return target per year 1
- 8% (Y1), 9% (Y2) & 10% (Y3+)1
return target per year 1
1 Years referenced in the graphic above refer to 1 year from the effective date of investment as determined by the Manager in accordance with the Fund’s Private Placement Memorandum, and each such year subsequent thereto. There are no assurances that the stated objectives will be met. The anticipated returns are based on the following assumptions:
Assumes average capitalization rate for purchase of 8% for MHCs and 5% for SS. Assumes average capitalization rate for sale of 8% for MHCs and 5% for SS. Assumes average leverage rate of 65%. Assumes average interest rate of 5%. Assumes a 10 year hold period at which time all Properties would be sold. Assumes an annual increase in revenue per year for the aforementioned 10 year projected holding period of (10% for year 1 and 5% per each subsequent year). Assumes a 1% Acquisition Fee and 1% Disposition Fee. Assumes Class A Members will receive an annual Preferred Return of 8% for year 1, 9% for year 2 and 10% for each subsequent year through year 10. Assumes Class A Members will receive an 11%, or greater, return per year for 10 years from the capital appreciation of the Assets. Assumes Class B Members will receive an annual Preferred Return of 8% per year for 10 years. Assumes Class B Members will receive an 11%, or greater, return per year for 10 years from the capital appreciation of the Assets. Assumes a return of 50% of Members Capital Account balance at year 5.
2 The Company cannot guarantee the amount of future distributions, or if distributions will be paid at all.
3 “Excess Income” shall be defined as Net Proceeds Available for Distributions less a Members Preferred Return.
4 “Excess Equity” shall be defined as a Members share the Net Capital Event Proceeds less (1)first, to the Class A Members and Class B Members, pro rata based upon each such Member’s respective unpaid Preferred Return as provided according to Table 4 in the Fund’s Private Placement Memorandum, until such Class A Preferred Return and Class B Preferred Return has been paid; (2) second, to the Members to the extent and in proportion with their Invested Capital Contributions until the aggregate amount distributed to such Members in accordance with the second subsection Section 4.2 of the Private Placement Memorandum is sufficient to provide for a return of such Members’ Invested Capital Contributions by the Company; and (3) thereafter, 50% to the Class A and Class B Members, as a group, pro rata based upon each Member’s relative Membership Interest, and 50% to the Class C Member.
MHPI VII, LLC (the “Company”) has been formed to acquire storage facilities (“SS”) and manufactured housing communities (“MHCs”) through subsidiary single purpose entities. The objective is to provide an investment opportunity that offers reduced risk compared to the stock market or other real estate investments, yet significantly higher returns relative to traditional low-risk alternatives such as saving accounts or CDs. In particular, MHCs are well suited to meet this investment profile because they are a tangible asset that fulfills an under-supplied fundamental and growing need (affordable housing), can offer immediate cash flow, and can provide opportunities for value creation using our time-tested business model and proven growth strategies.
The goal for the Fund is to assemble a diversified portfolio of cash-flowing properties that gives Investors the financial benefits of asset ownership, but without the headaches of day-to-day management and resolving tenant issues. The objective is to provide an excellent return on investment for Investors while at the same time providing customers with a quality experience offered at an affordable rate.
|Maximum Offering Amount||$25 Million|
|Minimum Investment||$50,000 (Class B Members) & $250,000 (Class A Members)|
|Expected Duration||10 Years, or more|
|Accepted Funding Sources||Cash, Self-Directed IRA or other retirement account options may be used|
|Limited Number of Interests Available?||Yes|
|Offering Type||The offering is being made under The Securities Act of 1933, Regulation D, Rule 506(c) and is open only to verified Accredited Investors.|
Accelerated depreciation is allowed for “land improvements” (15 years versus 27.5 years for most residential real estate) and may result in the deferral of much of an Investor’s tax burden against their respective Preferred Return.
The Fund may offer diversification and stability as it plans to acquire both Storage and Manufactured Housing assets that produce high cash flow located in multiple states. In addition, the members of the Manager represent a strong and experienced team in their respective industries.
MHC’s and Storage assets have historically demonstrated a low correlation to the broader market. In addition, MHC's offer resident stability and longevity due to “immobility” of mobile homes lead to greater consistency of income as compared to other asset classes.
High Yield Income w/ Capital Appreciation6
The Fund anticipates a total return of 20%, or greater, per year to the Class A Members of the Fund. The anticipated total return target for Class B Members is 18%, or greater, per year.
5 Investors should consult with their financial advisor, accountant and/or tax attorney for tax advice specific to their particular needs and objectives.
6 Due to the risks involved in the ownership of real estate, there is no guarantee of any return on investment.
Underperforming Real Estate
Buying underperforming real estate and improving the management is a common goal of all investors, and it is ours as well. We have done it in the past and expect to do it with this fund. However, every investor should keep in mind there are a limited number of properly priced underperforming assets; there are many well-managed successful projects that have a very good future. We manage dozens of them. Therefore, we will be looking for good quality properties, both underperforming and well-managed.
Maximizing Market Potential
Markets are constantly changing. Our goal is to rapidly adjust to the marketplace to maximize the potential revenue. This is where the unique characteristics of storage and manufactured housing are so valuable. Every tenant is subject to a month to month lease, so rents can be adjusted monthly. Changes of just a few dollars are insignificant to most customers, but can have a huge impact on occupancy and revenue when thousands of tenants are involved.
Yields can be increased if the properties are refinanced quickly and a portion of the equity is returned to the investor. Our goal is to return a substantial portion of the equity investment within a 3-5 year period. Unlike most forms of real estate which have long term leases and relatively slow turnover, self storage leases are short term and allow for rapid turnover. During periods of strong demand, it is possible to implement increases in rental rates which can lead to higher property value. This, in turn, makes the recapture of the equity investment possible.
We believe our long time experience in the industry and a thorough understanding of how to add value will serve our investors well.
6 The properties shown, or referenced above, represent properties purchased prior to MHPI VII, LLC ("Fund 7"). Properties shown are owned and or operated by Affiliates of the Manager. The current portfolio shown is effective as of 3/31/17 and will likely change over time. Black circles on the map indicate a Storage Facilities, while red circles indicate Manufactured Housing Communities.
7 Assets Purchased refers to the Initial Purchase Price paid to third parties and refers to the gross purchase price of assets currently owned and operated by members of the Manager and its Affiliates.
The members of the Manager, and their Affiliates, have significant prior experience in acquiring and managing self storage facilities and is estimated to be a Top 50 operator7. Senior management of the Dahn Corporation, an affiliated company, (“Storage Team”) has almost 150 years of combined self storage experience. The Storage Team has worked together for over 25 years. During this time, the Storage Team has built or purchased over 5 million square feet of self storage properties located throughout the United States. Since inception, the Dahn Corporation has acted as the property manager to over 95 self storage facilities and the total number of units it has owned and/or operated has exceeded 55,000. Over that time, the Storage Team has rented over 500,000 units.
In addition to self storage facilities, the members of the Manager, and their Affiliates, have significant prior experience in acquiring and managing manufactured housing communities. They are estimated to own and/or operate the 5th largest number of MHCs8, with an excess of 250 MHCs containing over 25,000 lots under management in 29 states.
The extensive background and relationships of the Key Principals helps in identifying properties that minimize investment risk and maximize returns for investors.
7 Self Storage Top-Operator List – Dahn Corp. - http://www.insideselfstorage.com/guides/top-ops-guide.aspx
8 MHU Top 100 U.S. Manufactured Home Community Owners – www.mobilehomeuniversity.com. This website is owned and operated by Affiliates of the members of the Manager. The information is both gathered and provided by such members of the Manager and is believed to be accurate but is entirely reliant upon publicly accessible and available information and, as such, no guarantees can be provided as to the accuracy of such information.
2 Distributions are not guaranteed and may be suspended, modified or terminated at the discretion of the Manager. Future distributions may include a return of principal or borrowed funds, which may lower overall returns to the investor and may not be sustainable.
The information herein does not supplement or revise any information in the Private Placement Memorandum. To the extent information herein conflicts with the Private Placement Memorandum, the information in the Private Placement Memorandum shall govern.
There are no assurances that the stated objectives will be met.
