Before Deduction
Payments to Sponsor:
Cash
0
Notes
0
Amount Paid to Sponsor from Property Sales and Refinancing:
TABLE
III
OPERATING RESULTS OF PRIOR PROGRAMS
(UNAUDITED)
Table III sets forth the operating results as of
December 31, 2007 of the Bosphorus Fund, a Prior Program
that has conducted an offering which has closed since
December 31, 2002. The Bosphorus Fund closed in July 2007.
2007
Gross Revenues
$
155,820
Profit on Sale of Properties
0
Less: Operating Expenses
$
6,882,540
Interest Expense
$
421,890
Depreciation
0
Net Income (GAAP basis)
$
(7,148,610
)
Taxable Income
From
Operations(1)
0
From Gain on Sale
0
Cash Generated From Operations
0
Cash Generated from Sales
0
Cash Generated from Refinancing
0
Total Cash Generated
0
Less Cash Distributions to Investors:
From Operating Cash Flow
0
From Sales and Refinancing
0
From Other
0
Cash Generated (Deficiency) After Cash Distributions
0
Less Special Items (not including sales and refinancing):
None
Cash Generated (Deficiency) After Cash Distributions and Special
Items
0
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
(1)
Ordinary Income (Loss)
From operations
0
From recapture
0
Capital Gain (loss)
0
Cash Distributions to Investors
Source (on GAAP Basis)
Operations
0
Return of Capital
0
Source (on Cash Basis)
Sales
0
Refinancing
0
Operations
0
Other
0
Amount (in percentage terms) remaining invested in program
properties at the end of 2007 (original total acquisition cost
of properties retained divided by original acquisition costs of
all properties in program)
100
%
(1)
The Bosphorus Fund commenced operations in January 2008. The
fund is not required to file tax returns in the United States,
although it does provide K1 information for any limited partner
investors who may have to make United States tax filings.
The following prior performance tables provide information
relating to real estate investment programs sponsored by
BlackRock Realty Advisors, Inc. (“BlackRock Realty”).
Each of these individual real estate investment programs (a
“BlackRock Prior Program”) has its own specific
investment objectives; however, the general investment
objectives common to all prior real estate programs include
providing investors with exposure to investment real estate in
the United States as an asset class.
This information should be read together with the summary
information included in the “Prior Performance of Our
Sub-Advisor” section of this prospectus.
Investors should not construe inclusion of the following
tables as implying, in any manner, that NorthEnd Income Property
Trust Inc. will have results comparable to those reflected in
such tables. Distributable cash flow, federal income tax
deductions or other factors could be substantially different.
Investors should note that, by acquiring shares of NorthEnd
Income Property Trust, Inc., they will not be acquiring any
interest in any BlackRock Prior Program.
Description
of the Tables
The following tables are included herein:
Table I Experience in Raising and Investing Funds (As
a Percentage of Investment)
Table II Compensation to Sponsor
Table III Annual Operating Results of Prior Real
Estate Programs
Table IV Results of Completed Programs
Table V Sales or Dispositions of Property
Additional information relating to the acquisition of properties
by BlackRock Prior Programs is contained in Table VI, which is
included in Part II of the registration statement which
NorthEnd Income Property Trust, Inc. has filed with the SEC of
which this prospectus is a part. Copies of Table VI will be
provided to prospective investors at no charge upon request.
TABLE
I
EXPERIENCE IN RAISING AND INVESTING FUNDS
(UNAUDITED)
Table I presents information showing the experience of Blackrock
and its affiliates in raising and investing funds for the
Blackrock Prior Programs, the offering of which closed or raised
capital in the three-year period ending December 31, 2007.
Information is included for offerings with similar investment
objectives that have closed since December 31, 2007.
Information is provided as to the manner in which the proceeds
of the offerings have been applied. Also set forth is the timing
and length of these offerings and information pertaining to the
time period over which the proceeds have been invested.
BlackRock
BlackRock
BlackRock
BlackRock
Apartment Value
Diamond Property
Strategic Apartment
Granite Property
Fund III, Inc.
Fund, Inc.
Fund, Inc.
Fund, Inc.