MHPI VII, LLC does not provide investment, legal or tax advice.
This is not an offer. Securities can be offered by the prospectus only, which should accompany or precede this material. Since investing in MHPI VII, LLC is not suitable for all investors, the prospectus should be read carefully by an investor before investing. Investors are advised to consider the investment objectives, risks, charges and expenses before investing. The prospectus, which is available at ElevationFund.com, and may also be obtained by calling 888-642-2007, contains this and other information about MHPI VII, LLC.
An investment in the Units involves a significant degree of financial risk and, accordingly, a prospective Investor should consider carefully all of the risk factors described below. This Offering is intended only for persons who understand the risks and their consequences and who are able to bear the risk of loss of their investment. The following list is not intended to be an exhaustive list of the risks associated with this Offering, and prospective Investors should consider factors set forth elsewhere in this Memorandum before making their investment decision and discuss them with their own advisors, which may include attorneys, accountants, and/or investment advisors, as prospective Investors deem necessary.
Risk Factors Related to the Company
Risk of Failure to Comply with the Private Placement Exemption
This Offering constitutes the sale of securities. It is being made pursuant to an exemption from registration available under the United States Securities and Exchange Commission's (SEC's) Regulation D, Rule 506(c). In order to maintain the Company’s exemption, the Manager shall ensure reasonable compliance with the rules of the exemption, including, but not limited to, the prohibition against commingling of funds between other investments or companies operated by the Manager, the duty to not misrepresent and/or omit any material facts, and the filing of the requisite notices with both the Federal and State securities regulatory agencies. If the private placement exemptions relied upon are not available to the Company and/or its Manager for any reason, the Company and its Manager may be required to offer to the Investors the right to rescind their purchase of Interests, which could have a material adverse effect on the Company, its business, and its financial condition. There is no assurance that the Company and/or its Manager would have adequate funds to repay its Members if such rescission were required.
The Company's Success Depends on Performance of the Manager
The Company's ability to achieve its investment objectives and to pay distributions is dependent upon the performance of the Manager with respect to certain decisions to be made by the Manager, in its sole judgment and discretion, including, but not limited to: (a) selecting appropriate properties to acquire; (b) overseeing third party service-providers during the formation of the Company and due diligence for each Property; (c) overseeing the Property Manager, construction contractors, professionals, and suppliers during Property operations; (d) finding and determining appropriate financing arrangements for acquiring and/or refinancing Company Property; (e) managing the Company in accordance with its Limited Liability Company Agreement on behalf of its Members in such a manner as to produce cash flow and/or equity upon resale; and (f) selecting the appropriate methods to market and dispose of Company Properties; etc. The Manager will be relying upon its own prior experience with similar investments and the assistance of its professional team members to further the Investment Objectives of the Company when making such decisions in the judgment and discretion of the Manager.
The Manager May be Unable to Retain Key Personnel
A loss of key personnel of the Manager, or contractor personnel integral to operation of the Property during the course of business of the Company could have a detrimental effect upon the Company. The Manager will attempt to develop relationships with alternative, local service providers in the event of termination or failure of its team members to perform as anticipated. Further, the Manager may hire its own employees and/or an Affiliate to provide such services at rates commensurate with local providers, if acceptable service providers are not available in the marketplace.
Lack of Control and Limited Voting Rights of the Class A Members and Class B Members
The Manager will make all decisions with respect to the management of the Company. The Members will have no right or power to take part in the management of the Company and, except as expressly provided in the Agreement, the Class A Members and the Class B Members have no voting rights. The Manager may not be removed by the Members.
Members' Actions Could Jeopardize Their Limited Liability
The liability of each Member will be limited to their investment in the Company assuming compliance with the laws of each jurisdiction where the Company operates, compliance with the Agreement, and observation of applicable formative and qualification requirements of a limited liability company in Delaware. However, if a Member participates in the control of the business of the Company and/or acts outside its authority as a Member in such a way that binds the Company, such Member may be held liable for Company obligations in its own right and/or to the same extent as the Manager in certain circumstances.
The Offering Is Being Made on a Best Efforts Basis
The Class A Units and Class B Units hereby offered are being sold on a "best efforts basis", with respect to the Minimum Dollar Amount and on a "best efforts basis" with respect to the sale of the remaining Class A Units and/or Class B Units up to the Maximum Dollar Amount. Accordingly, there can be no assurance that any or all of the Units will be sold. No commitment has been made by anyone to purchase any or all of the Units offered herein and no commitment will be accepted until a Member represents and warrants in their Subscription Agreement (see Exhibit 3 hereof) that such Member has read and understands all of the documents associated with this Offering that have been provided by the Manager and that such Member meets the financial and/or other necessary qualifications for Membership as set forth in Section 1 hereof.
The Company Does Not Guarantee a Return on Investment
The Company makes no representations and/or warranties with respect to any return on an investment in the Company. There can be no assurance that a prospective Investor will receive any return on an investment in the Company and/or realize any profit on such prospective Investor's investment in the Company.
The Offering Price for Each Unit Has Been Arbitrarily Determined
The price for individual Class A Units and the price for individual Class B Units offered herein have been arbitrarily determined by the Manager and do not necessarily bear any relationship to the Properties, book value, earnings and/or net worth of the Company or any other established criteria of value.
Lack of Capital May Impede Achievement of Investment Objectives
There is a risk that the amount of capital raised in this Offering will be insufficient to meet the Investment Objectives and/or operational requirements of the Company. If the Company raises only the Minimum Dollar Amount, the Company may not have sufficient proceeds to fully implement its Investment Objectives with respect to the Properties. Alternatively, even if the Company raises the Maximum Dollar Amount, improvement and/or operation costs may be greater than expected. In either case, a reduction in the amount of funds available for capital improvements to the Properties may result in decreased rental payments for the storage facilities or mobile home lots in the future, which could decrease the cash available for distribution to Members.
If there is a shortage of capital necessary to meet its Investment Objectives, the Manager will use its best efforts to obtain funds from a third party. Obtaining funds from a third party may require an increase in the amount of financing that the Company will be obligated to repay. In addition, there is no certainty that funds from a third party will be available at a reasonable cost, if available at all, and the Manager may need to sell additional Interests, which could dilute the Interests of the Members.
Specifically, and solely with respect to non-real estate secured loans, the Manager will consider first obtaining funds from Members to satisfy any such shortage in capital. If the Manager is unable to obtain such funds from Members, the Manager will then consider obtaining funds from a third party. Obtaining funds from a Member and/or third party may require an increase in the amount of financing that the Company will be obligated to repay. In addition, there is no certainty that funds from a Member and/or third party will be available at a reasonable cost with respect to non-real estate secured loans, if available at all, and the Manager may need to sell additional Interests to Members, and if there is still a shortage of necessary capital, the Manager may need to sell additional Interests to prospective Investors, which could dilute the Interests of the Members.
Company Has No Track Record
The Company is newly formed and has no operational history. It will be managed by the Manager. However, the members of the Manager that will be making investment decisions on behalf of the Company, have significant prior experience in negotiating, purchasing, operating, managing and selling storage facilities and mobile home parks. See Section 9.2.
Limited Transferability or Liquidity of Class A Interests and Class B Interests
The Interests are being offered and sold without registration under the Securities Act, and without registration or qualification under the securities laws of any state, in reliance upon the exemptions from registration provided by Sections 3(b) and 4(2) of the Securities Act and Regulation D, Rule 506(c) promulgated thereunder and certain exemptions from registration and/or qualification under applicable state securities laws and regulations. When subscribing for Interests, each Member agrees to not resell or offer for resale any of the Interests, unless the Interests are registered and/or qualified under the Securities Act and applicable state securities laws, or unless an exemption from such registration and qualification is available therefor. Furthermore, the Manager may, in its sole discretion, prohibit any transfers that could: (a) cause the Company to be characterized as a “publicly traded partnership” for tax purposes; (b) violate the Securities Act or any rules or regulations thereunder, or any applicable state securities laws or any rules or regulations thereunder; (c) subject the Company to the reporting or registration requirements of the Securities Exchange Act of 1934; and/or (d) result in the treatment of the Company as an association taxable as a corporation.