Dollar Amount Offered
$
106,447,000.00
$
885,043,331.00
$
287,500,000.00
$
1,519,345,123.00
Dollar Amount Raised
$
106,447,000.00
$
885,043,331.00
$
287,500,000.00
$
1,519,345,123.00
Percentage Amount Raised
100%
100%
100%
100%
Less Offering Expenses:
Selling Commissions
$
—
$
—
$
—
$
—
Organizational
Expenses(1)
$
380,512.05
$
—
$
47,383.65
$
—
Other
$
—
$
—
$
—
$
—
Reserves:
$
—
$
—
$
—
$
—
Percent available for investment
99.6%
100.0%
100.0%
100.0%
Acquisition Costs Property Level:
Cash Down Payment
$
99,198,758.36
$
911,678,797.86
$
162,975,250.80
$
2,914,788,742.87
Mortgage Loan
$
188,438,222.01
$
1,326,066,138.51
$
275,882,513.11
$
514,820,250.80
Acquisition Fees—Advisor
$
1,486,861.00
$
6,327,826.00
—
$
—
Other
$
4,831,064.65
$
27,034,785.68
$
4,973,432.17
$
29,552,154.24
Total Acquisition Cost
$
293,954,906.02
$
2,271,107,548.05
$
443,831,196.08
$
3,459,161,147.91
Percent leverage (mortgage financing divided by total
acquisition cost)
64%
58%
62%
15%
Date Offering Began
4/12/2004
4/1/2005
4/15/2005
1/1/1981
Length of Offering
12 months
Open-End
Open-End
Open-End
Months to invest 90 percent of amount available for
investment (measured from the beginning of offering)
Table II provides a summary of the amount and type of
compensation paid to BlackRock Realty and its affiliates as of
December 31, 2007 related to the BlackRock Prior Programs
with similar investment objectives that have conducted offerings
which have closed or had commitment activity since
December 31, 2004. Also included is a summary of the amount
and types of compensation paid to BlackRock Realty and its
affiliates as of December 31, 2007 related to the BlackRock
Prior Programs, the offerings of which have begun since
December 31, 2004, presented on an aggregate basis.
BlackRock
BlackRock
BlackRock
Diamond
Strategic
BlackRock
Apartment Value
Property Fund,
Apartment Fund,
Granite Property
Fund III, Inc.
Inc.
Inc.
Fund,
Inc.1
Date Offering Commenced
Dollar Amount Raised
$
106,447,000
$
885,043,331
$
287,500,000
$
1,519,345,123
Amount Paid to Sponsor from Proceeds of Offering:
$
—
$
—
$
—
$
—
Underwriting Fees
$
—
$
—
$
—
$
—
Acquisition Fees:
$
—
$
—
$
—
$
—
Real Estate Commissions
$
—
$
—
$
—
$
—
Advisory Fees
$
1,486,861
$
6,327,826
$
—
$
—
Other (identify and quantify)
$
—
$
—
$
—
$
—
Dollar Amount of Cash Generated from Operations before Deducting
Payments to Sponsor Includes Cash Spent to acquire assets
$
(196,630,892
)
$
(1,298,523,328
)
$
(291,197,915
)
$
(2,594,817,792
)
Amount Paid to Sponsor from Operations:
$
—
$
—
$
—
$
—
Property Management Fees
$
—
$
—
$
—
$
—
Partnership Management Fees
$
2,541,868
$
13,531,156
$
7,905,149
$
51,809,622
Reimbursements
$
—
$
—
$
—
$
—
Leasing Commissions
$
—
$
—
$
—
$
—
Other (identify and quantify)
Dollar Amount of Cash Generated from Property Sales and
Refinancing Before Deduction Payments to Sponsor:
$
115,060,732
$
556,632,910
$
246,638,543
$
1,396,645,905
Cash
$
—
$
—
$
—
$
—
Notes
$
—
$
—
$
—
$
—
Amount Paid to Sponsor from Property Sales and Refinancing:
$
—
$
—
$
—
$
—
Real Estate Commissions
$
—
$
—
$
—
$
—
Incentive Fees (1)
$
—
$
2,518,361
$
—
0
Other (identify and quantify) - Financing Fees
$
94,000
$
3,181,483
$
—
$
352,500
1 For
periods before the fourth quarter of 2006, the information
presented includes the performance of Tower Fund, a commingled
insurance company real estate separate account with a core
investment strategy. On September 30, 2006, substantially
all of the unit holders of Tower Fund received shares of
BlackRock Granite Property Fund, Inc. BlackRock Realty or a
predecessor also managed Tower Fund from January 1, 1994,
and the investment professionals with primary responsibilities
for the management of Tower Fund prior to January 1, 1994,
became employed by the predecessor of BlackRock Realty on such
date.
TABLE
III
OPERATING RESULTS—CONSOLIDATED
(UNAUDITED)
Table III sets forth the operating results as of
December 31, 2007 of the Blackrock Prior Programs with
similar investment objectives that have closed since
December 31, 2002.