The Company is under no obligation to repurchase Units from the Members, and it is not anticipated that there will be a public market for the Units. The Manager may, but is not obligated to, assist Members in reselling their Units under certain circumstances when such resales are made in compliance with applicable securities laws. There can be no assurances that a Member will be able to liquidate its investment prior to the liquidation of the Company. Units, therefore, should be purchased only for long-term investment.
The transferability of the Units is substantially restricted by the Securities Act and state securities laws. The transferability of Units also is substantially restricted under the terms of the Agreement, which provides that a Member may not sell, transfer and/or assign its Units without the prior written consent of the Manager.
Further, under certain circumstances, the Manager has the right to prohibit the transfer of a Member’s economic interest in the Company. An assignee of Units may be substituted as a Member only with the consent of the Manager, in its sole discretion, using assignment forms required by the Manager. Because any classification of the Company as a “publicly traded partnership” would significantly decrease the value of the Units, the Manager intends to exercise fully its right to prohibit transfers of Units under circumstances that could cause the Company to be so classified.
In the event that an Investor wants to Transfer their Membership Interest, the Company shall have a right of first refusal to purchase any Membership Interest that Class A Members or Class B Members propose to Transfer, and such Membership Interest, if purchased by the Company, shall be sold at a price agreeable to the Manager and transferor, at the Manager’s sole discretion.
As noted elsewhere herein, all distributions to the Members will be contingent upon the Company having adequate cash flow, as determined by the Manager, in its sole discretion, to make such distributions after payments of debts, expenses and other Company obligations. In addition, the Members’ investment return from the Company is expressly contingent upon the Company realizing and/or furthering certain economic objectives. There can be no assurance that such economic objectives will be attained, and even if such economic objectives are attained, that the Company would then have the cash flow necessary to make such additional distributions to the Members.
Additionally, distributions to Members may be contingent on the amount of capital raised in this Offering because Proceeds of the Offering may be used to pay distributions to Members.
Lack of Diversification
The Company will own no significant assets other than the Properties. The success of the Company, therefore, will be dependent upon the success of the Properties and its successful management and operation by the Manager.
Special Risks for Investors Who Acquire More Than 20% of the Equity Interests
Such Investors May Be Subject to the Bad Actor Provisions of Rule 506(d)
Regulation D, Rule 506(d) was adopted by the SEC under the JOBS Act on September 23, 2013. Rule 506(d) pertains to Investors ("covered persons") who acquire more than twenty percent (20%) of the voting (equity) interests in companies seeking an exemption from securities registration under Rule 506. If such Investors have been subject to certain “disqualifying events” (as defined by the SEC), they are required to either: (a) disclose such events to other Investors (if they occurred before September 23, 2013); or (b) own less than twenty percent (20%) of the voting (equity) Interests in the Company (if they occurred after September 23, 2013); and they may not participate in management or fundraising for the Company. Disqualifying events are broadly defined to include such things as criminal convictions, citations, cease and desist or other final orders issued by a court, state or federal regulatory agency related to financial matters, Investors, securities violations, fraud, or misrepresentation.
Investors or other covered persons who do not wish to be subject to this requirement should: (a) acquire less than twenty percent (20%) of the voting Interests in the Company (or ensure that the Interests they acquire are non-voting); and (b) abstain from participating in management or fundraising for the Company. Covered persons have a continuing obligation to disclose disqualifying events both: (a) at the time such covered person is Accepted to the Company; and (b) when such disqualifying event occurs (if later), for so long as such covered person is participating in the Company. Failure to do so may cause the Company to lose its Rule 506 securities exemption.
Investors Not Represented by Manager's Counsel
The prospective Investors, as a group, have not been represented by independent counsel in connection with the formation of the Company and/or this Offering. The Offering documents, including this Memorandum, the Agreement, the Subscription Booklet, and any amendments thereto have been prepared by counsel for the Manager, Lowndes, Drosdick, Doster, Kantor & Reed, P.A. (“Lowndes”). Lowndes will not be representing Investors in connection with their investment in Units in the Company.
Consequences for a Default on the Property Management Agreement
The Company will enter into a Property Management Agreement with Property Manager to serve as the onsite manager of each of the Properties to direct, supervise, manage, and operate the Properties on a day-to-day basis. The Property Management Agreement for each Property will be for a term of ten (10) years and the Company may incur a penalty if a Property Management Agreement is terminated prior to the expiration of its term due to an event of default caused by the Company.
No Experience of Manager
The Manager is a newly formed entity and has no experience owning and operating storage or mobile home facilities or managing funds. Investors will not be able to review prior performance of the Manager. Certain principals of the Manager have prior experience managing storage and mobile home facilities.
Limited Resources of the Manager.
The Manager has limited or no net worth and limited financial resources to satisfy its obligations as the Manager. A financial reversal for the Manager could adversely affect the ability of the Manager to manage the Company. There can be no assurance that the Manager will have sufficient funds to meet its obligations to the Company, or to otherwise financially support the Company. The Manager has no obligation to advance, invest or loan money to the Company.
Potential Adverse Effects of Delays in Investments.
Delays which may take place in the selection and acquisition of the Properties could adversely affect the return to an investor as a result of corresponding delays in the commencement of distributions to Members and the reduced amount of such distributions.
Conflicts of Interest
The principals of the Manager and its Affiliates are employed independently of the Company and may engage in other activities. The Manager and its Affiliates are engaged in other activities and intend to continue to engage in such activities in the future, including other real estate ventures that may acquire real estate that is similar to the Properties. The Manager and its Affiliates and their principals will therefore have conflicts of interest in allocating management time, services and functions between various existing enterprises and future enterprises the Manager and its Affiliates and their principals may organize, as well as other business ventures in which the Manager, its Affiliates and their principals may be or may become involved. The Manager and its Affiliates, however, believe that they will have sufficient staff, consultants, independent contractors and business managers to perform adequately their responsibilities to the Company. See “Conflicts of Interest.”
Receipt of Compensation Regardless of Profitability
The Manager is entitled to receive certain significant fees and other compensation, and payments regardless of whether the Company operates at a profit or a loss.
No Financial Statements of the Manager
This Memorandum does not contain financial statements of the Manager.
Loss on Dissolution and Termination
In the event of a dissolution or termination of the Company, the proceeds realized from the liquidation of the assets of the Company will be distributed among the Members, but only after payment of all loans and other obligations of the Company. The ability of a Member to recover all or any portion of such Member’s investment in the Company under such circumstances will, accordingly, depend on the amount of net proceeds realized from such liquidation and the amount of claims to be satisfied therefrom. There can be no assurance that the Company will recognize gains on such liquidation.
Limitation of Liability/Indemnification of the Manager
The Manager and its attorneys, agents and employees may not be liable to the Company or Members for errors of judgment or other acts or omissions not constituting fraud, gross negligence or willful misconduct as a result of certain indemnification provisions in the Operating Agreement. A successful claim for such indemnification would deplete the Company’s assets by the amount paid. See “Summary of Limited Liability Company Agreement.”
Offering Not Registered With the SEC or State Securities Authorities
The Offering will not be registered with the SEC under the Securities Act or the securities agency of any state, and is being offered in reliance upon an exemption from the registration provisions of the Securities Act and state securities laws applicable only to offers and sales to investors meeting the suitability requirements set forth herein.
Private Offering – Lack of Agency Review
Because the Offering is a nonpublic offering and, as such, is not registered under federal or state securities laws, investors will not have the benefit of a review of the Offering or this Memorandum by the SEC or any state securities commission. The terms and conditions of the Offering may not comply with the guidelines and regulations established for real estate programs that are required to be registered and qualified with the SEC or any state securities commission.
The Company intends to use general advertisement in connection with the sale of Units in reliance on the exemption from registration provided in Rule 506(c) of Regulation D promulgated under the Securities Act. In order to qualify for the exemption provided by Rule 506(c), all purchasers of Units must be Accredited Investors as defined in Regulation D. The Company is required to have a reasonable basis to believe that the purchasers of Units are Accredited Investors. In the event that a person who is not an Accredited Investor acquires Units and the Company is deemed not to have complied with the reasonable basis requirement set forth in Rule 506(c), the Company could lose its exemption from registration of the Offering.
Private Offering Exemption – Limited Information
Because the Offering of the Units is a nonpublic offering and the Units are only to be sold to Accredited Investors, certain information that would be required if the Offering were not so limited has not been included in this Memorandum, including, but not limited to, financial statements and prior performance tables. Thus, investors will not have this information available to review when deciding whether to invest in Units.
Purchase of Units by the Manager or its Affiliates
The Manager and its Affiliates may subscribe for any number of Units for any reason deemed appropriate by the Manager. As a result, the Minimum Offering Amount may not be raised entirely from third party investors. The Manager and its Affiliates will not acquire any Units with a view to resell or distribute such Units. The purchase of Units by the Manager or its Affiliates could create certain risks, including, but not limited to, the following: (i) the Manager or its Affiliates would obtain voting power as Members, (ii) the Manager or its Affiliates may have an interest in disposing of Company assets at an earlier date than the other Members so as to recover its investment in the Units, (iii) substantial purchases of Units may limit the Manager’s ability to fulfill any financial obligations that it may have to or on behalf of the Company and (iv) acquisition of Units by the Manager and/or its Affiliates will mean that the total Units acquired will not have been provided by disinterested investors after an assessment of the merits and risks of the Offering.
Investment by Tax-Exempt Purchasers
In considering an investment in Units of a portion of the assets of a trust of a pension or profit-sharing plan qualified under Code Section 401(a) and exempt from tax under Code Section 501(a), a fiduciary should consider (i) that the plan, although generally exempt from federal income taxation, would be subject to income taxation were its income from an investment in the Company and other unrelated business taxable income to exceed $1,000 in any taxable year (it is anticipated that if the Company generates taxable income, it will be considered unrelated business taxable income), (ii) whether an investment in the Company is advisable given the definition of plan assets under ERISA and the status of Department of Labor regulations regarding the definition of plan assets, (iii) whether the investment is in accordance with plan documents and satisfies the diversification requirements of Section 404(a) of ERISA, (iv) whether the investment is prudent under Section 404(a) of ERISA, considering the nature of an investment in, and the compensation structure of, the Company and the potential lack of liquidity of the Units, (v) that the Company has no history of operations and (vi) whether the Company or any Affiliate is a fiduciary or party in interest to the plan.
Subsequent Investors May be Able to Review Company’s Investments
Investors who invest in the later stages of the Offering will have a greater opportunity to review information regarding the Company’s Properties that will not be available to early investors. Early investors will not have an opportunity to review any Properties to be acquired with the Offering Proceeds. In this regard, later investors may have an advantage in initially deciding whether to invest in the Company.
Exemption from Investment Company Act of 1940
The Company may accept 100 or more Unit holders. The Investment Company Act requires that any issuer that is beneficially owned by 100 or more persons and that owns certain securities be registered as required under the Investment Company Act. The Manager believes that, because the Company will be purchasing the Properties directly or through wholly-owned subsidiaries, the ownership of the Properties will not be deemed to be securities for purposes of the Investment Company Act. As a result, the Company will not register under the Investment Company Act requirements. In the event the Company is required to register under the Investment Company Act, the returns to the Members will likely be significantly reduced.
Prior Programs Sponsored by Affiliates of the Manager
Dahn Corporation, an Affiliate of the Manager, sponsored a number of other real estate projects beginning in 1981. Some of the other projects have not met the income and distribution levels anticipated by the Manager. Several of the real estate properties sponsored and managed by Dahn Corporation have been foreclosed upon by the lenders for such properties. Investors in these programs have lost all or a portion of their investment in the applicable property. There can be no assurance the Company will meet the objectives set forth herein.
Risks Related to Owning Real Estate
Factors which could affect the Company's ownership of income-producing Property may include, but is not limited to, any or all of the following: changing environmental regulations; adverse use of adjacent or neighboring real estate; changes in the demand for or supply of competing Property; local economic factors which could result in the reduction of the fair market value of a Property; uninsured Losses, significant unforeseen changes in general or local economic conditions; inability of the Company to obtain any required permits or entitlements for a reasonable cost, on reasonable conditions, or within a reasonable time frame, or to obtain such permits or entitlements at all; inability of the Company to obtain the services of appropriate consultants at the proposed cost; changes in legal requirements for any needed permits or entitlements; problems caused by the presence of environmental hazards on a Property; changes in federal or state regulations applicable to real property; failure of a lender to approve a loan on terms and conditions acceptable to the Company; lack of adequate availability of liability insurance, all-risk, or other types of required insurance at a commercially-reasonable price; shortages or reductions in available energy; and acts of God or other calamities. Furthermore, there could be a loss of liquidity in the capital markets.
Liability for Environmental Issues
Under various federal, state and local environmental and public health laws, regulations and ordinances, the Company may be required, regardless of knowledge or responsibility, to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases (including in some cases natural substances such as methane or radon gas) and may be held liable under these laws or common law to a governmental entity or to third parties for property, personal injury or natural resources damages and for investigation and remediation costs incurred as a result of the real or suspected presence of these substances in soil or groundwater beneath a Property. These damages and costs may be substantial and may exceed and insurance coverage the Company has for such events.
Buildings and structures on a Property may have contained hazardous or toxic substances, or have released pollutants into the environment; or may have known or suspected asbestos-containing building materials, lead based paint, mold, or insect infestations (such as roaches or bed bugs), that the Company may be required to mitigate.
The Manager will attempt to limit exposure to such conditions by conducting due diligence on each Property, however, all or some of these conditions may not be discovered or occur until after such Property has been acquired by the Company.
Uninsured and Underinsured Losses; Availability and Cost of Insurance
The geographic area in which the Properties are located may be at risk for damage to property due to certain weather-related and environmental events, including such things as severe thunderstorms, tornadoes, snowstorms and earthquakes. To the extent possible, the Manager will attempt to acquire insurance against fire or environmental hazards. However, such insurance may not be available in all areas, nor are all hazards insurable as some may be deemed acts of God or be subject to other policy exclusions.
All decisions relating to the type, quality and amount of insurance to be placed on the Properties are made exclusively by the Manager, in its sole discretion. Certain types of losses, generally of a catastrophic nature (due to such things as ice storms, tornadoes, wind damage, hurricanes, earthquakes, landslides, sinkholes, and floods) may be uninsurable, not fully insured or not economically insurable. This may result in insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full prevailing market value or prevailing replacement cost of a Property. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it unfeasible to use insurance proceeds to replace the Properties after the Properties have been damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore the Properties.
Furthermore, an insurance company may deny coverage for certain claims, and/or determine that the value of the claim is less than the cost to restore the Property, and a lawsuit could have to be initiated to force them to provide coverage, resulting in further losses in income to the Company. Additionally, the Properties may now contain or come to contain mold, which may not be covered by insurance and has been linked to health issues.
Federal, State and Local Regulations May Change
There is a risk of a change in the current Federal, State and Local regulations as it may relate to operations of a Property in the area of fuel or energy requirements or regulations, construction and building code regulations, approved property use, zoning and environmental regulations, or property taxes, among other regulations.
The Manager will attempt to limit exposure to such circumstances by conducting due diligence on each Property prior to acquisition, however, some of these changes are unforeseeable and may not be discovered or occur until after such Property has been acquired by the Company.
Lack of Liquidity
Real estate investments are relatively illiquid as compared to other investment opportunities, as the primary means to recover a Member's investment in real estate is upon the refinance or resale of the real estate, which often may not be feasible until some passage of time and/or operational history has accrued. Such illiquidity of real estate investments generally, may limit the Company's ability to return Capital Contributions to the Members until such time as all Company Property is refinanced or sold.
Compliance with Americans With Disabilities Act
Under the Americans With Disabilities Act of 1990 (the ADA), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that a Company Property contains a public accommodation that is not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants. If substantial modifications are made to comply with the ADA, the Company's ability to make distributions to its Members may be impaired.