2007
2006
2005
2004
2003
Gross Revenues
$
267,067,918
$
214,991,289
$
159,707,560
$
149,040,419
$
140,151,000
Unrealized appreciation/(depreciation)
$
941,817,902
$
317,947,323
$
186,480,436
$
10,179,000
$
(813,000
)
Realized
$
4,519,446
$
22,460,622
$
52,073,000
$
(19,429,000
)
$
266,000
Less:
Operating Expenses
$
144,134,761
$
104,911,152
$
72,017,255
$
57,499,789
$
58,508,000
Interest Expense
$
77,206,062
$
53,268,465
$
32,479,865
$
16,484,660
$
13,887,000
Depreciation
$
—
Net Income (GAAP basis)
$
992,064,443
$
397,219,617
$
293,763,876
$
65,805,970
$
67,209,000
Taxable Income/(Loss)
From Operations
$
(67,995,605
)
$
(37,107,418
)
$
(9,888,373
)
$
(174,503
)
$
—
From Gain on Sale
$
47,798,191
$
9,676,867
$
—
$
—
$
—
Cash Generated From Operations (Includes cash spent to acquire
assets)
$
(1,975,987,687
)
$
(2,972,104,437
)
$
(1,361,481,105
)
$
(701,177,468
)
$
(149,559,000
)
Cash Generated from Sales
$
300,949,023
$
357,172,970
$
597,468,172
$
281,726,000
$
48,969,000
Cash Generated from Refinancing
$
438,249,691
$
370,050,593
$
317,760,777
$
231,335,000
$
27,040,000
Total Cash Generated
$
(1,236,788,973
)
$
(2,244,880,874
)
$
(446,252,078
)
$
(188,116,468
)
$
(73,550,000
)
Contributions from Investors
$
1,524,930,869
$
2,349,926,245
$
639,930,724
$
262,340,600
$
112,400,000
Less Cash Distributions to Investors:
From Operating Cash Flow
$
64,615,569
$
64,440,520
$
54,487,504
$
74,981,000
$
67,756,000
From Sales and Refinancing
$
174,216,351
$
70,916,145
$
53,998,371
$
66,246,000
$
57,953,000
From Other
$
—
Cash Generated (Deficiency) After Cash Distributions
$
49,309,976
$
(30,311,294
)
$
85,192,771
$
(67,002,868
)
$
(86,859,000
)
Less Special Items (not including sales and refinancing):
—
—
—
—
—
Cash Generated (Deficiency) After Cash Distributions and Special
Items
$
49,309,976
$
(30,311,294
)
$
85,192,771
$
(67,002,868
)
$
(86,859,000
)
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
Ordinary Income (Loss)
From operations
$
(10.85
)
$
(8.18
)
$
(4.95
)
$
(0.12
)
$
—
From recapture
NA
NA
NA
NA
NA
Capital Gain (loss)
$
7.63
$
2.13
$
—
$
—
$
—
Cash Distributions to Investors:
Source (on GAAP Basis)
Operations
$
7.30
$
12.53
$
27.63
$
52.34
$
55.07
Return of Capital
$
30.81
$
17.32
$
26.66
$
46.14
$
47.10
Source (on Cash Basis)
Operations
$
10.31
$
14.21
$
27.27
$
52.29
$
55.07
Sales and Refinancing
$
27.79
$
15.64
$
27.02
$
46.20
$
47.10
Other
$
—
$
—
$
—
$
—
$
—
Amount (in percentage terms) remaining invested in program
properties at the end of the last year reported in the Table
(original total acquisition cost of properties retained divided
by original acquisition costs of all properties in program) (See
Note Below)
TABLE
III
OPERATING RESULTS OF BLACKROCK GRANITE PROPERTY FUND, INC.
(UNAUDITED)
Table III sets forth the operating results as of
December 31, 2007 of the Blackrock Prior Programs with
similar investment objectives that have closed since
December 31, 2002.
2007
2006
2005
2004
2003
Gross Revenues
$
179,744,241
$
149,844,119
$
122,555,000
$
147,719,000
$
140,151,000
Unrealized appreciation/(depreciation)
$
295,510,795
$
210,170,016
$
135,326,000
$
10,179,000
$
(813,000
)
Realized
$
1,944,503
$
17,853,903
$
52,073,000
$
(19,429,000
)
$
266,000
Less:
Operating Expenses
$
83,377,303
$
61,780,873
$
49,762,000
$
56,510,000
$
58,508,000
Interest Expense
$
35,724,867
$
29,334,726
$
21,824,000
$
16,228,000
$
13,887,000
Depreciation
$
—
Net Income (GAAP basis)
$
358,097,369
$
286,752,439
$
238,368,000
$
65,731,000
$
67,209,000
Taxable Income/(Loss)
From Operations
$
(815,947
)
$
3,261,674
$
—
$
—
$
—
From Gain on Sale
$
19,411,421
$
—
$
—
$
—
$
—
Cash Generated From Operations (Includes cash spent to acquire
assets)
$
(1,165,515,495
)
$
(549,203,519
)
$
(880,098,778
)
$
(381,824,000
)
$
(149,559,000
)
Cash Generated from Sales
$
210,931,786
$
309,645,992
$
597,468,172
$
281,726,000
$
48,969,000
Cash Generated from Refinancing
$
(26,624,169
)
$
161,559,855
$
143,664,269
$
97,215,000
$
27,040,000
Total Cash Generated
$
(981,207,878
)
$
(77,997,672