Risks Related to Owning Storage Facilities
Competitive Nature of Storage Industry
The storage industry is highly competitive with relatively low barriers to entry. The Company will face intense competition in the storage industry. The Company will compete with numerous national, regional, and local developers, owners and operators in the storage industry, many of which will have greater capital resources, cash reserves and ability to borrow funds to acquire properties. This competition for investments may reduce the number of suitable investment opportunities available to the Company, may increase acquisition costs and adversely affect the Company’s financial performance. Storage facilities generally draw customers from residents within a 3 to 5 mile radius. Thus, the performance of the Properties will be sensitive to rental rates offered by nearby competitors and to localized economic conditions. Further, the risk of increased competition due to the construction of new facilities is significant in the storage industry given the low cost of constructing a storage facility in comparison to other forms of real estate.
If new facilities are constructed that compete with the Properties or offer lower rental rates, the Company may lose potential or existing customers and could be forced to reduce rental rates to attract or retain customers. Any of these factors could adversely affect the financial performance of the Properties and reduce the Company’s ability to make cash distributions to the Members. Additionally, increased competition for customers may require the Company to make capital improvements to facilities, which could reduce cash available for distribution to the Members.
Risks of Storage Facility Operations
Storage operations are highly sensitive to local housing markets and economies. A significant portion of storage customers have moved recently or are storing inventory for a business. With short lease terms, occupancy and rental rates can fluctuate quickly and significantly in comparison to other types of real estate with longer lease terms. Such fluctuations could result in unstable cash flows from a Property. The Company will also be exposed to the risks associated with the operation of storage facilities, including risk of loss or damage to items stored in the facilities and personal injury to tenants or employees accessing storage units. There has been an increasing number of claims and litigation against owners and managers of rental and storage properties relating to moisture infiltration, which can result in mold or other property damage. The Company may be subject to claims and litigation from customers, employees and contractors, any of which could materially and adversely affect the profitability and cash flow from a Property.
The Company Will Rely on Local Property Managers and Contractors
The Company has no independent ability and/or resources to manage and/or renovate each Property it acquires. The Company will rely upon the Property Manager and/or contractors to manage each Property and make renovations. The Manager has carefully reviewed the past experience, qualifications, and references of the Property Manager and will carefully review the past experience, qualifications, and references of any contractors and will ensure that any contracts with such persons have appropriate termination clauses in the event of default thereof.
As of the commencement of the Offering, the Manager has not identified any real estate to be acquired as a Property. Thus, investors will not have an opportunity to evaluate for themselves information about the Properties, such as operating history, terms of financing and other relevant economic and financial information. Although the Manager has established criteria to guide it in acquiring properties for the Company, the Manager has broad authority and discretion in making investment decisions. Consequently, investors must exclusively rely on the Manager to make investment decisions. No assurance can be given that the Company will be able to acquire suitable Properties or that the Company’s objectives will be achieved.
No Purchase Agreements for the Properties
The Company will purchase the Properties from unaffiliated sellers and sellers that may be Affiliates of the Manager. The Manager is currently in the process of identifying Properties to be purchased by the Company, but has not identified any Properties to be acquired by the Company. As a result, the terms of the purchase agreements or contribution agreements, including the specific Properties, to be acquired and the purchase prices of the Properties are unknown at this time. There can be no assurance that the Company will be able to enter into purchase contracts for a sufficient number of Properties.
The Company may acquire Properties from Affiliates of the Manager. Accordingly, the purchase agreements for such Properties will not be negotiated on a third-party, arm’s length basis. Some of the terms of the purchase agreements with Affiliates of the Manager may not be on market terms.
No Environmental Indemnity
Federal, state and local laws impose liability on a landowner for the release or the otherwise improper presence on the premises of hazardous materials or hazardous substances. This liability is without regard to fault for, or knowledge of, the presence of such substances. A landowner may be held liable for hazardous materials or hazardous substances brought onto the property before it acquired title and for hazardous materials or hazardous substances that are not discovered until after it sells the property. Similar liability may occur under applicable state law. However, an innocent landowner defense to environmental liability under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) may be available where a landowner has conducted an appropriate inquiry with respect to potential hazardous substances at and around the subject property in accordance with good commercial and customary practices. Such a defense is generally predicated on obtaining an environmental site assessment that has been prepared in substantial compliance with the “All Appropriate Inquiry Practices” identified by CERCLA and the ASTM Standard E1527-05: Standard Practice for Phase I Environmental Site Assessments. Among other things, the overall site assessment must occur no more than one year prior to the date the property is acquired, and certain components of the site assessment must be performed within 180 days of the property acquisition. Although the Company will attempt to obtain current environmental site assessments for the Projects prior to acquisition, the Company may not obtain such information. Consequently, the innocent landowner defense may not be available to the Company if hazardous substances are found within the Properties. Further, similar defenses to environmental liability may not be available under state or local law. If any hazardous materials or hazardous substances are found within the real property underlying any of the Properties at any time, the Company could be held liable for cleanup costs, fines, penalties and other costs, particularly if the Company owns the real property directly rather than through a special purpose entity. If losses arise from hazardous substance contamination which cannot be recovered from other responsible parties, the financial viability of the Properties may be materially and adversely affected.
Lack of Representations and Warranties
The Company may acquire real estate from sellers who make only limited or no representations and warranties regarding the condition of such real estate, the status of leases, the presence of hazardous materials or hazardous substances within such real estate, the status of governmental approvals and entitlements for such real estate or other matters adversely affecting such real estate are discovered, the Company may not be able to pursue a claim for damages against such sellers except in limited circumstances. The extent of damages that the Company may incur as a result of such matters cannot be predicted but potentially could result in a significant adverse effect on the value of such real estate.
No Appraisals or Reports
The Company typically will obtain independent third-party appraisals or valuations of a Property or other reports with respect to a Property, before the Company invests in such Property. In special circumstances, such as the Company having an opportunity to acquire a distressed Property provided that it can close the acquisition on an accelerated timeline, the Company may not have time to obtain an appraisal or other reports. If the Company does not obtain such third-party appraisals or valuations, there can be no assurance that a Property’s value will exceed its cost or that any sale or other disposition of such Property will result in a profit. Third-party appraisals and other reports may be prepared for lenders, in which case the Company typically will try to obtain a copy of such appraisals and reports for review, as well as reliance letters from the third-party preparers to allow the Company to rely on such appraisals and reports. To the extent the Company does not obtain other reports or reliance letters before investing in a Property, the risk of investing in such Property may be increased.
No Audited Results of Operation
The Company will not obtain audited operating statements regarding the prior operations of a Property. The Company will rely on unaudited financial information provided by the sellers of the Properties. Thus, it is possible that information relied upon by the Company with respect to the acquisition of a Property may not be accurate.
Some of the Properties may be newly or recently constructed. Newly constructed Properties are sometimes subject to construction defects that only reveal themselves over time. If any of the Properties should become subject to any construction defect issues, the Company may have remedies under state law as well as under any warranties from the contractors for the construction work, provided that the warranties were assigned to such owner. If work is required to cure any construction defects, reserves may not be sufficient to pay for such work. Accordingly, the presence of construction defects could adversely affect the financial performance of the Properties, the Company may be required to pay for all or part of the repair of such construction defects which will reduce the cash flow from the Properties, and the return to the Members may be reduced.
Condemnation of Land
The Properties or a portion of the Properties could become subject to an eminent domain or inverse condemnation action. Any such action could have a material adverse effect on the marketability of a Property or the amount of return on investment for the Members.
Availability of Financing and Market Conditions
Market fluctuations in real estate loans may affect the availability and cost of loans needed for the Properties. Credit availability is currently significantly restricted and there is no assurance that the Company will be able to obtain the required financing to acquire the Properties. Restrictions upon the availability of real estate financing or high interest rates on real estate loans may also adversely affect the ability of the Company to sell the Properties. Based on historical interest rates, current interest rates are low and, as a result, it is likely that the interest rates available for future real estate loans and refinancings will be higher than the current interest rates for such loans, which may have a material and adverse impact on the Properties and the Company.
No Loan Commitments
While the Company anticipates that the Company will obtain financing to acquire the Properties, the Company has not obtained any financing commitments for the acquisition of the Properties. In the event that the Company is unable to obtain financing for the acquisition of the Properties, the Company may not be able to acquire any Properties or may only be able to acquire a limited number of Properties. In such case, the return to the Members would be materially reduced.
Unknown Loan Terms
The terms of the loans to be obtained or assumed by the Company to acquire the Properties will vary and the exact terms are unknown. It is anticipated that the loans may not allow for prepayment until shortly before maturity and that any prepayment may require the payment of a yield maintenance penalty. Consequently, the Company may not be able to take advantage of favorable changes in interest rates.