)
$
(138,966,337
)
$
(2,883,000
)
$
(73,550,000
)
Contributions from Investors
$
1,071,071,164
$
139,171,243
$
309,102,716
$
64,924,000
$
112,400,000
Less Cash Distributions to Investors:
From Operating Cash Flow
$
60,242,071
$
58,728,520
$
50,969,000
$
74,981,000
$
67,756,000
From Sales and Refinancing
$
23,081,047
$
65,311,033
$
49,415,371
$
66,246,000
$
57,953,000
From Other
$
—
Cash Generated (Deficiency) After Cash Distributions
$
6,540,168
$
(62,865,982
)
$
69,752,008
$
(79,186,000
)
$
(86,859,000
)
Less Special Items (not including sales and refinancing):
—
—
—
—
—
Cash Generated (Deficiency) After Cash Distributions and Special
Items
$
6,540,168
$
(62,865,982
)
$
69,752,008
$
(79,186,000
)
$
(86,859,000
)
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
Ordinary Income (Loss)
From operations
$
(0.27
)
$
1.87
$
—
$
—
$
—
From recapture
NA
NA
NA
NA
NA
Capital Gain (loss)
$
6.51
$
—
$
—
$
—
$
—
Cash Distributions to Investors:
Source (on GAAP Basis)
Operations
$
20.35
$
33.61
$
34.67
$
60.63
$
55.07
Return of Capital
$
7.61
$
37.38
$
33.61
$
53.57
$
47.10
Source (on Cash Basis)
Operations
$
20.21
$
33.61
$
34.67
$
60.63
$
55.07
Sales and Refinancing
$
7.74
$
37.38
$
33.61
$
53.57
$
47.10
Other
$
—
$
—
$
—
$
—
$
—
Amount (in percentage terms) remaining invested in program
properties at the end of the last year reported in the Table
(original total acquisition cost of properties retained divided
by original acquisition costs of all properties in program)
TABLE
III
OPERATING RESULTS OF BLACKROCK DIAMOND PROPERTY FUND, INC.
(UNAUDITED)
Table III sets forth the operating results as of
December 31, 2007 of the Blackrock Prior Programs with
similar investment objectives that have closed since
December 31, 2002.
2007
2006
2005
2004
2003
Gross Revenues
$
32,184,033
$
19,661,825
$
6,682,176
Unrealized appreciation/(depreciation)
$
140,913,362
$
51,472,619
$
17,124,273
Realized
$
1,875,000
$
(372,662
)
$
—
Less:
Operating Expenses
$
25,439,148
$
13,047,589
$
6,528,945
Interest Expense
$
21,361,838
$
9,300,846
$
2,659,865
Depreciation
Net Income (GAAP basis)
$
128,171,409
$
48,413,347
$
14,617,639
$
—
$
—
Taxable Income/(Loss)
From Operations
$
(45,915,876
)
$
(18,419,970
)
$
(3,134,398
)
From Gain on Sale
$
—
$
8,401,601
$
—
Cash Generated From Operations (Includes cash spent to acquire
assets)
$
(652,419,772
)
$
(392,888,602
)
$
(253,214,954
)
Cash Generated from Sales
$
—
$
18,241,309
$
—
Cash Generated from Refinancing
$
309,006,929
$
140,094,164
$
89,290,508
Total Cash Generated
$
(343,412,843
)
$
(234,553,129
)
$
(163,924,446
)
Contributions from Investors
$
446,031,068
$
262,638,081
$
176,374,182
Less Cash Distributions to Investors:
From Operating Cash Flow
$
—
$
—
$
—
From Sales and Refinancing
$
134,030,633
$
3,378,146
$
—
From Other
Cash Generated (Deficiency) After Cash Distributions
$
(31,412,408
)
$
24,706,806
$
12,449,736
Less Special Items (not including sales and refinancing):
—
—
—
—
—
Cash Generated (Deficiency) After Cash Distributions and Special
Items
$
(31,412,408
)
$
24,706,806
$
12,449,736
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
Ordinary Income (Loss)
From operations
$
(48.67
)
$
(40.61
)
$
(17.77
)
NA
NA
From recapture
NA
NA
NA
NA
NA
Capital Gain (loss)
$
—
$
18.52
$
—
NA
NA
Cash Distributions to Investors:
Source (on GAAP Basis)
Operations
$
—
$
—
$
—
$
—
$
—
Return of Capital
$
142.06
$
7.45
$
—
NA
NA
Source (on Cash Basis)
Operations
$
—
$
—
$
—
NA
NA
Sales and Refinancing
$
142.06
$
7.45
$
—
NA
NA
Other
$
—
$
—
$
—
NA
NA
Amount (in percentage terms) remaining invested in program
properties at the end of the last year reported in the Table
(original total acquisition cost of properties retained divided
by original acquisition costs of all properties in program)
TABLE
III
OPERATING RESULTS OF BLACKROCK STRATEGIC APARTMENT FUND, INC.
(UNAUDITED)
Table III sets forth the operating results as of
December 31, 2007 of the Blackrock Prior Programs with
similar investment objectives that have closed since
December 31, 2002.
2007
2006
2005
2004
2003
Gross Revenues
$
41,708,289
$
39,588,762
$
27,399,384
$
948,419
$
—
Unrealized appreciation/(depreciation)
$
12,211,913
$
39,875,919
$
23,430,163
$
—
Realized
$
(1,720,911
)
Less:
Operating Expenses
$
24,252,738
$
23,076,634
$
12,596,310
$
516,789
Interest Expense
$
14,190,154
$
12,317,141
$
7,189,000
$
171,660
Depreciation
Net Income (GAAP basis)
$
13,756,399
$
44,070,906
$
31,044,237
$
259,970
$
—
Taxable Income/(Loss)
From Operations
$
(1,849,686
)
$
(13,508,282
)
$
(3,974,688
)
$
(174,503
)
From Gain on Sale
$
16,811,729
$
—
Cash Generated From Operations (Includes cash spent to acquire
assets)
$
(34,671,711
)
$
(73,430,909
)
$
(183,095,295
)
$
(285,767,468
)
Cash Generated from Sales
$
74,038,543
$
—
$
—
Cash Generated from Refinancing
$
20,600,000
$
67,000,000
$
85,000,000
$
120,000,000
Total Cash Generated
$
59,966,832
$
(6,430,909
)
$
(98,095,295
)
$
(165,767,468
)
$
—
Contributions from Investors
$
1,318,674
$
8,417,921
$
111,047,826
$
169,892,600
Less Cash Distributions to Investors:
From Operating Cash Flow
$
3,265,397
$
5,712,000
$
3,518,504
From Sales and Refinancing
$
2,183
$
—
$
—
From Other
Cash Generated (Deficiency) After Cash Distributions
$
58,017,926
$
(3,724,988
)
$
9,434,027
$
4,125,132
$
—
Less Special Items (not including sales and refinancing):
—
—
—
—
—
Cash Generated (Deficiency) After Cash Distributions and Special
Items
$
58,017,926
$
(3,724,988
)
$
9,434,027
$
4,125,132
$
—
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
Ordinary Income (Loss)
From operations
$
(5.18
)
$
(42.59
)
$
(14.13
)
$
(1.03
)
N/A
From recapture
NA
NA
NA
NA
Capital Gain (loss)
$
47.12
$
—
$
—
$
—
N/A
Cash Distributions to Investors:
Source (on GAAP Basis)
Operations
$
9.15
$
13.23
$
12.51
$
—
$
—
Return of Capital
$
0.01
$
4.78
$
—
$
—
NA
Source (on Cash Basis)
Operations
$
9.15
$
18.01
$
12.51
$
—
NA
Sales and Refinancing
$
0.01
$
—
$
—
$
—
NA
Other
$
—
$
—
$
—
$
—
NA
Amount (in percentage terms) remaining invested in program
properties at the end of the last year reported in the Table
(original total acquisition cost of properties retained divided
by original acquisition costs of all properties in program)
TABLE
III
OPERATING RESULTS OF BLACKROCK APARTMENT VALUE FUND III,
INC.
(UNAUDITED)
Table III sets forth the operating results as of
December 31, 2007 of the Blackrock Prior Programs with
similar investment objectives that have closed since
December 31, 2002.
2007
2006
2005
2004
2003
Gross Revenues
$
10,500,096
$
5,896,583
$
3,071,000
$
373,000
Unrealized appreciation/(depreciation)
$
19,289,200
$
16,428,769
$
10,600,000
$
—
Realized
$
2,420,854
$
4,979,381
$
—
$
—
Less:
Operating Expenses
$
7,699,713
$
5,712,816
$
3,130,000
$
473,000
Interest Expense
$
5,197,192
$
2,315,752
$
807,000
$
85,000
Depreciation
Net Income (GAAP basis)
$
19,313,245
$
19,276,165
$
9,734,000
$
(185,000
)
$
—
Taxable Income/(Loss)
From Operations
$
(15,048,413
)
$
(8,255,662
)
$
(2,779,287
)
$
—
From Gain on Sale
$
11,575,041
$
1,275,266
$
—
$
—
Cash Generated From Operations (Includes cash spent to acquire
assets)
$
(35,027,485
)
$
(116,531,407
)
$
(45,072,000
)
$
(33,586,000
)
Cash Generated from Sales
$
15,978,694
$
29,285,669
$
—
$
—
Cash Generated from Refinancing
$
18,643,795
$
51,346,574
$
(194,000
)
$
14,120,000
Total Cash Generated
$
(404,996
)
$
(35,899,164
)
$
(45,266,000
)
$
(19,466,000
)
Contributions from Investors
$
13,342,000
$
49,699,000
$
43,406,000
$
27,524,000
Less Cash Distributions to Investors:
From Operating Cash Flow
From Sales and Refinancing
$
12,000
$
2,226,966
$
4,583,000
$
—
From Other
Cash Generated (Deficiency) After Cash Distributions
$
12,925,004
$
11,572,870
$
(6,443,000
)
$
8,058,000
Less Special Items (not including sales and refinancing):
—
—
—
—
—
Cash Generated (Deficiency) After Cash Distributions and Special
Items
$
12,925,004
$
11,572,870
$
(6,443,000
)
$
8,058,000
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
Ordinary Income (Loss)
From operations
$
(96.64
)
$
(65.73
)
$
(39.34
)
$
—
NA
From recapture
NA
NA
NA
NA
NA
Capital Gain (loss)
$
74.33
$
10.15
$
—
$
—
NA
Cash Distributions to Investors:
Source (on GAAP Basis)
Operations
$
—
$
—
$
—
$
—
$
—
Return of Capital
$
0.08
$
17.73
$
64.87
$
—
NA
Source (on Cash Basis)
Operations
$
—
$
—
$
—
$
—
NA
Sales and Refinancing
$
0.08
$
17.73
$
64.87
$
—
NA
Other
$
—
$
—
$
—
$
—
NA
Amount (in percentage terms) remaining invested in program
properties at the end of the last year reported in the Table
(original total acquisition cost of properties retained divided
by original acquisition costs of all properties in program)
TABLE
III
Operating Results Of BlackRock Retail Opportunity Fund, LLC
(UNAUDITED)
Table III sets forth the operating results as of
December 31, 2007 of the Blackrock Prior Programs with
similar investment objectives that have closed since
December 31, 2002.