Carve-Outs to Nonrecourse Liability
Although the Company anticipates obtaining loans for the Properties that will be nonrecourse as to principal and interest, it is possible that lenders may require the Manager and the Company to be personally liable for certain carve-outs. It is also anticipated that the Company will be liable for certain springing recourse events. In circumstances where personal liability attaches, the lender could proceed against the Company’s assets. It is possible that the Manager, the Property Manager and/or the Company could each be responsible for all of the nonrecourse carve-outs or springing recourse events. Members, however, will not be personally liable for any nonrecourse carve-outs or springing recourse events.
Although the Company anticipates that any loan it obtains to acquire a Property will be nonrecourse, the Manager has the discretion to obtain recourse loans. In the event the Company obtains a recourse loan and the related Property fails to perform as expected, the Company may not have adequate cash to make payments due on the loan. If the Company defaults on a recourse loan, in addition to foreclosing on the related Property, the lender may seek repayment from other assets of the Company, which would adversely affect the performance of the Company.
Restrictions on Transfers
It is anticipated that the loans for the Properties will restrict the ability of the Company to sell its interest(s) in the Properties. The lenders may also impose restrictions on the transferability of Units. Upon violation of the restrictions on transfer or encumbrance, a lender will have the right to declare the entire amount of the loan, including principal, interest, prepayment premiums and other charges, to be immediately due and payable. If the lender declares the loan to be immediately due and payable, the Company will have the obligation to immediately pay the loan in full, including applicable prepayment charges. If replacement financing is not found or the loan is not immediately paid in full, the lender may invoke its other remedies under the loan, which may include proceeding with a foreclosure that would cause the Company to lose its entire interest in the applicable Property.
Variable Interest Rates and Interest Only Loans
It is anticipated that loans obtained by the Company may have variable interest rates. In the event that the interest rate on any loan increases significantly, the Company may not have sufficient funds to pay the required interest payments. In such event, the continued ownership of the applicable Property may be threatened. In addition, it is anticipated that some of the loans will only require interest payments. Thus, balloon payments of principal will be due upon maturity. In the event that the Property has not been sold or refinanced before such balloon payment is due, the continued ownership of the applicable Property by the Company will be threatened.
Events of Default
It is anticipated that certain actions by the Company will cause an event of default under the loan documents. Generally it is anticipated that the following items will cause a default under the loan, the failure to pay required payments under the loan, the failure to pay taxes, the failure to maintain insurance, the assignment by an owner of the Property of an interest in the Property to a creditor, the bankruptcy of an owner of a Property, the filing of an action for partition or the transfer of an interest in the Property without lender’s consent will constitute an event of default under a loan. Additional events of default may be applicable for some or all of the loans. Should any of the owners of a Property, or the Property Manager, default under a loan for any reason, the lender may declare a default under the applicable loan, which could result in foreclosure by the lender on the applicable Property and the loss of all or substantial portion of the investment made by the Company.
Risks Related to Owning Mobile Home Parks
Market and Economic Conditions May Impact Revenue from Property Operations
Local conditions in the market of each mobile home park may significantly affect occupancy, rental rates, and the operating performance of a Property. The risks that may adversely affect the Properties include the following:
• Plant closings, industry slowdowns and other factors that affect the local economy.
• An oversupply of, or a reduced demand for, mobile homes.
• A decline in household formation or employment or lack of employment growth.
• Rent control or rent stabilization laws, or other laws regulating mobile home parks, that could prevent the Company from raising lot rents or selling mobile homes.
• Economic conditions that could cause an increase in the Company's operating expenses, such as increases in property taxes, utilities, compensation of on-site associates and/or routine maintenance.
Market and Economic Conditions May Impact the Property Value on Resale
The sale price of a Property is likely dependent upon the condition of the economy in the area where such Property is located. The Manager anticipates holding each Property for up to ten (10) years, or longer. There is a risk that at the time of the projected sale, the marketplace may be different than projected, which may require that the Company hold a Property longer than anticipated, and/or sold at a loss. Despite the Manager's projections, an Investor should be prepared to leave their Capital Contribution with the Company until all Properties owned by the Company are sold.
Competition Could Impact Occupancy or Market Rental Rates
Properties owned by the Company will compete with other housing alternatives to attract residents, including other mobile home parks, apartments, condominiums and single-family homes that are available for rent, as well as other mobile homes, new and existing condominiums, and single-family homes for sale. Competitive residential housing in a particular area could adversely affect the Company's ability to sell its mobile homes, rent its mobile home lots as necessary to maintain occupancy, and/or to increase or maintain lot rental rates. Improvements to Properties planned by the Manager will be designed to make them more attractive to new and existing occupants, in hopes of creating a competitive advantage as compared to other housing alternatives in the marketplace.
Vacancies and Tenant Defaults May Reduce Revenues
The Company depends on lot rental income and mobile home sales to pay both the operating expenses for its Properties and the Company itself. Vacant lots and/or purchase payment defaults by tenants and/or buyers of mobile homes sold by the Company could reduce the amount of Net Proceeds Available for Distribution that might otherwise be available for payment of its expenses and mortgage payments and/or Distribution to the Members, if the Properties were fully occupied and/or all occupants were making timely lot rent or purchase payments. Significant Company expenditures such as debt service payments, real estate taxes, insurance and maintenance costs are generally not reduced when circumstances cause a reduction in income from Properties owned by the Company.
A vacancy or default of a tenant on its lot rent or mobile home purchase payments will cause the Company to lose the revenue from that unit and if enough effective vacancies occur, it could cause the Company to have to find an alternative source of revenue to meet its mortgage payments and other operating expenses for a particular Property. In the event of a tenant default, the Company may experience delays in enforcing its rights as landlord and may incur substantial costs in evicting the tenant, removing its mobile home, and re-renting the affected lot. In the case of a default on a seller-financed mobile home, the Company could experience delays in enforcing its rights against a defaulting purchaser.
The Manager will attempt to mitigate its effective vacancies by employing a marketing campaign and/or lease incentive programs. It will attempt to minimize tenant defaults by screening new tenants and potential mobile home buyers. The methods for screening new tenants and potential mobile home buyers will be determined on a case-by-case basis. The Manager will attempt to minimize such Losses by employing the Property Manager and/or legal counsel to promptly remove each defaulting tenant/buyer within the purview of the applicable law.
The Company Will Rely on Local Property Managers and Contractors
The Company has no independent ability and/or resources to manage and/or renovate each Property it acquires. The Company will rely upon the Property Manager and/or contractors to manage each Property and make renovations. The Manager has carefully reviewed the past experience, qualifications, and references of the Property Manager and will carefully review the past experience, qualifications, and references of any contractors and will ensure that any contracts with such persons have appropriate termination clauses in the event of default thereof.
Risk Associated with Construction or Development of Associated Property
The Company anticipates acquiring and renovating mobile home parks, individual mobile homes, and various amenities of the Properties. Additionally, some mobile home Properties may have additional property or buildings which the Manager may need to manage, such as vacant land that can be developed as additional mobile home spaces, mini-storage, warehouses, etc. These activities may expose the Company to the following risks:
• The Company may be unable to obtain, or experience delays in obtaining necessary zoning, occupancy, or other required governmental or third party permits and authorizations, which could result in increased costs or the delay or abandonment of opportunities.
• The Company may incur costs that exceed original construction estimates due to increased material, labor and/or other costs.
• Occupancy rates and rents of the Properties may fail to meet the Manager's expectations for a number of reasons, including changes in the market and economic conditions beyond the Manager's control and the development by competitors of competing communities.
• The Company may be unable to complete the construction and the leasing of its Properties on the Company’s projected schedule, resulting in increased construction and/or financing costs and a potential decrease in anticipated revenues.
• The Company may incur liabilities to third parties during the development process, for example, in connection with managing existing improvements on its sites or in connection with providing services to third parties, such as the construction of shared infrastructure or other improvements.
The Company may incur liability if its Properties are not constructed and operated in compliance with accessibility provisions of the Americans with Disabilities Act, the Fair Housing Act or other federal, state or local requirements. Noncompliance could result in imposition of fines, an award of damages to private litigants, and a requirement that the Company undertake structural modifications to remedy the noncompliance.
Risks Related to Properties Acquired by the Company
Due Diligence May Not Uncover All Material Facts
It is possible that the Manager may not discover certain material facts about the Properties the Company acquires, because information presented by the sellers may be prepared in an incomplete or misleading fashion, and material facts related to the Properties may not be discovered and/or occur until after the acquisition thereof.
The Manager has extensive prior experience in acquiring similar properties, however, and has used and will use its experience in such matters during the course of its due diligence. In addition, the Manager has employed and will employ an appropriately licensed (where applicable) or other local professional property managers, inspectors, appraisers, surveyors, contractors, and/or other consultants as the Manager may, in its sole discretion, deem necessary to assist in its due diligence efforts to obtain and verify material facts regarding the Properties, prior to acquisition.
The Company Anticipates Using Leverage
The Company anticipates the use of institutional financing in the acquisition and possible refinancing of its Properties. The Company's use of leverage potentially increases the risk of an investment in the Company, as it is possible that the rental income from the Properties in any month may be inadequate to allow the Company to make the monthly debt service required on each of the loans against its Properties. If the Company is unable to make the required financing payments on a Property, a lender may foreclose upon such Property and some or all of the Company's investment in such Property may be lost.
The Manager anticipates that proposed loans for individual Properties will have an average loan to value ratio of between approximately sixty percent (60%) and seventy percent (70%) of the gross fair market value of each Property, with a maximum loan to value ratio of seventy-five percent (75%) of the Company’s Property portfolio, and mortgages will typically have balloon payments due five (5) to ten (10) years following the closing on each Property. The interest rate on the loans will typically be fixed, up to the prevailing market interest rates at the time such loan is secured by the Manager. The Company may refinance some or all of its Properties prior to expiration of the initial loan terms in lieu of resale. The monthly payments will generally be based on an amortization schedule ranging from fifteen (15) to thirty (30) years.
Because of balloon payments, to avoid a default, the Company must either: repay the principal, refinance the mortgage on or before the maturity date of the loan, or sell the Property upon which the loan was secured. No assurance can be given that the Company will be able to repay the principal and/or refinance a mortgage on one or more of its Properties at or prior to their maturity date thereof. No assurance can be made that the Company will be able to refinance any loan at an interest rate that is comparable to the current interest rate or on favorable terms in the future.
Mortgages typically contain customary covenants and the Company's continued ability to borrow against a Property is subject to compliance with these financial and other covenants. In addition, failure to comply with such covenants could cause a default under the applicable debt agreement, which would then require such debt to be repaid with capital from other sources.
There is also the risk that, at the time of sale of a Property, the sales proceeds will be less than the amount needed to pay off the total remaining balance of any financing upon such Property at the time of sale, and as a result, some or all of the Company's investment in such Property could be lost therefrom. There is also a risk that if upon the expiration of the loan term, a Property cannot be sold or refinanced such that the proceeds generated thereby will ensure repayment of the remaining balance of such loan, and the Company may be forced to surrender such Property to the lender upon a foreclosure thereof, resulting in the total loss of all of the capital invested in such Property.
Financial Projections May Be Wrong
The Manager has not provided financial projections regarding operations of the Company. Prospective Investors should review Section 10 of this Memorandum describing the investment objectives and policies of the Company. It is possible that actual results from the operation of the Company may be different than the returns anticipated by the Manager, as such are detailed herein, and/or that these returns may not be realized in the timeframe projected by the Manager, if at all. The Manager will periodically provide the Members with information about the Properties it acquires on behalf of the Company.
The Company's example financial projections in its Investment Summary has not been examined by an independent auditor or accounting firm. There can be no assurance that the Company's target returns based on its own internal financial projections will be realized. The Company's financial projections in its Investment Summary may contain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, and intentions. The cautionary statements made in the Property Information Package should be read as being applicable to all related forward-looking statements wherever they appear. Furthermore, any Company financial projections have been prepared based upon the assumption that the Company will attain successful operations and obtain mortgage financing for Properties upon acceptable terms. Accordingly, the Company's actual results could materially differ from those anticipated by the Manager and detailed in the Investment Summary.
The Property May Not Yield Anticipated Results
One or more Properties may fail to perform as the Manager anticipated when analyzing each investment thereto. Further, actual renovation and/or redevelopment costs of a Property may exceed the Manager's estimates of the cost of renovating and/or redeveloping a Property. The financial projections for a specific Property contemplated for purchase will be based on the Company's ability to secure a sufficient number of tenants or sales at the local estimated market rate, which is based on current rental and/or resale rates for storage facilities and mobile homes in the vicinity of such Property as well as a review of market rents/sale prices in comparable properties, to the extent comparable properties and resale storage facilities and mobile homes exist in the marketplace. There can be no assurances that the Company will be able to find a sufficient number of suitable occupants or that the Company will be able to charge and collect its estimated market rates for lot rental or resale of storage facilities and mobile homes.
Lack of Reserves or Working Capital
A portion of the proceeds of this Offering will, in the Manager’s sole discretion, necessarily be set aside for Working Capital and Reserves, and therefore, will not be available for investment. It is possible that expenses of acquiring, holding, and reselling the Properties may exceed the Reserves or Working Capital the Manager has set aside for the Company, such that additional capital may be needed to operate the Company's business. In the event that additional capital is required as determined by the Manager in its sole discretion, an advance from the Manager and/or one or more of the Members, and/or obtaining additional outside financing may be needed to raise such capital.
Title Insurance May Not Cover All Title Defects
The Manager anticipates acquiring title insurance on each Property, but it is possible that title defects may arise in the future that are excluded from coverage and/or for which the title company may deny coverage, or that title insurance may not be available for certain Properties; in which case, the Company may have to defend or otherwise resolve such defects on its own, the cost of which may impact the profitability of such Property and/or the Company.
Hazard Insurance May Not Cover All Hazards
To the extent possible, the Company will attempt to acquire insurance protecting the Company against fire, weather, or environmental hazards, theft and vandalism for each of its Properties. However, based upon the locale of a Property, such insurance may not be available in such areas, nor are all hazards insurable as some may be deemed acts of God or be subject to other policy exclusions. Furthermore, an insurance company may deny coverage for certain claims requiring the Company to initiate a lawsuit in order to receive coverage for such claims, resulting in further Losses to the Company. Additionally, a Property may be found to contain mold, which may not be covered by insurance and has been linked to health issues. Should an uninsured loss occur, the Company could lose its capital investment and/or anticipated Profits and cash flow from such Property, which could in turn cause the Manager, in its sole discretion, to reduce or eliminate the amount of distributions the Company makes to Members.
Inclement Weather Could Increase Maintenance and Repair Costs
Properties owned by the Company may be exposed to risks of inclement weather, including, but not limited to wind-related events such as severe thunderstorms, windstorms, tornadoes and/or hurricanes. Further, unpredictable winter conditions may result in indeterminate costs for the removal of snow and ice, as well weather delays in the renovation and redevelopment. In addition, inclement weather could increase the need for maintenance and repair of the Properties. As some of these hazards may be uninsurable, and/or the routine maintenance costs or damages caused by such hazards may be less than the insurance deductibles, the Company may need to expend its own funds for such repairs or mitigation.
Payments to Service Providers Will Reduce Cash Available for Distributions
Payments to the Property Manager (or Affiliates of the Manager) in connection with the management and leasing of the Properties will be an expense of the Company, and will reduce the amount of cash available for distributions to Members.
Risk Factors Involving Income Taxes
The Company May Be Characterized as a Publicly Traded Partnership
Based upon representations by the Manager that the Units will be issued in a transaction not registered under the Securities Act, the representation of the Manager and Jumpstart Securities that the interests in the Company will not be traded on an established securities market and the obligations of the Manager to take all actions reasonably necessary to prevent the Interests in the Company from being traded in a secondary market or the substantial equivalent thereof within the meaning of Section 7704 of the Code, it is more likely than not that the Company will not be treated as a “publicly traded partnership” for federal income tax purposes. Classification of the Company as a “publicly traded partnership” could result in (i) taxation of the Company as a corporation or (ii) application of the passive activity loss rules in a manner that could adversely affect the Members.