2007
2006
2005
2004
2003
Gross Revenues
$
2,350,261
$
—
$
—
$
—
$
—
Unrealized appreciation/(depreciation)
$
—
$
—
$
—
$
—
$
—
Realized
Less:
Operating Expenses
$
3,892,962
Interest Expense
$
732,011
Depreciation
Net Income (GAAP basis)
$
(2,274,712
)
$
—
$
—
$
—
$
—
Taxable Income/(Loss)
From Operations
$
(1,872,748
)
From Gain on Sale
Cash Generated From Operations (Includes cash spent to acquire
assets)
$
(107,342,615
)
Cash Generated from Sales
$
—
Cash Generated from Refinancing
$
68,087,262
Total Cash Generated
$
(39,255,353
)
$
—
$
—
$
—
$
—
Contributions from Investors
$
42,452,500
Less Cash Distributions to Investors:
From Operating Cash Flow
—
—
—
—
—
From Sales and Refinancing
—
—
—
—
—
From Other
—
—
—
—
—
Cash Generated (Deficiency) After Cash Distributions
$
3,197,147
$
—
$
—
$
—
$
—
Less Special Items (not including sales and refinancing):
—
—
—
—
—
Cash Generated (Deficiency) After Cash Distributions and Special
Items
$
3,197,147
$
—
$
—
$
—
$
—
Tax and Distribution Data Per $1,000 Invested
Federal Income Tax Results:
Ordinary Income (Loss)
From operations
$
(44.11
)
NA
NA
NA
NA
From recapture
NA
NA
NA
NA
NA
Capital Gain (loss)
$
—
NA
NA
NA
NA
Cash Distributions to Investors:
Source (on GAAP Basis)
Operations
$
—
$
—
$
—
$
—
$
—
Return of Capital
$
—
NA
NA
NA
NA
Source (on Cash Basis)
NA
NA
NA
NA
Operations
$
—
NA
NA
NA
NA
Sales and Refinancing
$
—
NA
NA
NA
NA
Other
$
—
NA
NA
NA
NA
Amount (in percentage terms) remaining invested in program
properties at the end of the last year reported in the Table
(original total acquisition cost of properties retained divided
by original acquisition costs of all properties in program)
TABLE
III
OPERATING RESULTS OF PETER COOPER VILLAGE STUYVESANT TOWN
PARTNERS, L.P. II
(UNAUDITED)
Table III sets forth the operating results as of
December 31, 2007 of the Blackrock Prior Programs with
similar investment objectives that have closed since
December 31, 2002.
2007
2006
2005
2004
2003
Gross Revenues
$
580,998
$
—
Unrealized appreciation/(depreciation)
$
473,892,632
$
—
Realized
$
—
$
—
Less:
Operating Expenses
$
(527,103
)
$
1,293,240
Interest Expense
Depreciation
Net Income (GAAP basis)
$
475,000,733
$
(1,293,240
)
$
—
$
—
$
—
Taxable Income/(Loss)
From Operations
$
(2,492,935
)
$
(185,178
)
From Gain on Sale
Cash Generated From Operations (Includes cash spent to acquire
assets)
$
18,989,391
$
(1,840,050,000
)
Cash Generated from Sales
Cash Generated from Refinancing
$
48,535,874
$
(49,950,000
)
Total Cash Generated
$
67,525,265
$
(1,890,000,000
)
Contributions from Investors
$
(49,284,537
)
$
1,890,000,000
Less Cash Distributions to Investors:
From Operating Cash Flow
$
1,108,101
From Sales and Refinancing
$
17,090,488
From Other
Cash Generated (Deficiency) After Cash Distributions
$
42,139
$
—
Less Special Items (not including sales and refinancing):
—
—
—
—
—
Cash Generated (Deficiency) After Cash Distributions and Special
Items
TABLE
IV
RESULTS OF COMPLETED PROGRAMS
(UNAUDITED)
This Table sets forth summary information as of
December 31, 2007 on the results of the BlackRock Prior
Programs having similar investment objectives that have
completed operations since December 31, 2002.