Tax Liability May Exceed Distributions
As a result of decisions of the Manager in operating the Company, which may require the suspension of distributions due to a need to maintain a higher level of cash reserves, as determined in the sole discretion of the Manager, there is a risk that, in any tax year, the tax liability owed by a Member may exceed the distributions received by such Member in that year. As a result, some or all of the payment of taxes may be an out of pocket expense of the Member.
There is a risk that upon the disposition of a Property, the tax liability of a Member may exceed the distributable cash available therefrom. In the event of an involuntary disposition of a Property, there is the possibility of a Member having a larger tax liability than the amount of cash available for distributions at the time of such disposition, or at any time in the future. However, the Manager will use its best efforts to limit such exposure to the Members.
Risk that Federal or State Income Tax Laws Will Change
There is a risk that Federal or State income tax laws may change affecting the projected returns of an investment in the Company. There is a possibility that in the future Congress may make substantial changes in the Federal tax laws that will apply to the Company and its Members.
Risk of Including Foreign Investors
The Company may accept Subscriptions from Non-U.S. Persons, in which case there is a risk that: the proper tax withholding amounts will not be withheld or paid by the Non-U.S. Person as required by the Foreign Investor in Real Property Tax Act of 1980 (FIRPTA) and that the Company could remain liable for a Non-U.S. Person's individual tax liabilities to the IRS. There is a further risk that a Non-U.S. Person Investor could be named on the list of Specially Designated Nationals, Blocked Persons, or Sanctioned Countries or Individuals, which, if undiscovered, could result in an enforcement action against the Company by the U.S. Department of the Treasury and/or other Federal agencies. In order to mitigate these possibilities, the Manager will conduct due diligence on each Non-U.S. Person it considers Accepting as a Member of the Company, and will attempt to determine whether there are any security restrictions on such Non-U.S. Person at the time of its subscription. Further, if the Manager Accepts Non-U.S. Persons as a Member to the Company, the Manager will employ a C.P.A. versed in international investments on which it will rely upon to calculate and remit the appropriate withholding amounts therefrom. At the time of publication of this Memorandum, the Manager is contemplating including certain specific Non-U.S. Persons as Investors in the Offering.
Phantom Income Risk
The voluntary or involuntary sale or transfer of a Company Investment owned by the Company or any entity through which it invests may, under certain circumstances, result in substantial tax liability to a Member with little or no cash available for distribution to such Member to cover such tax liability. Because a discharge of liability, even without any cash distribution, can produce taxable income, a Member’s taxable income and tax liability may exceed the cash, if any, received by such investor. To the extent of such excess, the payment taxes would require an out-of-pocket payment by the Member.
Risk of Audit
The Company’s federal information returns may be audited by the IRS. An audit may result in the challenge and disallowance of some of the deductions described in the returns. No assurance or warranty of any kind can be made with respect to the deductibility of any such items in the event of either an audit or any litigation resulting from an audit.
Unrelated Business Taxable Income
It is anticipated that if the Company generates taxable income, such income will be considered unrelated business taxable income. Tax-exempt entities should consult their own tax counsel regarding the effect of any unrelated business taxable income.
Sale or Disposition of Company Property
If interests in the Properties constitute capital assets in the hands of the Company, profit or loss realized on the sale or exchange of such interests will generally result in capital gain or loss, except to the extent of any depreciation recapture. If the Company were deemed a dealer, any sale or exchange of interests in the Properties would be treated as ordinary income or loss.
Possible Disallowance of Various Deductions
The availability, timing and amount of deductions or allocations of income of the Company will depend not only upon general legal principles but also upon various determinations that are subject to potential controversy on factual and other grounds. Such determinations could include, among other things, whether fees paid to the Manager or its Affiliates are non-deductible on the ground that such payments are excessive or constitute nondeductible distributions to the Manager or an Affiliate. Additional issues could arise regarding the allocation of basis to buildings, land, leaseholds and personal property. If the IRS were successful, in whole or in part, in challenging the Company on these issues, the federal income tax benefits of an investment in the Company, if any, might be materially reduced.
Limitations on Losses and Credits from Passive Activities
Deductions in excess of income, i.e., losses from passive trade or business activities, generally may not be used to offset “portfolio income,” i.e., interest (other than interest received by a taxpayer engaged in the trade or business of lending money), dividends and royalties, or salary or other active business income. Deductions from passive activities may generally be used to offset income from passive activities. Interest deductions attributable to passive activities are treated as passive activity deductions, and not as investment interest. Thus, such interest deductions are subject to limitation under the passive activity loss rule and not under the investment interest limitation. Credits from passive activities generally are limited to the tax attributable to the income from passive activities. Passive activities include trade or business activities in which the taxpayer does not materially participate, which would include holding an interest as a Member. Thus, a portion of the Company’s Net Income and Net Loss will constitute income and loss from passive activities. A taxpayer may deduct passive losses from rental real estate activities if: (i) more than half of the personal services performed by the taxpayer in trades or businesses are performed in a real estate trade or business in which the taxpayer materially participates and (ii) the taxpayer performs more than 750 hours of service during the tax year in real property trades or businesses in which the taxpayer materially participates.
Allocations of Net Income and Net Loss
In order for the allocations of income, gains, deductions, losses and credits under the Operating Agreement to be recognized for tax purposes, such allocations must possess substantial economic effect. No assurance can be given that the IRS will not claim that such allocations lack substantial economic effect. If any such challenge to the allocation of losses to any Member were upheld, the tax treatment of the investment for such Member could be adversely affected.
Successive Owners of Units
As between successive owners of Units, Net Income and Net Loss will be allocated (for income tax and other purposes) as provided in the Operating Agreement, to the extent permitted under the Code, regardless of the dates upon which cash distributions are made to the Members or the amount of any such cash distributions. The purchaser or seller of Units may, accordingly, be required to report a share of the Company’s Net Income on such person’s personal income tax return, even though such person receives no cash distribution during the period in which the Units were held or, if such person has received any cash distributions, even though the amounts of such distributions bear no relation to the amount of Net Income that such person is so required to report.
Potential Limitation of Net Loss
You should be aware that the Members will only be able to utilize Net Loss up to the amount of their basis in their Units.
Alternative Minimum Tax
The alternative minimum tax applies to designated items of tax preference. The limitations on the deduction of passive losses also apply for purposes of computing alternative minimum taxable income.
Accuracy Related Penalties and Interest
If an income tax audit disallows Company deductions, you should be aware that the IRS could assess significant penalties and interest on tax deficiencies. The Code provides for penalties relating to the accuracy of tax returns equal to 20% of the portion of the underpayment to which the penalty applies. The penalty applies to any portion of any understatement that is attributable to (i) negligence or disregard of rules or regulations, (ii) any substantial understatement of income tax or (iii) any substantial valuation misstatement. The IRS has recently added a new penalty related to understatements resulting from a listed or reportable transaction. A reportable transaction is a transaction that the IRS has identified as having the potential for tax avoidance or evasion. A listed transaction is a reportable transaction which the IRS has specifically identified as a tax avoidance transaction. The penalty is equal to 20% of the portion of the understatement to which the penalty applies if the taxpayer disclosed the transaction and 30% of the portion of the underpayment to which the penalty applies if the taxpayer did not disclose the transaction. In addition, in the event the sale of the Units are determined to be a reportable transaction, and the taxpayer fails to include information regarding such reportable transaction, the taxpayer will be subject to a penalty in the amount of $10,000 if the taxpayer is an individual and $50,000 in any other case. In the event the sale of the Units are determined to be a listed transaction, the penalty increases to $100,000 in the case of an individual and $200,000 in any other case.
State Income Taxes
The Members may have to file and pay taxes in jurisdictions where the Company owns property and may be subject to withholding for income taxes.
The foregoing list of risk factors does not purport to be a complete enumeration or explanation of the risks involved in an investment in the Company. Prospective Investors should read this entire Memorandum and consult with their own advisors before deciding to invest in the Company. In addition, as the investment program of the Company develops and changes over time, an investment in the Company may be subject to additional and different risk factors. No assurance can be made that profits will be achieved or that substantial losses will not be incurred.