TABLE
V
SALE OR DISPOSITION OF PROPERTIES
(UNAUDITED)
This Table sets forth summary information as of
December 31, 2007 on the results of the sale or disposals
of properties by the BlackRock Prior Programs since
December 31, 2004 by prior real estate programs having
similar investment objectives.
Location
Fund
Property Name
Address
City
State
BlackRock Diamond
Property Fund, Inc.
Sunrise Mountain
5250 Stewart Avenue
Las Vegas
NV
International Drive
5400-5498 Touchstone Drive
Orlando
FL
BlackRock Granite
Property Fund,
Inc.(1)
King of Prussia
625 Clark Avenue
King of Prussia
PA
Lucas Aerospace
Watson Industrial Center
Aurora
OH
Pier One Imports
Philadelphia @ Maryland
Aberdeen
MD
Weber Dist. Ctr
9345 Santa Anita Avenue
Rancho Cucamonga
CA
Gateway Shop Ctr
21001 San Ramon Valley Boulevard
San Ramon
CA
Whitewater I
12600 Whitewater Drive
Minneapolis
MN
Gateway Bus. Park
Meadow Drive
Grove City
OH
Appling Lakes
1392 Equestrian Drive
Cordova
TN
Tech Park—Cons.
Various by building
Norcross
GA
Braker Ctr.—Cons.
Various by building
Austin
TX
Ameriplex
7451-7452 Tempel Hof Drive
Indianapolis
IN
Remington Lakes
850 Naperville Road
Bolingbrook
IL
Johns Creek—Cons.
Various by building
Duluth
GA
San Marin/San Miguel
4025 Duval Road
Austin
TX
Canyon Corp. I
2510 West Dunlap Avenue
Phoenix
AZ
Carol Point
Chicago
IL
Landmark Ctr. II
18451 North Dallas
Dallas
TX
Tech Center
5575 Tech Center Drive
Colorado Springs
CO
Canyon Corp. II
2512 West Dunlap Avenue
Phoenix
AZ
Raven’s Crest
8098 Ravens Crest Court
Manassas
VA
Landmark Ctr. I
North Dallas Parkway
Dallas
TX
Remington II
800 Veterans Parkway
Bolingbrook
IL
Canyon Corp. III Land
West Dunlap Avenue
Phoenix
AZ
GlenPoint VI
175-199 Internationale Boulevard
Glendale Heights
IL
Elmhurst I
847-853 Church Court
Elmhurst
IL
Shawmut—Cons.
5 - 110 Shawmut Road
Canton
MA
Executive House
1025 Hancock Street
Quincy
MA
Warm Springs Plaza
46500 Mission Blvd.
Fremont
CA
(1) For
periods before the fourth quarter of 2006, the information
presented includes the performance of Tower Fund, a commingled
insurance company real estate separate account with a core
investment strategy. On September 30, 2006, substantially
all of the unit holders of Tower Fund received shares of
BlackRock Granite Property Fund, Inc. BlackRock Realty or a
predecessor also managed Tower Fund from January 1, 1994,
and the investment professionals with primary responsibilities
for the management of Tower Fund prior to January 1, 1994,
became employed by the predecessor of BlackRock Realty on such
date.
You should rely only on the information contained in this
prospectus. No dealer, salesperson or other individual has been
authorized 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 above.
You should not assume that the delivery of this prospectus will
remain fully accurate and correct as of any time subsequent to
the date of this prospectus.
The following table itemizes the expenses incurred by us in
connection with the issuance and registration of the securities
being registered hereunder, other than the asset-based
distribution fee. All amounts shown are estimates except the SEC
registration fee and the FINRA filing fee.
SEC registration fee
$
88,425
FINRA filing fee
75,500
Printing costs
*
Legal fees and expenses
*
Accounting fees and expenses
*
Blue sky fees and expenses
*
Miscellaneous expenses
*
Total
$
*
* To be filed by amendment.
Item 32.
Sales to
Special Parties.
None
Item 33.
Recent
Sales of Unregistered Securities.
On August 19, 2008, a wholly owned subsidiary of
ML & Co. purchased 100 shares of common stock of
NorthEnd Income Property Trust Inc. for total cash
consideration of $1,000 to provide our initial capitalization.
The issuance of such shares was effected and the purchase of
such shares will be effected in reliance upon an exemption from
registration provided by Section 4(2) under the Securities
Act of 1933, as amended (the “Securities Act”).
Item 34.
Indemnification
of Directors, Officers and Others.
Maryland law allows directors and officers to be indemnified
against judgments, penalties, fines, settlements and reasonable
expenses actually incurred in connection with a proceeding
unless the following can be established:
•
an 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 act or omission was unlawful.
Indemnification could reduce the legal remedies available to us
and the stockholders against the indemnified individuals,
however.
This provision does not reduce the exposure of directors and
officers to liability under federal or state securities laws,
nor does it limit the stockholders’ ability to obtain
injunctive relief or other equitable remedies for a violation of
a director’s or an officer’s duties to us or our
stockholders, although the equitable remedies may not be an
effective remedy in some circumstances.
Our charter, however, provides that the directors, our advisor
and its affiliates will be indemnified by us for losses arising
from our operation only if all of the following conditions are
met:
•
the directors, our advisor or its affiliates have determined, in
good faith, that the course of conduct which caused the loss or
liability was in our best interests;
•
the directors, our advisor or its affiliates were acting on our
behalf or performing services for us;
•
in the case of affiliated directors, our advisor or its
affiliates, the liability or loss was not the result of
negligence or misconduct by the party seeking
indemnification; and
•
in the case of independent directors, the liability or loss was
not the result of gross negligence or willful misconduct by the
party seeking indemnification.
The indemnification or agreement to hold harmless is recoverable
only out of our net assets and not from the stockholders.
We will not, however, indemnify our advisor and its affiliates
for losses and liabilities arising from or out of alleged
violations of federal or state securities laws unless one or
more of the following conditions are met:
•
there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the
particular indemnitee;
•
such claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction as to the particular
indemnitee; or
•
a court of competent jurisdiction approves a settlement of the
claims against a particular 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 securities of our company were offered or
sold as to indemnification for violation of securities laws.
We have agreed to indemnify and hold harmless our advisor and
its affiliates performing services for us from specific claims
and liabilities arising out of the performance of their
obligations under the advisory agreement. As a result, we and
our stockholders may be entitled to a more limited right of
action than we would otherwise have if these indemnification
rights were not included in the advisory agreement.
The general effect to investors of any arrangement under which
any of our controlling persons, directors or officers are
insured or indemnified against liability is a potential
reduction in distributions resulting from our payment of
premiums associated with insurance or, to the extent any such
loss is not covered by insurance, our payment of indemnified
loss. In addition, indemnification could reduce the legal
remedies available to us and our stockholders against the
officers and directors.
Item 35.
Treatment
of Proceeds from Shares Being Registered.
Not applicable.
Item 36.
Financial
Statements and Exhibits.
(a) Financial Statements.
See
page F-1
for an index of the financial statements included in the
registration statement.
(a) 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 Securities 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.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the “Calculation of Registration Fee”
table in the effective registration statement.
(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.
(b) That, for the purpose of determining any liability
under the Securities Act, each such post-effective amendment
will be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time will be deemed to be the initial bona
fide offering thereof.
(c) 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.
(d) That all post-effective amendments will comply with the
applicable forms, rules and regulations of the SEC in effect at
the time such post-effective amendments are filed.
(e) That, for the purpose of determining liability under
the Securities Act to any purchaser, each prospectus filed
pursuant to Rule 424(b) as part of the registration
statement relating to the offering, other than a registration
statement relying on Rule 430B or other than a prospectus
filed in reliance on Rule 430A, shall be deemed to be part
of and 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 a 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.
(f) That, for the purpose of determining liability of the
registrant under the Securities Act to any purchaser in the
initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities
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 registrant 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.
2. 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.
3. The registrant undertakes to provide to the stockholders
the financial statements required by
Form 10-K
for the first full fiscal year of operations of the registrant.
4. The registrant undertakes to file a sticker supplement
pursuant to Rule 424(c) under the Securities 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 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 will disclose all
compensation and fees received by the advisor and its affiliates
in connection with any such acquisition. The post-effective
amendment will include audited financial statements meeting the
requirements
Rule 3-14
of
Regulation S-X
only for properties acquired during the distribution period.
5. The registrant undertakes to file, after the end of the
distribution period, a current report on
Form 8-K
containing the financial statements and 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.
6. Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions and otherwise, the registrant has been advised that
in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities 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
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 whether such indemnification by it is
against public policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
TABLE
VI
ACQUISITIONS OF PROPERTIES BY PROGRAMS
(UNAUDITED)
Table VI presents summary information on properties acquired
since December 31, 2004 by the Bosphorus Fund, a Prior
Program, and the BlackRock Prior Programs. This table provides
information regarding the general type and location of the
properties and the manner in which the properties were acquired.
All figures are through December 31, 2007.
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds
to believe that the registrant meets all of the requirements for
filing on
Form S-11
and has duly caused this amended Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, in the State of New York,
on this
27th day
of January, 2009.
NorthEnd Income Property Trust Inc.
By:
/s/ Douglas
W. Sesler
Douglas W. Sesler
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 as
indicated.
Name
Title
Date
/s/
Douglas
W. Sesler
Chief Executive Officer and Director
(Principal Executive Officer)